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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10QSB
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(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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
Suite 206
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 February 12, 1999 was 26,467,883 shares.
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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 December 31,
1998 (unaudited) and March 31, 1998
Consolidated Statements of Operations for the nine
and three months ended December 31, 1998
(unaudited) and 1997 (unaudited)
Consolidated Statements of Cash Flows for the nine
and three months ended December 31, 1998
(unaudited) and 1997 (unaudited)
Consolidated Statement of Changes in Stockholders'
Equity for the nine months ended December 31, 1998
(unaudited)
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis
Part II. Other Information
Signature Page
See Notes to Consolidated Financial Statements.
1
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC.
(FORMERLY ELECTRONICS COMMUNICATIONS CORP.) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
ASSETS 1998 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash ............................................... $ 38,295 $ 1,767,930
Accounts Receivable
(Net of $63,000 Allowance for Doubtful Accounts at
December 31, 1998 and $71,000 at March 31, 1998) . 1,936 62,217
Prepaid Expenses ................................... -- 21,071
------------ ------------
Total Current Assets ....................... 40,231 1,851,218
------------ ------------
Property And Equipment:
Property and Equipment ............................. 777,259 1,686,122
Accumulated Depreciation ........................... (722,135) (649,732)
------------ ------------
Net Property And Equipment ................. 55,124 1,036,390
------------ ------------
Other Assets:
PCS Licenses ....................................... 13,266,269 22,300,351
Paging System Costs ................................ -- 676,614
Debt Issue Cost .................................... -- 1,020,000
Other Assets ....................................... 274,759 127,666
------------ ------------
Total Other Assets ......................... 13,541,028 24,124,631
------------ ------------
Total Assets .......................................... $ 13,636,383 $ 27,012,239
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC.
(FORMERLY ELECTRONICS COMMUNICATIONS CORP.) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
Liabilities And Stockholders' Equity 1998 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Current Liabilities:
Accounts Payable and Accrued Expenses ....................................... $ 2,097,609 $ 1,316,606
Notes Payable--Other ........................................................ 331,826 795,677
Current Portion of Long Term Debt ........................................... 648,038 332,524
Current Portion of Notes Payable to FCC ..................................... 419,871 158,670
------------ ------------
Total Current Liabilities ............................................ 3,497,344 2,603,477
------------ ------------
Long Term Liabilities:
Notes Payable to FCC ........................................................ 9,144,897 18,760,307
Long Term Debt .............................................................. -- 1,087,345
------------ ------------
Total Long Term Liabilities .......................................... 9,144,897 19,847,652
------------ ------------
Commitments And Contingencies
Stockholders' Equity:
Preferred Stock, $.01 par value, 45 authorized Series C Non-voting
Convertible, 20.75 Shares issued and outstanding at December 31, 1998 and
45 at March 31, 1998, 5,000 authorized Series D Non-voting Convertible, 900
shares issued and outstanding at December 31, 1998 and 0 at March 31, 1998,
350 authorized Series E Non-voting Convertible, 334.2 shares issued and
outstanding at December 31, 1998 and 0 at
March 31, 1998 ............................................................ 12 --
Common Stock, par value $.60 per share, 40,000,000 authorized,
26,467,883 issued and outstanding at December 31, 1998 and 5,531,705
at March 31, 1998 ......................................................... 15,937,552 3,375,845
Additional Paid-In Capital .................................................. 13,771,757 24,443,726
Accumulated Deficit ......................................................... (27,819,029) (21,203,461)
Discount on Common Stock available to
Series C Preferred Shareholders ........................................... (896,150) (2,055,000)
------------ ------------
Total Stockholders' Equity ........................................... 994,142 4,561,110
------------ ------------
Total Liabilities And Stockholders' Equity .................................... $ 13,636,383 $ 27,012,239
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC.
(FORMERLY ELECTRONICS COMMUNICATIONS CORP.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Nine
Months Ended Months Ended
December 31, December 31,
1998 1997
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues:
Paging & Two Way Radio ............................ $ 457,532 $ 1,745,386
Commissions ....................................... -- 422,428
Electronics ....................................... -- 9,614
----------- -----------
Total Revenues ............................. 457,532 2,177,428
----------- -----------
Cost of Sales:
Paging & Two Way Radio ............................ 425,017 1,087,399
Commissions ....................................... -- 275,562
Electronics ....................................... -- 389,275
----------- -----------
Total Cost Of Sales ........................ 425,017 1,752,236
----------- -----------
Gross Profit ............................... 32,515 425,192
----------- -----------
Selling, General And Administrative Expenses:
Selling ........................................... -- 1,380,842
General and Administrative ........................ 2,927,544 3,195,278
----------- -----------
Total Selling, General and
Administrative Expenses ................. 2,927,544 4,576,120
----------- -----------
Loss From Operations ................................. (2,895,029) (4,150,928)
----------- -----------
Other Income (Expense):
Interest Expense .................................. (2,293,049) (2,497,499)
Interest Income ................................... 25,304 3,514
Loss on Writedown of Paging Assets ................ (1,452,794) --
----------- -----------
Total Other Income (Expense) ............... (3,720,539) (2,493,985)
----------- -----------
Loss Before Minority Interest and Extraordinary Income (6,615,568) (6,644,913)
----------- -----------
Minority Interest in Loss of Consolidated Subsidiaries -- (30,245)
----------- -----------
Loss Before Extraordinary Income ..................... (6,615,568) (6,675,158)
----------- -----------
Extraordinary Income ................................. -- 599,146
----------- -----------
Net Loss ............................................. $(6,615,568) $(6,076,012)
=========== ===========
Loss Per Common Share ................................ $ (0.40) $ (3.47)
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC.
(FORMERLY ELECTRONICS COMMUNICATIONS CORP.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
December 31, December 31,
1998 1997
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues:
Paging & Two Way Radio ............................ $ 46,500 $ 592,813
Cost of Sales:
Paging & Two Way Radio ............................ 72,201 351,726
Commissions ....................................... -- 19,831
----------- -----------
Total Cost Of Sales ........................ 72,201 371,557
----------- -----------
Gross Profit ............................... (25,701) 221,256
----------- -----------
Selling, General And Administrative Expenses:
Selling ........................................... -- 425,890
General and Administrative ........................ 861,534 848,940
----------- -----------
Total Selling, General and
Administrative Expenses ................. 861,534 1,274,830
----------- -----------
Loss From Operations ................................. (887,235) (1,053,574)
----------- -----------
Other Income (Expense):
Interest Expense .................................. (637,458) (883,955)
Interest Income ................................... 48 --
Loss on Writedown of Paging Assets ................ (1,452,794) --
----------- -----------
Total Other Income (Expense) ............... (2,090,204) (883,955)
----------- -----------
Loss Before Minority Interest and Extraordinary Income (2,977,439) (1,937,529)
----------- -----------
Minority Interest in Loss of Consolidated Subsidiaries -- (15,084)
----------- -----------
Loss Before Extradordinary Income .................... (2,977,439) (1,952,613)
----------- -----------
Extradordinary Income ................................ -- 599,146
----------- -----------
Net Loss ............................................. $(2,977,439) $(1,353,467)
=========== ===========
Loss Per Common Share ................................ $ (0.12) $ (0.44)
=========== ===========
</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>
Nine Months Nine Months
Ended Ended
December 31, December 31,
1998 1997
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash Flows From Operating Activities
Net Loss .................................................. $(6,615,568) $(6,076,012)
Adjustments to Reconcile Net Loss to
Net Cash Used By Operations:
Issuance of Common and Preferred Stock for Interest Expense 36,566 --
Warrants Issued for Interest Expense ...................... -- 59,000
Issuance of Common Stock for Consulting and Other Services -- 459,140
Legal Fees Financed with Stockholder Note Payable ......... -- 80,000
Debt Forgiveness Income ................................... -- (599,146)
Depreciation and Amortization ............................. 215,732 738,049
Non-cash Amortization of Finance Charges .................. 2,178,110 2,264,143
Marketing Service Contracts ............................... -- 531,678
Writedown of Paging Assets ................................ 1,452,794 --
Minority Interest in Loss (Income) ........................ -- 30,245
Changes in:
Accounts Receivable ....................................... 60,281 181,304
Inventories ............................................... -- 86,576
Prepayments ............................................... 21,071 (74,507)
Accounts Payable and Accrued Expenses ..................... 748,041 (1,077,351)
Accrued Interest .......................................... 27,243 --
Security Deposits and Other ............................... (147,093) (7,189)
----------- -----------
Total Adjustments ................................. 4,592,745 2,671,942
----------- -----------
Net Cash Used In Operating Activities ........................ (2,022,823) (3,404,070)
----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC.
(FORMERLY ELECTRONICS COMMUNICATIONS CORP.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Nine Months
Ended Ended
December 31, December 31,
1998 1997
----------- -----------
(Unaudited) (Unaudited)
Cash Flows From Investing Activities
PCS Licenses .................................. $ -- $ 33,481
Additions to Property and Equipment ........... (49,589) (63,305)
Paging System Costs and Other Assets .......... -- 43,266
----------- -----------
Net Cash (Used) Provided By Investing Activities . (49,589) 13,442
----------- -----------
Cash Flows From Financing Activities
Payment for Deferred Debenture Costs .......... -- (325,000)
Net Proceeds of Shareholder Loans ............. -- 189,188
Payments of Bank and Other Loans .............. -- (869,050)
Proceeds from 10% Convertible Promisory Notes . -- 500,000
Proceeds from Other Loans ..................... 10,000 --
Proceeds from Debentures ...................... -- 2,399,139
Principal Payments of Capital Lease Obligations (80,529) (130,945)
Proceeds from Sale of Common Stock ............ -- 627,810
Proceeds from Sale of Series C Preferred Stock -- 2,595,000
Proceeds from Sale of Series D Preferred Stock 783,000 --
Payments of Long Term Debt .................... (44,319) (4,395)
Payment of Notes Payable to FCC ............... (325,375) --
----------- -----------
Net Cash Provided by Financing Activities ........ 342,777 4,981,747
----------- -----------
Net Increase (Decrease) In Cash .................. (1,729,635) 1,591,119
----------- -----------
Cash, Beginning Of Period ........................ 1,767,930 48,620
----------- -----------
Cash, End Of Period .............................. $ 38,295 $ 1,639,739
=========== ===========
See Notes to Consolidated Financial Statements.
7
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC.
(FORMERLY ELECTRONICS COMMUNICATIONS CORP.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
December 31, December 31,
1998 1997
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Supplemental Disclosure For Cash Flows
Cash Paid During The Period For:
Interest ............................................ $ 58,107 $ 262,217
Taxes ............................................... -- --
Supplemental Schedule Of Non-Cash
Investing And Financing Activities
Common Stock Issued for Payment of Loan Payable ..... -- 352,360
Exchange of Convertible Debentures for Common Stock . 559,397 2,600,000
Exchange of Common Stock for Convertible Debentures . -- 1,908,093
Exchange of Convertible Notes for Common Stock ...... 173,152 --
Exchange of Convertible Notes for Preferred Stock ... 334,200 --
Exchange of Preferred Stock for Common Stock ........ 7,881,585 --
Non-cash Interest Capitalized on Notes Payable to FCC 624,933 --
Retirement of Warrants and Notes Receivable ......... -- 5,701
</TABLE>
See Notes to Consolidated Financial Statements.
8
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC.
(FORMERLY ELECTRONICS COMMUNICATIONS CORP.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
December 31, December 31,
1998 1997
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash Flows From Investing Activities
Net Loss .................................................. $(2,977,439) $(1,353,467)
Adjustments to Reconcile Net Loss to
Net Cash Used By Operations:
Issuance of Common and Preferred Stock for Interest Expense 7,500 --
Issuance of Common Stock for Consulting and Other Services -- 294,306
Legal Fees Financed with Stockholder Note Payable ......... -- 80,000
Debt Forgiveness Income ................................... -- (599,146)
Warrants Issued for Interest Expense ...................... -- 59,000
Depreciation and Amortization ............................. 5,303 119,108
Non-cash Amortization of Finance Charges .................. 598,606 880,982
Marketing Service Contracts ............................... -- 177,226
Writedown of Paging Assets ................................ 1,452,794 --
Minority Interest in Loss (Income) ........................ -- 45,406
Changes in:
Accounts Receivable ....................................... 48,745 441,518
Inventories ............................................... -- 380,525
Prepayments ............................................... -- 28,537
Accounts Payable and Accrued Expenses ..................... 377,193 (1,381,554)
Accrued Interest .......................................... 14,138 (885,671)
Security Deposits and Other ............................... (94,169) (6,114)
----------- -----------
Total Adjustments ........................ 2,410,110 (365,877)
----------- -----------
Net Cash Used in Operating Activities ........................ (567,329) (1,719,344)
----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
9
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC.
(FORMERLY ELECTRONICS COMMUNICATIONS CORP.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Three Months
Ended Ended
December 31, December 31,
1998 1997
----------- -----------
(Unaudited) (Unaudited)
Cash Flows From Investing Activities
PCS License ................................... $ -- $ 40,025
Additions to Property and Equipment ........... -- (17,166)
Paging System Costs and Other Assets .......... -- 1,043,611
----------- -----------
Net Cash Provided By Investing Activities ........ -- 1,066,470
----------- -----------
Cash Flows From Financing Activities
Payment for Deferred Debenture Costs .......... -- (356,729)
Net Proceeds of Shareholder Loans ............. -- 119,043
Proceeds from Other Loans ..................... 10,000 --
Proceeds from 10% Convertible Promissory Notes -- 500,000
Payments of Bank and Other Loans .............. -- (779,293)
Proceeds from Debentures ...................... -- 142,110
Proceeds from Sale of Series C Preferred Stock -- 2,595,000
Proceeds from Sale of Series D Preferred Stock 783,000 --
Principal Payments of Capital Lease Obligations -- (50,848)
Payments of Notes Payable to FCC .............. (325,375) --
Payments of Long Term Debt .................... -- (4,395)
----------- -----------
Net Cash Provided by Financing Activities ........ 467,625 2,164,888
----------- -----------
Net Increase (Decrease) In Cash .................. (99,704) 1,512,014
----------- -----------
Cash, Beginning Of Period ........................ 137,999 127,725
----------- -----------
Cash, End Of Period .............................. $ 38,295 $ 1,639,739
=========== ===========
See Notes to Consolidated Financial Statements.
10
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC.
(FORMERLY ELECTRONICS COMMUNICATIONS CORP.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
December 31, December 31,
1998 1997
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Supplemental Disclosure For Cash Flows
Cash Paid During The Period For:
Interest ............................................ $ 16,269 $ 84,276
Taxes ............................................... -- --
Supplemental Schedule Of Non-Cash
Investing And Financing Activities
Exchange of Convertible Debentures for Common Stock . 110,844 2,600,000
Exchange of Convertible Notes for Preferred Stock ... 334,200 --
Exchange of Preferred Stock for Common Stock ........ 918,974 --
Non-cash Interest Capitalized on Notes Payable to FCC 208,311 --
</TABLE>
See Notes to Consolidated Financial Statements.
11
<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 .................. -- -- 1,711,387 1,026,832
Conversion of Series C Preferred
Stock into Common Stock ....... (24.25) -- 13,135,975 7,881,585
Sale of Series D Preferred Stock
Net of $117,000 of Expenses ... 900 9 -- --
Conversion of 10% Promissory
Notes into Common Stock ....... -- -- 6,088,816 3,653,290
Conversion of 10% Promisory Notes
into Series E Preferred Stock . 334.20 3 -- --
Amortization of discount on
Common Stock available
to Preferred Shareholders ..... -- -- -- --
Net Loss ........................ -- -- -- --
------------ ------------ ------------ ------------
Balance as of
December 31, 1998 ............. 1,254.95 $ 12 26,467,883 $ 15,937,552
============ ============ ============ ============
<CAPTION>
Discount on
Common
Stock
Additional Available to
Paid-In Accumulated Preferred
Capital Deficit Shareholders Total
------------ ------------ ------------ ------------
<S> <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 .................. (427,434) -- -- 599,398
Conversion of Series C Preferred
Stock into Common Stock ....... (7,881,585) -- -- --
Sale of Series D Preferred Stock
Net of $117,000 of Expenses ... 782,991 -- -- 783,000
Conversion of 10% Promissory
Notes into Common Stock ....... (3,480,138) -- -- 173,152
Conversion of 10% Promisory Notes
into Series E Preferred Stock . 334,197 -- -- 334,200
Amortization of discount on
Common Stock available
to Preferred Shareholders ..... -- -- 1,158,850 1,158,850
Net Loss ........................ -- (6,615,568) -- (6,615,568)
------------ ------------ ------------ ------------
Balance as of
December 31, 1998 ............. $ 13,771,757 $(27,819,029) $ (896,150) $ 994,142
============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
12
<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.
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 nine months and three
months ended December 31, 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.
13
<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
the straight line method over the estimated useful lives of the respective
assets (3 to 7 years).
(D) 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.
(E) CONCENTRATION OF CREDIT RISK
The Company maintains its cash accounts in banks in New York. Cash deposits
are insured by the Federal Deposit Insurance Corporation up to $100,000 per
account. There were no uninsured balances at December 31, 1998.
(F) 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.
(G) FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31 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.
14
<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)
(H) 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.
(I) 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".
(J) 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 as discussed in
Note 1(A). 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 10
years from the date obtained.
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).
15
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC.
(FORMERLY ELECTRONICS COMMUNICATIONS CORP.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2 -- PCS LICENSES (continued)
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. Debt incurred for the licenses was reduced from $23,806,980
to $11,903,490 ($8,842,090 when discounted using an imputed interest rate of
14%--see Note 1(G)). 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 50%
of the total accrued and capitalized interest, a credit of $529,044 for 40% of
the downpayment forfeiture and a credit of $164,547 for 50% of the interest
payments made. Total suspended accrued interest due to the FCC of $423,118 is to
be paid in eight quarterly installments of $52,890. Quarterly interest payments
due on the FCC notes were reduced from $416,622 to $208,311.
Included in the license costs are certain legal and professional fees
incurred in obtaining the licenses. Capitalized PCS interest in the amount of
$1,048,051 and $2,233,418 is included in PCS Licenses at December 31, 1998 and
March 31, 1998, respectively. 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.
Under Section 310(b)(4) of the Communications Act, aliens may own up to 25%
percent of the Company's stock. In late December 1998, the Company learned that
stock ownership by aliens rose to approximately 29%. In order for the Company to
bring itself into full compliance with the Communications Act, the FCC must find
that the public interest would not be served by disallowing the current alien
ownership.The Company will formally request the FCC to make the requisite public
interest finding, and to forebear from imposing any monetary fine or other
penalty on the Company.
Counsel for the Company has also advised that changes in ownership of its
stock might jeopardize the Company's status as a very small business. In such
event, the Company could be subject to less favorable installment and interest
payments, could be required to supplement previous payments it made to the FCC,
might have to reimburse the FCC for the bidding credit it initially was awarded,
and might possibly forfeit the licenses. Counsel is reviewing this matter to
determine whether, in fact, the new ownership has affected the Company's
eligibility for treatment as a very small business and, if so, what remedial
measures may be adopted to restore such eligibility.
Note 3 -- PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
December 31, March 31,
1998 1998
--------- ---------
Paging equipment $1,446,822 $1,619,250
Computer and other equipment 74,376 47,917
Leasehold improvements,
furniture and fixtures 18,955 18,955
--------- ---------
1,540,153 1,686,122
Less: Reserve for Writedown
of Paging Equipment (762,894) --
Accumulated depreciation (722,135) (649,732)
--------- ---------
Net Property and Equipment $ 55,124 $1,036,390
========= =========
See Note 4 for discussion of reserve for writedown of paging equipment.
16
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC.
(FORMERLY ELECTRONICS COMMUNICATIONS CORP.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 4 -- WRITEDOWN OF PAGING ASSETS
Due to ongoing losses from operations and a continued working capital
deficiency, management determined in the fiscal 1999 third quarter that a
dissolution of the paging operations conducted in the TCI subsidiary was
necessary. During the quarter, all employment positions at TCI were eliminated
and all operations were terminated. There were no severance or benefits
obligations associated with the eliminations.
Due to the working capital deficiency, the Company defaulted under all of
its capital leases that financed the acquisition of the majority of the fixed
assets used in the paging operations (see Note 6). The Company has received
offers for the purchase of some of these fixed assets, however, the offers
received were for less than the remaining obligations under the capital leases.
There can be no assurances that any such offers will result in a final sale.
The $1,452,794 writedown of paging assets is comprised of the following:
1) approximately $763,000 represents the net book value of the fixed
assets used in paging operations as any proceeds from a potential sale
would be utilized to settle the remaining obligations under the
capital leases, and,
2) approximately $690,000 represents the net book value of intangible
assets resulting from TCI's acquisition of GCE in 1996 (see Note
1(A)). The intangible assets were no longer deemed to have any value
after the paging operations were ceased.
Note 5 -- 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 ($8,842,090 when discounted using the imputed interest
rate of 14%--see Note 1(G)). Accrued interest as of December 31, 1998 amounted
to $722,678 for a total obligation of $9,564,768 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. As discussed in Note 2, the Company had not made a quarterly
interest payment since March 31, 1997 due to an FCC moratorium on quarterly
interest payments. The payment of interest was to be resumed on July 31, 1998.
The Company deferred the payment due on July 31, 1998. The July 31, 1998 payment
in the amount of $341,644 (including a 5% late charge of $16,269) was made on
October 27, 1998. The payment of the October 31, 1998 quarterly installment in
the amount of $261,201 was deferred and was paid on January 27, 1999 with a 5%
late charge. The payment of the January 31, 1999 quarterly installment in the
amount of $261,201 was deferred and is due on April 30, 1999 with a 5% late
charge.
(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.
(2) During the 1998 fiscal third quarter, the Company borrowed $300,000
from one lender and $200,000 from a second lender. The 10% convertible
promissory 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. 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 recorded a
debt issue cost and a corresponding increase to additional paid in capital of
$506,000, representing the difference between the
17
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC.
(FORMERLY ELECTRONICS COMMUNICATIONS CORP.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 5 -- NOTES PAYABLE (continued)
fair market value of the Company's Common Stock on the date of the loan and the
conversion price. The cost was amortized over the original life of the loan. In
addition, the Company issued 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 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 was 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.
As 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.
On October 26, 1998, the holder of $300,000 of principal amount of the
notes executed amendments wherein the repayment of principal of $100,000 plus
accrued interest from one note was deferred until April 30, 1999 and the
repayment of principal of $200,000 plus accrued interest from a second note was
deferred until May 13, 1999. The original maturity dates were October 31, 1998
and November 13, 1998, respectively. In addition, the amendments provide that
the holder will not convert any of the principal amount or exercise any of the
related warrants until the new maturity dates. In consideration for the deferral
of the maturity dates and conversion rights, the Company decreased the exercise
price of the warrants to $.09375 per share (the closing bid price on the day
preceding the date of the amendments). On December 31, 1998, the holder of the
two notes totalling $300,000 executed a Debt Exchange Agreement with the Company
pursuant to which the principal amount of the notes of $300,000 plus accrued
interest of $34,200 was exchanged for 334.2 shares of Series E Preferred Stock
(see Note 8(C) for a description of the Series E Preferred Stock). There was no
gain or loss recognized for this exchange transaction.
As of December 31, 1998, $160,000 of principal plus $13,152 of accrued
interest was converted into 6,088,816 shares of the Company's Common Stock. On
October 26, 1998, the holder of the note with a remaining principal balance of
$40,000 executed an amendment wherein the repayment of principal plus accrued
interest was deferred until June 4, 1999. The original maturity date was
December 4, 1998. In addition, the amendment provides that the holder will not
convert any of the principal amount or exercise any of the related warrants
until the new maturity date. In consideraton for the deferral of the maturity
dates and conversion rights, the company decreased the exercise price of the
warrants to $.09375 per share (the closing bid price on the day preceding the
date of the amendments). The balance at December 31, 1998 includes accrued
interest of $4,259.
Note 6 -- LONG-TERM DEBT
A summary of long-term debt follows:
Interest December 31, March 31,
Description Rate 1998 1998
------------ ----------
Convertible Debentures (a) 8% $ -- $ 593,332
Installment notes payable
monthly through August 1999 (b) 12% 113,281 151,300
Capital leases and notes (c) Various 534,757 675,237
---------- ----------
648,038 1,419,869
Less: Current maturities 648,038 332,524
---------- ----------
$ -- $1,087,345
========== ==========
18
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC.
(FORMERLY ELECTRONICS COMMUNICATIONS CORP.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 6 -- LONG-TERM DEBT (continued)
(a) In an August 7, 1998 Regulation S Private Placement Offering, the
Company issued $4,970,334 principal amount of 8% Cumulative Convertible
Debentures (the "Debentures"). The principal amount of the Debentures were
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. The Debentures bear interest at the
rate of 8% per annum payable on August 7 of each year commencing August 7, 1998.
The Debentures were redeemable and callable for conversion under certain
circumstances and are due June 30, 2000.
As of December 31, 1998, all of the Debentures totaling $4,970,334 had been
converted into 5,650,829 shares of the Company's common stock.
(b) In connection with TCI's acquisition of GCE, the Company assumed a
$350,000 non-interest bearing note. The outstanding principal amount of this
note was $116,667 and $165,278 at December 31 and March 31, 1998, respectively,
less unamortized discount (discount is based on an imputed interest rate of 12%)
for a net balance of $113,281 (including accrued interest) and $151,300,
respectively. Due to the ongoing liquidity problems of the Company, the Company
is in default under the terms of this note. See Note 16(C) for discussion of the
related lawsuit.
(c) The obligations under capital leases are collateralized by paging
equipment. The interest rates on the capitalized leases and notes range from
approximately 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. Due to the ongoing liquidity problems of the
Company, the Company is in default under all of its capital leases. Due to the
defaults, all amounts due under the leases are currently due and payable.
As discussed in Note 4, the Company is currently negotiating with a
potential buyer for a portion of the fixed assets used in paging operations. In
conjunction with these negotiations, the Company is in discussions with each of
the lessors in an attempt to apply the potential sale proceeds in partial or
full settlement of the obligations owed in lieu of tendering the equipment to
the lessors under the terms of the leases. At this time, neither the outcome of
the negotiations nor the final settlement of the remaining obligations under the
leases can be determined.
Additionally, due to the Company's exit from the two way radio business
conducted in its GTA subsidiary (see Note 1(A)), in July 1998, equipment with a
book value of approximately $80,000 was returned to the lessor. The Company is
currently in litigation with the lessor regarding the residual balance owed. See
Note 15(B) for further discussion of the lawsuit.
Note 7 -- Supplemental Disclosure Of Loss Per Share
Basic and Diluted Loss Per Common Share:
<TABLE>
<CAPTION>
Nine Months Nine Months Three Months Three Months
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Income (Loss) Per Common Share:
Before Extraordinary Income $ (0.40) $ (3.81) $ (0.12) $ (0.63)
Extraordinary Income -- 0.34 -- 0.19
----------- ---------- ----------- -----------
Net Loss per Common Share $ (0.40) $ (3.47) $ (0.12) $ (0.44)
=========== ========== =========== ===========
Weighted Average Common Shares
Outstanding 16,550,041 1,753,457 25,872,077 3,107,380
=========== ========== =========== ===========
</TABLE>
19
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC.
(FORMERLY ELECTRONICS COMMUNICATIONS CORP.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8 -- PREFERRED STOCK
(A) SERIES C CONVERTIBLE PREFERRED STOCK
On December 24, 1997, the 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 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 Series C 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 Series C 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 Series C Preferred Stock, any outstanding shares 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. The Company issued the maximum 45 shares
of Series C Preferred Stock and received proceeds of $3,897,500, net of $602,500
in expenses. In accordance with EITF D-60, the Company recorded an adjustment
for the discount on Common Stock available to Preferred shareholders and a
corresponding increase to additional paid in capital of $2,423,000, representing
the value of the 35% conversion discount offered on the Series C 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 December 31, 1998, 24.25 shares of the Series C Preferred Stock had
been converted into 13,135,975 shares of the Company's Common Stock.
As of December 31, 1998, there were dividends in arrears of $207,500 on the
20.75 shares outstanding of the Series C Preferred Stock.
(B) SERIES D CONVERTIBLE PREFERRED STOCK
On November 4, 1998, the Company began a Private Offering the terms of
which provide for the subscription of a minimum of 500 and a maximum of 5,000
shares of Series D Preferred Stock, $.01 par value, $1,000 stated value and
purchase price per share. Holders of the Series D Preferred Stock are entitled
to receive a dividend (provided the Company has either sufficient surplus or net
income) at the rate of 10% of the stated value per annum, payable upon
conversion in cash, or at the option of the holder, in shares of the Company's
Common Stock. The Series D Preferred Stock is non-voting and is convertible,
subject to certain quantitative limitations, commencing February 1, 1999 into
shares of the Company's Common Stock at a conversion price equal to the lower of
(i) the closing bid price of the Company's Common Stock on the date of issuance
of the Series D Preferred Stock, or (ii) 75% of the average closing bid price of
the Company's Common Stock for the five trading days immediately preceding the
date on which the Company receives a Conversion Notice from a holder of Series D
Preferred Stock. The Series D Preferred Stock is subject to redemption by the
Company at a redemption price equal to the sum of the stated value and the
accrued dividends thereon, multiplied by 133%. The Placement Agent for this
offering will be paid a placement fee of 11% and a non-accountable expense
allowance of 2% of any offering proceeds received as well as five-year warrants
exercisable to purchase 5,000,000 shares of the Company's Common Stock (see Note
10).
The initial closing occurred on November 6, 1998 pursuant to which 500
shares of the Series D Preferred Stock were issued for $500,000 of which the
Company received proceeds of $48,500 after deducting fees and expenses and the
repayment of a $374,000 advance received on October 28, 1998. The advance was
personally guaranteed by the Company's President & CEO. As consideration for the
personal guarantee, the President & CEO was issued with Board of Directors
approval, warrants to purchase 1,000,000 shares of the Company's Common Stock
(see Note 10).
20
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC.
(FORMERLY ELECTRONICS COMMUNICATIONS CORP.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8 -- PREFERRED STOCK (continued)
A second closing occurred on November 20, 1998 pursuant to which 400 shares
of the Series D Preferred Stock were issued for $400,000 of which the Company
received proceeds of $291,000 after deducting fees and expenses and the
repayment of a $37,000 advance.
(C) SERIES E CONVERTIBLE PREFERRED STOCK
In December 1998, in order to facilitate the exchange and cancellation of
10% convertible promissory notes, the Board of Directors of the Company
authorized the issuance of 350 shares of Series E Preferred Stock, $.01 par
value, $1,000 stated value and purchase price per share. On December 31, 1998,
334.2 shares of Series E Preferred Stock were issued in exchange for the
cancellation of $334,200 of principal plus accrued interest of two 10%
convertible promissory notes (see Note 5(B) (2)). The holder of the Series E
Preferred Stock is entitled to receive a dividend (provided the Company has
either sufficient surplus or net income) at the rate of 10% of the stated value
per annum, payable upon conversion in cash, or at the option of the holder, in
shares of the Company's Common Stock. The Series E Preferred Stock is non-voting
and is convertible, subject to certain quantitative limitations, commencing May
19, 1999 into shares of the Company's Common Stock at a conversion price equal
to the lower of (i) $1.125 per share, or (ii) 65% of the average closing bid
price of the Company's Common Stock for the 5 trading days immediately preceding
the date on which the Company receives a Conversion Notice. The Series E
Preferred Stock is subject to redemption by the Company at a redemption price
equal to the sum of the stated value and all accrued dividends thereon.
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 that 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
21
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC.
(FORMERLY ELECTRONICS COMMUNICATIONS CORP.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10 -- STOCK OPTIONS AND WARRANTS (continued)
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. On November 23, 1998, the Board consented to an increase in the
aggregate number of shares that may be the subject of options granted pursuant
to the 1997 Plan to 2,000,000 shares. This proposed increase in shares available
unde the 1997 Plan is subject to shareholder approval.
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 December 31, 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
Directors in October 1997 145,000 (b) (b)
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 originally 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. In November 1998, the Board reduced the
exercise price of all 300,000 options to $.3125 per share. The term of all
options is ten years.
(b) The original 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. In November 1998, the Board
reduced the exercise price of all 145,000 options to $.3125 per share.
ISO's issued and outstanding at December 31, 1998 are as follows:
Shares Exercise Price Expiration
Issuable Per Share Date
-------- --------------- ----------
ISO's issued to President
& CEO in October 1997 200,000 (c) (c)
ISO's issued to Secretary,
Executive VP and CFO 100,000 (d) 12/2002
ISO's issued to Other
Key Employees 50,000 (d) 1/2003
-------
Total 350,000
=======
22
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC.
(FORMERLY ELECTRONICS COMMUNICATIONS CORP.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10 -- STOCK OPTIONS AND WARRANTS (continued)
(c) The original 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). In November 1998, the Board
reduced the exercise price of all 200,000 options to $.3125 per share.
(d) The original exercise prices equaled the mean between the closing bid
and the closing asked prices for the Company's common stock in the
over-the-counter market on the grant date. In November 1998, the Board reduced
the exercise price to $.3125 per share.
On July 31, 1998, the Board approved the issuance to certain key employees
options to purchase an aggregate of 100,000 shares of the Company's Common Stock
at an original exercise price of $.75 per share that was subsequently reduced by
the Board in November 1998 to an exercise price of $.3125 per share. On December
11, 1998, the Board approved the issuance of additional options to purchase an
aggregate of 787,000 shares of the Company's Common Stock at an exercise price
of $.375 per share. The additional option grants were as follows: 275,000 to the
President & CEO, 250,000 to the Executive VP and CFO, 250,000 to non-officer
Directors, and 12,000 to certain key employees. As of December 31, 1998, options
to purchase only 55,000 shares were available for grant under the 1997 Plan. The
additional 832,000 shares to be issued are subject to shareholder approval of
the Board's proposed increase in the number of shares authorized under the 1997
plan.
In July 1998, the Company granted 100,000 options to purchase the Company's
Common Stock at an exercise price of $.375 per share (the closing bid price on
the date of related marketing service agreement) to a public relations and
direct marketing advertising firm as consideration for the public relations
firms services in publicizing the Company to brokers, prospective investors and
shareholders.
Options outstanding are summarized as follows:
Nine Months
Ended Year Ended
December 31, 1998 March 31, 1998
----------------- --------------
Options Outstanding at Beginning of Period 1,025,000 80,000
Options Granted 100,000 1,548,077(a)
Options Expired -- --
Options Exercised -- (523,077)
Options Transferred -- --
Options Cancelled -- (80,000)
------------ ----------
Options Outstanding at End of Period 1,125,000 1,025,000
============ ==========
Exercise Price per Share $.3125-$2.25 $.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.
Proforma results of operations, had SFAS 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.
23
<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 fair market value of the options 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.
Warrants
As of December 31, 1998, there were Class A warrants that expire on May 12,
1999 to purchase 570,415 shares of the Company's Common Stock at an exercise
price of $2.25 per share.
As of December 31, 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 5(B)(2).
As of December 31, 1998, there were ten year warrants outstanding, with
full registraton rights, exercisable to purchase 1,000,000 shares of the
Company's Common Stock at an exercise price of $.09375 per share that were
issued to the Company's President and CEO as consideration for a personal
guarantee of $374,000 advance received by the Company (see Note 8(B)).
As of December 31, 1998, there were five-year warrants outstanding
exercisable to purchase 5,000,000 shares of the Company's Common Stock at an
exercise price of $.17182 per share (110% of the closing bid price for the day
immediately preceding the initial closing of the sale of Series D Preferred
Stock) that were issued to the Placement Agent as compensation for the closing
of the sale of Series D Preferred Stock (See Note 8 (B)).
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.
NOTE 12 -- DELISTING FROM NASDAQ STOCK MARKET
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, in September 1998, 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 was to be held on
October 15, 1998 to consider the proposed reverse stock split. In October 1998,
the Company announced that the stockholder meeting date was being postponed.
The Company requested a hearing with NASDAQ to discuss the continued
listing of the Company's Common Stock on the NASDAQ Small Cap Market. The
hearing was held on October 29, 1998. On January 4, 1999, NASDAQ elected to
delist the Company's securities from the Nasdaq Small Cap market because, due to
the absence of additional financing, Nasdaq lacked confidence in the Company's
ability to achieve and sustain long term compliance with the net tangible assets
requirement of Nasdaq. Upon the successful closing of the proposed transactions
more fully discussed in Notes 13 and 16(A), the Company will apply for
reinstatement on the Nasdaq Stock Market.
NOTE 13 -- BUSINESS PLAN AND LIQUIDITY
The Company's wholly owned subsidiary, PCN, 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. On October 21, 1998, the Company
received a commitment for a $16 million term loan facility from a PCS equipment
vendor. The commitment is subject to, among other conditions, the Company
obtaining binding commitments for equity contributions and/or subordinated debt
in the amount of at least $16 million. The
24
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC.
(FORMERLY ELECTRONICS COMMUNICATIONS CORP.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 13 -- BUSINESS PLAN AND LIQUIDITY (continued)
original commitment expired on December 15, 1998, however, the commitment was
extended until February 26, 1999. The Company has requested an additional
extension to April 30, 1999 to coincide with the closing of the proposed
investment of $16.0 million more fully discussed in Note 16(A). 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.
In January 1999, the Company signed a letter of intent with a potential
investor that reflects the intention of the potential investor to purchase 80%
of the Common Stock of the Company for $16,000,000 and provide a working capital
loan for $1,000,000. See Note 16(A) for further discussions of the proposed
transaction.
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.
In July 1998, management made the decision to discontinue reselling paging
airtime for Skytel, a nationwide paging carrier, 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 entered into a settlement
agreement effective July 1, 1998 with Skytel. Pursuant to the terms of the
settlement agreement, the Company paid Skytel approximately $98,000 and tendered
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. As of December 31, 1998, the balance due to Skytel was approximately
$130,000.
On March 16, 1998, 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. However, due to continued losses
from operations and a working capital deficiency and managements inability to
raise the funds necessary to continue operations until such time that said
paging operations could become cash flow positive, management determined in the
fiscal 1999 third quarter that a dissolution of the paging operations was
necessary. See Note 4 for further discussion.
The Company's financial statements for the three months ended December 31,
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 $6,615,568 for the nine months ended December 31, 1998. The Company
had a working capital deficiency of $3,457,113 at December 31, 1998 and its cash
used by operations during the nine months ended December 31, 1998 was
$2,022,823. 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 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.
25
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC.
(FORMERLY ELECTRONICS COMMUNICATIONS CORP.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 14 -- CONTINGENT LIABILITIES
(A) 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.
(B) On October 16, 1998, the Company entered into a purchase and sale
contract for an 8,000 square foot switching and customer care facility located
in South Burlington, Vermont. The total purchase price of the building was
$550,000 of which a down payment of $80,000 was made which is reflected in Other
Assets. Closing is scheduled on or before May 3, 1999 and, until such time, the
Company is leasing the facility on a month to month basis.
NOTE 15 -- PENDING LITIGATION
(A) 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. On or
about May 15, 1998, Motorola filed a Motion for Summary Judgment with the
Superior Court of New Jersey Law Division, Essex County. On June 19, 1998,
Motorola's motion for summary judgement was denied. In October 1998, the Company
executed a Stipulation of Settlement with Motorola in settlement of the lawsuit,
which required the Company to pay $126,500 to Motorola by November 15, 1998. As
a result of the Company not making the settlement payment of $126,500 on
November 15, 1998, Motorola sought and received an Order of Judgement for
$126,500 and is seeking a judgment for an as yet undetermined amount for its
claim for lost profits. The "lost profits" claim asserts that due to the
Company's failure to purchase certain equipment, Motorola sustained lost profits
of approximately $1.2 million. The Company will seek to defend against the
claim. Pursuant to the Stipulation of Settlement, the Company has the right to
pay Motorola the sum of $131,500 in full satisfaction of its obligations under
the Stipulation of Settlement at any time prior to entry of judgement on
Motorola's loss profits claim.
(B) On October 29, 1998, the Company received an Amended Complaint from
Madison Leasing Co., Inc. Due to the Company's default under the terms of a
lease for two way radio equipment, Madison is seeking to recover approximately
$160,000 plus interest and attorneys fees. Madison has obtained an Order for
Judgement in the amount of approximately $160,000. The Company is disputing the
amounts set forth in the judgement and the service of such judgement on the
Company. However, at this time management cannot make a determination as to the
outcome of the disputes set forth above.
(C) In November 1998, the Company was served a summons wherein Nitas, Inc.
and Irwin Satin ("Plaintiff") filed suit against the Company, TCI, and certain
former and current officers and directors of the Company. The lawsuit seeks to
recover the amounts due under a promissory note (see Note 6(b)) under which the
Company is currently in default, amounts due under the Purchase and Sale
Agreement for GCE (see Note 5(B)(1)), and attorney's fees and cost of suit. The
plaintiff is seeking to recover approximately $500,000 in total. At this time
management is attempting to settle this matter, however, management cannot make
a determination as to the outcome of this lawsuit or the settlement
negotiations.
(D) In December 1998, the Company was served a summons wherein Signius
Corp. (d/b/a 5by5 Communications) ("Plaintiff") filed suit against TCI for
breach of a contract wherein the Plaintiff provided certain paging service to
TCI. The lawsuit seeks to recover amounts due under the contract of
approximately $67,000, and attorney's fees and cost of suit. The amount due
under the contract is currently reflected in the Company's accounts payable. At
this time management cannot make a determination as to the outcome of this
lawsuit.
26
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC.
(FORMERLY ELECTRONICS COMMUNICATIONS CORP.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15 -- PENDING LITIGATION (continued)
(E) On January 20, 1999, counsel for an 8% convertible debenture holder,
filed suit against the Company in the United States District Court for the
Northern District of Illinois alleging that the Company is in breach of contract
with respect to the debenture agreement. As such, the debenture holder alleges
that they are entitled to relief in an amount equaling $1,000 for each day that
has passed since June 18, 1998 and approximately 181,000 additional shares of
the Company's Common Stock. The Company is currently contemplating its defenses
in this matter, however, at this time, management cannot make a determination as
to the outcome of this lawsuit.
(F) On February 10, 1999, the Company received notice of a Demand for
Arbitration filed with the American Arbitration Association by claimant Robert
P. DePalo, former director of the Company. The dispute arises out a consulting
contract entered into by Mr. DePalo and the Company on February 1, 1998. Mr.
DePalo seeks damages in the amount of $106,250, the balance of payments
remaining under the contract. It is the position of management that Mr. DePalo
breached his obligations under the contract and that no additional amounts are
due or owing to Mr. DePalo. Furthermore, the Company will file a counter-claim
in the amount of approximately $25,000. There can be no assurances made with
respect to the Company's success in this matter.
(G) On February 5, 1999, Spacecom Systems, Inc. filed a complaint against
the Company for breach of contract seeking damages in an amount not less than
$19,402.99, plus the aggregate amount of the monthly payments due under the
terms of the Agreement through January 1, 2008. It is management's position that
this case should be dismissed as Spacecom's contract is with Electrocom
Wireless, Inc. and not Northeast Digital Networks, Inc. As Spacecom has
improperly named the Company in the suit, the Company has requested the court to
dismiss all charges against it. Management cannot determine at this time whether
the court will grant the Company's request to dismiss the suit or enter a
default judgement against the Company. Furthermore, even if the Court were to
dismiss all charges against the Company, it is unknown whether Spacecom will
seek to recover damages against Electrocom Wireless, Inc., individually.
NOTE 16 -- SUBSEQUENT EVENTS
(A) In January 1999, the Company signed a letter of intent with a potential
investor whereby said investor will invest $16.0 million in cash and provide the
Company with a $1.0 million working capital loan in exchange for newly issued
shares of the Company's Common Stock that will represent 80% of the Company's
issued and outstanding Common Stock after such purchase, calculated after giving
effect to all warrants, options and convertible securities or other rights to
acquire stock on a fully exercised or converted basis, assuming the maximum
shares possible upon exercise or conversion. The Company and the potential
investor are in the process of preparing a more definitive agreement. The
closing of the proposed transaction is subject to, among other things, approval
by the FCC. The Company will also seek shareholder approval of the transaction.
Upon closing of the proposed transaction, proceeds received will be used in
conjunction with the $16.0 million term loan facility more fully discussed in
Note 13 to develop a PCS network that will utilize the PCS licenses held in the
Company's PCN subsidiary.
(B) In January and February 1999, the Company received loans totaling
$400,000 that were used for the January 27, 1999 quarterly installment payment
for the FCC Notes Payable and for working capital. The loans are payable on
demand and bear interest at a rate of 8%.
27
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC.
(FORMERLY ELECTRONICS COMMUNICATIONS CORP.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. As discussed in Note 13, the Company's ability to complete the
construction of the PCS network is contingent upon the Company raising the
necessary capital.
The Company, through its TCI subsidiary, had operated a state of the art digital
900MHz Glenyre satellite-based Flex paging system, which covered the New York
Metropolitan area and New Jersey. As discussed in Notes 4 and 13, the Company
exited from its paging operations.
Results of Operations
Three and Nine Months Ended December 31, 1998 Compared To Three and Nine Months
Ended December 31, 1997
Paging and Two Way Radio revenues decreased $546,313 or 92% for the three months
ended December 31, 1998 compared to the three months ended December 31, 1997.
Total revenues decreased $1,719,896 or 79% for the nine months ended December
31, 1998 compared to the nine months ended December 31, 1997. Paging and Two Way
Radio revenues decreased $1,287,854 or 74% for that same nine month comparative
period. There were no Commissions or Electronics revenues for the nine months
ended December 31, 1998 compared to $422,428 and $9,614, respectively, for the
nine months ended December 31, 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.
The Commissions revenue decrease for the nine month comparative period was due
to the Company ceasing activations of cellular phones which was primarily 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
$275,562 for the nine month comparative period.
The decrease of Paging and Two Way Radio revenues for both the three and nine
month comparative periods 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 coupled with
28
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC.
(FORMERLY ELECTRONICS COMMUNICATIONS CORP.) AND SUBSIDIARIES
continuing losses from operations, the Company's inability to raise additional
capital for the paging operations and a working capital deficiency resulted in
the Company's exit from its paging operations as further discussed in Notes 4
and 13. There was a corresponding decrease in Paging and Two Way Radio cost of
sales of $279,525 or 79% for the three month comparative period and $662,382 or
61% for the nine month comparative period.
Selling, General and Administrative Expenses ("SGA") for the three months ended
December 31, 1998 was $861,534 compared to $1,274,830 for the three months ended
December 31, 1997, a decrease of $413,296 or 32%. SGA for the nine months ended
December 31, 1998 was $2,927,544 compared to $4,576,120 for the nine months
ended December 31, 1997, a decrease of $1,648,576 or 36%. 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 $637,458 for the three months ended December 31, 1998
compared to $883,955 for the three months ended December 31, 1997 and $2,293,049
for the nine months ended December 31, 1998 compared to $2,497,499 for the nine
months ended September 30, 1997. The decrease in interest expense for the three
month comparative period is primarily attributable to the decrease of non-cash
amortization of finance charges. For the nine month comparative period, total
interest expense was virtually unchanged as the non-cash finance charges
associated with the 8% convertible debentures for the nine month period in 1997
is somewhat offset by the amortization of deferred finance charges associated
with the $500,000 10% promissory notes (see Note 5(B)(2)) and the Company's
Series C Preferred Stock (see Note 8) for the nine month period in 1998.
Other Income (Expense) for the three and nine months ended December 31, 1998,
includes a Loss on Writedown of Paging Assets of $1,452,794 resulting from the
Company's exit from paging operations as further discussed in Notes 4 and 13.
The three and nine month periods ended December 31, 1997 includes Extraordinary
Income of $599,146 resulting from the negotiated settlement of certain trade
accounts payable.
Net Loss for the three months ended December 31, 1998 was $2,977,439 compared to
$1,353,467 for the three months ended December 31, 1997 and $6,615,568 for the
nine months ended December 31, 1998 compared to $6,076,012 for the nine months
ended December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Since its formation through December 31, 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 had a working capital deficiency of $3,457,113 as of December 31,
1998.
Net cash used by operating activities for the three months ended December 31,
1998 was $567,329 compared to $1,719,344 for the three months ended December 31,
1997 and $2,022,823 for the nine months ended December 31, 1998 compared to
$3,404,070 for the nine months ended December 31, 1997.
Net cash used by investing activities for the three months ended December 31,
1998 was $0 compared to $1,066,470 for the three months ended December 31, 1997
and net cash used by investing activities for the nine months ended December 31,
1998 was $49,589 compared to net cash provided by financing activities of
$13,442 for the nine months ended December 31, 1997.
Net cash provided by financing activities for the three months ended December
31, 1998 was $467,625 compared to $2,164,888 for the three months ended December
31, 1997. Net cash provided by financing activities for the nine months ended
December 31, 1998 was $342,777 compared to $4,981,747 for the nine months ended
December 31, 1997.
29
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC.
(FORMERLY ELECTRONICS COMMUNICATIONS CORP.) AND SUBSIDIARIES
The Company's financial statements for the three months ended December 31, 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
$6,615,568 for the nine months ended December 31, 1998. The Company had a
working capital deficiency of $3,457,113 at December 31, 1998 and its cash used
by operations during the nine months ended December 31, 1998 was $2,022,823. 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.
Although the Company, was able to raise $400,000 of working capital loans in
January and February 1999 as discussed in Note 16(B), no assurances can be given
that the efforts of the Company or that of its consultants will continue to 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.
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.
30
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company incorporates herein the information set forth in Note 15 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
None
Item 5. Other Information
None
Item 6. Exhibit and Reports on Form 8-K
None
31
<PAGE>
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: February 19, 1999
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
32
