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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10QSB
--------------------------
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from---------------- to ---------------
COMMISSION FILE NUMBER 1-13764
NORTHEAST DIGITAL NETWORKS, INC.
(FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
Delaware 11-2649088
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
425 Broad Hollow Road
Melville, New York 11747
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (516) 501-0466
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of the registrant's common stock ($.60 par value)
outstanding as of August 15, 1998 was 12,555,071 shares.
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<PAGE>
NORTHEAST DIGITAL NETWORKS, INC.
(FORMERLY ELECTRONICS COMMUNICATIONS CORP.) AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 1998 (unaudited) and
March 31, 1998
Consolidated Statements of Operations for the three months ended
June 30, 1998 (unaudited) and 1997 (unaudited)
Consolidated Statements of Cash Flows for the three months ended
June 30, 1998 (unaudited) and 1997 (unaudited)
Consolidated Statement of Changes in Stockholders' Equity for the
three months ended June 30, 1998 (unaudited)
Notes to Consolidated Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
PART II. OTHER INFORMATION
SIGNATURE PAGE
1
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC.
(FORMERLY ELECTRONICS COMMUNICATIONS CORP.) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, MARCH 31,
ASSETS 1998 1998
---------- ----------
(UNAUDITED)
CURRENT ASSETS:
Cash .................................... $ 1,087,815 $ 1,767,930
Accounts Receivable
(Net of $71,000 Allowance for
Doubtful Accounts at
June 30, 1998 and March 31, 1998) ..... 48,919 62,217
Prepaid Expenses ........................ 20,164 21,071
------------ ------------
TOTAL CURRENT ASSETS ............ 1,156,898 1,851,218
------------ ------------
PROPERTY AND EQUIPMENT:
Property and Equipment .................. 1,655,573 1,686,122
Accumulated Depreciation ................ (657,852) (649,732)
------------ ------------
NET PROPERTY AND EQUIPMENT ...... 997,721 1,036,390
------------ ------------
OTHER ASSETS:
PCS Licenses ............................ 12,440,526 22,300,351
Deferred Registration Costs
and Loan Origination Fees ............. 13,701 13,701
Paging System Costs ..................... 663,848 676,614
Debt Issue Cost ......................... 615,089 1,020,000
Security Deposits and Other Assets ...... 112,379 113,965
------------ ------------
TOTAL OTHER ASSETS .............. 13,845,543 24,124,631
------------ ------------
TOTAL ASSETS ............................... $ 16,000,162 $ 27,012,239
============ ============
See Notes to Consolidated Financial Statements.
2
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC.
(FORMERLY ELECTRONICS COMMUNICATIONS CORP.) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, MARCH 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1998
---------- ----------
(UNAUDITED)
CURRENT LIABILITIES:
Accounts Payable and Accrued Expenses ..... $ 1,429,345 $ 1,316,606
Notes Payable--Other ...................... 808,177 795,677
Current Portion of Long Term Debt ......... 377,305 332,524
Current Portion of Note Payable to FCC .... 419,871 158,670
------------ ------------
TOTAL CURRENT LIABILITIES .......... 3,034,698 2,603,477
------------ ------------
LONG TERM LIABILITIES:
Notes Payable to FCC ...................... 8,639,281 18,760,307
Long Term Debt ............................ 481,762 1,087,345
------------ ------------
TOTAL LONG TERM LIABILITIES ........ 9,121,043 19,847,652
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, no par value, 45
authorized Series C Non-voting
Convertible 30.5 Shares issued
and outstanding at June 30, 1998
and 45 at March 31, 1998 ................ -- --
Common Stock, par value $.60 per share,
40,000,000 authorized, 10,102,323
issued and outstanding at
June 30, 1998 and 5,531,705
at March 31, 1998 ....................... 6,118,216 3,375,845
Additional Paid-In Capital ................ 22,189,908 24,443,726
Accumulated Deficit ....................... (22,792,177) (21,203,461)
Discount on Common Stock available to
Series C Preferred Shareholders ......... (1,671,526) (2,055,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ......... 3,844,421 4,561,110
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY ..................... $ 16,000,162 $ 27,012,239
============ ============
See Notes to Consolidated Financial Statements.
3
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC.
(FORMERLY ELECTRONICS COMMUNICATIONS CORP.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE THREE
MONTHS ENDED MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997
------------- -------------
(UNAUDITED) (UNAUDITED)
REVENUES:
Paging & Two Way Radio ................... $ 203,339 $ 545,532
Commissions .............................. -- 95,573
Electronics .............................. -- 9,614
----------- -----------
TOTAL REVENUES..................... 203,339 650,719
----------- -----------
COST OF SALES:
Paging & Two Way Radio ................... 171,463 347,167
Commissions .............................. -- 85,663
Electronics .............................. -- 9,421
----------- -----------
TOTAL COST OF SALES ............... 171,463 442,251
----------- -----------
GROSS PROFIT (LOSS) ............... 31,876 208,468
----------- -----------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES:
Selling .................................. -- 542,204
General and Administrative ............... 800,510 938,195
----------- -----------
TOTAL SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ........ 800,510 1,480,399
----------- -----------
INCOME (LOSS) FROM OPERATIONS ............... (768,634) (1,271,931)
----------- -----------
OTHER (INCOME) EXPENSE:
Interest Expense ......................... 838,800 94,263
Interest Income .......................... (18,718) (430)
----------- -----------
TOTAL OTHER (INCOME) EXPENSE ...... 820,082 93,833
----------- -----------
LOSS BEFORE MINORITY INTEREST ............... (1,588,716) (1,365,764)
----------- -----------
MINORITY INTEREST IN GAIN (LOSS) OF
CONSOLIDATED SUBSIDIARIES ................... -- (3,802)
----------- -----------
NET LOSS .................................... $(1,588,716) $(1,369,566)
=========== ===========
LOSS PER COMMON SHARE ....................... $ (0.19) $ (1.30)
=========== ===========
See Notes to Consolidated Financial Statements.
4
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC.
(FORMERLY ELECTRONICS COMMUNICATIONS CORP.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1997
------------ ------------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net Loss ................................................... $(1,588,716) $(1,369,566)
Adjustments to Reconcile Net Loss to
Net Cash Used By Operations:
Issuance of Common Stock for Interest Expense ............... -- 33,334
Depreciation and Amortization .............................. 84,928 355,481
Provision for Bad Debts .................................... -- 4,404
Non-cash Amortization of Finance Charges ................... 787,645 --
Marketing Service Contracts ................................ -- 177,226
Minority Interest in Loss (Income) ......................... -- (3,802)
Changes in:
Accounts Receivable ........................................ 13,298 (49,871)
Inventories ................................................ -- 70,360
Prepayments ................................................ 907 --
Accounts Payable and Accrued Expenses ...................... 112,673 (45,217)
Accrued Interest ........................................... 19,387 416,622
Security Deposits and Other ................................ 1,586 (1,075)
----------- -----------
TOTAL ADJUSTMENTS .................................. 1,020,424 957,462
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES ......................... (568,292) (412,104)
----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC.
(FORMERLY ELECTRONICS COMMUNICATIONS CORP.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1997
------------- -------------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM INVESTING ACTIVITIES
<S> <C> <C>
PCS License ................................................ $ -- $ (448,793)
Additions to Property and Equipment ........................ (32,687) (5,524)
Other Asssets .............................................. -- (5,599)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES ......................... (32,687) (459,916)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Deferred Private Placement Costs ........................... -- 347,971
Payment for Deferred Registration Costs .................... -- (137,969)
Net Proceeds (Payments) of Shareholder Loans ............... -- 20,389
Private Placement Advance .................................. -- (1,628,254)
Payments of Bank Loans ..................................... -- (364,059)
Proceeds from Debentures Advance ........................... -- 1,061,302
Principal payments of Capital Lease Obligations ............ (54,261) (57,292)
Proceeds from Sale of Common Stock ......................... -- 1,604,759
Payments of Long Term Debt ................................. (24,875) --
----------- -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES .............. (79,136) 846,847
----------- -----------
NET INCREASE (DECREASE) IN CASH ............................... (680,115) (25,173)
----------- -----------
CASH, BEGINNING OF PERIOD ..................................... 1,767,930 48,620
----------- -----------
CASH, END OF PERIOD ........................................... $ 1,087,815 $ 23,447
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC.
(FORMERLY ELECTRONICS COMMUNICATIONS CORP.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1997
------------- -------------
(UNAUDITED) (UNAUDITED)
SUPPLEMENTAL DISCLOSURE FOR CASH FLOWS
CASH PAID DURING THE PERIOD FOR:
<S> <C> <C>
Interest ................................................... $ 31,768 $ 94,263
Taxes ...................................................... -- --
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Common Stock Issued for Payment of Loan Payable ............ -- 375,000
Exchange of Convertible Debt for Common Stock .............. 448,553 --
Exchange of Preferred Stock for Common Stock ............... 2,077,478 --
Non Cash interest capitalized on Note Payable to FCC ....... 208,311 --
</TABLE>
See Notes to Consolidated Financial Statements.
7
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC.
(FORMERLY ELECTRONICS COMMUNICATIONS CORP.) AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------ ----------------------
SHARES AMOUNT SHARES AMOUNT
------- ------ ---------------------
<S> <C> <C> <C> <C>
Balance as of March 31, 1998 ..... 45 -- 5,531,705 $ 3,375,845
Conversion of 8% cumulative
convertible debentures into
Common Stock ................... -- -- 1,108,155 664,893
Conversion of Series C Preferred
Stock into Common Stock ........ (14.5) -- 3,462,463 2,077,478
Amortization of discount on Common
Stock available to Preferrred
Shareholders .................. -- -- -- --
Net Loss..........................
------- ------ ------------ ------------
Balance as of June 30, 1998 ...... 30.5 -- 10,102,323 $ 6,118,216
======= ====== ============ ============
</TABLE>
<TABLE>
<CAPTION>
DISCOUNT ON
NOTES RECEIVABLE COMMON
ARISING FROM STOCK
ADDITIONAL COMMON STOCK AVAILABLE TO
PAID-IN ACCUMULATED PURCHASE PREFERRED N
CAPITAL DEFICIT WARRANT SHAREHOLDERS TOTAL
---------- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Balance as of March 31, 1998 ..... $ 24,443,726 $(21,203,461) -- $(2,055,000) $ 4,561,110
Conversion of 8% cumulative
convertible debentures into
Common Stock ................... (176,340) -- -- -- 488,553
Conversion of Series C Preferred
Stock into Common Stock ........ (2,077,478) -- -- -- --
Amortization of discount on Common
Stock available to Preferrred
Shareholders .................. -- -- -- 383,474 383,474
Net Loss.......................... (1,588,716) -- -- (1,588,716)
------------ ------------ -------- ------------ ------------
Balance as of June 30, 1998 ...... $ 22,189,908 $(22,792,177) $ -- $ (1,671,526) $ 3,844,421
============ ============ ======== ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
8
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BUSINESS ACTIVITY AND BASIS OF PRESENTATION
In June of 1998, Northeast Digital Networks, Inc. (the "Company") changed
its name from Electronics Communications Corp. During 1994, Electronics
Communications Corp. 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
engaged in the wholesale distribution of cellular telephones and related
accessories and electronic products) and Trade Zone Distributors, Inc. (which
engaged in the activation of cellular radio subscribers for commissions), both
serving the New York Metropolitan Area. The Company no longer distributes
cellular telephones and related accessories and electronic products nor does it
engage in the activation of cellular telephones for commissions.
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. The Company is
presently inactive. In July 1995, the Company formed Personal Communications
Network, Inc. ("PCN"), a Delaware corporation, to participate in the Federal
Communications Commission ("FCC") auction for licenses to engage in personal
communications services ("PCS"). 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 five states. On June 8, 1998, the Company
elected a debt relief option (the "Disaggregation Option") offered by the FCC.
The election of the Disaggregation Option for all six licenses permitted the
return of 15 MHz of the 30 MHz originally awarded the Company in exchange for a
reduction of the debt incurred for such licenses (see Note 2). PCN is 100% owned
by the Company.
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"). GCE is in the business of
reselling paging air time to corporate clients. 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. During the first
quarter of fiscal 1999, GTA ceased all operations.
On June 28, 1996, the Company acquired 51% of TCI. On January 2, 1998, the
Company purchased the remaining 49% of TCI for a $90,000 cash payment.
On July 31, 1997, the Company's board of directors effected a 1 for 12
reverse stock split of its $.05 par value common stock. The new common stock has
a $.60 per share par value. On May 28, 1998, the Company's stockholders ratified
the reverse stock split at a special meeting of stockholders. All references to
number of common shares for all periods presented reflects the ratification and
have been retroactively restated for the reverse stock split. See Note 15 for
discussion of proposed 1 for 8 reverse stock split.
On August 11, 1997, the Company changed its fiscal year end from December
31 to March 31.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Article 10 of
Regulation S-X. Accordingly, they do not necessarily include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months ended
June 30, 1998 are not necessarily indicative of the results that may be expected
for the year ended March 31, 1999. The unaudited consolidated financial
statements should be read in conjunction with the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10KSB as amended for the year ended March 31, 1998.
9
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company,
its wholly owned subsidiaries, Free Trade Distributors, Inc., Trade Zone
Distributors, Inc., Personal Communications Network, Inc., Threshold
Communications, Inc. and majority owned 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
straight line and accelerated methods over the estimated useful lives of the
respective assets (5 to 7 years).
(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 (i) sales of
its paging and two way radio services, (ii) commissions for fees earned on sales
of cellular radio service contracts, and (iii) sales of electronic goods. Sales
of electronic goods are recognized when they are shipped.
Commissions are inclusive of fees earned for the sale of cellular telephone
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 telephone service supplier and are paid on customer usage for a maximum
of three years.
Revenues from paging and two-way radio services are recognized in the
beginning of the month for which they are invoiced.
(F) CONCENTRATION OF CREDIT RISK
The Company maintains its major cash accounts in banks in New York. The
total cash deposits are insured by the Federal Deposit Insurance Corporation up
to $100,000 per account. Uninsured balances at June 30, 1998 totaled
approximately $1,107,000.
(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) FAIR VALUE OF FINANCIAL INSTRUMENTS
At June 30, and March 31, 1998, the fair values of cash, accounts
receivable, non-convertible short term debt and current portion of long-term
debt and accounts payable, 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 to the FCC with an actual interest rate of
7% and the corresponding PCS Licenses were adjusted to reflect an imputed
interest rate of 14% which more closely corresponds to the Company's borrowing
rate.
10
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(I) EARNINGS PER SHARE
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standard (SFAS) No. 128, "Earnings Per Share" which was
issued in February 1997 and is effective for periods ending after December 15,
1997. SFAS No. 128 replaces the presentation of primary and fully diluted
earnings per share. The Company uses the weighted-average number of common
shares outstanding during each period to compute basic earnings per common
share. Diluted earnings per share is computed using the weighted-average number
of common shares and dilutive potential common shares outstanding. Dilutive
potential common shares are additional common shares assumed to be exercised.
(J) STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting For Stock Issued To Employees (APB 25) and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of employee stock options equals the market price of
the underlying stock on the date of grant, no compensation expense is recorded.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation".
(K) RECLASSIFICATIONS
Certain amounts from previous periods have been reclassified to conform to
the current presentation.
NOTE 2 -- PCS LICENSES
The PCS licenses were awarded in a FCC "C" Block Auction. The markets
awarded the Company include Elmira-Corning, New York; Bangor/Lewiston-Auburn/
Waterville-Augusta, Maine; and Burlington/Rutland-Bennington, Vermont. The
Vermont markets encompass virtually the entire 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.
11
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- PCS LICENSES (CONTINUED)
The Company's total winning bids amounted to $26,452,200, after the 25%
discount provided to small businesses, for which the Company qualified under the
terms of the auction. The Company deposited cash of $2,645,220. The remaining
balance is payable over the next 10 years with 7% interest only during the first
six years. On March 31, 1997, the FCC imposed a moratorium on the payment of
interest until March 31, 1998. On March 24, 1998, the FCC released an Amendment
of the Commission's Rules Regarding Installment Payment Financing for Personal
Communications Services (PCS) Licensees, WT Docket 97-82, Order on
Reconsideration of the Second Report and Order whereby the moratorium on the
payment of interest was extended to July 31, 1998.
On October 16, 1997, in an effort to bring relief to C-Block license
holders, the FCC offered three options. The three options are as follows: (1) an
"Amnesty Option" permitting return of the licenses which will result in the
forfeiture of the original down payment of $2,645,220 and the return to the
Company of the previous installments paid which amount to approximately
$286,000; (2) a "Disaggregation Option" permitting the return of 15 megahertz of
the 30 megahertz of spectrum awarded under the licenses, back to the FCC and
reducing the current note payable to the FCC by 50%; and (3) a "Prepayment
Option" permitting the exchange of all licenses in a particular BTA for a
partial reduction of the current note payable to the FCC (equal to 70% of the
total down payments of the surrendered licenses).
On June 8, 1998, the Company elected the Disaggregation Option. As a
result, 15 MHz of the 30 MHz of spectrum awarded under the licenses were
returned to the FCC. Accrued and capitalized interest due to the FCC of
$2,233,418 was reduced by $1,810,300 to $423,118 after applying a credit for 40%
of the downpayment forfeiture of $529,044 and a credit for 50% of the interest
payments made of $164,547. Total accrued interest due to the FCC of $423,118 is
to be paid in eight quarterly installments of approximately $53,000. Quarterly
interest payments due on the FCC notes were reduced from $416,622 to $208,311.
The first payments due the FCC for interest on the notes is currently $261,200
and was due on July 31, 1998. The Company deferred the payment of the July 31,
1998 amounts due until October 31, 1998. Debt incurred for the licenses was
reduced from $23,806,980 to $11,903,490 ($8,342,780 when discounted using an
imputed interest rate of 14% - see Note 1(H)).
Included in the license costs are certain legal fees incurred in obtaining
the license. Capitalized PCS interest in the amount of $423,118 and $2,233,418
is included in PCS Licenses at June 30, 1998 and March 31, 1998, respectively,
and represents interest capitalized in conjunction with these licenses. The
Company has not begun PCS service and will require substantial additional
financing to pay the balance of the purchase price for the PCS licenses and to
construct the system prior to initiating PCS service. No assurance can be given
that such financing will become available. Assuming inception of PCS services,
the Company will amortize the licenses and related costs over a forty-year
period.
NOTE 3 -- PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
June 30, March 31,
1998 1998
--------- ----------
Paging equipment $1,566,571 $1,619,250
Computer and other equipment 69,890 47,917
Leasehold improvements,
furniture and fixtures 19,112 18,955
---------- ----------
1,655,573 1,686,122
Less: Accumulated depreciation
and amortization (657,852) (649,732)
---------- ----------
$997,721 $1,036,390
========== ==========
12
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- NOTES PAYABLE
(A) NOTES PAYABLE -- FCC
After applying the effects of the election of the Disaggregation Option as
discussed in Note 2, Notes Payable--FCC consist of six 7% 10 year notes
aggregating $11,903,490 ($8,427,723 when discounted using the imputed interest
rate of 14%--see Note 1(H)). Accrued interest as of June 30, 1998 amounted to
$631,429 for a total obligation of $9,059,152 of which $419,871 is current. 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 was partially paid on March
31, 1997. The Company has not made a quarterly interest payment since March 31,
1997. This non-payment is due to an FCC moratorium on quarterly interest
payments.
(B) NOTES PAYABLE -- OTHER
(1) In connection with the Company's acquisition of the 51% interest in
TCI, the Company was contingently liable to pay the difference between the
market value at the date of acquisition of the Company's common stock used as
consideration for a portion of the acquisition price and the average market
price of the Company's stock during the period in which a restriction on the
resale of the stock expired. This resulted in the recognition of an obligation
for $277,567 as of March 31, 1998.
(2) During the 1998 fiscal third quarter, the Company borrowed $300,000
from one lender and $200,000 from a lender affiliated with the Placement Agent
of the Company's August 1997 Regulation S Private Placement Offering of
debentures (See Note 6) and of its December 1997 Regulation S Private Placement
Offering of shares of its 1997 Series C Preferred Stock (see Note 10). The
Company agreed to issue its 10% promissory notes to the lenders in the principal
amounts of the loans. The notes are payable one year after the loans together
with interest at a 10% annual rate payable semi-annually in cash, or at the
Company's option, in shares of Common Stock. Accrued interest on these notes was
$30,610 as of June 30, 1998. The note principal is convertible at the holder's
option into shares of Common Stock at a conversion price equal to the lesser of
$1.125 per share or a Conversion Formula similar to the Conversion Formula of
the Series C Preferred Stock. In accordance with Emerging Issues Task Force
("EITF") Abstract D-60 "Accounting for the Issuance of Convertible Preferred
Stock and Debt Securities with a Nondetachable Conversion Feature", the Company
has recorded a debt issue cost and a corresponding increase to additional paid
in capital of $506,000, representing the difference between the fair market
value of the Company's common stock on the date of the loan and the conversion
price. The cost is being amortized over the life of the loan. In addition, the
Company has agreed to issue five-year warrants to the lenders exercisable to
purchase 100,000 shares of Common Stock for each $100,000 loan (i.e., an
aggregate 500,000 shares of Common Stock) at an exercise price per share equal
to 120% of the closing bid price for such Common Stock on the trading day
immediately preceding the day of a particular loan. In accordance with SFAS No.
123, the Company has recorded a debt issue cost and a corresponding increase to
additional paid in capital of $1,111,000, representing the fair value of the
warrants on the date of grant. The fair value of the warrants were estimated
using the Black-Scholes option pricing model with the following weighted-average
assumptions: the risk free interest rate of 14%, dividend yield of 0.0%,
volatility factors of the expected market price of the Corporation's common
stock of 203.1% and a weighted-average expected life of the warrants of 5 years.
This cost is being amortized over the life of the loan.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected price volatility.
Because the warrants have characteristics significantly different from those of
normal publicly traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of the aforementioned warrants.
13
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- PRIVATE PLACEMENT OF SECURITIES AND 8% CUMULATIVE CONVERTIBLE
DEBENTURES
In April 1997, the Company sold 205,861 units consisting of an aggregate
205,861 shares of Common Stock and Class A warrants exercisable to purchase an
additional aggregate 308,792 shares of Common Stock at an exercise price of
$60.00 per share (subsequently reduced to $2.25 per share). The units were sold
in a Private Placement to a number of unaffiliated investors for an aggregate
$2,470,334 including cash consideration of $2,061,999 and an exchange of Company
notes payable and accrued interest aggregating $408,334. The Company incurred
$562,239 of expenses in connection with the Private Placement. All of the
investors in this Private Placement subsequently exchanged their units for
Debentures in the August 1997 Private Placement Offering hereinafter described.
On August 7, 1997, the Company consummated a Regulation S Private Placement
Offering directed to non "United States Persons" pursuant to which the Company
sold $2,500,000 principal amount of the Company's 8% Cumulative Convertible
Debentures (the "Debentures"). The principal amount of the Debentures are
convertible into shares of the Company's common stock at the option of the
holder, commencing 41 days after issuance, at a price equivalent to a 30%
discount from market based upon the five (5) day average daily closing bid
price, as reported on NASDAQ, for the five (5) trading days immediately
preceding the applicable date of conversion. As a result of EITF D-60, the
Company has recorded a finance charge and a corresponding increase to Paid in
Capital of $1,071,429 attributable to the sale of the Convertible Debentures.
The Debentures bear interest at the rate of 8% per annum payable on August 7 of
each year commencing August 7, 1998. The Debentures are redeemable and callable
for conversion under certain circumstances and are due June 30, 2000. The
Company paid a placement fee equal to 10% of the gross proceeds and a 3%
non-accountable expense allowance to the Placement Agent.
At the same time, but separate from the Regulation S Private Placement
Offering, $2,470,334 principal amount of the Debentures were offered to those
persons who subscribed to and participated in the Company's April 1997 Private
Placement of the units. Those investors were offered the opportunity to exchange
all, but not less than all, of their units for Debentures, on a dollar for
dollar basis. As a result, effective August 7, 1997, the holders of the April
1997 Private Placement units exchanged their units for an aggregate $2,470,334
principal amount of the 8% Convertible Debentures. The Debentures in this
separate offering are convertible at the option of the holder commencing 180
days after issuance. As a result of EITF D-60, the Company has reduced the
carrying value of the Debentures and recorded an increase in Paid In Capital and
a corresponding finance charge of $1,058,715 on the sale of these convertible
debentures.
As of June 30, 1998, $4,870,334 of the Debentures had been converted into
5,047,597 shares of the Company's common stock.
NOTE 6 -- LONG-TERM DEBT
A summary of long-term debt follows:
Interest June 30, March 31,
Description Rate 1998 1998
------- ------- ----------
Convertible Debentures (Note 5) 8% $ 111,666 $593,332
Installment notes payable
monthly through August 1999 (a) 12% 126,425 151,300
Capital leases and notes (b) Various 620,976 675,237
--------- ---------
859,067 1,419,869
Less: Current maturities 377,305 332,524
--------- ---------
$ 481,762 $1,087,345
========= =========
(a) In connection with TCI'S acquisition of GCE, the Company assumed a
$350,000 non-interest bearing note. The outstanding principal amount of this
non-interest bearing note was $136,111 and $165,278 at June 30 and March 31,
1998, respectively, less unamortized discount (discount is based on interest of
12%) for a net balance of $126,425 and $151,300, respectively.
14
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- LONG-TERM DEBT (CONTINUED)
(b) The obligations under capital leases are collateralized by paging
equipment with a book value of approximately $599,000 as of June 30, 1998. The
interest rates on the capitalized leases and notes range from 10% to 25% and the
lease rates are imputed based on the lower of the Company's incremental
borrowing rate at the inception of each lease or the lessor's implicit rate of
return.
Long-term debt at June 30, 1998 matures as follows:
Year Ending June 30:
-------------------
1999 $ 377,305
2000 319,506
2001 150,068
2002 12,188
--------
$859,067
========
NOTE 7 -- SUPPLEMENTAL DISCLOSURE OF LOSS PER SHARE
Basic and Diluted Income (Loss) Per Common Share:
Three Months Three Months
Ended Ended
June 30, 1998 June 30, 1997
------------- -------------
Loss per Common Share (0.19) (1.30)
-------- ---------
Weighted Average Common Shares
Outstanding 8,153,337 1,052,820
========= =========
NOTE 8 -- CONVERTIBLE PREFERRED STOCK
On December 24, 1997, the new Board of Directors of the Company authorized
the issuance of a minimum of 20 shares and a maximum of 45 shares of Series C
Preferred Stock ("Preferred Stock") at the aggregate subscription price of
$100,000 per share pursuant to an offer and sale of such Preferred Stock in a
Regulation S Private Placement Offering. Holders of the Preferred Stock are
entitled to receive a 10% cumulative annual dividend payable semi-annually in
cash, or at the Company's option, in shares of the Company's common stock $.60
par value. The Preferred Stock is non-voting and is convertible in whole or in
part at any time commencing fifty (50) days after issuance at the election of
the holder, into shares of common stock at an initial conversion price equal to
a 25% discount from the average closing bid price for the common stock in the
over-the-counter market for the five trading days immediately preceding the
conversion, said discount thereafter increasing at the rate of 2% per calendar
month commencing March 1, 1998 up to a maximum discount of 35% ("the Conversion
Formula"). The Company has no ability to force conversion but 24 months after
issuance of the initial Preferred Stock, any outstanding Preferred Stock will
automatically convert into shares of Common Stock based on the Conversion
Formula then in effect. The Company paid a placement fee equal to 13% of the
gross proceeds to the Placement Agent. As of December 31, 1997, the Company
issued 30 shares of Preferred Stock and received $2,595,000, net of $405,000 in
expenses. In accordance with EITF D-60, the Company has recorded an adjustment
for the discount on Common Stock available to Preferred shareholders and a
corresponding increase to additional paid in capital of $1,615,000, representing
the value of the 35% conversion discount offered on the Preferred Stock. This
cost is being amortized over the period in which the maximum discount will be
realized, commencing with the date of the issuance.
15
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- CONVERTIBLE PREFERRED STOCK (CONTINUED)
On January 20, 1998, the Company completed its December 1997 Regulation S
Private Offering through the sale of an additional 15 shares of its 1997 Series
C Convertible Preferred Stock and received $1,302,500 net of $197,500 in
expenses. In accordance with EITF D-60, the Company has recorded an adjustment
for the discount on Common Stock available to Preferred shareholders and a
corresponding increase to additional paid in capital of $808,000, representing
the value of the 35% conversion discount offered on the Preferred Stock. This
cost is being amortized over the period in which the maximum discount will be
realized, commencing with the date of the issuance.
As of June 30, 1998, 14.5 shares of the Series C Convertible Preferred
Stock had been converted into 3,462,463 shares of the Company's common stock.
(See Note 15 (A)).
As of June 30, 1998, there were dividends in arrears of $152,500 on the
30.5 shares outstanding of the Series C Convertible Preferred Stock.
NOTE 9 -- INCOME TAXES
The Company adopted the liability method of accounting for income taxes, as
set forth in SFAS 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. At
December 31, 1997, the Company had federal net operating loss carryforwards of
approximately $11,000,000, which will expire beginning in fiscal 2010. These
losses are limited by the provisions of Section 382 of the Internal Revenue Code
due to a considered more than 50% change in ownership with the issuance of the
Convertible Subordinated Debentures in August 1997. Following such a change, the
utilization of tax loss carryforwards is limited to the value of the Company on
the date of such change, multiplied by the Federal long-term exempt rate (the
"annual limitation"). To the extent amounts available under the annual
limitation are not used, they may be carried forward for the remainder of 15
years from the date the losses were originally incurred. As a result of the
change in ownership, use of net operating losses will be limited to
approximately $300,000 per year subject to certain additional limitations.
The Company has deferred tax asset of approximately $1,500,000 at December
31, 1997, representing principally the tax benefit of the loss carry forwards
under Section 382 and for periods subsequent to the effective date of the Plan.
This deferred tax asset has been offset by a 100% valuation allowance. A
valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. Based on the Company's
operating results to date a full valuation allowance has been recorded at
December 31, 1997.
NOTE 10 -- STOCK OPTIONS AND WARRANTS
STOCK OPTIONS
On October 30, 1997, the Board of Directors of the Company (the "Board"),
subject to shareholder approval, adopted the October 30, 1997 Stock Option Plan
(the "1997 Plan"). The aggregate number and class of shares which may be the
subject of options granted pursuant to the 1997 Plan is 1,000,000 shares of
Common Stock, $.60 par value, of the Company. The options to be granted may, at
the discretion of the Company, be designated to be options which will qualify
for incentive stock option treatment ("ISO's) under the Internal Revenue Code of
1986, as amended (the "Code") or options which will not so qualify
("Non-ISO's"). Officers, directors and key employees of the Company or
subsidiaries of the Company, as determined by the Board, shall be eligible to
receive options under the 1997 Plan. The exercise price for the Shares
purchasable under ISOs granted pursuant to the 1997 Plan shall not be less than
100%, or, in the case of an ISO granted to a Ten Percent Shareholder, 110%, of
the fair market value per share of the Shares subject to the ISO under the plan
at the Date of Grant, as determined by the Board. Under the 1997 Plan, the Board
shall have absolute discretion in determining the period during which, the rate
at which, and the terms and conditions upon which any option granted may be
exercised. Except as set forth in the 1997 Plan, ISOs shall terminate upon the
date of voluntary or involuntary termination of employment regardless of the
expiration date specified in such ISO. No option granted under the Plan may be
sold, pledged, assigned or transferred in any manner except to the extent that
options may be exercised by an executor or administrator upon the death of the
holder.
16
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- STOCK OPTIONS AND WARRANTS (CONTINUED)
The 1997 Plan and any options granted pursuant to the 1997 Plan prior to
May 28, 1998 received approval of the shareholders at the special meeting in
lieu of an annual meeting held on May 28, 1998.
NON-ISO's ISSUED AND OUTSTANDING AT JUNE 30, 1998 ARE AS FOLLOWS:
Shares Exercise Price Expiration
Issuable Per Share Date
------- -------- --------
Non-ISO's Issued to
President and CEO in October 1997 300,000 (a) 9/2007
Non-ISO's Issued to 145,000 (b) (b)
Directors in October 1997
Non-ISO's issued to former
Director and employee 230,000 $2.25 9/2002
-------
Total 675,000
=======
(a) The exercise prices for the 300,000 shares granted to the President and
CEO on 10/30/97 are as follows: 100,000 with an exercise price of the mean
between closing bid and closing asked prices on 10/30/97; 100,000 at $1.75 per
share; 100,000 at $2.00 per share. The term of all options is ten years.
(b) The exercise prices and the terms for the 145,000 options are as
follows: (i) five-year non-qualified options to purchase 100,000 shares at the
closing mean price for the common stock on 10/30/97; 1/3 immediately
exercisable, 1/3 commencing 11/1/98 and 1/3 commencing 11/1/99; and (ii)
five-year non-qualified options, exercisable to purchase 45,000 shares at the
closing mean price for the common stock on 10/30/97.
ISO's ISSUED AND OUTSTANDING AT JUNE 30, 1998 ARE AS FOLLOWS:
Shares Exercise Price Expiration
Issuable Per Share Date
------- -------- --------
ISO's issued to President 200,000 $1.453125 (c)
& CEO in October 1997
ISO's issued to Secretary, 100,000 $2.109375 12/2002
Executive VP and CFO
ISO's issued to Vice
President of Operations 50,000 (d) 1/2003
-------
Total 350,000
=======
(c) The exercise prices for the 200,000 shares issued to the President &
CEO in October 1997 are as follows: (i) 68,817 shares purchasable upon exercise
of incentive stock options at an exercise price of $1.453125; (ii) 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).
(d) The exercise price equals the mean between the closing bid and the
closing asked prices for the Company's common stock in the over-the-counter
market on February 19, 1998.
On July 31, 1998, the board of directors approved the issuance to certain
key employees options to purchase an aggregate of 100,000 shares of the
Company's Common Stock at an exercise price of $.75 per share. These options are
subject to shareholder approval of an increase in the number of shares
authorized under the 1997 plan.
17
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- STOCK OPTIONS AND WARRANTS (CONTINUED)
Options outstanding are summarized as follows:
Three Months
Ended Year Ended
June 30, 1998 March 31, 1998
---------------- ----------------
Options Outstanding at
Beginning of Year 1,025,000 80,000
Options Granted -- 1,548,077(a)
Options Expired -- --
Options Exercised -- (523,077)
Options Transferred -- --
Options Cancelled -- (80,000)
------------ -----------
Options Outstanding at End of Year 1,025,000 1,025,000
============ ===========
Exercise Price per Share $.62-$2.29 $.62-$2.29
Fair Value of Options Granted $1.66 $1.66
(a) 945,000 of the options granted during the year ended March 31, 1998
were under the October 30, 1997 Incentive Stock Option Plan approved by the
shareholders on May 28, 1998 ("1997 Plan") and 80,000 options were granted via
Board of Directors approval in September 1997. The remaining 603,077 options
granted during the year ended March 31, 1998 were pursuant to the unanimous
written consent of the Board of Directors on September 29, 1997.
At June 30, 1998, options to purchase 45,000 shares were available for
grant under the 1997 Plan.
Proforma results of operations, had FAS 123 been used to account for
stock-based compensation cost, would have resulted in additional compensation
expense of approximately $2,966,000 for the year ended March 31, 1998 resulting
in a proforma net loss of approximately $13,446,000 for that same reporting
period.
The fair market value of the warrants were estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions, respective: risk-free interest rates of 14%, dividend yield of
0.0%, volatility factors of the expected market price of the Company's Common
Stock of 203% and an expected life equaling the warrants exercise periods.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vested restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's warrants have characteristics significantly
different from those of normal publicly traded stock, and because changes in the
subjective input assumptions can materially affect the fair value estimate. In
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock warrants.
WARRANTS
As of June 30, 1998, there are five-year warrants outstanding exercisable
to purchase 500,000 shares of Common Stock that were issued in connection with a
lending transaction as discussed more fully in Note 4(B)(2).
As of June 30, 1998, there were Class B Warrants outstanding exercisable to
purchase an aggregate 27,750 shares of the Company's common stock at an exercise
price of $1.20 per share.
NOTE 11 -- OPERATING LEASE
On December 8, 1997 the Company entered into a five year operating lease
expiring December 31, 2002 for 1,500 square feet of office space in Melville,
Long Island, New York. Minimum future rental payments under this operating
lease, including electric is $35,735 per annum.
18
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 -- BUSINESS PLAN AND LIQUIDITY
Management has made the decision to discontinue reselling paging airtime
for Skytel, a nationwide paging carrier, and other paging carriers and focus its
sales efforts on adding direct subscribers and resellers to the Company's 900
MHz Glenayre paging system. In connection with this decision, Management has
entered into a settlement agreement effective July 1, 1998 with Skytel. Pursuant
to the terms of the settlement agreement, the Company will pay Skytel
approximately $98,000 and tender its Skytel customer base and the corresponding
accounts receivable to Skytel, who will assume all future billing, collections
and customer service. Skytel will apply 25% of all future cash collections from
the transferred customer base against the remaining balance due to Skytel after
payments made under the Settlement Agreement. Once the balance due to Skytel of
approximately $194,000 (after applying the $98,000 payment discussed above) has
reached $75,000, Skytel will release the Company from any further obligations
under the Settlement Agreement.
On March 16, 1998, Threshold Communications, Inc. ("TCI"), the Company's
wholly owned paging subsidiary, entered into a Management Service Agreement with
Paging Source of New York ("PSNY"). Under this Agreement, PSNY was to, among
other things, perform billing, customer service and other management services
for a monthly fee. As a result of PSNY's subsequent breach of this Agreement,
TCI has internalized the management of paging operations. In response to this,
TCI purchased new billing software, hired a general manager, director of sales
and several customer service representatives and billing personnel. TCI intends
to sell airtime through resellers and direct sales channels.
Personal Communications Network, Inc. ("PCN"), a wholly owned subsidiary of
the Company, is currently seeking to raise funds, which may include the issuance
of equity securities, necessary to build out a wireless communications network,
thus utilizing the Company's six PCS licenses in Vermont, Maine and a portion of
upstate New York, with certain overlap in Pennsylvania and New Hampshire. There
can be no assurance that the Company will be able to secure financing sufficient
to cover the cost associated with the system build out, its operations and the
FCC licenses.
See Note 2 for further discussion of debt reduction resulting from the
Company's election of the Disaggregation Option. Based on management's
continuing negotiations for vendor and other third party financing, election of
the Disaggregation Option as discussed in Note 2 should enhance PCN's ability to
secure such financing.
The Company's financial statements for the three months ended June 30, 1998
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 continued to incur net losses with a net loss of
$1,588,716 for the three months ended June 30, 1998. The Company had a working
capital deficiency of $1,877,800 at June 30,1998 and its cash used by operations
during the three months ended June 30, 1998 was $568,292. If cash flows from
operations were assumed to be the same for the fiscal year 1999 as 1998, the
Company would continue to have a working capital deficiency. Recognizing that
the Company must generate additional resources or consider modifying operations
to enable it to continue operations with available resources, management has
retained a public relations firm and certain other independent consultants to
assist it in taking steps to minimize this cash shortfall and to assist it in
identifying entities interested in its business. However, no assurances can be
given that the efforts of the Company or that of its consultants will be
successful in raising additional capital. Furthermore, there can be no
assurance, assuming the Company raises additional funds, that the Company will
achieve profitability or positive cash flow. If the Company is unable to obtain
adequate additional financing, the Company may be required to seek bankruptcy
protection from its creditors.
NOTE 13 -- CONTINGENT LIABILITIES
On July 31, 1998, the Company (by order of the board of directors) entered
into an amended and restated employment agreement with the president. The term
of the agreement is for five years commencing on November 1, 1997 and expiring
October 31, 2002 with compensation of approximately $975,000 over the five-year
term. On July 31, 1998, the Company (by order of the board of directors) entered
into an amended and restated employment agreement with the chief financial
officer. The term of the agreement is for five years commencing on January 2,
1998 and expiring on January 1, 2003 with compensation of approximately $815,000
over the five-year term.
19
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 -- PENDING LITIGATION
On or about October 15, 1997, the Company was served with a Summons in an
action entitled: Motorola, Inc., Plaintiff, v. Electronics Communications Corp.,
Defendant, in the Superior Court of New Jersey Law Division: Union County
Special Civil Part. Motorola claims the Company owes it approximately $106,000
including interest for merchandise, consisting of various pager parts and
equipment, restocking fees of approximately $13,100, and attorneys' fees. New
management and counsel, after a review of the matter, believe that Motorola is
inaccurate in its claim and has made several attempts, which were unsuccessful,
to settle this matter. On or about May 15, 1998, Motorola filed a Motion for
Summary Judgement with the Superior Court of New Jersey Law Division, Essex
County. On June 19, 1998, Motorola's motion for summary judgement was denied.
Despite the Company's lack of success in the past in settling this matter,
management, in an effort to avoid litigation and minimize attorneys' fees, will
continue its efforts to resolve this dispute on terms management believes to be
favorable for the Company. There can be no assurances that the Company will be
successful in settling this dispute and avoiding litigation.
NOTE 15 -- SUBSEQUENT EVENTS
(A) As of August 15, 1998, an additional 4.85 shares of the 1997 Series C
Convertible Preferred Stock had been converted into 2,258,161 shares of the
Company's Common Stock.
(B) In response to a notice that its common stock would be delisted from
trading on the NASDAQ Small Cap Market due to failure to maintain a minimum
$1.00 bid price in the over-the-counter market, the Company's board of directors
approved a 1 for 8 reverse stock split of its common stock subject to
stockholder approval. A special stockholder meeting is to be held on October 15,
1998 to consider the proposed reverse stock split.
20
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto.
OVERVIEW
The Company through its PCN subsidiary, is licensed by the FCC to provide
wireless telecommunications services, which include the ability to deliver
traditional telephony along with new digital technologies that allow fax,
internet, e-mail and short message services (e.g., sports scores, weather, stock
quotes, etc). PCN's personal communication services ("PCS") licenses cover
nearly contiguous markets in Vermont, Maine and a small portion of Northern New
Hampshire, as well as a small market in Upstate New York that extends into
Pennsylvania. PCN's six Basic Trading Areas ("BTA") cover approximately 1.5
million potential subscribers ("POPs"). The Company is currently in the
engineering and design phase for the build out of a wireless mobile
communications network utilizing GSM as its technology platform. PCN is also
licensed to provide local and long distance services in Vermont, Maine and New
York and may incorporate such services through "bundling," upon completion of
its PCS network.
The Company, through its TCI subsidiary, currently operates a state of the art
digital 900MHz Glenyre satellite-based Flex paging system, which covers the New
York Metropolitan area and New Jersey. Due to the recent construction of the
Company's paging network, a significant portion of the Company's paging revenues
continues to be derived from the resale of other carrier's airtime.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Total sales decreased approximately $447,380 or 69% for the three months ended
June 30, 1998 compared to the three months ended June 30, 1997. There were no
Commissions and Electronics Revenues for the three months ended June 30, 1998
compared to $95,573 and $9,614, respectively, for the three months ended June
30, 1997. The Company attributes the decrease in Electronics revenues to its
exit from the distribution of consumer electronics, which was conducted at the
Company's wholly owned subsidiary, FTD. FTD was engaged in the wholesale
distribution of cellular telephones, related accessories and other electronic
products.
Commissions revenue decreased due to the loss of the Company's Master Agent
Agreement with NYNEX Mobile Communications, Inc. ("NYNEX") and Bell Atlantic
Mobile, Communications, Inc. ("BAM"). On May 15, 1997, the Company entered into
a Settlement & Separation Agreement (the "Settlement Agreement") whereby the
Company severed its agency relationship with NYNEX and BAM with respect to the
solicitation of cellular activations. The contract with NYNEX and BAM was the
Company's largest source of commission income. As a result of the Settlement
Agreement, the Company's inability to establish a profitable relationship with
another cellular carrier, a lack of available resources and continuing losses,
the Company ceased cellular phone activations. This resulted in a related
decrease in cost of sales of approximately $85,663 for the same period.
Paging and Two Way Radio Revenue decreased approximately $342,193 for the
three months ended June 30, 1998 compared to the three months ended June 30,
1997. This decrease was due to management's redirecting of the Company's
resources towards the restructuring of the Company and its subsidiaries in the
third and fourth quarter of fiscal 1998, thus requiring a significant reduction
of sales and marketing personnel. The restructuring included a highly focused
effort to raise additional capital in order to settle numerous obligations of
the Company and its subsidiaries and re-position the Company and its PCN
subsidiary for entry into the personal communications service business,
including the preparation of a business plan for PCN and requests for proposals
that were sent to various vendors of GSM equipment. This redirection of
resources resulted in a corresponding decrease in Paging and Two Way Radio cost
of sales of approximately $176,000 or 32%.
Selling, General and Administrative Expenses ("SGA") for the three months
ended June 30, 1998 was $800,510 compared to $1,480,399 for the three months
ended June 30, 1997. This was principally attributable to the Company's
restructuring and the resulting significant reduction in sales and marketing
personnel, somewhat offset by expenses incurred due to the Company's refocusing
of its efforts towards the build-out of its PCS licenses and provision of
digital wireless services and the initial engineering and design of the proposed
PCS network.
Interest expense was $838,800 for the three months ended June 30, 1998 compared
to $94,263 for the three months ended June 30, 1997. Interest expense increased
as a result of the private placement of 8% convertible debentures on August 7,
1997, and the issuance of a total of $500,000 10% one year promissory notes. In
addition, the Company
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incurred a non-cash interest expense of $787,645 due to EITF D-60 discussed more
fully in Note 4(B), and the subsequent amortization of deferred finance charge
on the sale of the Company's Series C Preferred Stock.
Net Loss for the three months ended June 30, 1998 was $1,588,716 compared to
$1,369,566 for the three months ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Since its formation through June 30, 1998, the Company has financed its
operations and met its capital requirements primarily through the use of its
cash flow from capital investments, including the issuance of convertible notes
and debentures and convertible preferred stock.
The Company incurred net losses of $1,588,716 and $1,369,566 for the three
months ended June 30, 1998 and the three months ended June 30, 1997,
respectively. The Company attributes a portion of the increase in net loss of
$219,150 to an increase in interest expense of approximately $745,000 for the
three months ended June 30, 1998 as compared to the three months ended June 30,
1997 offset by the decrease in SGA as discussed above. The $745,000 increase is
primarily attributable to non-cash interest expense associated with the issuance
of the Series C Preferred Stock and the related $500,000 of Notes Payable (see
Notes 8 and 4(B)), respectively). See the Results of Operations section for
further discussion of interest expenses.
The Company had a working capital deficiency of $1,877,500 for the three months
ended June 30, 1998 as compared to a working capital deficiency of $3,571,545
for the three months ended June 30, 1997.
Net cash used in operating activities for the three months ended June 30, 1998
was $568,292 compared to $412,104 for the three months ended June 30, 1997.
Net cash used in investing activities for the three months ended June 30, 1998
was $32,687 compared to $459,916 for the three months ended June 30, 1997.
Net cash used by financing activities for the three months ended June 30, 1998
was $79,136 compared to net cash provided by financing activities of $846,847
for the three months ended June 30, 1997.
The Company's financial statements for the three months ended June 30, 1998 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 continued to incur net losses with a net loss of
$1,588,716 for the three months ended June 30, 1998. The Company had a working
capital deficiency of $1,877,500 at June 30,1998 and its cash used by operations
during the three months ended June 30, 1998 was $568,292. If cash flows from
operations were assumed to be the same for the fiscal year 1999 as 1998, the
Company would continue to have a working capital deficiency. Recognizing that
the Company must generate additional resources or consider modifying operations
to enable it to continue operations with available resources, management has
retained a public relations firm and certain other independent consultants to
assist it in taking steps to minimize this cash shortfall and to assist it in
identifying entities interested in its business. However, no assurances can be
given that the efforts of the Company or that of its consultants will be
successful in raising additional capital. Furthermore, there can be no
assurance, assuming the Company raises additional funds, that the Company will
achieve profitability or positive cash flow. If the Company is unable to obtain
adequate additional financing, the Company may be required to seek bankruptcy
protection from its creditors.
YEAR 2000 ISSUE
Many existing computer programs use only two digits to identify a year in the
date field. These programs were designed and developed without considering the
impact of the upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results by or at the Year 2000. The
Year 2000 issue affects virtually all companies and organizations. The Company
has reviewed its existing computer programs and it believes that it will not be
adversely affected by the Year 2000 Issue. However, there can be no assurance
that the Company's suppliers, creditors, customers and financial service
organizations may not be adversely affected by the Year 2000 issue and as a
result, there can be no assurance as to the impact of the Year 2000 issue on the
Company.
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FORWARD LOOKING STATEMENTS
In addition to statements of historical fact, this quarterly report contains
forward-looking statements reflecting the Company's expectations or beliefs
concerning future events which could materially affect the Company's performance
in the future. The Company cautions that these and similar statements involve
risks noted in the Company's SEC filings which may cause actual results to
differ materially. Such risks include the possible inability of the Company to
raise additional financing required to pay the purchase price for its PCS
licenses and to build out its planned PCS network. Forward-looking statements
are made in the context of information available as of the date stated. The
Company undertakes no obligation to update or revise such statements to reflect
new circumstances or unanticipated events as they occur.
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NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company incorporates herein the information set forth in Note 14 to
the Financial Statements of this report.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters in a Vote of Security Holders
See Item 4 of the Company's Annual Report on Form 10KSB for the year
ended March 31, 1998
Item 5. Other Information
None
Item 6. Exhibit and Reports on Form 8-K
None
24
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NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
DATED: August 19, 1998 NORTHEAST DIGITAL NETWORKS, INC.
(formerly ELECTRONICS COMMUNICATIONS CORP.)
By: /s/ Joseph A. Rosio
------------------------------------
Joseph A. Rosio, President,
Principal Executive Officer
By: /s/ Christopher J. Garcia
------------------------------------
Christopher J. Garcia, Treasurer,
Principal Financial and Accounting Officer
25
