SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. __)
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|_| Preliminary Proxy Statement
|_| Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
|X| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
ELECTRONICS COMMUNICATIONS CORP.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|X| No fee required.
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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|_| Fee paid previously with preliminary materials.
|_| Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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<PAGE>
ELECTRONICS COMMUNICATIONS CORP.
425 Broad Hollow Road, Melville, New York 11747
516-501-0466
------------------
NOTICE OF SPECIAL MEETING IN LIEU OF
ANNUAL MEETING OF STOCKHOLDERS
May 28, 1998
------------------
A special meeting in lieu of annual meeting of stockholders of Electronics
Communications Corp., a Delaware corporation (the "Company") will be held at the
Wyndham Wind Watch Hotel, 1717 Vanderbilt Motor Parkway, Hauppauge, Long Island,
New York 11788, on Thursday, May 28, 1998 at 1:00 P.M. local time, for the
following purposes:
1. To elect a four (4) member Board of Directors to serve until the next
annual meeting of stockholders of the Company and until their successors
are duly elected and shall qualify (Proposal One).
2. To amend the Company's Certificate of Incorporation (the "Certificate of
Incorporation") to change the Company's name to "Northeast Digital
Networks, Inc." (Proposal Two).
3. To amend the Certificate of Incorporation to limit the liability of a
director for monetary damages to the Company or its stockholders for
breach of fiduciary duty, to liability (i) for breach of the director's
duty of loyalty to the Company or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for willful or negligent violations by
the director of the provisions of Delaware law concerning unlawful stock
purchases or redemptions and the unlawful payment of dividends, and (iv)
for any transaction from which the director derived an improper personal
benefit (Proposal Three).
4. To amend the Certificate of Incorporation to ratify the change in the
par value of the Common Stock from $.05 par value to $.60 par value and
in connection therewith, to ratify the one-for-twelve reverse stock
split of the Common Stock authorized by the Board of Directors effective
July 31, 1997 (Proposal Four).
5. To approve the Company's October 30, 1997 Stock Option Plan which
provides for the grant of options to officers, directors and key
employees with respect to a maximum 1,000,000 shares of Common Stock,
$.60 par value (Proposal Five).
6. To transact such other business as may properly be brought before the
meeting or any adjournment thereof.
Pursuant to the provisions of the By-Laws, the Board of Directors has fixed
the close of business on Wednesday April 22, 1998 as the record date for
determining the stockholders of the Company entitled to notice of, and to vote
at the meeting or any adjournment thereof.
Stockholders who do not expect to be present in person at the meeting are
urged to date and sign the enclosed proxy and promptly mail it in the
accompanying postage-paid envelope.
By Order of the Board of Directors
Joseph A. Rosio
President
Dated: April 24, 1998
PLEASE COMPLETE AND PROMPTLY RETURN YOUR PROXY IN THE ENCLOSED ENVELOPE.
THIS WILL NOT PREVENT YOU FROM VOTING IN PERSON AT THE MEETING BUT WILL,
HOWEVER, HELP TO ASSURE A QUORUM AND AVOID ADDED PROXY SOLICITATION COSTS.
<PAGE>
ELECTRONICS COMMUNICATIONS CORP.
425 Broad Hollow Road, Melville, New York 11747
516-501-0466
-----------------------
PROXY STATEMENT
-----------------------
Special Meeting in Lieu of Annual Meeting of Stockholders
May 28, 1998
-----------------------
This Proxy Statement of Electronics Communications Corp., a Delaware
corporation (the "Company") is first being mailed to Stockholders on or about
April 28, 1998 in connection with the solicitation of proxies by the Company's
Board of Directors to be used at the Special Meeting in Lieu of Annual Meeting
of Stockholders of the Company to be held on Thursday, May 28, 1998 at 1:00 P.M.
(local time) at the Wyndham Wind Watch Hotel, 1717 Vanderbilt Motor Parkway,
Hauppauge, Long Island, New York 11788. Accompanying this Proxy Statement is a
Notice of Special Meeting in Lieu of Annual Meeting of Stockholders, a form of
Proxy, a copy of the Company's 1996 Annual Report containing financial
statements and related data, and a copy of the Company's quarterly report on
Form 10QSB for the quarter ended December 31, 1997 also containing financial
statements for the nine months then ended.
All proxies which are properly filled in, signed and returned to the
Company prior to or at the Meeting will be voted in accordance with the
instructions thereon. A proxy may be revoked by any stockholder giving the same
prior to the exercise thereof by: (a) written notice delivered to the Company's
principal offices prior to the commencement of the Meeting, (b) providing a
signed proxy bearing a later date, or (c) appearing in person and voting at the
Meeting. The Company intends to vote executed but unmarked proxies in favor of
Proposals One, Two, Three, Four and Five. Broker non-votes will be counted for
purposes of determining a quorum but otherwise will be considered not
represented with regard to voting on any matter with respect to which there is a
broker non-vote. The Board has fixed the close of business on Wednesday, April
22, 1998 as the record date for the determination of stockholders who are
entitled to notice of, and to vote at the meeting or any adjournment thereof.
The expenses of preparing, assembling, printing and mailing the form of
proxy and the material used in solicitation of proxies will be borne by the
Company. In addition to the solicitation of proxies by use of the mails, the
Company may utilize the services of some of its officers and regular employees
(who will receive no additional compensation therefor) to solicit proxies
personally, and by telephone. The Company has requested banks, brokers and other
custodians, nominees and fiduciaries to forward copies of the proxy material to
their principals and to request authority for the execution of proxies and will
reimburse such persons for their services in doing so. The cost of such
additional solicitation incurred otherwise than by use of the mails is estimated
not to exceed $5,000.
Vote Required, Principal Stockholders and Stockholdings of Management
The Board of Directors has fixed the close of business on Wednesday, April
22, 1998 as the record date for the determination of stockholders who are
entitled to notice of, and to vote at the meeting or any adjournment thereof. At
the record date, the Company had 5,908,223 shares of its Common Stock, $.60 par
value (the "Common Stock") outstanding, the holders of which are each entitled
to one vote per share. The presence in person or by proxy of at least a majority
of the outstanding Common Stock of the Company is necessary to constitute a
quorum at the meeting. Election of directors (Proposal One) requires the
affirmative vote of a majority of the votes cast by the holders of Common Stock
present in person or by proxy at the meeting. Approval of each of the amendments
to the Certificate of Incorporation (i) to change the Company's name (Proposal
Two), (ii) to limit director liability (Proposal Three) and (iii) to ratify the
change in the par value of the Common Stock as well as the one-for-twelve
reverse stock split (Proposal Four), and approval of the October 30, 1997 Stock
Option Plan (Proposal Five), require the affirmative vote of a majority of the
outstanding Common Stock.
<PAGE>
Unless otherwise indicated, all share and per share information contained
in this Proxy Statement gives effect to the one-for-twelve reverse split of the
Company's Common Stock effected July 31, 1997. In addition, unless otherwise
indicated, actual prices for the Company's Common Stock and the Common Stock
exercise purchase prices for the Company's Class A Warrants, Class B Warrants
and stock options have been adjusted throughout this Proxy Statement by
multiplying the actual prices and/or exercise prices for periods prior to July
31, 1997 by 12. No assurance can be given that the actual prices for the Common
Stock during such pre-split periods would have approximated such adjusted prices
if the one-for-twelve reverse stock split had been effectuated at such times.
The following table sets forth, as of April 22, 1998, the number of shares
of Common Stock owned beneficially to the knowledge of the Company by each
beneficial owner of more than 5% of the outstanding Common Stock, by each
director and by all officers and directors of the Company as a group. The
percentages have been calculated on the basis of treating as outstanding for
purposes of computing the percentage ownership of a particular individual, all
shares of Common Stock outstanding as of such date and all shares of Common
Stock issuable to such individual in the event of exercise of outstanding
options owned by such holder at such date which are exercisable within 60 days
of such date. Except as indicated in the footnote to the table, each individual
is the sole beneficial owner with sole voting rights and investment power with
respect to the shares set forth opposite his name (except for shares issuable
upon exercise of his options, none of which have been exercised).
<TABLE>
<CAPTION>
Amount and Nature of Percent
Name and Address of Beneficial Owner Beneficially Ownership of Class
------------------------------- -------------------- --------
<S> <C> <C>
Directors*
Joseph A. Rosio ............................................ 368,817shs(1) 5.9%
John P. Cassella ........................................... 33,334shs(2) 1.0%
Christopher J. Garcia ...................................... -0-(3) --
Mal Gurian ................................................. 45,000shs(4) 1.0%
All executive officers and directors as a group
(four persons) ............................................. 447,151shs(1)(2)(3)(4) 7.0%
Other
Marotta Group Ltd. ......................................... 312,985shs 5.3%
c/o Mintz & Gold LLP
444 Park Avenue South
New York, New York 10016
- ----------
*The address of each executive officer and director is c/o the Company, 425
Broad Hollow Road, Melville, New York 11747.
</TABLE>
(1) Includes 300,000 shares of Common Stock purchasable upon exercise of
non-qualified options at exercise prices ranging from $1.453125 to $2.00
per share and 68,817 shares purchasable upon exercise of incentive stock
options at an exercise price of $1.453125 per share. Does not include an
additional aggregate 131,183 shares purchasable upon exercise of incentive
stock options at an exercise price of $1.453125 per share, which options
are first exercisable in 1999 (68,817 shares) and in 2000 (62,366 shares).
All of these options have been granted pursuant to the October 30, 1997
Stock Option Plan and are subject to stockholder approval of the Plan. See
"Stock Options" and Proposal Five.
(2) Includes 33,334 shares of Common Stock purchasable upon exercise of
non-qualified options at an exercise price of $1.453125 per share. Does
not include 33,333 shares purchasable commencing November 1, 1998, or an
additional 33,333 shares purchasable commencing November 1, 1999 upon
exercise of non-qualified options at an exercise price of $1.453125 per
share. All of these options have been granted pursuant to the October 30,
1997 Stock Option Plan and are subject to stockholder approval of the
Plan. See "Stock Options" and Proposal Five.
(3) Mr. Garcia has been granted incentive stock options exercisable to
purchase an aggregate 100,000 shares of Common Stock at an exercise price
of $2.109375 per share. These options are first exercisable in 1999 (with
respect to 47,407 shares), in 2000 (with respect to an additional 47,407
shares) and in 2001 (with respect to the balance). They were granted
pursuant to the October 30, 1997 Stock Option Plan and are subject to
stockholder approval of the Plan. See "Stock Options" and Proposal Five.
(4) These 45,000 shares of Common Stock are purchasable upon exercise of
non-qualified options at an exercise price of $1.453125 per share. These
options were granted pursuant to the October 30, 1997 Stock Option Plan
and are subject to stockholder approval of the Plan. See "Stock Options"
and Proposal Five.
2
<PAGE>
ACTION TO BE TAKEN AT THE MEETING
ELECTION OF DIRECTORS
(Proposal One)
Four directors of the Company are to be elected at the meeting, each to
serve until the next Annual Meeting and until his successor is elected and
qualifies. The shares represented by proxies will be voted in favor of the
election as directors of the persons named below who are nominees for election
and authority to vote for the election of directors shall be deemed granted
unless specifically withheld. Management has no reason to believe that any of
the nominees for the office of director will not be available for election as a
director. However, should any of them become unwilling or unable to accept
nomination for election, it is intended that the individuals named in the
enclosed proxy may vote for the election of such other person as Management may
recommend. The Company does not have a nominating committee. During the twelve
month period ended December 31, 1997, the Company's board of directors held a
total of seven meetings.
<TABLE>
<CAPTION>
Nominees for Election as Directors
Director
Nominee Age Since Position with Company
- -------- ---- ------- --------------------
<S> <C> <C> <C>
Joseph A. Rosio 35 1997 Chairman of the Board,
President, Chief Executive
Officer and Director
Christopher J. Garcia(a) 30 1998 Treasurer, Chief Financial
Officer, Secretary and Director
John P. Cassella(a) 38 1997 Director
Mal Gurian(a) 71 1995 Director
</TABLE>
- ----------
(a) Member of the Audit Committee.
The Audit Committee, established in February 1998, confers with the
Company's auditors and reviews, evaluates and advises the Board of Directors
concerning the adequacy of the Company's accounting systems, its financial
reporting practices, the maintenance of its books and records and its internal
controls. In addition, the Audit Committee reviews the scope of the audit of the
Company's financial statements and the results thereof.
The Company does not have an Executive Committee. The term of office of
each director expires at the next annual meeting of stockholders and when his
successor is elected and qualified. The term of office of each executive officer
expires at the next organizational meeting of the board of directors following
the next annual meeting of stockholders and when his successor is elected and
qualified.
The following is a brief account of the business experience of each nominee
for director of the Company.
Joseph A. Rosio is a graduate of Pace University with a Bachelor of Science
degree in accounting (1986). He became duly licensed by New York State as a
certified public accountant in December 1989. From 1986 through 1988, Mr. Rosio
was employed as an assistant accountant and then as a senior accountant by
Arthur Andersen & Co. in New York City. From June 1988 through 1990, he was a
financial reporting analyst and then a senior analyst at Reliance Group Holdings
Inc., a holding company with interests in property, casualty, life and title
insurance companies, and other diversified investments. From July 1990 through
1992, Mr. Rosio was a senior accountant in the Emerging Business Group of Ernst
& Young in New York City. From July 1992 through 1996, Mr. Rosio was initially,
assistant to the chief financial officer of Troster Singer, a division of the
securities trading firm of Spear Leeds & Kellogg and subsequently became a
trader, conducting market making activities for Troster Singer. From August 1996
through August 1997, Mr. Rosio was a senior trader conducting market making
activities for the securities trading firm of Knight Securities LP in Jersey
City, New Jersey. Mr. Rosio subsequently rendered general business consulting
services until he became the president and chief executive officer of the
Company in October 1997.
3
<PAGE>
Christopher J. Garcia is a graduate of St. John's University with a
Bachelor of Science degree in accounting (1989) and of Boston College Law School
with a J.D. degree (1996). He became duly licensed by New York State as a
certified public accountant in November 1991 and was admitted to the Connecticut
Bar in 1996. Mr. Garcia was employed as a senior accountant at Ernst & Young in
New York City from 1989 through 1992 and through 1993 as an auditor by Time
Warner. In 1996 and 1997, he was an associate at the Hartford, Connecticut law
firm of Murtha, Cullina, Richter and Pinney. Mr. Garcia became the treasurer,
chief financial officer, secretary and a director of the Company in early 1998.
From 1982 through the present, John P. Cassella has been employed by the
Nortel Division of Northern Telecom Corporation, a manufacturer and provider of
telecommunications products and services and since May 1997, by the successor in
interest to the Nortel Division's business, Wiltel Communications, LLC. From
1982 through 1992, Mr. Cassella was a technician, then a supervisor and finally
the Branch Manager of the New York City office of the Nortel Division. In 1992,
Mr. Cassella became the customer support center director and in 1994 the
National Service Director for the Nortel Division, employed at its Rocky Hill,
Connecticut headquarters. In May 1997, Wiltel Communications, LLC succeeded to
the business of the Nortel Division and Mr. Cassella now serves at such Rocky
Hill, Connecticut location as National Service Director for Wiltel. Mr. Cassella
was elected as a director of the Company in October 1997. He is not actively
engaged in the business of the Company.
From January 1995 to the present, Mal Gurian has been Chairman of the Board
of Authentix Network, Inc., provider of subscriber authentication for cellular
telephone carriers, with principal offices in Tucson, Arizona. Mr. Gurian began
his career as the Vice President of Radio Telephone Corporation in 1960. He then
became Senior Vice President of Aerotron Inc., a Siemens Company. In 1980, three
years before the launch of the first commercial cellular service in the U.S.,
Mr. Gurian was recruited by OKI Electric Industries Company of Japan to start
and build OKI Telecom, that company's Cellular Telephone Division. While
President and a member of the Board of Directors of OKI Telecom's Cellular
Telephone Division, the world's first manufacturer of a cellular telephone, Mal
Gurian was responsible for OKI receiving the first FCC type certification for a
cellular telephone. Following their divestiture by AT&T, Mr. Gurian was
instrumental in negotiating for OKI, private label contracts with the seven
Regional Bell Operating Companies. Under Mr. Gurian's leadership, OKI Telecom
quickly became one of the two major manufacturers of cellular phones for the
U.S. market. Also under Mr. Gurian's leadership, the company successfully
introduced and marketed several new products, including the first briefcase
portable cellular telephone, the OKI/Chrysler "Visor Phone" and OKI's credit
card "Swipe" Telephone. After leaving OKI in 1987, Mr. Gurian served as
President of Cartell, Inc. in Detroit and Cellcom Cellular Corporation in New
Jersey until late 1991. Mr. Gurian served as Chief Executive Officer and a
Director of Universal Cellular Corporation in early 1992. Mr. Gurian has
developed strong relationships with most of the major cellular carriers and is
frequently consulted by key industry leaders in important issues affecting the
industry. Mr. Gurian serves as a moderator and speaker in numerous industry
conventions and forums. Mr. Gurian has served as an advisor to many major
companies including OKI, Sony, TRW and the Communications Division of Murata as
a corporate and strategic consultant. He has served as an Arbitrator for the
American Arbitration Association. Mr. Gurian is a recipient of the "Sarnoff
Citation" from the Radio Club of America in addition to the "Special Service
Award" and the "Fred Link Mobile Award." He also received the "Chairman's
Award," the highest recognition bestowed by the National Association of Business
and Educational Radio (NABER), Washington, D.C. (now known as "PCIA") and has
served as a Director of that organization. He is currently a Fellow and
President Emeritus of the Radio Club of America and has served that organization
as a Director from 1977 to 1980, Vice President from 1980 to 1992, Executive
Vice President in 1993 and President in 1994. Mr. Gurian is a 1995 recipient of
an honorary degree of the Popov Scientific Society from the St. Petersburg
Electrotechnical University in St. Petersburg, Russia. He is a veteran of World
War II having served in the U.S. Marine Corps where he participated in seven
major South Pacific Campaigns; and he is listed in Marquis "Who's Who in
America" and "Who's Who in the World." Mr. Gurian was elected as a director of
the Company in March 1995. He is not actively engaged in the business of the
Company.
Compliance with Section 16 (a) of the Exchange Act
Based solely upon a review of Forms 3 and 4 and on representations made,
the Company believes that with respect to the twelve-month period ended December
31, 1997, all Section 16(a) filing requirements applicable to its officers,
directors and beneficial owners of more than 10% of its equity securities were
timely complied with
4
<PAGE>
except that Joseph A. Rosio and John P. Cassella, who were elected directors on
October 8, 1997, filed their Form 3s on November 10, 1997.
INFORMATION REGARDING EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
or accrued by the Company during the three calendar years ended December 31,
1996 to its Chief Executive Officer as well as to any other executive officer of
the Company or a subsidiary who earned at least $100,000 during calendar year
1996.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
(1994-1996)
Long-Term Compensation
-------------------------
Annual Compensation Awards Payouts
------------------------------------ ---------------- -------
Restricted
Name and Other Annual Stock Options/ LTIP All other
Principal Position Year Salary Bonus Compensation Award(s) SARs Payouts Compensation
- ---------------- ---- ------ ------ ------------ -------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(1) (2) (3) ($) ($) ($)
William S. Taylor* 1996 $150,000 -- $4,065 -- -- -- (4)(5)(6)
President, CEO 1995 $166,641 $67,500 $6,132 -- -- -- (5)
and Chairman of 1994 $ 83,212 $50,000 $3,800 -- -- -- (5)
the Board(7)
Les Winder 1996 $137,500 -- $2,225 -- -- -- (4)(5)(6)
Executive Vice 1995 $117,245 $42,500 $2,778 -- -- -- (5)
President and 1994 $ 70,786 $50,000 $2,275 -- -- -- (5)
Treasurer, Director(8)
Brenda Taylor* 1996 $ 75,000 -- $1,557 -- -- -- (4)(5)(6)
Secretary and 1995 $ 38,278 -- $ 779 -- -- -- (5)
Director 1994 $ 36,173 -- $-0- -- -- -- (5)
Robert DePalo 1996 $ 75,000 -- $-0- -- -- -- (4)(5)(6)
Director, Finance 1995 $-0- -- $-0- -- -- -- (5)
1994 $-0- -- $-0- -- -- -- (5)
</TABLE>
- ----------
* William S. Taylor is Brenda Taylor's son.
(1) On September 12, 1996, the Board approved a 20% increase in the annual
compensation of Messrs. Taylor and Winder, effective December 1, 1996.
Messrs. Taylor and Winder agreed to defer such increases, subject to
accrual, until an improvement in the Company's cash flow. All rights to
these increases have been waived. See "Settlements with Prior Management."
(2) The payment of bonuses to Messrs. Taylor and Winder for 1994 and 1995 was
deferred until an improvement in the Company's cash flow. No payments on
account of these bonuses were made. All rights to these bonuses have been
waived. See "Settlements with Prior Management."
(3) Messrs. Taylor and Winder and Mrs. Taylor were also entitled to certain
fringe benefits in connection with their employment including an
automobile allowance and medical insurance benefits. The amount listed in
this column reflects the aggregate value of such fringe benefits for the
applicable period.
(4) On June 3, 1996, subject to certain conditions, the Board of Directors of
the Company authorized the issuance to officers and directors of the
Company of Class A Warrants, exercisable to purchase an aggregate 191,667
shares of Common Stock, at an exercise price of $60 per share (reduced to
$27 per share on December 24, 1996 and further reduced to $2.25 per share
effective September 16, 1997), as compensation for certain loans and
guarantees made by Brenda Taylor and Messrs. William S. Taylor, Winder and
DePalo. The Company reserved 191,667 shares of Common Stock for issuance
upon the exercise of such Class A Warrants. This authorization was part of
an overall plan to compensate such persons for providing personal
guarantees and for posting certain collateral to facilitate loans by the
Company to fund its bid deposits required to make the Company eligible for
the FCC's PCS licenses auction. These compensation arrangements included
the right to purchase up to six (6) shares of the capital stock of the
Company's PCN subsidiary for $1,000 per share by each of Messrs. Taylor,
Winder and DePalo and Mrs. Taylor, for an aggregate of 24% of the stock of
PCN. Two of the six (6) shares allocated to Mr. DePalo were purchased by
his wife. The grant of the Class A Warrants and the pur-
5
<PAGE>
chase and delivery of the PCN stock was conditioned on the grant to the
Company of the PCS Licenses and the delivery and acceptance of the
Company's FCC Notes and related Security Agreements by the FCC. See
"Settlements with Prior Management" as to agreements pursuant to which
Brenda Taylor and Messrs. William S. Taylor, Winder and DePalo waived any
rights to these Class A Warrants and rescinded their purchases of PCN
stock, and pursuant to which, the Company repurchased Mrs. DePalo's shares
of PCN stock.
(5) On November 20, 1994, the Company's Board of Directors authorized the sale
of Class B Warrants exercisable to purchase an aggregate 82,500 shares of
Common Stock to William S. Taylor (39,167 shares), Les Winder (8,333
shares), Brenda Taylor (16,667 shares), Stewart Taylor, who is the husband
of Brenda Taylor and father of William S. Taylor (16,667 shares) and to
Fawn Taylor-McCauley, sister of William S. Taylor and daughter of Brenda
and Stewart Taylor (1,666 shares) for an aggregate $99,000 in principal
amount of 8% promissory notes or $1.20 per warrant. The Class B Warrants
were initially exercisable at $60 per share during the four-year period
ending May 12, 1999. On January 20, 1995, the Company reduced the exercise
price to $30 per share for Class B Warrants exercisable to purchase an
aggregate 25,000 shares owned by William S. Taylor (12,500 shares), Brenda
Taylor (6,250 shares) and Stewart Taylor (6,250 shares) and in exchange,
received certain financial guarantees and the extension of the due date of
certain loans owed by the Company to William S. Taylor and Stewart Taylor.
On November 20, 1995, the Board of Directors authorized the conversion of
the remaining Class B Warrants exercisable to purchase 57,500 shares of
Common Stock into a like number of Class A Warrants exercisable to
purchase 57,500 shares of Common Stock at an exercise price of $60 per
share (reduced to $27 per share on December 24, 1996 and further reduced
to $2.25 per share effective September 16, 1997). Of the $99,000 purchase
price for the Class B Warrants, an aggregate $93,299 had been paid at
December 31, 1996. The Company subsequently wrote off the $5,701 balance.
On November 16, 1995, William S. Taylor, Brenda Taylor, Stewart Taylor and
Les Winder each sold Class B Warrants exercisable to purchase 6,937.5
shares (or an aggregate 27,750 shares of Common Stock) to five individuals
at the $1.20 per warrant purchase price. A portion of these Class B
Warrants, exercisable to purchase an aggregate 11,083 shares of Common
Stock were purchased by Joseph Albanese, at the time, a 49% owner of the
Company's TCI subsidiary. In connection with settlement agreements signed
by them with the Company in the first quarter of calendar year 1998,
William S. Taylor, Brenda Taylor and Les Winder each represented that he
(or she) no longer owned any Class A Warrants or Class B Warrants. See
"Settlements with Prior Management."
(6) On July 23, 1996, the Company's Board of Directors authorized the sale of
an aggregate 4,000,000 shares of Series B Preferred Stock in equal amounts
to Brenda Taylor and Messrs. William S. Taylor, Winder and DePalo for
$6,000,000 in principal amount of 7% non-recourse promissory notes (the
"7% Notes") to be collateralized by a pledge of the Stock. The issuance of
the Series B Preferred Stock was approved by the Company's stockholders at
the Annual Meeting of Shareholders held on October 17, 1996. The Series B
Preferred Stock was convertible into an aggregate 500,000 shares of Common
Stock. The Company did not issue the Series B Preferred Stock and did not
receive any 7% Notes in payment therefor. Brenda Taylor and Messrs.
William S. Taylor, Winder and DePalo subsequently waived any rights to and
rescinded their purchases of the Series B Stock. See "Settlements with
Prior Management."
(7) Effective December 1, 1994, the Company entered into an employment
agreement with William S. Taylor for a term of five years. In October
1996, this Agreement was modified to provide for an option for an
additional three years, with annual one-year renewals thereafter,
exercisable in the sole discretion of Mr. Taylor. The agreement provided
for annual compensation of $150,000 during the term of his employment and
entitled Mr. Taylor to certain fringe benefits, including an automobile
and maintenance, disability insurance, medical benefits and life insurance
coverage. Mr. Taylor agreed that during the term of his agreement and for
twelve months thereafter (unless the agreement was terminated without
cause), he would be subject to non-competition provisions. Upon
termination of employment without cause, Mr. Taylor would be entitled to a
lump sum payment of $75,000 multiplied by the number of years of his
employment by the Company. See "Settlements with Prior Management" as to
the cancellation of this employment agreement and the waiver by Mr. Taylor
of all rights thereunder.
(8) On May 17, 1995, the Company entered into an employment agreement with Les
Winder, which agreement was also amended in October 1996. The term of the
agreement was for five years with an option for an additional three-year
term, renewable annually thereafter at the option of Mr. Winder. The
agreement provided for annual compensation of $137,500 during the term of
his employment and entitled Mr. Winder to certain fringe benefits,
including an automobile (leasing and insuring), disability insurance,
medical benefits and life insurance coverage. Mr. Winder agreed that
during the term of his agreement and for six months thereafter (unless the
agreement was terminated without cause), he would be subject to
non-competition provisions. Upon termination of employment without cause,
Mr. Winder would be entitled to a lump sum payment of $50,000 multiplied
by the number of years of his employment by the Company. See "Settlements
with Prior Management" as to the cancellation of this employment agreement
and the waiver by Mr. Winder of all rights thereunder.
On August 18, 1997, the Company filed a current report on Form 8-K
reporting a change as of August 11, 1997 in its certifying accountant from the
firm of Stetz, Belgiovine CPAs, P.C. to Wiss & Company, LLP, CPAs and reporting
a change in its fiscal year end from December 31 to March 31. As a result, the
three month period ended March 31, 1997 is a transition period and the Company's
most recently completed fiscal year is the twelve-month period ended March 31,
1998. In order to provide comparative executive compensation information, the
following table sets forth certain information concerning the compensation paid
or accrued during the twelve-month
6
<PAGE>
period ended December 31, 1997 (including the three-month transition period
ended March 31, 1997 and the first nine months of its most recently completed
fiscal year) by the Company to its Chief Executive Officer as well as to any
other executive officer of the Company or a subsidiary who earned at least
$100,000 during such twelve-month period or who is named in the earlier table.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
(1997)
Long-Term Compensation
---------------------------
Annual Compensation Awards Payouts
12 mos. ----------------------------- ---------------------- -------
ended Restricted
Name and Dec. 31 Other Annual Stock Options/ LTIP All other
Principal Position 1997 Salary Bonus Compensation Award(s) SARs Payouts Compensation
- ---------------- ---- ------ ------ ------------ -------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
(1) ($) ($) ($)
William S. Taylor* $124,133 $0 $ 8,978 -- 176,923shs(2) -- --
President, CEO
and Chairman of
the Board (until
10/8/97)(7)
Joseph A. Rosio $ 29,006 $0 -0- -- 500,000shs(3) -- --
President, CEO
and Chairman of
the Board
(commencing
10/8/97)(8)
Les Winder $101,282 $0 $17,585 -- 103,846shs(4) -- --
Executive Vice
President and
Treasurer, Director
(until 10/8/97)(9)
Brenda Taylor* $ 57,386 $0 $ 7,799 -- 50,000shs(5) -- --
Secretary and
Director
(until 10/8/97)
Robert DePalo $ 87,808 $0 -0- -- 272,308shs(6) -- --
Director (until
3/24/98)(10)
</TABLE>
- ----------
* William S. Taylor is Brenda Taylor's son.
(1) William S. Taylor, Les Winder and Brenda Taylor were also entitled to
certain fringe benefits in connection with their employment including an
automobile allowance and medical insurance benefits. The amount listed in
this column reflects the aggregate value of such fringe benefits for the
applicable period.
(2) These options, exercisable to purchase 176,923 shares of Common Stock at
$1.30 per share, were granted to William S. Taylor pursuant to the
unanimous written consent of the Board of Directors dated September 29,
1997 for various items of consideration including cancellation of his
employment agreement. Mr. Taylor exercised the options and paid the
exercise price by releasing his claims to certain credits including
amounts due him on the Company's books. The shares were issued to him in
October 1997. The Company issued W-2s to Mr. Taylor and to the IRS for
1997 indicating in addition to any other compensation paid to Mr. Taylor
by the Company in 1997, additional compensation of $183,357 equal to the
difference between the number of shares (176,923) multiplied by the mean
between the closing bid and asked prices for the Company's Common Stock in
the over-the-counter market on October 8, 1997 of $1.65625 per share or
$293,029 on the one hand, and the net amount of the loans and advances
owed by the Company to Mr. Taylor as indicated by the Company's books of
account, plus a credit for rescission of his prior PCN stock purchase,
plus legal fees paid by Mr. Taylor on behalf of the Company, aggregating
$109,672, on the other. Such additional compensation is not reflected in
the table. See "Settlements with Prior Management."
7
<PAGE>
(3) These options granted to Mr. Rosio by the Board of Directors on October
30, 1997, include incentive stock options exercisable to purchase 200,000
shares of Common Stock at $1.453125 per share and non-qualified stock
options exercisable to purchase 300,000 shares at exercise prices ranging
from $1.453125 to $2.00 per share. All of these options have been granted
pursuant to the October 30, 1997 Stock Option Plan and are subject to
stockholder approval of the Plan. See Proposal Five.
(4) These options, exercisable to purchase 103,846 shares of Common Stock at
$1.30 per share, were granted to Les Winder pursuant to the unanimous
written consent of the Board of Directors dated September 29, 1997 for
various items of consideration including cancellation of his employment
agreement. Mr. Winder exercised the options and paid the exercise price by
releasing his claims to certain net credits owed him by the Company. The
shares were issued to him in October 1997. The Company issued W-2s to Mr.
Winder and to the IRS for 1997 indicating in addition to any other
compensation paid to Mr. Winder by the Company in 1997, additional
compensation of $157,801 equal to the difference between the number of
shares (103,846) multiplied by the mean between the closing bid and asked
prices for the Company's Common Stock in the over-the-counter market on
October 8, 1997 of $1.65625 per share or $171,995 on the one hand, and a
credit for rescission of his prior PCN stock purchase plus legal fees paid
by Mr. Winder on behalf of the Company aggregating $14,194 after offset of
the $11,806 net amount of the loans and advances owed by Mr. Winder to the
Company as indicated by the Company's books of account, on the other. Such
additional compensation is not reflected in the table. See "Settlements
with Prior Management."
(5) These options, exercisable to purchase 50,000 shares of Common Stock at
$1.30 per share, were granted to Brenda Taylor pursuant to the unanimous
written consent of the Board of Directors dated September 29, 1997 for
various items of consideration. Ms. Taylor exercised the options and paid
the exercise price by releasing her claims to certain credits including
amounts due her on the Company's books. The shares were issued to her in
October 1997. The Company issued W-2s to Ms. Taylor and to the IRS for
1997 indicating in addition to any other compensation paid to Ms. Taylor
by the Company in 1997, additional compensation of $17,813 equal to the
difference between the number of shares (50,000) multiplied by the mean
between the closing bid and asked prices for the Company's Common Stock in
the over-the-counter market on October 8, 1997 of $1.65625 per share or
$82,813 on the one hand, and the net amount of the loans and advances owed
by the Company to Ms. Taylor as indicated by the Company's books of
account, plus a credit for rescission of her prior PCN stock purchase
aggregating $65,000, on the other. Such additional compensation is not
reflected in the table. See "Settlements with Prior Management."
(6) Includes options exercisable to purchase 80,000 shares of Common Stock at
$2.00 per share and options exercisable to purchase 192,308 shares of
Common Stock at $1.30 per share. These options were granted to Robert
DePalo pursuant to the unanimous written consent of the Board of Directors
dated September 29, 1997 for various items of consideration including
cancellation of his employment agreement. Mr. DePalo exercised the
options, exercisable at $1.30 per share, and paid the exercise price by
releasing certain credits including amounts due him on the Company's
books. The shares were issued to him in October 1997. The Company issued
W-2s to Mr. DePalo and to the IRS for 1997 indicating in addition to any
other compensation paid to Mr. DePalo by the Company in 1997, additional
compensation of $78,764 equal to the difference between the number of
shares purchased by him on exercise (192,308), multiplied by the mean
between the closing bid and asked prices for the Company's Common Stock in
the over-the-counter market on October 8, 1997 of $1.65625 per share or
$318,510 on the one hand, and the net amount of the loans and advances
owed by the Company to Mr. DePalo as indicated by the Company's books of
account, plus a credit for rescission of his prior PCN stock purchase,
plus legal fees paid by Mr. DePalo on behalf of the Company, aggregating
$239,746, on the other. Such additional compensation is not reflected in
the table. See "Settlements with Prior Management."
(7) See footnote (7) to the earlier Summary Compensation Table herein as to
the terms of William S. Taylor's employment agreement and "Settlements
with Prior Management" as to the cancellation of this employment agreement
and the waiver by Mr. Taylor of all rights thereunder.
(8) See "Current Employment and Consulting Agreements" as to the terms of Mr.
Rosio's employment agreement with the Company effective November 1, 1997.
(9) See footnote (8) to the earlier Summary Compensation Table herein as to
the terms of Mr. Winder's employment agreement and "Settlements with Prior
Management" as to the cancellation of this employment agreement and the
waiver by Mr. Winder of all rights thereunder.
(10) Effective May 28, 1997, the Company entered into an employment agreement
with Mr. DePalo for a term of five years. The agreement provided for Mr.
DePalo to provide a minimum of 30 hours per month of financial, investment
banking, strategic planning and related services to the Company for an
initial annual base salary of $130,000 per year increasing by 10% in each
succeeding year as well as a 10% finder's fee with respect to any merger
or acquisition transaction involving the Company which Mr. DePalo
procured. See "Settlements with Prior Management" as to the cancellation
of this employment agreement and the waiver by Mr. DePalo of all rights
thereunder, and "Current Employment and Consulting Agreements" as to the
terms of Mr. DePalo's consulting agreement with the Company effective
February 1, 1998.
8
<PAGE>
Stock Options
The Company has a Stock Option Plan adopted in September 1994 and
subsequently approved by shareholders (the "1994 Plan") permitting the granting
of stock options exercisable to purchase an aggregate 25,000 shares of Common
Stock to employees, directors and consultants. Pursuant to the 1994 Plan,
options to purchase 1,667 shares at an exercise price of $45.60 per share were
issued to a director, Mal Gurian on July 10, 1995. On June 3, 1996, options to
purchase 833 shares at an exercise price of $21.60 per share were issued to
another director, Ira Tabankin, and options to purchase an additional 4,166
shares at an exercise price of $21.60 per share were issued to Mr. Gurian. Mr.
Tabankin's options have since terminated and Mr. Gurian agreed to the
cancellation of his options at the time of the October 30, 1997 grant to him of
options exercisable to purchase 45,000 shares pursuant to the October 1997 Plan.
No other options were granted pursuant to the 1994 Plan.
Pursuant to the unanimous written consent of the Board of Directors on
September 29, 1997, options exercisable to purchase the following number of
shares of Common Stock at $1.30 per share were granted to the following officers
and directors:
William S. Taylor 176,923 shares
Les Winder 103,846 shares
Brenda Taylor 50,000 shares
Robert DePalo 192,308 shares
All of such options were exercised. See "Settlements with Prior Management"
as to the issuance by the Company to each of such individuals of IRS Form W-2
indicating in addition to any other compensation paid to each by the Company in
1997, additional compensation in an amount equal to the difference between the
number of shares issued to the individual multiplied by $1.65625 (the mean
between the per share closing bid and asked prices for the Common Stock on
October 8, 1997) and certain credits including amounts due on the Company's
books. Additional options granted to William S. Taylor, Les Winder, Brenda
Taylor and Robert DePalo on September 29, 1997, exercisable to purchase an
aggregate 290,000 shares at $2.00 per share and an aggregate 270,000 shares at
$4.00 per share were cancelled prior to issuance. Mr. DePalo was also granted
options on September 29, 1997 exercisable to purchase 90,000 shares at $2.00 per
share which options were subsequently reduced to permit the purchase of 80,000
shares at $2.00. These options remain outstanding.
On October 30, 1997, the Board of Directors adopted the October 30, 1997
Stock Option Plan (the "October 1997 Plan") reserving a maximum of 1,000,000
shares of Common Stock, $.60 par value for options which could be granted under
the October 1997 Plan. The October 1997 Plan and any options granted pursuant to
such Plan are subject to stockholder approval of the adoption of the Plan. See
Proposal Five.
On October 30, 1997, the Board of Directors granted incentive stock options
pursuant to the October 1997 Plan, exercisable to purchase 200,000 shares of
Common Stock to Joseph A. Rosio at an exercise price of $1.453125 per share
equal to the mean between the closing bid price and the closing asked price for
such Common Stock in the over-the-counter market on said date. On the same date,
the Board of Directors granted non-qualified options pursuant to the October
1997 Plan; (i) to Mr. Rosio, exercisable to purchase an additional 300,000
shares of Common Stock at prices ranging from $1.453125 to $2.00 per share; (ii)
to John Cassella, exercisable to purchase 100,000 shares of Common Stock at
$1.453125 per share; and (iii) to Mal Gurian, exercisable to purchase 45,000
shares of Common Stock at $1.453125 per share.
Effective January 2, 1998, the Board of Directors granted incentive stock
options pursuant to the October 1997 Plan to Christopher J. Garcia, exercisable
to purchase 100,000 shares of Common Stock at $2.109375 per share, the mean
between the closing bid and asked prices for the Common Stock in the
over-the-counter market on said date. On February 4, 1998, the Board of
Directors granted incentive stock options pursuant to the October 1997 Plan to a
non-officer employee, exercisable to purchase 50,000 shares of Common Stock at
$2.296875 per share and non-qualified options to Mr. DePalo, exercisable to
purchase 150,000 shares of Common Stock at $2.25 per share. The mean between the
closing bid and asked prices for the Common Stock in the over-the-counter market
on February 4, 1998 was $2.296875.
9
<PAGE>
The above described options, granted pursuant to the October 1997 Plan and
exercisable to purchase an aggregate 945,000 shares of Common Stock, are subject
to stockholder approval of the adoption of the October 1997 Plan. See Proposal
Five.
No options were granted to any of the Company's executive officers in 1996.
The following table illustrates information concerning stock option grants made
during the 12 months ended December 31, 1997 to each officer named in the
"Summary Compensation Table."
<TABLE>
<CAPTION>
Option Grants in the Twelve Months Ended December 31, 1997
Number of Percent of
Shares of Total Options
Common Stock Granted to
Underlying Officers, Directors Market Price
Options and Employees Exercise on Date of Expiration
Name Granted In the Period Price Grant Date
- ----- ------------ ---------------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
William S. Taylor 176,923shs 14% $ .62(b) $1.65625 9/29/02
Joseph A. Rosio 300,000shs(a) 24% $1.453125 $1.453125 10/30/07
100,000shs(a) 8% $1.75 $1.453125 10/30/07
100,000shs(a) 8% $2.00 $1.453125 10/30/07
Les Winder 103,846shs 8% $ .14(b) $1.65625 9/29/02
Brenda Taylor 50,000shs 4% $1.30(b) $1.65625 9/29/02
Robert DePalo 80,000shs 6% $2.00 $1.65625 9/29/02
192,308shs 15% $1.25(b) $1.65625 9/29/02
</TABLE>
- ----------
(a) Issued pursuant to the October 1997 Plan and subject to stockholder
approval of adoption of the Plan. See Proposal Five.
(b) Based upon the amount of credits recognized by the Company in connection
with the exercise of the options divided by the number of shares
purchased. See "Settlements with Prior Management."
<TABLE>
<CAPTION>
Aggregated Option Exercises During Twelve Months Ended
December 31, 1997 and Value of Unexercised Options
at December 31, 1997
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Acquired Value Options at December 31, 1997 at December 31, 1997(2)
Name on Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
- ----- -------------- ---------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
William S. Taylor 176,923shs $183,357 -0- -0- -0- -0-
Joseph A. Rosio -0- -0- 368,817shs 131,183shs $174,950 $92,238
Les Winder 103,846shs $157,801 -0- -0- -0- -0-
Brenda Taylor 50,000shs $ 17,813 -0- -0- -0- -0-
Robert DePalo 192,308shs $ 78,764 80,000shs -0- $ 12,500 -0-
</TABLE>
- ----------
(1) Based on the market value of the Common Stock on October 8, 1998 ($1.65625
per share) minus certain credits recognized by the Company. See
"Settlements with Prior Management."
(2) Based on the market value of the Common Stock on December 31, 1997 minus
the exercise price.
Current Employment and Consulting Agreements
Effective November 1, 1997, the Company entered into an employment
agreement with Joseph A. Rosio employing him on a full- time basis as president
and chief executive officer. The employment agreement expires on March 31, 2001
and provides for annual compensation of $125,000 the first year, increasing by
$25,000 in each successive year with a salary for the final five months of
$72,917, provided that his salary will be increased to $200,000 with respect to
any fiscal year in which the Company realizes at least $2 million of pre-tax
income. Pursuant to the agreement, Mr. Rosio is also entitled to an annual bonus
equal to 5% of the first $10 million of the Company's pre-tax income and 7% of
any pre-tax income in excess of $10 million (in each case excluding
extraordinary items). Pursuant to the agreement, Mr. Rosio was granted options
exercisable to purchase 500,000 shares
10
<PAGE>
of the Company's Common Stock pursuant to the October 30, 1997 Stock Option
Plan, subject to stockholder approval of the Plan. See "Stock Options" and
Proposal Five.
Effective January 1, 1998, the Company entered into an employment agreement
with Christopher J. Garcia, employing him on a full-time basis as treasurer and
chief financial officer. The agreement is for a one-year term and provides for
an annual salary of $85,000 plus a bonus at the discretion of the Board of
Directors. In addition, Mr. Garcia received a $15,000 signing bonus. Pursuant to
the agreement, Mr. Garcia was granted options exercisable to purchase 100,000
shares of the Company's Common Stock pursuant to the October 30, 1997 Stock
Option Plan, subject to stockholder approval of the Plan. See "Stock Options"
and Proposal Five.
Effective February 1, 1998, the Company entered into a two-year consulting
agreement with Robert DePalo. The agreement provides for Mr. DePalo to provide a
minimum of 30 hours per month of financial consulting and investment banking
services to the Company for an annual consulting fee of $75,000. Pursuant to the
agreement, Mr. DePalo is also entitled to a 6% finder's fee in connection with
any acquisition by the Company of an entity procured by Mr. DePalo and a 10%
finder's fee in connection with any transaction procured by Mr. DePalo in which
the Company is acquired, provided in each case that the transaction is completed
no later than one year after the consulting agreement expires. Pursuant to the
consulting agreement, the Company has agreed to pay Mr. DePalo's cellular
telephone bills of up to $1,000 per month for the two-year term and to provide
him with a private office for such period. See "Settlements with Prior
Management."
CERTAIN TRANSACTIONS WITH AFFILIATED PARTIES
William S. Taylor, Les Winder, Robert DePalo and Brenda Taylor provided
personal guarantees of certain Company bank loans in the aggregate amount of
$1,150,000 incurred in the fourth quarter of calendar year 1995, and posted
collateral in connection with such loans in order to enable the Company to fund
the bid deposits required to render it an eligible bidder for the FCC's PCS "C"
Block licenses auction conducted in December 1995 and in the first quarter of
calendar 1996. In order to compensate the individuals for their guarantees and
posting of collateral, on June 3, 1997, the Board of Directors authorized the
issuance to them of Class A Warrants exercisable to purchase an aggregate
191,667 shares of Common Stock at an exercise price of $60 per share (reduced to
$27 per share on December 24, 1996 and further reduced to $2.25 per share
effective September 16, 1997) and also granted each the right to purchase up to
six (6) shares representing 6% of the capital stock of the Company's PCN
subsidiary for $1,000 per share. Two of the six PCN shares allocated to Mr.
DePalo were purchased by his wife. PCN was the recipient of six PCS licenses
awarded by the FCC on May 8, 1996 based on the Company's bid. The grant of the
Class A Warrants and the purchase and delivery of the PCN stock was conditioned
on the grant to the Company of the PCS licenses and the delivery and acceptance
of the Company's FCC Notes and related Security Agreements by the FCC. See
"Settlements with Prior Management" as to agreements pursuant to which Messrs.
William S. Taylor, Winder and DePalo and Brenda Taylor waived any rights to the
Class A Warrants and rescinded their purchases of PCN stock, and pursuant to
which the Company repurchased Mrs. DePalo's shares of PCN stock.
During the fourth quarter of calendar 1996, the Company borrowed $180,000
from Robert DePalo repayable on demand with interest at the rate of 10% per
annum. The Company borrowed the funds for working capital purposes. At March 31,
1997, the loan balance had been reduced by approximately $100,000 through
repayments to Mr. DePalo. In the quarter ended September 30, 1997, the Company
borrowed an additional $100,000 from Mr. DePalo on similar terms for working
capital purposes. During the fourth quarter of calendar year 1997, Mr. DePalo
loaned an additional $105,000 to the Company for working capital purposes which
amount was repaid by the Company to Mr. DePalo in December 1997 out of the net
proceeds of its December 1997 Regulation S Private Offering. At December 31,
1997, the net amount of the loans and advances made by Mr. DePalo to the Company
and payments made by him on behalf of the Company (excluding legal fees paid by
him on behalf of the Company) totalled approximately $200,000. See "Settlements
with Prior Management" as to the Company's settlement of these amounts with Mr.
DePalo.
In March 1996, the Company borrowed $134,000 from an unrelated third-party,
Technics in Design & Manufacturing, Inc. ("TDMI") for working capital purposes
and issued its promissory note in consideration for the loan. The loan was
payable on March 5, 1997 with interest at an annual rate of 10%. In July 1996,
the Company
11
<PAGE>
repaid $25,000 of the loan principal thereby reducing the balance to $109,000.
Although the Company has an assignment in its files dated May 5, 1996 pursuant
to which TDMI purportedly assigned the note to Mr. DePalo's wife, Mr. DePalo has
advised that it was not until October 1996 at a time when TDMI was requesting
early payment of the note, that Mrs. DePalo accommodated TDMI by purchasing the
note from TDMI for $109,000. The Company paid Mrs. DePalo the $109,000 balance
of the note together with accrued interest in January 1997 out of the net
proceeds of its December 1996 private placement.
Settlements with Prior Management
In January 1998, the Company entered into settlement agreements with three
former officer/directors, William S. Taylor, his mother Brenda Taylor and Les
Winder. Pursuant to the agreements, each of the three individuals agreed to
cancel his or her employment agreement or employment arrangement and proposed
consulting agreement with the Company, any rights to warrants and/or options
exercisable to purchase shares of the Company's Common Stock (excluding warrants
sold by the individual prior to August 31, 1997 and the options hereinafter
described) and any rights to shares of the Company's Series B Preferred Stock.
The issuance of the Series B Preferred Stock had been approved by the Company's
stockholders at the Annual Meeting of Shareholders held on October 17, 1996 but
the shares were never issued and the notes to be given in payment for the shares
were never delivered to the Company. Each individual also agreed to rescind the
transaction by which he or she had purchased 6% of the stock of the Company's
PCN subsidiary for $6,000. In consideration therefor, the Company agreed, unless
required to do so by court order, to take no action to challenge the issuance to
each individual of shares of its Common Stock issued to such individual (176,923
shares to William S. Taylor, 50,000 shares to Brenda Taylor and 103,846 shares
to Les Winder) pursuant to options granted to each such individual by the
September 29, 1997 unanimous written consent of the Company's Board of
Directors. The options, exercisable at $1.30 per share, were exercised and the
shares were issued to each of the three former officer/directors in October
1997.
The Company issued W-2s to William S. Taylor and to the IRS for 1997
indicating in addition to any other compensation paid to Mr. Taylor by the
Company in 1997, additional compensation in an amount equal to the difference
between the 176,923 shares issued to him multiplied by the mean between the
closing bid and asked prices for the Common Stock in the over-the-counter market
on October 8, 1997 of $1.65625 per share or $293,029 on the one hand, and the
net amount of the loans and advances owed by the Company to Mr. Taylor as
indicated by the Company's books of account ($63,671), plus a $6,000 credit for
rescission of his prior purchase of PCN stock, plus $40,000 of legal fees paid
by Mr. Taylor on behalf of the Company (a total of $109,672), on the other. The
Company also issued W-2s to Les Winder and to the IRS for 1997 indicating in
addition to any other compensation paid to Mr. Winder by the Company in 1997,
additional compensation in an amount equal to the 103,846 shares issued to him
multiplied by $1.65625 per share or $171,995 on the one hand, and the $20,000 of
legal fees paid by Mr. Winder on behalf of the Company, plus a $6,000 credit for
rescission of his prior purchase of PCN stock, less the $11,806 net amount of
the loans and advances owed by Mr. Winder to the Company as indicated by the
Company's books of account (a total of $14,194), on the other. Similarly, the
Company issued W-2s to Brenda Taylor and to the IRS for 1997 indicating in
addition to any other compensation paid to her by the Company in 1997,
additional compensation in an amount equal to the 50,000 shares issued to her
multiplied by $1.65625 per share or $82,813 on the one hand, and the net amount
of the loans and advances owed by the Company to Ms. Taylor as indicated by the
Company's books of account ($59,000), plus a $6,000 credit for rescission of her
prior purchase of PCN stock (a total of $65,000), on the other. In connection
with these settlement agreements, William S. Taylor and Brenda Taylor have
advised the Company that it is their position that certain General Release,
Indemnity and Hold Harmless Provisions adopted by the directors on September 29,
1997 when William S. Taylor, Brenda Taylor and Les Winder constituted three of
the six members of the Board of Directors, indemnifying them from any claims
asserted in connection with any action taken for or their role with the Company
are in full force. It is present management's position that such releases and
hold harmless provisions are not in effect.
On February 5, 1998, the Company entered into settlement agreements with a
director, Robert DePalo and his wife which resulted in the rescission by Mr.
DePalo of his previous purchase for $4,000 of 4% of the stock of the Company's
PCN subsidiary and the purchase by the Company from Ms. DePalo for $67,000 of 2%
of the stock of the PCN subsidiary which she had purchased for $2,000 in August
1996. As a result of the agreements with William S. Taylor, Brenda Taylor, Mr.
Winder and Mr and Mrs. DePalo, PCN is now 100% owned by the Company.
12
<PAGE>
Pursuant to his February 5, 1998 agreement with the Company, Robert DePalo
agreed to cancel his prior employment agreement and a prior proposed consulting
agreement with the Company, any rights to warrants exercisable to purchase
shares of the Company's Common Stock (excluding warrants sold by him prior to
August 31, 1997) and any rights to shares of the Company's Series B Preferred
Stock. He also agreed to waive any and all options he held exercisable to
purchase shares of the Company's Common Stock excluding (a) options exercisable
at $1.30 per share granted to him pursuant to the September 29, 1997 unanimous
written consent of the Board of Directors and exercised by him to purchase
192,308 shares of the Company's Common Stock, (b) five-year options previously
granted to him and exercisable to purchase 80,000 shares of the Company's Common
Stock at $2.00 per share, and (c) five-year options to purchase 150,000 shares
of the Company's Common Stock at $2.25 per share pursuant to a consulting
agreement with the Company executed on February 5, 1998 and hereinafter
described.
Pursuant to the settlement agreement with Mr. DePalo, the Company issued a
W-2 to him and to the IRS for 1997 indicating in addition to any other
compensation paid to him by the Company in 1997, additional compensation in an
amount equal to the difference between the 192,308 shares issued to him
multiplied by the mean between the closing bid and asked prices for the
Company's Common Stock in the over-the-counter market on October 8, 1997 of
$1.65625 per share or $318,510 on the one hand, and the net amount of the loans
and advances owed by the Company to Mr. DePalo as indicated by the Company's
books of account ($198,746), plus a $4,000 credit for rescission of his prior
purchase of the PCN stock, plus $37,000 of legal fees paid by Mr. DePalo on
behalf of the Company (a total of $239,746), on the other.
In consideration for Mr. DePalo's agreements and waivers, the Company and
Mr. DePalo executed a two-year consulting agreement previously described
pursuant to which Mr. DePalo was retained by the Company as a part-time
consultant for an annual consulting fee of $75,000 and was granted five-year
options pursuant to the Company's October 30, 1997 Stock Option Plan,
exercisable to purchase 150,000 shares of the Company's Common Stock at $2.25
per share but subject to stockholder approval of the Plan. See "Current
Employment and Consulting Agreements" and Proposal Five.
On March 24, 1998, Mr. DePalo resigned as a director of the Company. The
resignation does not affect his options or his consulting agreement.
------------------------
PROPOSED AMENDMENT TO THE
CERTIFICATE OF INCORPORATION TO
CHANGE THE COMPANY'S NAME TO
"NORTHEAST DIGITAL NETWORKS, INC."
(Proposal Two)
The proposed amendment to the Company's Certificate of Incorporation would
authorize the change of the Company's name to "Northeast Digital Networks, Inc."
The Company is currently undergoing a change in focus and direction from that of
a distributor of communications, consumer and business-oriented electronics
products to that of a prospective wireless telecommunications carrier through
the proposed development and construction of a wireless communications network
based upon the PCS licenses it acquired in the December 1996 Federal
Communications Commission C-Block auction. The licenses cover six markets in the
northeastern United States. Based on such change, the Board of Directors is of
the opinion that the name "Northeast Digital Networks, Inc." is more descriptive
of the Company's current activities.
The proposed resolution is as follows:
RESOLVED that Article FIRST of the Company's Certificate of Incorporation
be amended to read in its entirety as follows:
"FIRST: The name of the Corporation is Northeast Digital Networks, Inc."
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE FOREGOING
AMENDMENT TO ARTICLE FIRST OF THE COMPANY'S CERTIFICATE OF INCORPORATION.
13
<PAGE>
PROPOSED AMENDMENT TO THE
CERTIFICATE OF INCORPORATION TO LIMIT
THE LIABILITY OF DIRECTORS FOR
MONETARY DAMAGES TO THE COMPANY
OR ITS STOCKHOLDERS FOR BREACH
OF FIDUCIARY DUTY
(Proposal Three)
The Board of Directors of the Company has adopted a resolution proposing to
amend the Company's Certificate of Incorporation by adding a new Article EIGHTH
designed to limit the liability of a director for monetary damages to the
Company or its stockholders for breach of fiduciary duty, to liability (i) for
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) for willful or negligent
violations by the director of the provisions of Delaware law concerning unlawful
stock purchases or redemptions and the unlawful payment of dividends, and (iv)
for any transaction from which the director derived an improper personal
benefit.
The Delaware General Corporation Law (the "Delaware Code") was amended in
1986 to permit the stockholders of a corporation organized under the Delaware
Code to amend its Certificate of Incorporation to limit or eliminate any
director's liability for monetary damages for breach of his fiduciary duty of
care to the corporation and its stockholders. This change in the law was a
legislative response to the increasing unavailability of officers and directors
liability insurance to many corporations. Where such insurance is difficult or
impossible to obtain, a corporation may have difficulty attracting qualified
persons to serve as directors.
Management believes that the proposed amendment will assist the Company in
maintaining a highly qualified board of directors. Although the Company
currently maintains officers' and directors' liability insurance, coverage under
the policy is limited. The effect of stockholder approval of the proposed
amendment would be to eliminate both direct stockholder suits and derivative
suits on behalf of the Company against directors for money damages, when based
on allegations of breach of fiduciary duty of care by directors for negligence
or gross negligence. However, the proposed amendment will not eliminate or limit
any director's liability for breaches of his duty of loyalty, acts or omissions
not in good faith or knowing violations of law, unlawful dividend payments or
stock redemptions as provided in Section 174 of the Delaware Code or
transactions in which he derived a personal benefit. The proposed amendment
would not eliminate the availability of equitable remedies, such as injunction
or rescission, for breach of fiduciary duty. The proposed amendment would limit
director liability only for future conduct and does not affect any liability a
director may have with respect to conduct pre-dating the effective date of such
amendment.
The proposed resolution is as follows:
RESOLVED that the Company's Certificate of Incorporation be amended by
adding a new Article EIGHTH to read:
"EIGHTH. No director of the Corporation shall have liability to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director occurring after the date on which the
Certificate of Amendment amending the Certificate of Incorporation to
include this Article EIGHTH is filed with the Secretary of State of
Delaware; provided, however, that the foregoing shall not limit or
eliminate the liability of a director (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
Delaware General Corporation Law or (iv) for any transaction from which
the director derived an improper personal benefit."
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE FOREGOING
AMENDMENT ADDING A NEW ARTICLE EIGHTH TO THE COMPANY'S CERTIFICATE OF
INCORPORATION.
14
<PAGE>
PROPOSED AMENDMENT TO THE CERTIFICATE OF
INCORPORATION TO CHANGE THE PAR VALUE OF
THE COMMON STOCK AND TO RATIFY THE
ONE-FOR-TWELVE REVERSE STOCK SPLIT
(Proposal Four)
On May 28, 1997, the Board of Directors adopted resolutions to effect a
one-for-twelve reverse stock split of the Company's outstanding Common Stock,
$.05 par value and to change the par value of such stock to $.60 per share as of
the close of business on July 31, 1997. The Board announced that it had
authorized the reverse stock split "...in an effort to spur interest in the
Company's stock and to enhance shareholder value." Stockholders are hereby being
requested to ratify the change in the par value of the Common Stock from $.05
par value to $.60 par value and the one-for- twelve reverse stock split of the
Common Stock as authorized by the Board of Directors effective July 31, 1997,
and in connection therewith, to amend Article FOURTH of the Company's
Certificate of Incorporation.
It should be noted that the reverse stock split of the outstanding shares
of Common Stock did not affect the number of authorized shares of Common Stock
which remains at 40,000,000. As a result, in excess of 30,000,000 authorized but
unissued and unreserved shares of Common Stock are available for future
issuances. Although there are no present plans or arrangements to issue any such
shares, the Company will be required to arrange substantial additional financing
in order to build out and operate its planned PCS Systems. Any such financings,
the availability of which cannot be assured, will in all likelihood require the
Company to issue as part of the consideration therefor, additional shares of
Common Stock and/or securities convertible into shares of Common Stock in
amounts not presently ascertainable. Any such issuances could have a dilutive
effect on the Company's stockholders. In addition, large numbers of the
authorized but unissued and unreserved shares of Common Stock could be issued by
management to counter unwanted hostile takeover attempts, even if such proposed
takeovers are on terms advantageous to the existing stockholders.
The proposed resolutions are as follows:
RESOLVED that Article FOURTH of the Company's Certificate of
Incorporation be amended to read in its entirety as follows:
"FOURTH: The total number of shares which the Corporation may issue
is 48,000,000 of which 40,000,000 shall be Common Stock having a par
value of $.60 each and 8,000,000 shall be Preferred Stock having a par
value of $.01 each. The Board of Directors, in its sole discretion may,
at any time or from time to time, without any vote of the holders of the
Corporation's capital stock, issue all or a part of the unissued capital
stock of the Corporation authorized under this Certificate of
Incorporation. The Board of Directors, in its sole discretion, shall
have full and complete authority, by resolution, from time to time, to
establish one or more series or classes and to issue shares of Preferred
Stock, and to fix, determine and vary the voting rights, designations,
preferences, restrictions, qualifications, privileges, limitations,
options, conversion rights and other special rights of each series or
class of Preferred Stock, including, but not limited to, dividend rates
and manner of payment, preferential amounts payable upon voluntary or
involuntary liquidation, voting rights, conversion rights, redemption
prices, terms and conditions, and sinking funds and stock purchase
prices, terms and conditions."
and be it further
RESOLVED that the one-for-twelve reverse stock split of the Company's
Common Stock, $.05 par value authorized by the Board of Directors and
changing each share of the Company's Common Stock, $.05 par value
outstanding at July 31, 1997 into one-twelfth (1/12th) of one share of
new Common Stock, $.60 par value, without reducing, distributing or
withdrawing the existing capital of this Corporation, be and the same is
confirmed, ratified and approved.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE FOREGOING
AMENDMENT TO ARTICLE FOURTH OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND
RATIFICATION OF THE ONE-FOR-TWELVE REVERSE STOCK SPLIT.
15
<PAGE>
APPROVAL OF ADOPTION OF THE
OCTOBER 30, 1997 STOCK OPTION PLAN
(Proposal Five)
On October 30, 1997, the Board of Directors adopted the October 30, 1997
Stock Option Plan (the "October 1997 Plan") subject to stockholder approval. The
October 1997 Plan provides for the grant of options with respect to a maximum
1,000,000 shares of Common Stock, $.60 par value. As of the record date, the
Company had issued options to six individuals under the October 1997 Plan,
exercisable to purchase an aggregate 945,000 shares of Common Stock. These
options are subject to stockholder approval of the October 1997 Plan. See "Stock
Options."
Description of the October 1997 Plan
The October 1997 Plan provides for the grant of options to purchase up to
1,000,000 shares of the Company's Common Stock to officers, directors and key
employees. Under the terms of the October 1997 Plan, options granted thereunder
may be designated as options which qualify for incentive stock option treatment
("ISOs") under Section 422A of the Internal Revenue Code of 1986, as amended, or
options which do not so qualify ("Non-ISOs").
The October 1997 Plan is administered by the Board of Directors or by a
Stock Option Committee designated by the Board of Directors. The Board or the
Stock Option Committee, as the case may be, has the discretion to determine the
eligible officers, directors and key employees to whom, and the times and the
prices at which, options will be granted; whether such options shall be ISOs or
Non-ISOs; the periods during which each option will be exercisable; and the
number of shares subject to each option. The Board or Committee shall have full
authority to interpret the October 1997 Plan and to establish and amend rules
and regulations relating thereto.
Under the October 1997 Plan, the exercise price of an option designated as
an ISO shall not be less than the fair market value of the Common Stock on the
date the option is granted. However, in the event an option designated as an ISO
is granted to a ten percent stockholder (as defined in the October 1997 Plan)
such exercise price shall be at least 110% of such fair market value. Exercise
prices of Non-ISO options may be less than such fair market value. The aggregate
fair market value of shares subject to options granted to a participant which
are designated as ISOs which first become exercisable in any calendar year shall
not exceed $100,000.
The Board or the Stock Option Committee, as the case may be, may, in its
sole discretion, grant bonuses or authorize loans to or guarantee loans obtained
by an optionee to enable such optionee to pay any taxes that may arise in
connection with the exercise or cancellation of an option.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE
ADOPTION OF THE OCTOBER 30, 1997 STOCK OPTION PLAN.
Auditors
The firm of Wiss & Company, LLP, certified public accountants, has been
selected by the Board of Directors to audit the accounts of the Company and its
subsidiaries for the current fiscal year ending March 31, 1999. Said firm has
served as the Company's auditors since August 1997. Representatives of such firm
are not expected to be present at the May 28, 1998 Special Meeting in Lieu of
Annual Meeting of Stockholders.
Stockholder Proposals for 1999 Annual Meeting
Under current rules of the Securities and Exchange Commission, stockholders
wishing to submit proposals for inclusion in the Proxy Statement of the Board of
Directors for the 1999 Annual Meeting of Stockholders must submit such proposals
so as to be received by the Company at 425 Broad Hollow Road, Melville, New York
11747 on or before March 31, 1999.
16
<PAGE>
OTHER MATTERS
Management does not know of any other matters which are likely to be
brought before the Meeting. However, in the event that any other matters
properly come before the Meeting, the persons named in the enclosed proxy will
vote said proxy in accordance with their judgment in said matters.
By Order of the Board of Directors
Joseph A. Rosio
President
Melville, New York
April 24, 1998
17
<PAGE>
ELECTRONICS COMMUNICATIONS CORP.
Revocable Proxy Solicited on Behalf of the Board of Directors
Special Meeting in Lieu of Annual Meeting of Stockholders -- May 28, 1998
The undersigned, a stockholder of ELECTRONICS COMMUNICATIONS CORP.
(the "Company") hereby appoints Joseph A. Rosio and Christopher J. Garcia
or either of them, as proxy or proxies of the undersigned, with full power
of substitution, to vote, in the name, place and stead of the undersigned,
with all of the powers which the undersigned would possess if personally
present, on behalf of the undersigned, all the shares which the
undersigned is entitled to vote at the Special Meeting in Lieu of Annual
Meeting of the Stockholders of ELECTRONICS COMMUNICATIONS CORP. to be held
at 1:00 P.M. (local time) on Thursday, May 28, 1998, at the Wyndham Wind
Watch Hotel, 1717 Vanderbilt Motor Parkway, Hauppauge, Long Island, New
York 11788 and at any and all adjournments thereof. The undersigned
directs that this Proxy be voted as follows:
1) To elect directors for the ensuing year (Proposal One).
/ / FOR all nominees listed below
(except as marked to the contrary below).
/ / WITHHOLD AUTHORITY to vote for all nominees
listed below.
Nominees: JOSEPH A. ROSIO, CHRISTOPHER J. GARCIA,
JOHN P. CASSELLA, MAL GURIAN
(Instructions: To withhold authority for an individual nominee, write that
nominee's name on the line provided.)
- -------------------------------------
2) To amend the Certificate of Incorporation to change the Company's name
(Proposal Two).
/ / FOR / / AGAINST / / ABSTAIN
3)To amend the Certificate of Incorporation to limit the liability of a
director for monetary damages to the Company or its stockholders for breach of
fiduciary duty (Proposal Three).
/ / FOR / / AGAINST / / ABSTAIN
4)To amend the Certificate of Incorporation to ratify the change in par value
of the Common Stock from $.05 to $.60 per share and the one-for-twelve reverse
stock split of the Common Stock effective July 31, 1997 (Proposal Four).
/ / FOR / / AGAINST / / ABSTAIN
5) To approve the Company's October 30, 1997 Stock Option Plan (Proposal Five).
/ / FOR / / AGAINST / / ABSTAIN
6) In their discretion, on all other matters as shall properly come before the
meeting.
/ / AUTHORITY GRANTED / / AUTHORITY WITHHELD
(Continued and To be Signed on the Reverse Side)
<PAGE>
The Board of Directors recommends a vote FOR all of the foregoing. UNLESS
OTHERWISE SPECIFIED AS ABOVE PROVIDED, THIS PROXY WILL BE VOTED "FOR" PROPOSALS
ONE THROUGH FIVE AS SET FORTH IN THE PROXY STATEMENT. IN ADDITION, DISCRETIONARY
AUTHORITY IS CONFERRED AS TO ALL OTHER MATTERS THAT MAY COME BEFORE THE MEETING
UNLESS SUCH AUTHORITY IS SPECIFICALLY WITHHELD. Stockholders who are present at
the meeting may withdraw their Proxy and vote in person if they so desire.
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY PROMPTLY. No postage is required
if returned in the enclosed envelope and mailed in the United States. Receipt of
the Notice of Special Meeting in Lieu of Annual Meeting of Stockholders, the
accompanying Proxy Statement of the Board of Directors, the Company's Annual
Report for the year ended December 31, 1996, and its quarterly report for the
period ended December 31, 1997 is acknowledged.
Dated: , 1998
----------------------------------------
----------------------------------------
----------------------------------------
(Signature of Stockholder)
Please sign exactly as name appears on this Proxy. If shares are registered in
more than one name, the signatures of all such persons zare required. A
corporation should sign in its full corporate name by a duly authorized officer,
stating his title. Trustees, guardians, executors and administrators should sign
in their official capacity, giving their full title as such. If a partnership,
please sign in partnership name by authorized person.
PLEASE SIGN AND RETURN THIS PROXY PROMPTLY.
No postage is Required if Returned in the Enclosed Envelope and
Mailed in the United States.
<PAGE>
[LOGO]ECC
ELECTRONICS COMMUNICATIONS CORP.
1996 Annual Report
<PAGE>
LETTER TO THE SHAREHOLDERS
Dear Shareholders
Since October 10, 1997, I have been in charge of restructuring the Company,
building a new management team and attempting to raise the capital necessary to
build a wireless PCS network that will encompass five northeastern states. To
date, I have put a capable and experienced management team in place and raised
$4.5 million in equity financing. A portion of the proceeds were used to settle
major lawsuits with Brightpoint, Toshiba and other creditors. Currently there
are no material lawsuits outstanding against the Company.
Electronics Communications Corp. ("ECC's") prospective emergence as a
wireless telecommunications carrier represents a material change in the focus
and direction of the Company, which previously centered upon ECC's role as a
distributor of communications, consumer and business-oriented electronics
products. Those operations, which were principally carried on by the Company's
wholly-owned subsidiary, Free Trade Distributors, Inc., have been eliminated in
light of a longer term view regarding profitability and diminishing margins.
During 1997, the Company's principal source of income was derived from
soliciting cellular telephone activations as a Master Agent for Bell Atlantic
NYNEX Mobile, and subsequently as a sub agent for AT&T. Income from cellular
telephone activations diminished rapidly because of the loss of the Company's
Master Agent status with Bell Atlantic NYNEX Mobile in May 1997, market
conditions and competition. For these reasons, the Company no longer solicits
cellular telephone activations.
ECC presently has two operating subsidiaries: Personal Communications
Network ("PCN") and Threshold Communications, Inc. ("TCI").
PCN, effective February 5, 1998, is wholly owned by the Company and is
currently engaged in the development and the prospective construction of a
wireless communications network as a predicate to becoming a wireless carrier
providing Personal Communications Services ("PCS"). PCS will be provided
pursuant to licenses acquired in the December 1996 Federal Communications
Commission ("FCC") C-Block auction. The PCS licenses cover nearly 1.5 million
POPs (Points of population) in the following six markets: Burlington/Rutland --
Bennington, Vermont; Bangor/Lewiston -- Auburn/Waterville -- Augusta, Maine; and
Elmira -- Corning -- Hornell, New York (the "PCN Territories").
On March 4, 1998, PCN submitted a Request for Proposal ("RFP") to major
telecommunications equipment manufacturers including: Ericsson, Nokia, Nortel
and Siemens, to begin the vendor selection process. The Company has preliminary
RF (radio frequency) designs for all six markets and has dispatched an
experienced site acquisition team to begin locating potential sites for base
stations and switching equipment. In conjunction with the RFPs, PCN is currently
negotiating financing options with such vendors, some of whom are working in
conjunction with outside venture capitalists. While there can be no assurances
that the Company will be successful in obtaining such financing, management
remains optimistic about the Company's ability to obtain such financing and
build a state of the art PCS network.
In addition to owning licenses to provide PCS, PCN is also licensed to
provide long distance telephone service and has an application pending with the
FCC to resell local telephone service in New York, Vermont and Maine. PCN
intends to begin marketing local and long distance telephone services by the
summer of 1998. PCN's billing system will present the customer's bill in a
consolidated form, with all products the customer purchases from PCN on one
bill.
TCI, effective January 2, 1998, is also wholly-owned by ECC and operates
its own FCC licensed, state-of-the-art, Glenayre 900 MHz Flex Paging Network
covering metropolitan New York, New Jersey, Lower Connecticut and downtown
Philadelphia. The Company has approximately 13,000 subscribers on its network
and has a reseller base approximately 6,000. TCI, in an effort to cut payroll
and related costs, has entered into a management service agreement, whereby the
managing entity handles, among other things, all billing, customer service,
collections and pager repairs. TCI has also entered into a marketing agreement
with the same manager whereby, the manager will put subscribers on TCI's network
and pay TCI on a per subscriber basis.
On behalf of the Board of Directors, I would like to thank each and every
shareholder for their continued support through this transitional period in our
Company's history. I also remain grateful to our hardworking and dedicated
employees.
Yours Truly,
April 22, 1998 Joseph Rosio
President & CEO
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto.
RESULTS OF OPERATIONS
Year Ended on December 31, 1996 Compared to Year Ended on December 31, 1995
Revenues decreased approximately $1,379,078 or approximately 15.8% in 1996
compared to 1995. Electronic equipment sales decreased $1,965,846 or 39.8%.
Activation commissions decreased $398,083 or 10.5%. The Company attributes these
decreases to the redirection of its operations and business away from acting
principally as a distributor of consumer, home and office electronics products,
to operating as a multi-faceted wireless telecommunications company. Due to the
change in its operating focus, the Company, for the first time, had revenues
from Paging and Two Way Radio of $984,851 in 1996. Cost of Paging and Two Way
Radio sales was $445,808 in 1996.
Cost of electronics equipment sales decreased $1,472,895 during 1996
compared to 1995. This decrease is attributed to the Company changing its
operations. The gross profit margin however, decreased 8.8% from 11.6% in 1995
to 2.8% in 1996. The decrease of gross profit was due to the fact that the
Company liquidated all of its electronic equipment, with the exception of
cellular telephones.
Cost activations decreased due to a decrease in sales in 1996 compared to
1995. The gross profit margin increased from 15.7% in 1995 to 16% in 1996. The
higher gross profit margin is due to increased residuals paid by NYNEX and Bell
Atlantic.
Selling, general and administrative ("SGA") expenses increased
approximately $4,923,149 in 1996 compared to 1995. The Company attributes this
increase directly to meet the needs of the Company's growth and movement into
the wireless telecommunications industry. SGA as a percentage of sales increased
from 23.6% to approximately 95% due to an increase in administrative personnel
to meet the Company's expansion and growth as a multifaceted wireless
telecommunications Company and higher executive officer salaries, a one time
charge of $1,437,500 pursuant to a financial public relations contract the
Company entered into on September 4, 1996 and a one time charge of approximately
$493,000 related to a bad debt. Interest expenses increased approximately
$120,633 in 1996 compared to 1995 due to additional borrowings of the Company.
The Company had operating loss before interest, amortization and income
taxes and other expenses of $5,823,725, in 1996 compared to operating loss of
$1,967,823 in 1995. Net loss in 1996 after interest ($206,060) and a non-cash
expense of ($73,769) as a result of a settlement of potential litigation, was
$6,031,090 compared to net loss of $2,268,959 in 1995. These losses resulted
primarily from expenditures associated with the development and marketing of the
Company's paging and two-way radio systems, and the Company's move to more
suitable premises.
LIQUIDITY AND CAPITAL RESOURCES
The operations of the Company's subsidiaries since inception in 1991 to
date have been funded principally from cash flow from operations, capital
investments and loans from officers, directors, principal stockholders and third
parties. Although the officers and directors of the Company have provided the
financial accommodations to the Company in the past, there can be no assurance
that they will continue to do so in the future. In addition, the Company has a
$100,000 revolving line of credit with a bank. This loan is personally
guaranteed by the Company's President, cross corporate guaranteed by Free Trade
Distributors, Inc. and secured by the Company's inventory. As of December 31,
1996, there was an outstanding balance under this loan of $95,000 with interest
payable monthly at the rate of 1.5% per annum in excess of the bank's
fluctuating prime lending rate. As of December 31, 1996, the interest rate was
10.5%. This loan became due and payable on April 18, 1996. On June 17, 1996 the
bank extended the due date until April 17, 1997.
As of December 31, 1995 the Company has loaned $550,000 to Threshold
Communications, Inc. ("TCI"). TCI is a corporation engaged in the radio paging
business. TCI has acquired a paging subscriber base, associated paging hardware
and a paging carrier agreement with Skytel, a company that provides nationwide
paging, voice messaging and related messaging services to subscribers and
others. In addition, TCI owns a 900 megahertz FCC
2
<PAGE>
paging license in the Paging Service Area and holds a long-term lease for a
paging transmission site. A principal stockholder of TCI is a stockholder of the
Company.
On March 22, 1996 TCI acquired all of the assets and assumed certain
liabilities of General Communications and Electronics, Inc. ("GCE"). In
connection therewith, the Company advanced an additional $175,000 to TCI and
guaranteed certain obligations of TCI in the amount of $739,000. As a result of
the transaction with GCE, TCI, in addition to a paging transmission site which
it previously owned, became a paging reseller. TCI offers paging service
primarily through various paging carriers in the New York metropolitan area. TCI
offers national paging service through a sales and distribution agreement with
Skytel. Under this agreement, TCI pursues regional and national accounts through
its present dealer network in the Paging Service Area. As of the date hereof TCI
has approximately a 9000 person subscriber base. TCI also has the necessary
infrastructure to operate a paging operation, including but not limited to a
full service technical shop and repair facility, engineering capability,
marketing and sales force, billing and collection systems and ancillary product
support capability for paging related products. The Company is currently
negotiating the acquisition of TCI, however, there can be no assurance that the
Company will be able to reach an agreement with TCI. If the Company does acquire
TCI, it will utilize TCI's infrastructure in the operations of its own paging
system. In connection with TCI's acquisition of GCE, the Company issued a
$350,000 non-interest bearing note payable to a corporation owned by a
shareholder of the Company. This shareholder is neither a control person,
affiliate, officer, nor director of the Company. The balance of this loan was
$265,121 at December 31, 1996.
On June 28, 1996 the Company purchased 51% of the common stock of TCI and
its majority owned subsidiary GTA for $725,000 in cash and $389,000 worth of its
Common Stock (194,500 shares of the Company's Common Stock at $2.00 per share).
On January 16, 1996 the Company consummated a Private Placement of 69,460
shares of its Common Stock $.05 par value at a price of $2.25 per share. The
total offering resulted in gross proceeds of $156,2 85 of which $116,223 was
advanced to the Company prior to December 31, 1995. Each subscriber, in addition
to the shares received demand registrations rights which require the Company to
file a Registration Statement upon request of 25% or more of the shares sold in
the offering at anytime during the 18 month period commencing 30 days from the
closing date.
On February 29, 1996, the Company borrowed $134,000 from another unrelated
corporation. Interest is payable to a rate of 10% in monthly installments of
$1,117 per month. The loan becomes due on February 28, 1997. As additional
consideration, the Company issued to the corporation 800,000 A Warrants with 90
day registration rights and "piggy back" registration rights. The balance of
this loan was $109,711 as of December 31, 1996.
At approximately the same time, the Company also experienced a cash
shortfall and was unable to post the required deposit to be entitled to bid at
the FCC auction. To assist the Company in obtaining financing to facilitate its
bid, William S. Taylor, Les Winder, Brenda Taylor and Robert DePalo guaranteed
loans by the Company in the sum of approximately $1,150,000 and posted certain
cash collateral. In consideration for this loan and guarantee accommodation, and
the posting of cash collateral, the board of directors authorized the purchase
of 24 shares by such persons (six (6) shares each) of Personal Communications
Network, Inc. ("PCN") sole class of authorized and issued common stock and the
grant of 1,800,000 A Warrants. The purchase of the PCN stock and delivery of the
A Warrants were subject to certain conditions relating to the grant of the PCS
Licenses, and delivery of the FCC notes (the "FCC Notes") and related security
agreements by the Company. As a result, the closing of these transactions has
not been scheduled.
On March 21, 1996, the Company entered into a letter of intent with an
investment banking firm (the "Placement Agent") Pursuant to which the Company
offered $6,000,000 principal amount of the Company's Subordinated Convertible
Debentures (the "Debentures"). The Company sold an aggregate of $2,990,000 of
the Debentures in two tranches, at which time the Company and the Placement
Agent mutually agreed to terminate the offering. The principal amount of the
Debentures was convertible into shares of the Company's Common Stock at the
option of the holder, immediately upon issuance, at a price equivalent to 25%
discount from the average high closing bid price for five days prior to the
conversion or $1.50, whichever is less. The Debenture bears interest at the rate
of 5% per annum payable on April 1 of each year commencing April 1, 1997. The
Debentures are redeemable and callable for conversion under certain
circumstances and are due April 1, 2002. The Company paid to the Placement Agent
a placement fee equal to 10% of the gross proceeds, a 2% non-accountable expense
allowance and 200,000 Warrants to purchase the Company's common stock at $2.25
per share. The Company intends to use the proceeds of this
3
<PAGE>
offering to increase its deposit in the PCS auction, to build out its paging
system and for general working capital purposes. All $2,990,000 principal amount
of the Debentures has been converted into an aggregate of 5,706,822 shares of
the Company's Common Stock.
On May 8, 1996, the Company won six PCS Licenses. The total winning bids
amounted to $26,452,200, after the 25% discount provided to small business which
the Company qualifies for, under the terms of the auction. The Company has
deposited $2,645,220 with the FCC which equals 10% of the cost of the licenses.
On September 17, 1996, the FCC officially awarded the six PCS Licenses to
the Company. In connection therewith, the Company entered into six separate
Installment Payment Plan Notes ("Plan Notes") with the FCC in the aggregate
amount of $23,807,010. Interest only is due commencing December 31, 1996, with
the first payment of $479,400.84 and subsequent payments in equal consecutive
quarterly installments of $416,622.16 ($1,666,488.64 annually) until September
30, 2002. The interest payment due December 31, 1996 has not been paid. A
default under this note shall occur if the maker remains delinquent for more
than 90 days. Commencing December 31, 2002, the Company shall pay principal and
interest in equal installments of $1,718,853.88 ($6,875,415.52 annually) until
September 30, 2006 (the "Maturity Date"). The entire unpaid principal amount,
together with accrued and unpaid interest on the Plan Notes and all remaining
obligations thereunder, shall be due and payable on the Maturity Date.
On September 20, 1996, the Company entered into a loan agreement with the
Marrotta Group ("Marrotta"), pursuant to which the Company borrowed $500,000.
This loan, which was obtained to provide the Company with the ability to meet
its additional shortfalls on a further deposit with the FCC, was arranged by
Robert DePalo, a director, pursuant to a personal and business relationship with
the Marrotta Group, and one or more of its principal shareholders. The loan
bears interest at the rate of 10% per annum, and becomes due and payable on or
before June 20, 1997; however, the Company may request an automatic three (3)
month extension on the due date. As additional consideration for making the
loan, the Company agreed to issue to Marrotta 200,000 shares of the Company's
Common Stock, and 400,000 A Warrants, with demand and piggyback registration
rights.
On October 9, 1996, the Company entered into a loan with Robert DePalo, a
director of the Company, pursuant to which the Company borrowed $180,000. This
loan bears interest at the rate of 10% per annum. The loan is due upon three
days written demand. The Company used the proceeds of this loan for general
corporate purposes.
On October 21, 1996 the Company entered into a loan agreement with
Strategic Marketing Int'l Inc. ("Strategic"), pursuant to which the Company
borrowed $200,000. This loan bears interest at the rate of 10% per annum, and
becomes due and payable on October 21, 1997. As additional consideration for
making the loan, the Company agreed to issue to Strategic 80,000 shares of the
Company's Common Stock and 160,000 A Warrants, with demand and piggy back
registration rights. The Company used the proceeds of the loan for general
corporate purposes.
On May 22, 1996 the Company sold an aggregate of 500,000 shares of its
Common Stock for $625,000 or $1.25 per share to three unrelated parties. On May
22, 1996 the Company's Common Stock was trading at $2.00. The Company sold the
stock at a discount to market due to the fact the stock was restricted, and the
large quantity of shares made the stock relatively illiquid in comparison to the
Company's average daily volume prior to May 22, 1996. The Company received net
proceeds from this sale of $543,750. The Company utilized the proceeds generated
by this issuance of stock for general working capital purposes.
In December, 1996 the Company offered for sale a maximum of 2,200,000,
subsequently increased to 3,300,000, and a minimum 700,000 units (the "Units"),
at a price of $1.50 per Unit subsequently decreased to $1.00 per Unit. Each Unit
consists of one share of the Company's Common Stock, and one and one-half (1.5)
A Warrants, entitling the purchaser, as holder of each A Warrant to purchase one
share of Common Stock, at $5.00 per share, subsequently reduced to $2.25 per
share, at any time prior to May 12, 1999, subject to prior redemption by the
Company. As of May 1997 the Company has received subscription for approximately
2,300,000 Units.
The Company will offer and sell the Units through selling arrangements
between the Company and participating registered NASD Broker-Dealers and, where
permitted by law, through offeree representatives and others, in connection with
sales of Units solicited by them (collectively, the "Placement Agents"). The
Placement Agents will receive in the aggregate a selling commission of up to ten
(10%) percent of the aggregate amount of the Unit offering, plus a 1%
nonaccountable due diligence allowance, and an outright grant of 750,000 A
Warrants (assuming the maximum offering is achieved featuring the same terms as
the A Warrants included in the Units), which shall be
4
<PAGE>
allocated and distributed to the Placement Agents PRO RATA, based on the number
and percentage of Units placed by such Placement Agent(s), and the aggregate
amount of sale proceeds generated.
Certain disagreements have arisen between the Company and Bell Atlantic
Nynex Mobile ("BANMC") (the Company's sole source of commission revenue) in
connection with a debit card program promoted by BANMC. BANMC has asserted that
the Company is indebted to it for $249,000 in monthly access fees and fraud
charges. The dispute evolved around whether an inducement to obtain the
Company's participation in this program and whether the Company is responsible
for third-party mobile telephone cloning fraud. The Company asserted that there
was no basis for charging back the Company for cloning fraud. Complicating the
matter and the overall relationship was the fact that BANMC representatives have
attempted to coerce the Company's capitulation with respect to the access fees
and fraud charges, by holding back commission payments otherwise due, and
insisting that these amounts be paid before there is any discussion with respect
to the renewal of the Agency agreement. In May of 1997 as settlement in the
above dispute the Company accepted $95,000, which approximated the amount of
commission due from BANMC for commission and severed its relationship with
BANMC. Shortly thereafter the Company replaced BANMC with another supplier of
commission revenue.
On December 31, 1996, the Company had working capital deficit of
approximately $2,841,840, as compared to a working capital deficit of
approximately $1,724,852 at December 31, 1995. This decrease in the Company's
working capital was primarily due to the Company's redirection in its operations
and business away from acting as a distributor of electronics products, and due
to large expenditures associated with the development and marketing of the
Company's paging and two-way radio systems.
The Company's financial statements for the year ended December 31, 1996
have been prepared on a going concern basis which contemplates the realization
of assets and settlement of liabilities and commitments in the normal course of
business.
If cash flows from operations were assumed to be the same for 1996 as 1997
the Company would have an approximate cash shortfall of $830,000. The Company
has taken steps to minimize this cash shortfall. In the first quarter of 1997
the Company became a fully functional paging carrier which should increase cash
flows from operation by $500,000. The Company has severed its relationship with
its sole source of 1996 commission revenue from cellular radio service
contracts. The Company has replaced this source with two additional sources. The
Company's profitability from these two additional sources of commission revenue
is greater than it has had in the past. It is anticipated that this increased
profitability will increase cash flows from operations by $150,000. After taking
into account the above items the Company may still have an expected cash
shortfall of $200,000 which would be funded by cutting certain overhead costs
and if needed, loans to the Company by certain officers. Management recognizes
that the Company must generate additional resources or consider modifying
operations to enable it to continue operations with available resources.
Management's plans include consideration of the sale of additional equity
securities under appropriate market conditions, alliances with entities
interested in and resources to support the Company's operation or other business
transactions which would generate sufficient resources to assume continuation of
the Company's operations.
The Company has retained investment banking counsel to advise it on the
possible sale of equity securities as well as to introduce and assist in the
evaluation of potential merger and partnering opportunities. The Company also
has retained independent consultants to assist it to identify other entities
interested in its business. Management expects that these efforts will result in
the introduction of other parties with interests and resources which may be
compatible with that of the Company. However, no assurances can be given that
the Company will be successful in raising additional capital or entering into a
business alliance. Further, there can be no assurance, assuming the Company
raises additional funds or enters into a business alliance, that the Company
will achieve profitability or positive cash flow. If the Company is unable to
obtain adequate additional financing or enter into such business alliance,
management will be required to sharply curtail the Company's operations.
IMPACT OF INFLATION
The Company is subject to normal inflationary trends and anticipates that
any increased costs would be passed on to its customers.
5
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDING DECEMBER 31, 1996, AND 1995
------------
TABLE OF CONTENTS
Page
----
Independent Auditor's Report.................................. 7
Consolidated Balance Sheets................................... 8
Consolidated Statements of Changes in Stockholders'
Equity(Deficit)............................................... 10
Consolidated Statements of Operations......................... 11
Consolidated Statements of Cash Flows......................... 12
Notes to Consolidated Financial Statements.................... 14
6
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders
Electronics Communications Corp.
We have audited the accompanying consolidated balance sheets of Electronics
Communications Corp. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Electronics
Communications Corp. and subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 21 to the
financial statements, the Company has suffered recurring losses from operations
and has a net working capital deficiency that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 21. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
STETZ, BELGIOVINE CPAS, P.C.
February 17, 1997
Montclair, NJ 07042
7
<PAGE>
<TABLE>
<CAPTION>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------
1996 1995
---------- ----------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash ...................................................................... $ 179,188 $ 18,000
Restricted Cash ........................................................... -- 1,100,000
Accounts Receivable
(Net of $574,910 and $80,987 Allowance for Doubtful Accounts
at December 31, 1996 and 1995, respectively)........................... 676,797 2,204,789
Inventories ............................................................... 187,953 476,796
Bid Deposit ............................................................... -- 1,000,000
Loan Receivable ........................................................... 114,560 550,000
Prepaid Expenses .......................................................... 12,162 78,849
----------- -----------
TOTAL CURRENT ASSETS .............................................. 1,170,660 5,428,434
----------- -----------
PROPERTY AND EQUIPMENT
Property and Equipment .................................................... 2,754,910 335,858
Accumulated Depreciation .................................................. (634,314) (75,544)
----------- -----------
NET PROPERTY AND EQUIPMENT ........................................ 2,120,596 260,314
----------- -----------
OTHER ASSETS
PCS Licenses .............................................................. 19,473,392 --
Prepaid Service Contract .................................................. 1,205,137 --
Loan Origination Fees ..................................................... 808,287 --
Paging Carrier Agreement .................................................. 980,022 --
Deferred Private Placement Costs .......................................... 237,243 225,787
Deferred License Costs .................................................... 335,932 293,810
Security Deposits and Other Assets ........................................ 160,795 38,313
Goodwill .................................................................. 66,202 --
Deferred Registration Costs ............................................... 84,176 --
----------- -----------
TOTAL OTHER ASSETS ................................................ 23,351,186 557,910
----------- -----------
TOTAL ASSETS .................................................. $26,642,442 $ 6,246,658
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
8
<PAGE>
<TABLE>
<CAPTION>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------
1996 1995
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Accounts Payable .......................................................... $ 1,956,329 $ 1,783,344
Notes Payable-- Other ..................................................... 1,081,538 28,000
Notes Payable-- Bank ...................................................... 95,000 1,225,000
Notes Payable-- Stockholders .............................................. 181,677 252,007
Current Portion of Obligations Under Capital Leases........................ 234,885 50,244
Current Portion of Long Term Debt.......................................... 8,793 --
Private Placement Advance ................................................. 500,000 116,223
Accrued Expenses .......................................................... 552,005 248,764
Accrued Interest .......................................................... 493,401 --
Customer Deposits ......................................................... 24,009 --
----------- -----------
TOTAL CURRENT LIABILITIES ......................................... 5,127,637 3,703,582
----------- -----------
LONG TERM LIABILITIES
Notes Payable ............................................................. 16,348,771 --
Long Term Debt ............................................................ 43,971 --
Obligations under Capital Leases .......................................... 745,639 78,801
----------- -----------
TOTAL LONG TERM LIABILITIES ....................................... 17,138,381 78,801
Minority Interest ........................................................... 415,474 --
STOCKHOLDERS' EQUITY
Preferred Stock, par value $.01 per share, 8,000,000 authorized,
4,000,000 Series B Non-Voting Convertible Shares
issued outstanding at December 31, 1996 ................................. 40,000 --
Common Stock, par value $.05 per share, 40,000,000 authorized,
issued and outstanding 12,189,174 and 3,003,697
at December 31, 1996 and 1995, respectively.............................. 609,460 150,186
Additional Paid-In Capital ................................................ 18,295,820 5,320,629
Retained (Deficit) ........................................................ (8,978,629) (2,947,539)
Subscription Receivable ................................................... (6,000,000) --
Notes Receivable Arising from Common Stock Purchase Warrants Sold.......... (5,701) (59,001)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY ........................................ 3,960,950 2,464,275
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY ........................................ $26,642,442 $ 6,246,658
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
9
<PAGE>
<TABLE>
<CAPTION>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Preferred Stock Common Stock
------------------ --------------------- Additional
Shares Amount Shares Amount Capital
-------- ------- --------- -------- ----------
<S> <C> <C> <C> <C> <C>
Balance as of January 1, 1995................ 240,000 $ 2,400 1,516,086 $ 75,804 $ 644,942
Payment of Loan for Purchase B Warrants...... -- -- -- -- --
Conversion of Preferred Shares .............. (240,000) (2,400) 240,000 12,000 (9,600)
Sale of Common Stock ........................ -- -- 1,000,000 50,000 3,396,569
Sale of 2,000,000 "A" Warrants .............. -- -- -- -- 200,000
Sale of 300,000 "A" Warrants ................ -- -- -- -- 26,100
Stock Issued in Connection with Advertising
and Promotional Services................... -- -- 200,000 10,000 1,065,000
Replacement of Shares ....................... -- -- 47,611 2,382 (2,382)
Net Loss .................................... -- -- -- -- --
--------- ------- ---------- -------- -----------
Balance as of December 31, 1995.............. -- -- 3,003,697 150,186 5,320,629
Payment of Loan for Purchase B Warrants...... -- -- -- -- --
Sale of Common Stock ........................ -- -- 69,430 3,472 152,812
Issuance of Common Stock for Settlement
of Potential Litigation.................... -- -- 34,715 1,736 72,033
Warrants Issued In Connection With
Loan Agreements............................ -- -- -- -- 500,000
Sale of Common Stock ........................ -- -- 500,000 25,000 506,250
Shares Issued in Connection with
Marketing Agreement........................ -- -- 100,000 5,000 182,500
Shares Issued in Connection with
Consulting Agreement....................... -- -- 2,300,000 115,000 1,322,500
Shares Issued in Connection
with Acquisition .......................... -- -- 194,500 9,725 379,275
Conversion of Debentures .................... -- -- 5,706,832 285,342 2,924,220
Sale of Preferred Stock ..................... 4,000,000 40,000 -- -- 5,960,000
Shares Issued in Connection With
Debt Agreements............................ -- -- 280,000 14,000 975,601
Net Loss .................................... -- -- -- -- --
--------- ------- ---------- -------- -----------
Balance as of December 31, 1996.............. 4,000,000 $40,000 12,189,174 $609,460 $18,295,820
========= ======= ========== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
Notes Receivable
Arising From
Retained Common Stock
Paid-In Earnings Purchase Subscription
(Deficit) Warrant Receivable Total
---------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Balance as of January 1, 1995................ $ (318,580) $ (99,000) -- $ 305,566
Payment of Loan for Purchase B Warrants...... -- 39,999 -- 39,999
Conversion of Preferred Shares .............. -- -- -- --
Sale of Common Stock ........................ -- -- -- 3,446,569
Sale of 2,000,000 "A" Warrants .............. -- -- -- 200,000
Sale of 300,000 "A" Warrants ................ -- -- -- 26,100
Stock Issued in Connection with Advertising
and Promotional Services................... -- -- -- 1,075,000
Replacement of Shares ....................... -- -- -- --
Net Loss .................................... (2,628,959) -- -- (2,628,959)
----------- -------- ----------- -----------
Balance as of December 31, 1995.............. (2,947,539) (59,001) -- 2,464,275
Payment of Loan for Purchase B Warrants...... -- 53,300 -- 53,300
Sale of Common Stock ........................ -- -- -- 156,284
Issuance of Common Stock for Settlement
of Potential Litigation.................... -- -- -- 73,769
Warrants Issued In Connection With
Loan Agreements............................ -- -- -- --
Sale of Common Stock ........................ -- -- -- 531,250
Shares Issued in Connection with
Marketing Agreement........................ -- -- -- 187,500
Shares Issued in Connection with
Consulting Agreement....................... -- -- -- 1,437,500
Shares Issued in Connection
with Acquisition .......................... -- -- -- 389,000
Conversion of Debentures .................... -- -- -- 3,209,562
Sale of Preferred Stock ..................... -- -- (6,000,000) --
Shares Issued in Connection With
Debt Agreements............................ -- -- -- 989,601
Net Loss .................................... (6,031,090) -- -- (6,031,090)
----------- -------- ----------- -----------
Balance as of December 31, 1996.............. $(8,978,629) $ (5,701) $(6,000,000) $ 3,460,950
=========== ======== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
10
<PAGE>
<TABLE>
<CAPTION>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
----------------------------
1996 1995
---------- ----------
<S> <C> <C>
SALES
Electronics ............................................................... $ 2,978,142 $ 4,943,988
Commissions ............................................................... 3,394,444 3,792,527
Paging & Two Way Radio .................................................... 984,851 --
---------- ----------
TOTAL SALES ....................................................... 7,357,437 8,736,515
---------- ----------
COST OF SALES
Electronics ............................................................... 2,895,598 4,368,493
Commissions ............................................................... 2,851,363 3,195,601
Paging & Two Way Radio .................................................... 445,808 --
---------- ----------
TOTAL COST OF SALES ............................................... 6,192,769 7,564,094
---------- ----------
GROSS PROFIT ...................................................... 1,164,668 1,172,421
---------- ----------
EXPENSES
Selling ................................................................... 2,092,053 1,103,963
General and Administrative ................................................ 4,896,340 961,281
Advertising and Promotional Services ...................................... -- 1,075,000
---------- ----------
TOTAL EXPENSES .................................................... 6,988,393 3,140,244
---------- ----------
OPERATING LOSS BEFORE OTHER INCOME,
OTHER EXPENSES AND INCOME TAXES............................................ (5,823,725) (1,967,823)
OTHER INCOME
Minority Interest in Loss of Consolidated Subsidiaries................... 55,264 --
Interest Income ......................................................... 17,200 31,234
---------- ----------
TOTAL OTHER INCOME ................................................ 72,464 31,234
OTHER EXPENSES
Interest Expense .......................................................... 206,060 85,427
Settlement of Potential Litigation ........................................ 73,769 --
Amortization of Bridge Financing Costs .................................... -- 606,943
---------- ----------
TOTAL OTHER EXPENSES .............................................. 279,829 692,370
---------- ----------
NET LOSS BEFORE INCOME TAXES ................................................ (6,031,090) (2,628,959)
Income Taxes............................................................... -- --
---------- ----------
NET LOSS..................................................................... ($6,031,090) (2,628,959)
========== ==========
LOSS PER COMMON SHARE ....................................................... ($ 1.13) ($ 1.11)
========== ==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (NOTE 11)...................................................... 5,337,876 2,368,809
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
11
<PAGE>
<TABLE>
<CAPTION>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF CASH FLOWS
Year Ended December 31,
----------------------------
1996 1995
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss .................................................................. $ (6,031,090) $ (2,628,959)
Adjustments to Reconcile Net Loss to Net Cash Used By Operations:
Non-Cash Advertising and Promotional Services............................ -- 1,075,000
Issue of Common Stock For Marketing and Consulting Agreements............ 187,500 --
Depreciation and Amortization ........................................... 2,447,967 656,908
Provision for Doubtful Accounts ......................................... 493,923 50,790
Non-Cash Settlement of Potential Litigation ............................. 73,769 --
Minority Interest In Loss ............................................... (55,264) --
Changes in:
Accounts Receivable ................................................... 759,366 (664,636)
Inventories ........................................................... 217,613 67,659
Prepayments ........................................................... 55,024 (40,556)
Accounts Payable ...................................................... (119,657) 60,477
Security Deposits ..................................................... (98,904) (17,715)
Accrued Expenses and Taxes Payable .................................... 303,241 140,256
Accrued interest ...................................................... 14,000 --
Customer Deposits ..................................................... 24,009 --
---------- ----------
TOTAL ADJUSTMENTS ................................................. 4,302,587 1,328,183
---------- ----------
NET CASH USED BY OPERATING ACTIVITIES........................................ (1,728,503) (1,300,776)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Unrestriction of Cash ..................................................... 1,100,000 --
Bid Deposit ............................................................... -- (1,000,000)
Notes Receivable Arising from Common Stock Purchase Warrants............... 53,300 39,999
Deferred Licenses Costs ................................................. (42,122) (293,810)
Deferred Private Placement Costs ........................................ (11,456) --
Deferred Registration Costs ............................................. (84,176) --
License Costs ........................................................... (1,645,220) --
Additions to Property and Equipment ..................................... (726,140) (88,021)
Loan Receivable ......................................................... (8,000) (550,000)
Paging Carrier Agreement ................................................ 725,580 --
Payment for purchase of Threshold Communications, Inc.
net of cash acquired................................................... (158,511) --
Other Assets ............................................................ -- 6,496
---------- ----------
NET CASH USED BY INVESTING ACTIVITIES........................................ (796,745) (1,885,336)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of Shareholder Loans ............................................. (70,330) 187,616
Proceeds of Other Loans ................................................... 703,538 (112,000)
Payments of Bridge Loans .................................................. -- (800,000)
Payments of Bank Loans .................................................... (1,130,000) 1,135,000
Restriction of Cash ....................................................... -- (1,100,000)
Deferred Private Placement Costs .......................................... -- (225,787)
Private Placement Advance ................................................. 500,000 116,223
Net Proceeds from Debentures .............................................. 2,234,376 --
Principal Payments under Capital Lease Obligation ......................... (118,836) (2,528)
Principal Payments of Long Term Debt....................................... (3,288) --
Sale of Common Stock ...................................................... 570,976 3,869,385
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES.................................... 2,686,436 3,067,909
---------- ----------
NET INCREASE (DECREASE) IN CASH ............................................. 161,188 (118,203)
CASH, BEGINNING OF YEAR ..................................................... 18,000 136,203
---------- ----------
CASH, END OF YEAR ........................................................... $ 179,188 $ 18,000
========== ==========
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
Year Ended December 31,
----------------------------
1996 1995
---------- ----------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE FOR CASH FLOWS
CASH PAID DURING THE YEAR FOR :
Interest ................................................................ $ 206,060 $ 85,427
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Property Acquired Under Capital Leases .................................. 970,315 131,573
Issuance of Common Stock in Connection with Debt Agreements.............. 271,500
Issuance of Common Stock in Connection with
Conversion of Debentures............................................... 2,234,676
Fair Value of Debt Assumed in Connection with
Acquisition of PCS Licenses ........................................... 16,176,673
Fair Value of Assets Acquired ........................................... 1,114,000
Less: Cash Acquired ..................................................... 16,489
Conversion of Loans Receivable to Equity in Subsidiary .................. 550,000
Issuance of Common Stock ................................................ 389,000
</TABLE>
See Notes to Consolidated Financial Statements.
13
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- Summary of Significant Accounting Policies
(A) Business Activity and Basis of Presentation
During 1994, Electronics Communications Corp. (the "Company") changed its
name from Genetic Breeding, Inc. to Internow Affiliates, Inc. and then to
Electronics Communications Corp. Effective on January 1, 1994, the Company
acquired Free Trade Distributors, Inc. (which engages in the wholesale
distribution of cellular telephones and related accessories and electronic
products) and Trade Zone Distributors, Inc. (which engages in the activation of
cellular radio subscribers for commissions, both serving the New York
Metropolitan Area) in a business combination accounted for as a reverse
acquisition (the "Acquisition"). Accordingly, the historical financial
statements of Free Trade Distributors, Inc. and Trade Zone Distributors, Inc.
(the "Operating Entities" or "Acquirers") are included in the consolidated
statements of operations for the periods prior to the Acquisition. The assets
acquired and the liabilities assumed were recorded at cost. Historical
Stockholders' Equity of the Operating Entities has been retroactively restated,
as set forth in Note 2, in that the number of shares of common stock received in
the Acquisition, after adjustment of the par value of the Company's and the
Acquirers' common stock with an offset to additional paid-in capital. Retained
Earnings (deficiency) of the Acquirers were carried forward.
In 1995, the Company formed Electrocomm Wireless, Inc., a Delaware
corporation as a subsidiary, to become a radio paging and two-way radio carrier
in the New York Metropolitan Area and the State of New Jersey. On January 6,
1995, Electrocomm Wireless, Inc. entered into a one year contract to utilize the
transmission facilities of an unaffiliated paging carrier to commence paging
operations. The agreement required a non-refundable one-time connection fee of
$20,000, a monthly per diem charge per radio paging customer and the Company's
pro rata share of monthly access charges.
The contract expired in January and was not renewed.
In July 1995, the Company formed Personal Communications Network, Inc.
("PCN"), a Delaware corporation, as a majority (90%) owned subsidiary to
participate in the Federal Communications Commission auction for licenses to
engage in personal communications services ("PCS"). The Company has posted a bid
deposit of $1,000,000. On May 8, 1996 the Company obtained six PCS licenses for
$26,452,200 entitling it to operate wireless PCS telephone systems covering
nearly 1.5 million people in three states. Subsequent to year end, four (4)
officers and directors of the Company acquired a 24% interest in "PCN".
On March 22, 1996, Threshold Communications, Inc. ("TCI") acquired
substantially all of the assets and assumed certain liabilities of General
Communications and Electronics, Inc. ("GCE"). TCI also acquired as part of this
transaction 56 2/3% of the outstanding stock of General Towers of America, Inc.
(which engages in the business of providing two way radio services in the New
York Metropolitan Area). TCI and its subsidiary General Towers of America, Inc.
("GTA") are treated as subsidiaries of the Company.
On June 28, 1996, the Company acquired 51% of Threshold Communications,
Inc. (which engages in the business of providing radio paging services in the
New York Metropolitan Area.)
(B) Principles of Consolidation
The consolidated financial statements include the accounts of Electronics
Communications Corp., subsequent to the Acquisition, and its wholly-owned
subsidiaries, Free Trade Distributors, Inc., Trade Zone Distributors, Inc.
(Trade Zone Distributors , Inc. has a wholly owned subsidiary, Trade Zone
Distributors, II, Inc. which is an inactive, non-operating entity), Electrocomm
Wireless, Inc., and majority owned subsidiaries, Personal Communications
Network, Inc., Threshold Communications, Inc. and General Towers of America,
Inc. All significant intercompany accounts and transactions have been eliminated
in consolidation.
(C) Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided using
accelerated methods over the estimated useful lives of the respective assets (5
to 7 years). Depreciation expense charged to operations for the year ended
December 31, 1996 and 1995 was $546,535 and $49,965, respectively.
14
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ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1 -- Summary of Significant Accounting Policies (Continued)
(D) Inventories
Inventories are valued at the lower of cost or market, cost is determined
using the first in, first out method.
(E) Revenue Recognition
It is the Company's policy to categorize revenue into either sales from
electronic goods, commissions for fees earned on sales of cellular radio service
contracts or sales from its radio paging and two way radio services. Sales from
electronic goods includes, but is not limited to cellular phones and related
accessories and other electronic automobile and office products. Revenue from
the above mentioned products are recognized when they are shipped. Revenues from
sales of electronic goods represented 40% and 57% of the Company's total revenue
in 1996 and 1995. Commissions are inclusive of fees earned for the sale of
cellular radio service contracts and residuals received on those contracts.
Revenues and related commissions from the sale of the service contracts are
recognized at the point of activation. Revenues from residuals are realized when
approved by the cellular radio service supplier and are paid on customer usage
for a maximum of three years. Commission revenue represented 46% and 43% of the
Company's total revenue in 1996 and 1995. The Company establishes a reserve of
3.5% for charge-backs on customers that prematurely terminate cellular service.
In addition to the commissions paid by the cellular radio supplier, the Company
receives co-op fees. Co-op fees are reimbursements of expenditures that are
approved by the cellular radio supplier for advertising and promotion in
connection with the sale of cellular radio contracts. Revenues from radio paging
and two way radio services are recognized in the beginning of the month for
which they are invoiced and amounted to 13% of revenues in 1996.
(F) Concentration of Credit Risk
The Company maintains its major cash accounts in banks in the New York and
New Jersey Area. The total cash deposits are insured by the Federal Deposit
Insurance Corporation up to $100,000 per account.
The Company currently receives all of its commission revenue from one major
cellular radio carriers. Although there are a limited number of sources for this
type of revenue, management believes that other sources could provide similar
commissions on comparable terms. A change in carriers could cause a delay in
activations and a loss of sales which would affect operating results adversely.
(G) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
(H) Recent Pronouncements
During 1996, the Company adopted the provisions of two Statements of
Financial Accounting Standards ("SFAS") issued by the Financial Accounting
Standards Board. SFAS 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," requires that long-lived assets
and certain identifiable intangibles be reviewed periodically for impairment.
The adoption of SFAS 121 did not have a material effect on the financial
statements.
SFAS 123, "Accounting for Stock-Based Compensation" defines a fair value
based method of measuring and recording compensation costs for employee stock
compensation programs. The provisions of this FASB was used in valuing all
stock-based compensation transactions.
15
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ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1 -- Summary of Significant Accounting Policies (Continued)
(I) Fair Value of Financial Instruments
At December 31, 1996, the fair values of cash, cash equivalents,
non-convertible short term debt and current portion of long-term debt, accounts
payable, accrued interest, accrued salaries and other accrued liabilities
approximated their carrying values because of the short-term nature of these
instruments. The fair value and carrying amount of the Company's long term notes
payable, as described in Note 7G, are deemed to be approximately equivalent as
the note was issued based upon current interest rates.
NOTE 2 -- Acquisition, Recapitalization and Public Offering
(A) As described in Note 1, the Company acquired all of the outstanding
common stock of the Operating Entities. For accounting purposes the acquisition
has been treated as a recapitalization of the Operating Entities with the
Operating Entities as the Acquirers (reverse acquisition). As a result of this
transaction, historical additional paid-in capital of the Operating Entities was
retroactively reduced and common stock increased by $58,804 for the par value of
the 1,176,086 shares of common stock received in the transaction. Prior to the
acquisition, Free Trade Distributors, Inc. had 200 shares outstanding at $75 par
value or $15,000 in common stock and $60,000 in additional paid-in capital. The
recapitalization of these shares resulted in a transfer from common stock to
additional paid-in capital of $15,000. In 1993, Trade Zone Distributors, Inc.
was capitalized and issued 200 shares of $5 par value or $1,000 in common stock.
The recapitalization of these shares resulted in a transfer from common stock to
additional paid-in capital in the amount of $1,000. As a result of the reverse
acquisition, additional paid-in capital was also reduced by $13,354 on January
1, 1994 (the effective date of the acquisition). This is reflective of the
excess liabilities assumed over the assets by the Operating Entities. On January
1, 1994, the Company sold 340,000 shares of its common stock for $50,000. All
references in the financial statements and notes thereto to the number of shares
outstanding have been restated to reflect the 1 for 5 reverse common stock split
described below. Additionally, On May 25, 1995, 47,611 shares were issued to a
shareholder who did not receive the proper allocation when the company had its
reverse common split in Note 2B.
(B) On May 12, 1995 the Company successfully completed a public offering
(the "Offering"). The Company sold 1,000,000 shares of Common Stock and
2,000,000 Common Stock Purchase Warrants at an initial offering price of $5.00
per share and $.10 per Warrant. In order to complete this transaction the Board
approved a 1 for 5 reverse common stock split, in order to reduce the authorized
Common Stock from 42,000,000 shares to 8,400,000 shares and increase the par
value of the shares from $.01 to $.05. The Company also registered 1,000,000
shares of common stock owned by certain officers, directors and stockholders. In
addition, the Company granted the Underwriter an option to purchase up to
100,000 shares of Common Stock and 200,000 Common Stock Purchase Warrants. On
September 12, 1995 the Underwriter exercised the over-allotment option to
purchase an additional 300,000 warrants. All references in the financial
statements to average number of shares outstanding, per share amounts and stock
option plan data have been restated to reflect the reverse common stock split.
(C) On January 16, 1996 the Company consummated a Private Placement
Offering of 69,430 shares of the Company's $.05 par value common stock at a
price of $2.25 per share. The total offering resulted in gross proceeds of
$156,285 of which $116,223 was advanced to the Company prior to December 31,
1995. Each subscriber, in addition to the shares, received demand registration
rights, which require the Company to file a Registration Statement upon request
of 25% or more of the shares sold in the offering at anytime during the 18 month
period commencing 30 days from the closing date. In March 1996, the subscribers
demanded that the Company file a Registration Statement covering their shares.
The Company at that time was unable to comply with the request. In order to
avoid a potential litigation for failing to file a Registration Statement on a
timely basis, the Company issued a aggregate of 34,715 additional shares to the
subscribers. The additional cost of these shares issued were treated as an
increase of additional paid-in capital and expensed as a settlement of potential
litigation.
(D) On March 21, 1996, the Company entered into a letter of intent with an
investment banking firm (the "Placement Agent"), pursuant to which the Company
will offer $6,000,000 principal amount of the Company's Subordinated Convertible
Debentures (the "Debenture"). The principle amount of the Debentures shall be
convertible into shares of the Company's common stock at the option of the
holder, immediately upon issuance, at a price
16
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2 -- Acquisition, Recapitalization and Public Offering (Continued)
equivalent to 25% discount from the average high closing bid price for five days
prior to the conversion or $1.50, whichever is less. The Debenture bears
interest at the rate of 5% per annum payable on April 1 of each year commencing
April 1, 1997. The Debentures are redeemable and callable for conversion under
certain circumstances and are due April 1, 2002. The Company has advanced to the
Placement Agent a placement fee equal to 10% of the gross proceeds, a 2%
non-accountable expense allowance and to issue 200,000 Warrants to purchase the
Company's common stock at $2.25 per share. The Company intends to use the
proceeds of this offering to increase its deposit in the PCS auction, build out
its paging system and general working capital purposes. As of December 31, 1996
$2,990,000 was converted into 5,706,832 shares of Common Stock in accordance
with the Debenture.
The Company has recognized 975,520 in loan organization fees with regard to
the above mentioned debenture agreement. The loan organization fees were
recognized because the subordinated debentures were convertible to common stock
at a discount to market. The measurement date for determining these fees was the
date the convertible securities were issued, and will be amortized over the life
of the loan (five years). As of December 31, 1996 the Company had amortized
$975,520 of these fees due the conversion all of the debentures.
(E) On April 8, 1996, the Company entered into a contractual agreement with
a public relations and direct marketing firm for the intention of making its
name and business better known to shareholders, investors and brokerage houses.
The agreement is for a period of four months. The Company issued 100,000 shares
of its Common Stock and expensed $187,500 for marketing cost.
(F) On May 22, 1996, the Company completed a private placement of 500,000
shares of unregistered Common Stock for $625,000 ($1.25 per share). These shares
were sold at $.75 (37.5%) discount to the market price of the Company's Common
Stock on such date. This transaction was negotiated at arms length with the
investors. The primary reasons why the discount was so large, was based on the
aggregate amount of the shares relative to the total number of shares
outstanding, the limited liquidity in the Company's Common Stock at such time,
and the fact that the Common Stock was unregistered. Management determined that
it was in the best interest of the Company to sell such shares, because the
Company required large capital infusions to make the payments to the FCC for the
six PCS licenses the Company obtained on May 8, 1996. The Company paid $93,750
in associated placement fees and legal costs and issued 30,000 A warrants (2.25
exercise price) as additional consideration.
(G) On June 28, 1996, the Company purchased 51% of the common stock of TCI
and its majority owned subsidiary GTA for $725,000 in cash and $389,000 of its
common stock (194,500 shares at $2.00 per share).
The following unaudited pro forma combined results of operations for the
year ended December 31, 1996 and 1995 accounts for the acquisition described
above in Note 2G as if it had occurred on the beginning of the periods
presented.
Unaudited Pro Forma Combined Results of Operations
Year Ended Year Ended
December 31, 1996 December 31, 1995
------------- -------------
Sales............................... $8,492,801 $11,148,223
Net Loss ........................... ($5,815,046) ($2,630,059)
Net Loss Per Common Share .......... ($1.09) ($1.11)
(H) On September 4, 1996, the Company entered into a Client Service
Agreement with a public relations firm. Pursuant to the terms of the agreement,
the firm was hired as a financial public relations consultant to promote the
Company's business to the financial community. The term of the agreement is for
two years. In consideration of the services to be performed by the firm, the
Company issued 2,300,000 registered shares of the Company's common stock. The
above transaction resulted in a non cash expense of $1,437,500 of which
$1,205,137 was prepaid at December 31, 1996.
(I) In October 1996, the Company issued 200,000 shares of common stock to a
private lender as consideration for borrowing $500,000 (See Note 7H). In
addition, the private lender was granted 400,000 ($2.25 exercise price)
17
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2 -- Acquisition, Recapitalization and Public Offering (Continued)
Class A Warrants with "Piggy Back" rights. The shares and warrants were valued
at $742,100 and are included as loan origination fees and being amortized over
the term of the loan (one year).
(J) In November 1996, the Company issued 80,000 shares of common stock to a
private lender as consideration for borrowing $200,000 (See Note 7J). In
addition, the private lender was granted 160,000 Class A Warrants ($2.25
exercise price) with "Piggy Back" registration rights. The shares and warrants
were valued at $247,500 and are included as loan origination fees and being
amortized over the term of the loan. (one year).
(K) In December 1996, the Company by a private placement memorandum, is
offering for sale a maximum of 2,200,000, subsequently increased to 3,300,000
and a minimum of 700,000 units at a price of $1.50 per unit, subsequently
decreased to $1.00. Each unit consists of one (1) share of ECC common stock and
one and one-half (1 1/2) Class A Warrants. The Class A Warrant entitles the
purchaser to purchase one (1) additional share of common stock at $5.00 per
share, subsequently reduced to $2.25 per share, at any time prior to May 12,
1999, subject to prior redemption by the Company. For additional details
reference is made to the Private Placement Memorandum dated December 6, 1996.
See also Note 21.
NOTE 3 -- Accounts Receivable
Accounts Receivable consist of amounts due for sales of electronic goods,
commissions due from major cellular radio suppliers and from sales of radio
paging and two way radio service. Components of Accounts Receivable are $758,088
for the sale of electronic goods, $240,908 for commissions, and $252,711 for the
sale of radio paging and two way radio service at December 31, 1996 and
$1,503,303, $782,473 and $-0- at December 31, 1995, respectively.
NOTE 4 -- Other Assets
(A) Deferred Private Placement Costs consists of certain legal, accounting,
printing fees and other costs in connection with the private placement described
in Note 2K. These costs, together with any additional costs incurred in
connection with the placement will be recorded as a reduction of the proceeds to
be received from the sale of the securities offered.
(B) Deferred License Costs consists of various legal, consulting and
registration fees in connection with obtaining paging licenses and two-way radio
licenses. The licenses when put into service will be amortized over a fifteen
year period.
(C) The Paging Carrier Agreement consists of six paging licenses with
various paging carriers. The cost of such agreements are being amortized over a
fifteen year period.
(D) The PCS licenses were awarded in a Federal Communications Commissions
"C" Block Auction. The markets awarded the Company include Elmire-Corning, New
York; Bangor/Lewiston-Auburn/Waterville-Augusta, Maine; and
Burlington/Rutland-Bennington, Vermont. The Vermont markets encompass virtually
the whole state. The Maine markets cover a majority of the population and most
of the state geographically. The licenses expire and are subject to renewal
after ten (10) years.
The Company's total winning bids amounted to $26,452,200, after the 25%
discount provided to small businesses, which the Company qualifies for, under
the terms of the auction. The Company deposited cash of $2,645,220. The
remaining balance will be paid out over the next 10 years with 7% interest only
during the first six years. Included on the license costs are capitalized
interest in the amount of $479,401. The company has not begun PCS service. Upon
inception of such services, the Company will amortize the licenses and related
costs over a 10 year period.
NOTE 5 -- Loan Receivable
On December 31, 1996 the loan receivable-other consists solely of a note
due from one of the Company's consultants. This note is due December 31, 1997
and bears an interest rate of 8% payable on demand.
18
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6 -- Bid Deposit
The Company had participated in a Federal Communications Commission (the
FCC) auction for Personal Communication Services licenses. The FCC required an
advance payment in the amount of $1,000,000 which was fully refundable in the
event the Company was not the highest bidder. On May 8, 1996 the Company
obtained six PCS licenses entitling it to operate wireless PCS telephone systems
covering nearly 1.5 million people in three states (See Note 4D). The bid
deposit is included in PCS Licenses at December 31, 1996.
NOTE 7 -- Notes Payable
Notes Payable consist of the following:
(A) Notes Payable -- Other in the amount of $28,000 at December 31,
1995, and $5,000 at December 31, 1996 with interest at 10%, are payable on
demand. Payment of the notes are personally guaranteed by certain officers
and stockholders, and secured by a pledge of their personal property.
(B) On April 18, 1995, the Company entered into a financing agreement
with a bank in the amount of $100,000. This loan is personally guaranteed
by the Company's President, cross corporate guaranteed by Free Trade
Distributors, Inc. and secured by the Company's inventory. Interest is
payable monthly at the rate of 1.5% per annum in excess of the bank's
fluctuating prime lending rate. As of the date hereof, the interest rate
was 10.5%. The loan became due and payable on April 18, 1996. At December
31, 1996 the balance on this loan was $95,000. This note was temporarily
extended by the bank . On June 17, 1996 the bank extended the due date
until April 17, 1997.
(C) On October 6, 1995, the Company entered into a lending arrangement
with a bank. In connection herewith, the Company could borrow up to
$700,000 at an interest rate of 3/4% above the bank's base lending rate,
payable on demand. At December 31, 1995, the interest rate was 9.5%. The
Company deposited a $700,000 three month certificate of deposit with the
bank as collateral for such loan. The Certificate earns a 5% interest. The
loan is also secured by certain officers' personal guarantees, 245,000
shares of their stock and all the assets of the Company. On January 6, 1996
and then again on April 6, 1996 the bank extended the due date 90 days. The
note was paid in 1996.
(D) On December 22, 1995, the Company entered into a lending
arrangement with a bank. In connection therewith, the Company borrowed
$450,000 at an interest rate of 1% above the bank's base lending rate,
payable in ninety days. At December 31, 1995, the interest rate was 9.75%.
The Company deposited a $400,000 three month certificate of deposit with
the bank as collateral for such loan. The Certificate earns a 5% interest.
The loan is also secured by certain officers' and directors' personal
guarantees and inventory. On March 22, 1996 the bank extended the due date
90 days. The note was paid in 1996.
(E) On March 5, 1996, the Company entered into a financing arrangement
with a corporation in the amount of $134,000. The principal is due on March
5, 1997, interest is payable at a rate of 10% in monthly installments of
$1,117 per month. As additional consideration, the Company issued the
corporation 800,000 "A" warrants($2.25 exercise price) with 90 day
registration rights and "piggy back" registration rights with any other
offering of the Company. As a result of this transaction the Company
recognized $500,000 of Loan Origination Fees which are being amortized on
the life of the loan (one year).
(F) In connection with TCI's acquisition of GCE, the Company assumed a
$350,000 non-interest bearing note payable to a corporation owned by a
shareholder of the Company. The balance of this loan was $311,111 less an
unamortized discount of $45,990 (discount based on imputed interest of 12%)
for a net balance of $265,121 at December 31, 1996.
(G) The Notes Payable -- FCC consist of six 7% 10 year notes
aggregating $23,806,980. The notes are payable in quarterly installments of
interest only for the first six years and principal plus interest
thereafter. The notes are secured by the PCS licenses. The interest payment
due December 31, 1996 has not been paid. A default under this note ("Event
of Default") shall occur if the maker remains delinquent for more than 90
days.
19
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7 -- Notes Payable(Continued)
The fair value of the Company's Note Payable were estimated based on
an estimated fair value risk-adjusted interest rate of 14%. This fair value
risk-adjusted rate is based on rates obtained by other comparable wireless
telecommunications companies for debt financing.
(H) On September 20, 1996, the Company entered into a loan agreement
with a private lender, pursuant to which the Company borrowed $500,000. The
loan bears interest at the rate of 10% per annum. The loan becomes due and
payable on or before June 20, 1997, however the Company may request an
automatic three (3) month extension on the due date. The Company used the
proceeds of this loan for general corporate purposes.
(I) Purchase Money Notes Payable in monthly installments of $1,262
including interest at 13%. The last payment is due on August 1, 2001. This
loan is collateralized by equipment with a book value of $44,842. The
balance of this loan at December 31, 1996 was $52,764.
(J) On October 21, 1996 the Company entered into a loan agreement with
a private lender in the amount of $200,000. The loan is due in November
1997 with interest at 10% per annum. The loan is secured by all of the
Company's current accounts receivable as well as all equipment and fixtures
owned by the Company. See Notes 2J and 13.
NOTE 8 -- CAPITAL LEASE
Capital Leases include $1,117,073 for equipment. Minimum future lease
payments under capital leases as of December 31, 1996 for each of the next five
years and in the aggregate are:
1997................................................ $ 364,917
1998................................................ 349,959
1999................................................ 298,975
2000................................................ 203,982
2001................................................ 55,797
---------
Total Minimum Lease Payments........................ 1,273,630
Less: Amount Representing Interest................. (293,106)
---------
Present Value of Net Minimum Lease Payments......... 980,524
Less: Current Maturities included in
Current Liabilities................................ (234,885)
---------
Long Term Obligations Under Capital Leases.......... $ 745,639
=========
The interest rates on the capitalized leases range from 10% to 29.17% and
are imputed based on the lower of the Company's incremental borrowing rate at
the inception of each lease or the lessors implicit rate of return.
NOTE 9 -- Notes Payable -- Stockholders
Notes Payable -- Stockholders are unsecured and payable on demand with
interest at rates from 7.5% to 10.65% per annum.
NOTE 10 -- Other Advertising, Promotional and Marketing Services
(A) On July 21, 1995, the Company entered into an Advertising and
Promotional Services Agreement, pursuant to which the Company agreed to issue
200,000 shares of its common stock, $.05 par value, in exchange for services
provided to the Company. These services included analysis, advice, advertising
and promotional ideas and marketing campaign in connection with the Company's
development of its distribution of cellular products in South America. The
Company issued the stock to the consultant on August 8, 1995 which resulted in a
non-cash expense of $1,075,000 in the year ending December 31, 1995.
20
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10 -- Other Advertising, Promotional and Marketing Services (Continued)
(B) Various agreements described in Notes 2E and 2H were entered into
during 1996. These transactions resulted in a non-cash expense of $1,625,000 in
1996.
(C) On October 7, 1996 the Company entered into a consulting agreement.
Pursuant to the agreement the consulting firm is to provide financial consulting
and advisory services to the Company and its subsidiary PCN, including, without
limitation, general advice with respect to financing, acquisition, joint venture
or other corporate transactions. In consideration of the services to be rendered
PCN is issuing to the consulting firm or its designees ten shares of its common
stock representing an aggregate of 10% of the issued and outstanding shares of
PCN.
NOTE 11 -- Loss Per Common Share
The Company computes loss per common share by dividing the net loss by the
weighted average number of common stock and dilutive equivalent shares
outstanding, as retroactively adjusted to reflect shares issued for the business
combination described in Note 1A and the 1 for 5 reverse common stock split
described in Note 2A, and common stock equivalents outstanding during the
period. The computation of fully diluted net loss per share was antidilutive in
each of the periods presented; therefore, the amounts reported for primary and
fully diluted loss are the same.
NOTE 12 -- Convertible Preferred Stock
On July 23, 1996, the Board of Directors of the Company authorized the
issuance of an aggregate of 4,000,000 shares of Series B Preferred Stock
("Preferred Stock") with liquidation preferences of $.01 per share. Each share
of Preferred Stock is valued at $1.50 per share and convertible into 1.5 shares
of the Company's Common Stock. These shares were purchased by three (3) year
Promissory Notes ("Notes") bearing interest at the rate of 7% per annum. The
interest shall accrue and not be payable until the securities are sold. The
Notes shall be immediately extendible for additional one year terms. The Notes
are non-recourse, but collateralized by the Pledge of the Preferred Stock. Each
share of Preferred Stock is subject to a three year vesting period, whereby 1/3
was immediately vested, and the balance to be vested during the next two years
as long as the aforementioned individuals remain as either an officer or
director of the company.
NOTE 13 -- Warrants to Purchase Common Stock
(A) The Company approved the sale to certain officers, directors and
stockholders of 1,000,000 Common Stock Purchase B Warrants at a price of $.10
per Warrant, exercisable at $5.00 per share. On November 30, 1994, the Company
issued 990,000 Common Stock Purchase B Warrants for $.10 per Warrant, payable by
the Company accepting promissory notes bearing interest at 8% per annum due on
the earlier of the exercise of the Warrants, or December 1, 1996. On January 20,
1995, the Company agreed to reduce the exercise price of 300,000 B Warrants from
$5.00 to $2.50 and amended the exercise period of these 300,000 B Warrants so
that they are not exercisable until February 1, 1996. On November 20, 1995 the
board of directors authorized an amendment to the Warrant Agreement to provide
for the consolidation of 690,000 B Warrants having the same economic terms as
outstanding A Warrants and to permit the holders of such 690,000 B Warrants to
hold A Warrants in registered form. At this the board of directors authorized
the issuance of an additional 690,000 A Warrants to replace these 690,000 B
Warrants.
(B) During 1996, the company issued 560,000 shares of Class A Warrants in
connection with obtaining financing from certain private lenders. The Warrants
entitle the holder to purchase one share of common stock at a price of $2.25 and
are exercisable through May 12, 1999.
(C) On December 24, 1996 the board of directors authorized a reduction in
the exercise price of the A warrants from $5.00 to $2.25
21
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 13 -- Warrants to Purchase Common Stock (Continued)
(D) The Following is a summary of the warrant activity for each of the
periods presented;
<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Exercise Price
-------- ----------
<S> <C> <C>
"A" Warrants
Outstanding at January 1, 1995 .............................. 480,000 $2.25
Sold in Offering (Note 2B) .................................. 2,300,000 $2.25
Conversion from B Warrants to A Warrants (Note 13A).......... 690,000 $2.25
--------- -----
Total outstanding at December 31, 1995 ........................ 3,470,000 $2.25
--------- -----
Issued to Private Lender (Note 7E) ............................ 800,000 $2.25
Commission on Debenture Agreement (Note 20) ................... 1,400,000 $2.25
Issued to Private Lender (Note 7I) ............................ 400,000 $2.25
Issued to Private Lender (Note 7J) ............................ 160,000 $2.25
Issued as Commission to Underwriter (Note 2F) ................. 30,000 $2.25
--------- -----
Total Outstanding at December 31, 1996 ........................ 6,260,000 $2.25
========= =====
</TABLE>
NOTE 14 -- Income Taxes
The Company adopted the liability method of accounting for income taxes, as
set forth in Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Under the liability method, deferred taxes are determined
based on the differences between the financial statement and tax basis of assets
and liabilities at enacted tax rates in effect in the years in which the
differences are expected to reverse. The Company has not recorded provisions for
income taxes as it has consolidated net operating losses for income tax
purposes.
Deferred tax assets are comprised of the following:
December 31,
----------------------------
1995 1996
--------- ---------
Net Operating Loss Carryforwards...... $1,051,583 $2,412,436
Less: Valuation Allowance............. (1,051,583) (2,412,436)
--------- ----------
Net Deferred tax asset................ 0 0
========= ==========
Net deferred tax assets of approximately $1,051,583 and $2,412,436 at
December 31, 1994 and 1995, respectively, have been offset in full by a
valuation allowance as the Company has continually generated net losses from its
inception and is expected to continue to do so.
NOTE 15 -- Contingent Liabilities
(A) On December 1, 1994, the Company entered into an employment agreement
with the President of the Company for a term of five years with an option for an
additional three one year terms. The agreement provides for annual compensation
of $150,000 during the term of the employment agreement and entitles the
President to certain fringe benefits, including automobile maintenance,
disability insurance, medical benefits and life insurance coverage. The
President has agreed that during the term of his agreement and for 12 months
thereafter (unless the agreement is terminated without cause), he will be
subject to non-competition provisions. Upon termination of employment without
cause, the President will be entitled to a lump sum payment of $75,000
multiplied by the number of years of his employment by the Company.
(B) The Company has engaged a management company, which is an affiliate of
the Underwriter used in the Public Offering described in Note 2B, as the
Company's management consultant, for a period of 15 months commencing December
14, 1994, at a fee of $75,000 (exclusive of out-of-pocket expenses), which was
paid on May 12, 1995. In addition, the Company has agreed, subject to any
required regulatory approvals, to pay the Representative
22
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15 -- Contingent Liabilities (Continued)
a finder's fee, in the event that the Representative originates within five
years following the Effective Date of the Offering a merger, acquisition, joint
venture or other transaction to which the Company is party, in the amount equal
to 5% of the first $4,000,000, 4% of the next $1,000,000, 3% of the next
$1,000,000 and 2% of the excess, if any, over $6,000,000 of the consideration
actually received by the Company in any such transaction.
(C) On June 1, 1995, the Company entered into a consulting agreement with a
corporation owned by four of the Company's legal representatives for non-legal
services. In consideration for services performed by the consultant the Company
agreed to pay $144,000 per year for five years payable in monthly installments
of $12,000.
(D) On May 17, 1995, the Company entered into an employment agreement with
the Executive Vice President, which was amended on October 1, 1995. The term of
the agreement is for five years with an option for additional one year terms.
The agreement provides for annual compensation of $137,500 during the term of
the employment agreement and entitles the Executive Vice President to certain
fringe benefits, including automobile maintenance, disability insurance, medical
benefits and life insurance coverage. The Executive Vice President has agreed
that during the term of his agreement and for 6 months thereafter (unless the
agreement is terminated without cause), he will be subject to non-competition
provisions. Upon termination of employment without cause, the Executive Vice
President will be entitled to a lump sum payment of $50,000 multiplied by the
number of years of his employment by the Company.
(E) Effective September 12, 1996, the Company entered into Employment
Agreement with the Secretary of the Company. The form of the Agreement is for
five years, at an annual salary of $75,000, plus a monthly car allowance of
$750/month.
NOTE 16 -- Major Suppliers
Free Trade Distributors, Inc. purchased 100% of its cellular telephones and
related accessories from four major suppliers and Trade Zone Distributors, Inc.
received 100% of its income from one cellular radio supplier.
NOTE 17 -- Operating Lease
On May 15, 1996, the Company entered into a five year operating lease
expiring May 31, 2001 for a 14,000 square foot warehouse and office facility.
The Company has an option to renew the lease for a 5 year period at an adjusted
annual rent.
Minimum future rental payments under this non-cancelable operating lease
for each of the remaining years are:
1997............................................. $110,888
1998............................................. 110,888
1999............................................. 110,888
2000............................................. 110,888
2001............................................. 46,203
--------
Total Minimum Future Rental Payments............. $489,755
========
In addition, the Company rents tower space at numerous locations under
terms ranging from month to month to 5 years at a minimum annual rental of
approximately $200,000. Rent expense for 1996 and 1995 was approximately
$232,000 and $64,000 respectively.
NOTE 18 -- Amendment to Certificate of Incorporation
On March 12, 1996, at a meeting of the Company's shareholders a majority of
the Company's shareholders voted in favor of an amendment to the Company's
Certificate of Incorporation to increase the number of authorized shares of the
Company's common stock from 8,400,000 to 40,000,000.
23
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 19 -- Stock Option Plan
The Company's Board of Directors which adopted a Stock Option Plan (the
"Plan") approved by stockholders, under which, options to purchase up to an
aggregate of 500,000 shares of Common Stock are available for grants to
officers, directors, consultants and key employees of the Company. The Plan
provides for the grant of incentive stock options, non-qualified stock options
and director's options. The Plan will terminate in 2004, unless sooner
terminated by the Board of Directors. As a result of the reverse split the Board
of Directors, with stockholders approval, increased the number of shares of
Common Stock, after the effective date of the reverse split, which may be
subject to options granted under the Plan from 100,000 to 300,000. On July 10,
1995 the Company issued 20,000 options to a director of the Company at a price
of $3.80, 5,000 of these options were exercisable immediately, 5,000 on July 10,
1996, 5,000 on July 10, 1997 and 5,000 on July 10,1998 and expire on July 10,
2,000. The fair value of the stock was less than the option price therefore no
compensation expense was recognized in 1995. On June 3, 1996, the Company issued
an additional 60,000 options to certain directors of the Company at an exercise
price of $1.80, 15,000 options were exercisable immediately. An additional
15,000 shares shall be exercisable on June 3, 1997, 1998, 1999. The options will
expire if not previously exercised on or before June 3, 2001. No shares have
been exercised under the Plan. The fair value assigned to the options was
immaterial, therefore no compensation expense was recognized in 1996.
The following is a summary of the Plan activity for each of the periods
presented;
Weighted
Average
Number of Exercise
Shares Price
------- ------
Outstanding at January 1, 1995
1995 Grant.............................. 20,000 $3.80
------ -----
Total outstanding at December 31, 1995 ... 20,000 $3.80
------ -----
1996 Grant................................ 60,000 $1.80
------ -----
Total Outstanding at December 31, 1996 ... 80,000 $2.30
====== =====
NOTE 20 -- Pending Litigation
(A) On March 4, 1996 the Company commenced an action entitled Electronics
Communications Corp. as Plaintiff against Toshiba America Consumer Products,
Inc. ("Toshiba") and Audiovox Corporation, as defendants, case number 96 Civ.
1565, pending in the United States District Court, for the Southern District of
New York. The complaint asserts claims for antitrust, breach of contract,
tortious interference with contract and tortious interference with prospective
economic advantage and business relations. The complaint seeks damages in excess
of $5,000,000 and treble damages of more than $16,000,000. This action was
commenced because the Company expended significant moneys and resources
including the issuance of 200,000 shares of the Company's Common Stock to a
consultant in anticipation of South American cellular telephone program which
the Company was to undertake exclusively on behalf of Toshiba based on certain
reliance on Toshiba, and the withdrawal of Toshiba's commitment based on an
unlawful conspiracy with Audiovox. Immediately prior to the commencement of the
program, Toshiba discontinued manufacturing the line of cellular telephones that
the program was designed to offer. This decision which the Company believes was
coerced by Audiovox, has caused significant damages to the Company.
The defendants, Toshiba and Audiovox, moved to dismiss a portion of the
case, claiming that the Company had not pled a cognizable antitrust cause of
action, and that the remaining claims should be dismissed for lack of
supplemental jurisdiction, which could then be prosecuted in the state Courts.
On August 12, 1996 the Court ruled in favor of the motion of defendants Toshiba
and Audiovox and the cause was dismissed on such date. The Company appealed the
Court's ruling, filing its Brief on Appeal on February 21, 1997. On March 12,
1997, Toshiba and Audiovox served their responsive brief, and oral argument
before the United States Court of Appeals for the Second Circuit is scheduled
for May 22, 1997.
24
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 20 -- Pending Litigation (Continued)
(B) On or about March 11, 1997, the Company was served with a summons and
complaint in an action entitled "Daily News, L.P. v. Free Trade a/k/a Free Trade
Distributors, Inc. and Electronics Communications Corp.," pending in the United
States District Court for the Southern District of New York. The Plaintiff, The
Daily News, claims breach of a certain Advertising Contract, in that the
Company's subsidiary failed to pay for certain advertising and failed to meet
the minimum advertising expenditures set forth, resulting in the imposition of a
"short rate." As a result, Plaintiff claims damages aggregating $156,284.87. The
Company believes it has an excellent working relationship with The Daily News,
and that this resulted from a misunderstanding between the respective principals
of the parties, which remained unclarified due to the illness of an officer of
the Company. Counsel for the Company and the Daily News have conferred, and have
stipulated to extend the Company's time to answer or move with respect to the
Complaint, so that the principals may confer.
An additional claim has been asserted by a former supplier of the Company,
claiming that the Company owes it approximately $400,000 for merchandise
delivered. No formal action has commenced, although counsel have exchanged
letters. Counsel for the Company has advised the potential claimant that the
Company believes it has valid and compelling counterclaims which equal or exceed
such party's claims for payment. No assurance can be given that a settlement
will be achieved, or that litigation will not result.
NOTE 21 -- Business Plan and Liquidity
The Company's financial statements for the year ended December 31, 1996
have been prepared on a going concern basis, which contemplates the realization
of assets and settlement of liabilities and commitments in the normal course of
business. The Company has incurred net losses of $6,031,090, and $2,628,959 for
the years ended December 31, 1996 and 1995. The Company has a working capital
deficiency of $2,841,840 at December 31, 1996 and its cash used by operations in
1996 were $1,728,503. The Company also has debts due in 1997 of approximately
$1,400,000. As of May of 1997 the Company has received subscriptions for
approximately 2,500,000 units ($2,500,000 at 1$ a unit) of the private placement
offering described in Note 2k. If cash flows from operations were assumed to be
the same for 1996 as 1997 the company would have an approximate cash shortfall
of $630,000. The Company has taken steps to minimize this cash shortfall. In the
first quarter of 1997 the Company became a fully functional paging carrier which
should increase cash flows from operation by $500,000. As described in Note 21
the Company has severed its relationship with its sole source of 1996 cellular
revenues. The Company has replaced this source with two additional sources, one
relating to solicitations and the other to PCS activations. The Company's
profitability, on a transactional basis, from these two additional sources of
commission revenue is greater than it has had in the past. It is anticipated
that this increased profitability will increase cash flows from operations by
$150,000. If, after taking into account the above items, the Company were to
still have a cash shortfall it would be funded by cutting certain overhead costs
and if need by loans to the Company by certain officers.
In addition to the above steps , management recognizes that the Company
must generate additional resources or consider modifying operations to enable it
to continue operations with available resources. Management's plans also include
consideration of the sale of additional equity securities under appropriate
market conditions, alliances with entities interested in and resources to
support the Company's operation or other business transactions which would
generate sufficient resources to assume continuation of the Company's
operations.
The Company has retained investment banking firm to advise it on the
possible sale of equity securities as well as to introduce and assist in the
evaluation of potential merger and partnering opportunities. The Company also
has retained independent consultants to assist it to identify other entities
interested in its business. Management expects that these efforts will result in
the introduction of other parties with interests and resources which may be
compatible with that of the Company. However, no assurances can be given that
the Company will be successful in raising additional capital or entering into a
business alliance. Further, there can be no assurance, assuming the Company
raises additional funds or enters into a business alliance, that the Company
will achieve profitability or positive cash flow. If the Company is unable to
obtain adequate additional financing or enter into such business alliance,
management will be required to sharply curtail the Company's operations.
25
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 22 -- Subsequent Events
The Company has consummated a "Settlement & Separation Agreement" severing
its agency relationships with NYNEX Mobile Communications, Inc. ("NYNEX") and
Bell Atlantic Mobile Communications, Inc, ("Bell Atlantic") with respect to the
solicitation of cellular activations. This was the Company's largest source of
commission and other income over the past twelve months. As part of this
arrangement, the Company agreed to settle its claims for commissions due for the
fixed sum of $95,000, net of NYNEX's and Bell Atlantic's agreement to waive
certain payables by the Company. In addition, as part of the Settlement and
Separation Agreement, Bell Atlantic and NYNEX have agreed to release the Company
from the restrictions of certain solicitation and non-competition provisions
contained in the Company's Agency Agreements with NYNEX and Bell Atlantic,
respectively, which provisions would have precluded the Company from soliciting
prior customers and from engaging in solicitations of activations for Personal
Communications Services ("PCS") in the New York Metropolitan Area. The Company
continues to believe that PCS is the future to wireless communications. The
Company has already entered into various preliminary agreements with respect to
soliciting activations for PCS, and cellular activations on behalf of OmniPoint
and AT&T (directly or through various agents) in the New York Metropolitan Area.
By virtue of these arrangements, the Company believes that in the next several
months it will be able to replace most or all of its prior commission income
derived from its NYNEX and Bell Atlantic Agency Agreements. During this period,
the Company will continue to experience cash flow shortfalls. Neither of the
Omnipoint, nor the indirect AT&T arrangements, preclude the Company from other
PCS activities, including activation solicitations for others. Accordingly, the
Company will continue its efforts to build out and operate its own PCS system,
pursuant to its recently acquired FCC PCS Licenses, and to operate and expand
its proprietary paging system, in which capacities the Company acts, or will
act, as an FCC licensed carrier.
In December 1996, the Company by a private placement memorandum, is
offering for sale a maximum of 2,200,000 and a minimum of 700,000 units at a
price of $1.50 per unit. Each unit consists of one (1) share of ECC common stock
and one and one-half (11/2 Class A Warrants. The Class A Warrant entitles the
purchaser to purchase one (1) additional share of common stock at $5.00 per
share, subsequently reduced to $2.25 per share, at any time prior to May 12,
1999, subject to prior redemption by the Company. For additional details
reference is made to the Private Placement Memorandum dated December 6, 1996.
The Placement agents will receive, in the aggregate, a selling commission of up
to ten (10%) percent of the aggregate amount of the Unit offering, plus a 1%
non-accountable due diligence allowance, and an outright grant of 750,000 A
Warrants (assuming the Maximum offering price is achieved, featuring the same
terms as the A Warrants included in the Units), which shall be allocated and
distributed to the Placement Agents pro rata, based on the number and percentage
of Units placed by such Placement Agent(s), and the aggregate amount of sale
proceeds generated. This grant of the warrants will be included in the
underwriting commission and deducted from the proceeds of the offering.
Subscriptions for 1,408,000 units have been received as of April 15, 1997.
The Company has determined to reduce the per unit offering price to Investors
from $1.50 to $1.00 per unit. The Company will maintain the maximum offering
proceeds as $3,300,000. Assuming that the maximum Offering is achieved, a total
of 3,300,000 Units will be sold rather than 2,200,000 Units. The offering had
been extended to May 31, 1997, but may be terminated sooner in the discretion of
management. As of April 28, 1997 the Company has closed on $2,150,000 in
aggregate subscriptions, leaving approximately $1,150,000 remaining for sale.
NOTE 23 -- Correction of an Error
The accompanying financial statements have been restated to give effect to
various adjustments arising from the issuance of the convertible debentures
described in Note 2d and the loan agreement in Note 7(E) (H) (I). The effect of
the restatement was to decrease Net Income for the year ended December 31, 1996
by $367,036 ($.07 per share), decrease other assets by $5,324,321.40, decrease
long term liability by $7,630,307, and increase stockholder equity by
$1,826,585.
26
<PAGE>
MARKET INFORMATION
The Company's Common Stock is traded on The Nasdaq Stock Market, Inc. under
the symbol "ELCC". The following table sets forth the range of high and low
closing bid prices for the Common Stock on the NASDAQ Small Cap Market for the
periods indicated as derived from reports furnished by the National Quotation
Bureau. All such prices have been adjusted to give effect to the one-for-twelve
reverse stock split effected on July 31, 1997. Prices for periods prior to the
split have been computed by multiplying the actual bid price by twelve. No
assurances can be given that the actual bid prices for the Common Stock would
have approximated the prices set forth in the table for periods prior to July
31, 1997 if the one-for-twelve reverse stock split had been in effect during
such prior period. Furthermore, the prices in the table represent prices between
dealers, do not include mark-ups, mark-downs or commissions and may not
necessarily represent actual transactions.
Closing Bid Price
------------------
Calendar Year High Low
---------- ------ ------
1996
First quarter................. $27.75* $22.50*
Second quarter................ 30.75* 18.00*
Third quarter................. 23.25* 6.375*
Fourth quarter................ 27.00* 15.375*
1997
First quarter................. $22.50* $15.375*
Second quarter................ 18.375* 4.875*
July 1-30..................... 5.25* 3.75*
July 31-- September 30........ 3.00 1.625
Fourth quarter................ 2.9375 1.375
- ----------
* As Adjusted
On April 17, 1998, there were 489 record holders of the Common Stock. In
view of the fact that a large number of shares are in nominee name, the Company
believes that the number of beneficial owners is substantially greater.
The Company has not paid dividends on its Common Stock in the past and
anticipated capital requirements make it unlikely that it will pay dividends on
the Common Stock in the foreseeable future.
27
<PAGE>
Officers
- --------
Joseph A. Rosio
Chairman of The Board,
President & CEO
Christopher J. Garcia
Secretary, Treasurer, CFO
& Director
Directors
- ---------
Joseph A. Rosio
Christopher J. Garcia
John P. Cassella
National Service Director
Wiltel Telecommunications, LLC
Rocky Hill, CT
Manufacturer and Provider of
Telecommunications Products
and Services
Mal Gurian
Chairman of The Board,
Authentix Networks, Inc.
Tuscon, AZ
Provider of Subscriber
Authentication for Cellular
Telephone Carriers
Legal Counsel
- -------------
Tolins & Lowenfels
A Professional Corporation
12 East 49th Street
New York, New York 10017
Auditors
- --------
Wiss & Co., LLP
354 Eisenhower Parkway
Livingston, NJ 07039
Common Stock
- ------------
Nasdaq Symbol "ELCC"
A copy of the Company's annual report on Form 10-K for the year ended December
31, 1996 may be obtained by addressing a written request to Electronics
Communications Corp, Shareholder Relations, 425 Broad Hollow Road, Melville, NY
11747.
<PAGE>
[LOGO]ECC
ELECTRONICS COMMUNICATIONS CORP.
425 Broad Hollow Road
Melville, New York 11747
Telephone: (516) 501-0466
