ELCC: NEXT MOVER!!!!!!!
ELECTRONICS COMMUNICATIONS CORP (ELCC)
Quarterly Report (SEC form 10QSB)
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 currently operates a state of the art digital 900-megahertz Glenyre satellite-based Flex paging system which covers South-Western Connecticut, Southern New York, New Jersey and the downtown Philadelphia area. The Company also operates a trunked two-way radio system covering New York and New Jersey. The Company through its PCN subsidiary successfully bid, through the FCC's C-Block auction, for six 30MHz baseband PCS licenses covering portions of New York, Pennsylvania, Vermont, Maine, and New Hampshire. The Company is currently discussing financing options with major wireless equipment vendors regarding the build out of a wireless communications network that will utilize the Company's six PCS licenses.
Results of Operations
FOR THE THREE MONTHS AND NINE MONTHS ENDED DECEMBER 31, 1997 AND THE THREE
MONTHS AND NINE MONTHS ENDED DECEMBER 31, 1996
Revenues from paging and two-way radio for the three months ended December 31, 1997 were $592,813 compared to $353,461 for the three months ended December 31, 1996.
Revenue from paging and two-way radio for the nine months ended December 31, 1997 were $1,745,386 compared to $984,851 for the nine months ended December 31, 1996.
On June 28, 1996, the Company entered the paging and two-way radio business with the acquisition of a 51% stake in Threshold Communications, a reseller of paging air time. On January 3, 1998 the Company acquired the remaining 49% of Threshold Communications. During May of 1997, the Company completed the build out of its 900 MHz Glenayre paging system thereby becoming a paging carrier. New paging subscribers are now placed directly on the Company's own paging system. The Company transmits and receives paging signals on 929.0875 MHz and 929.2625 MHz.
Commissions on activations of cellular telephones for the three months ended December 31, 1997 were zero compared to $307,394 for the three months ended December 31, 1996.
Commissions on activations of cellular telephones for the nine months ended December 31, 1997 were $422,428 compared to $2,114,646 for the nine months ended December 31, 1996.
On May 15, 1997, the Company entered into a "Settlement & Separation Agreement" whereby the Company severed its agency relationship with NYNEX Mobile Communications, Inc. ("NYNEX") and Bell Atlantic Mobile Communications Inc. ("Bell Atlantic") with respect to the solicitation of cellular activation's. The contract with NYNEX and Bell Atlantic was the Company's largest source of commission income. As a result of the Settlement and Separation 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.
Revenues from the sale of electronics were $9,614 for the nine months ended December 31, 1997 reflecting the Company's exit from the business. However, the Company, having been advised of the affirmation of its October 28, 1997 dismissal of the federal lawsuit against Toshiba and in consultation with its new auditors and counsel, reinstated the account payable and charged cost of sales in the amount of $379,854. This matter was settled on favorable terms for the Company. The difference between the original account payable and the amount paid to settle this claim is reflected on the Company's statement of operations as an extraordinary item.
Selling General and Administrative expenses decreased approximately 45% to $1,274,830 for the three months ended December 31, 1997 from $2,802,565 for the three months ended December 31, 1996. Selling, General and Administrative expenses decreased approximately 71% to $4,576,120 for the nine months ended December 31, 1997 from $6,467,137 for the nine months ended December 31, 1996. Included in Selling, General and Administrative expenses for the three and nine months ended December 31, 1997 is a one-time non recurring charge to salary expense of $327,640 which represented amounts paid to previous officers and directors of the Company in exchange for, among other things, the rescission of all employment agreements. The decrease in expenses is the direct result of cost saving measures instituted by new management which includes, among other things, layoffs, improved controls over purchasing, and the relocation of the Company's officers.
Interest expense was $883,955 for the three months ended December 31, 1997 compared to $74,396 for the three months ended December 31, 1996. Interest expense was $2,291,499 for the nine months ended December 31, 1997 compared to $165,098 for the nine months ended December 31, 1996. Interest expense increased for the three months and nine months ended December 31, 1997 as a result of leases for office equipment and paging equipment, increased bank borrowings, the private placement of 8% convertible debentures on August 7, 1997, and the issuance of a total of $500,000 10% one year promissory notes. In addition, the Company incurred a non-cash interest expense of $2,264,143 in the three and nine months ended December 31, 1997 due to EITF Bulletin D-60 discussed more fully in Note 2 and the subsequent amortization of deferred finance charge on the sale of the Company's 8% convertible debentures.
For the three and nine months ended December 31, 1997, the Company recorded $599,146 as extraordinary income. This amount represents the difference between amounts recorded in accounts payable and amounts actually paid by the Company through non judicial settlements with certain of the Company's creditors.
LIQUIDITY AND CAPITAL RESOURCES
The Company incurred net losses of $1,353,467 and $2,927,722 for the three months ended December 31, 1997 and 1996 respectively and $6,076,012 and $5,958,578 for the nine months ended December 31, 1997 and 1996 respectively.
The Company has a working capital deficiency of $810,073 at December 31, 1997 as compared to a working capital deficiency of $3,775,300 Included in current liabilities is accrued interest on the FCC notes of $957,861. Since March 31, 1997 there has been a moratorium on the payment of interest until March 31, 1998. The amount recorded in the company's fianancial statements assumes that the Company will not elect one of the three financial restructuring options offered by the FCC. If the Company elects one of the three options more fully discussed in Note 3 of the consolidated financial statements, the amount of accrued interest on the FCC notes could range from no amounts due under the amnesty option to 50% of the amount currently recorded in the current liabilities section of the Company's consolidated financial statements or $478,930, less the return of 50% of previous interest payments or $143,000 which amounts to $335,930 under the disaggregation option. The total amount of accrued interest on FCC Notes will be spread over eight quarters upon the lifting of the moratorium. Management has not made a decision as to which financial restructuring option, if any, the Company will elect.
Net cash used in operrating activities decreased to $1,614,928 for the nine months ended December 31, 1997 compared to $2,221,398 for the nine months ended December 31, 1996.
Net cash used in investing activities increased to $1,775,700 for the nine months ended December 31, 1997 from $586,292 for the nine montbs ended December 31, 1996. The increase in investing activities is primarily the result of the Company's investment in its PCS licenses.
Net cash provided by the financing activities increased to $4,981,747 for the nine months ended December 31, 1997 from $2,932,549 for the nine months ended December 31, 1996. During the three months ended December 31, 1997 the Company issued 30 shares of new Series C Convertible Preferred Stock and received $2,595,000 net of $405,000 in expenses. The Company also issued a total of $500,000 10% one year convertible notes. The proceeds of these offerings were used to repay past due indebtedness and $105,000 loan made by a director of the company with the balance being added to working capital.
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. 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.
Financial Condition, Liquidity and Capital Resources
Forward-Looking Statements
This quarterly report on Form 10-Q for the quarter ended December 31, 1997 as well as other public documents of the Company contain forward-looking statements which involve risks and uncertainties. The Company's actual results may differ materially from those discussed in such forward-looking statements. Such statements include, without limitation, the Company's expectation and estimates as to future financial performance, including growth in net sales and earnings, cash flows from operations, improved results from business consolidations, the possibility of gains from dispositions of the Company's PCs network and the availability of funds from the sale of additional shares of Electronic Communications Corp. Readers are urged to consider statements which use the terms "believes," "no reason to believe," "expects," "plans," "intends,"
"estimates," "anticipated," or "anticipates" to be uncertain and
forward-looking. Such statements reflect the current views of the Company with
respect to future events and are subject to certain risks, uncertainties and
assumptions. In addition to factors that may be described in the Company's
Commission filings, including this filing, the following factors, among others,
could cause the Company's actual results to differ materially from those
expressed in any forward-looking statements made by the Company; (I)
difficulties or delays in building out the Company PCS network; (ii) actions by
competitors, including business combinations, technological breakthroughs, new
product offerings and marketing and promotional successes; (iii) the inability
to secure capital contributions or loans from outside investors or sell assets
or additional shares of Electronic Communications Corp; (iv) effects of and
changes in current FCC rules and regulations; (v) difficulties or delays in
realizing improved results from business consolidations and in realizing gains
from the sale of certain assets held for sale; and (vi) insolvency of any
potential joint venture partners.
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES |
