UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File No. 0-4465
eLEC COMMUNICATIONS CORP.
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(Exact name of Registrant as specified in its charter)
New York 13-2511270
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(State or other jurisdiction (IRS employer
of incorporation or organization) identification no.)
509 Westport Avenue, Norwalk, Connecticut 06851
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (203) 750-1000.
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
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 [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ____
As of February 15, 2000, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $46,098,656.
As of February 15, 2000, there were 11,524,664 shares outstanding of the
Registrant's Common Stock.
Documents Incorporated by Reference
Portions of the Registrant's definitive proxy statement to be filed with the
Securities and Exchange Commission in connection with the Registrant's 2000
Annual Meeting of Stockholders are incorporated by reference into Part III.
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TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Signatures
Index to Financial Statements
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The statements contained in this Report that are not historical
facts are "forward-looking statements" which can be identified by the use of
forward-looking terminology, such as "estimates," "projects," "plans,"
"believes," "expects," "anticipates," "intends," or the negative thereof or
other variations thereon, or by discussions of strategy that involve risks and
uncertainties. Management wishes to caution the reader of the forward-looking
statements, that such statements, which are contained in this Report, reflect
our current beliefs with respect to future events and involve known and unknown
risks, uncertainties and other factors, including, but not limited to, economic,
competitive, regulatory, technological, key employee, and general business
factors affecting the Company's operations, markets, growth, services, products,
licenses and other factors discussed in the Company's other filings with the
Securities and Exchange Commission, and that these statements are only estimates
or predictions. No assurances can be given regarding the achievement of future
results, as actual results may differ materially as a result of risks facing the
Company, and actual events may differ from the assumptions underlying the
statements that have been made regarding anticipated events. Factors that may
cause actual results, performance or achievements of the Company, or industry
results, to differ materially from those contemplated by such forward-looking
statements include, without limitation: (1) the availability of additional funds
to successfully pursue the Company's business plan; (2) the Company's ability to
maintain, attract and integrate internal management, technical information and
management information systems; (3) the time and expense to construct the
Company's planned network operating center and digital subscriber line network;
(4) the cooperation of incumbent carriers in implementing the unbundled network
elements platform required by the Federal Communications Commission; (5) the
Company's ability to market its services to current and new customers and
generate customer demand for its products and services in the geographical areas
in which the Company can operate; (6) the Company's success in gaining
regulatory approval to access new markets; (7) the Company's ability to
negotiate and maintain suitable interconnection agreements with the incumbent
carriers; (8) the availability and maintenance of suitable vendor relationships,
in a timely manner, at reasonable cost; (9) the impact of changes in
telecommunication laws and regulations; (10) the intensity of competition; and
(10) general economic conditions. All written and oral forward looking
statements made in connection with this Report that are attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by these cautionary statements. Given the uncertainties that surround
such statements, prospective investors are cautioned not to place undue reliance
on such forward-looking statements.
Part I
In this Annual Report on Form 10-K, we will refer to eLEC Communications Corp.,
a New York Corporation, as "eLEC," the "Company," "we," "us," and "our."
Item 1. - Business
Overview
eLEC Communications Corp. is a full-service telecommunications company that
focuses on developing integrated telephone service in the emerging competitive
local exchange carrier industry. We offer an integrated set of
telecommunications products and services, including local exchange, local
access, domestic and international long distance telephone, calling cards,
paging, Internet access, dedicated access, Web site design, Web site hosting,
Internet-based yellow-pages directory listings and other enhanced and
value-added telecommunications services tailored to meet the needs of our
<PAGE>
customers and the growing marketplace demand from small- and medium-sized
businesses for reliability and speed. As part of our nationwide expansion plan,
we have completed the deployment of our first network node in a planned 18-node
build-out to provide high speed Internet access via digital subscriber lines
("DSL"), and for the anticipated provisioning of Voice over DSL.
We believe that the Telecommunications Act of 1996 (the
"Telecommunications Act"), which opened the local exchange market to
competition, has created an attractive opportunity for competitive local
exchange carriers ("CLECs"), such as eLEC. Like most CLECs, our entry in this
industry was dependent upon the provisions of the Telecommunications Act that
allow CLECs to lease various elements of the networks of the incumbent local
exchange carriers ("ILECs") that are necessary to provide local telephone
service in a cost-effective manner. This aspect of the Telecommunications Act is
referred to as "unbundling" the ILEC networks, and allows us to lease unbundled
network elements on an as-needed basis and provide such elements to our
customers at a lower cost than that which the ILEC is charging.
The majority of our installed access lines are provisioned on the
unbundled network elements platform ("UNE-P"). We believe that the use of this
platform is the most cost-effective manner in which we can provide voice
service. Other CLECs have invested a substantial amount of capital to buy
switches and rollout fiber, only to find that their equipment is severely
underutilized and that there is a significant shortfall in their revenue stream
when compared to their capital investment. We refer to this strategy as a
"facilities-first" strategy, because the CLEC has invested in its equipment and
placed the equipment in service before the CLEC has developed a customer base.
Our strategy is a "customer-first," or a "deferred-build" strategy. We therefore
lease facilities on an as-needed basis from ILECs while we build our customer
base. After we have a substantial geographical concentration of customers, we
make decisions regarding the purchase and installation of our own network
equipment. This strategy allows us to be very flexible with our customer base as
we grow our business. We can move our customer base to alternative access, if
appropriate, and we do not become a captive of our own underutilized equipment,
as can happen with a "facilities-first" CLEC. The technological advances in
equipment and the lowering of equipment prices have validated our deferred-build
strategy and have enabled us to preserve our capital.
Our strategy for building our data network is similar to our
strategy for building our voice network. We currently provide dial-up access and
dedicated access on our own network in Connecticut, where we have a geographical
concentration of customers, and we lease facilities from another Internet
service provider to provide our customers with nation-wide dial-up access. As of
February 15, 2000, we have installed one Point of Presence ("POP") in Miami,
Florida for high-speed Internet access via DSL and for Voice over DSL. We chose
the Miami location because we have, through an affiliated company, an
established customer base in the Miami area of approximately 2,000 customers. We
are planning to build out an 18-node data network throughout the East coast to
carry DSL and Voice over DSL to our customer base.
We believe we can provide competitive service in every state in
which we can utilize UNE-P and we plan a nationwide rollout to take advantage of
a recent Federal Communications Commission ("FCC") ruling mandating the UNE-P
service offering. Our marketing and expansion efforts are focused primarily on
states that have quickly adopted the UNE-P service offerings, which initially
included the nine states served by BellSouth Corporation ("BellSouth"), plus New
York and Massachusetts. Under UNE-P, we can provide service with significantly
lower capital requirements than either fiber-based or wireless CLECs, and offer
our services to a broader customer base faster and at a lower cost. The ability
to quickly provision accounts and to deliver reliable service at a lower cost
than offered by the ILECs should provide us with certain competitive advantages
as we market our services to small- and medium-sized businesses.
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Development of Business
The Company was incorporated in the state of New York under the
name Sirco Products Co. Inc. in 1964, and we subsequently changed our name to
Sirco International Corp. We initially developed a line of high quality
handbags, totes, luggage and sport bags to be sold at competitive prices. In
1995, we divested our handbag operations, which had experienced several years of
operating losses. Although we were profitable in fiscal 1996, declining revenues
in our next two fiscal years, combined with operating losses, forced us to
analyze other business opportunities. In August 1997, to help bolster luggage
division sales and to provide a channel of distribution to a mobile customer
base that would be a potential target for online Internet sales, we acquired a
retail operation, Airline Ventures, Inc. ("AVI"), which sells travel and
aviation related products to professional airline crew members.
In October 1997, we made our first investment in a CLEC, Access
One Communications, Inc. ("Access One"), when we purchased approximately 28% of
Access One's outstanding capital stock. Access One was a newly-formed CLEC with
approximately 2,000 installed local access lines that looked to us for growth
capital to meet its business plan. Our Board of Directors believed that Access
One's "customer-first" growth strategy of obtaining a customer base first and
later building an equipment network around a geographically concentrated
customer base was a compelling strategy that would utilize capital wisely and
yield high valuations in the future. At February 15, 2000, we were the largest
shareholder of Access One, owning approximately 21% of Access One's capital
stock. Access One has advised us that, at February 15, 2000, they had
approximately 60,000 installed local access lines.
We commenced operations in the telecommunications industry in
fiscal 1998 by acquiring on February 27, 1998, Essex Communications, Inc.
("Essex"), a newly-formed CLEC formed to attract and retain a geographically
concentrated customer base in the metropolitan New York region, primarily
through the resale of products and services of incumbent and alternative
facilities-based local providers. We provisioned our first line in May 1998 and,
including lines for which we have contracts to install, we had over 20,000 lines
as of February 15, 2000. Essex has customers in Florida, Massachusetts, New
York, New Jersey and Virginia.
In furtherance of our telecommunications strategy, on August 14,
1998, we acquired WebQuill Internet Services, LLC ("WebQuill"), an Internet
service provider ("ISP") based in Connecticut. WebQuill is a full-service,
value-added ISP providing national dial-up access, dedicated access, high-speed
DSL access, Web site design, Web site hosting, Internet-based yellow-pages
directory listing, and E-commerce sites.
Due to our increased focus on E-commerce sites, Internet access
and telecommunications services, and the significant decrease in luggage
division sales in recent fiscal years, our Board of Directors decided in July
1999 to divest the Company's luggage division, and we sold a substantial portion
of the assets of our U.S. luggage operations in August 1999. Since such time, we
have liquidated the remaining operating assets of our U.S. and Canadian luggage
businesses. Our luggage segment has been classified as a discontinued operation
in our income statement, and this segment has reported significant net operating
losses for each of the last three fiscal years. See Note 8 of the Notes to
Consolidated Financial Statements.
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To signify our new business focus, we recommended, and in
November 1999 our shareholders approved, a name change to eLEC Communications
Corp. Our main business focus had changed to the local exchange market, which is
estimated to be more than $50 billion in annual revenues and one of the most
profitable segments in the communications industry. With this new focus, we
wanted our company name to include the letters LEC, representing our focus on
being a local exchange carrier. However, in this electronic age and with our
wholly-owned ISP to provide Internet access, DSL services and Web site design
and hosting, we believed the term "e" LEC more appropriately described our new
business operations. We consequently changed our name to eLEC Communications
Corp., our ticker symbol to ELEC and our domain name to www.elec.net.
In January 2000, we acquired a New Jersey-based CLEC, Telecarrier
Services, Inc. ("Telecarrier"). Telecarrier currently operates as a CLEC in the
states of Massachusetts, New Jersey, New York and Rhode Island. It also resells
long distance service in 13 states. The addition of Telecarrier is an important
step in creating an additional marketing channel for eLEC. See "Sales and
Marketing Strategies."
Information concerning sales, business segment operations and
identifiable assets attributable to each of our reportable industry segments can
be found in Note 9 of the Notes to Consolidated Financial Statements and is
incorporated herein by reference.
eLEC's Telecommunications Services
We tailor our service offerings to meet the specific needs of
small businesses, not-for-profit organizations, governmental agencies and other
institutional customers in our target markets. We primarily market our services
through three different distribution channels. We use third-party telemarketers
to attract small-business accounts (typically two to ten lines in size), we use
third-party agents and interconnect companies to attract medium-sized business
accounts (typically ten to 100 lines in size), and we use our own management
team to attract wholesale accounts (typically 100 lines or more in size). Based
upon feedback received from our customers and analysis of the types of services
the entities in each of these groups need, we tailor a basic telecommunications
service package, which can be promptly adjusted to the specific needs of
individual customers. We creatively package our services to provide "one-stop
shopping" solutions for our customers, so they can purchase all their
communications services directly from us. Listed below are the basic categories
of services that we offer:
o Local Exchange Services. We offer local exchange services,
starting with local dial tone, plus numerous features, the most common of which
are call waiting, call forwarding, caller ID and dial back features. By offering
local dial tone, we also receive originating and terminating access charges for
interexchange calls placed or received by our subscribers.
o Long Distance. In addition to our local telephone service, we
offer long distance services as part of a bundled product to customers through
agreements we have with a national long distance carrier. The long distance
services include domestic service, such as interLATA, which are calls that pass
from one "Local Access and Transport Area" or "LATA" to another LATA, and
intraLATA, which are calls that stay within the LATA in which they originated,
but are beyond the distance limits of the local calling plan. Our services also
include international calling, toll-free services (800, 888, 877), calling card
and other enhanced services.
<PAGE>
o Internet and Data Services. We offer dedicated and dial-up
Internet access services via conventional modem connections, integrated services
digital networks, T-1s and higher speed dedicated connections. In addition, we
have installed our first node to carry DSL services, and we plan to offer Voice
over DSL before the end of fiscal year 2000.
o Web Site Design and Hosting Services. We offer Web site design
services and Web site hosting on our own computer servers to provide customers
with a complete, user-friendly product for presence on the World Wide Web. We
have built and are currently providing for our customers E-commerce sites, an
interactive comparative insurance rater site, and an interactive auction site.
o Yellow Pages Directory Services. Our local telephone service
customers are given a free Web page for six months in our Internet yellow pages
directory. This page is also sold for $24.95 per month to non-telephone
customers. The site is accessed by more than 80% of Internet search engines, and
offers links to other sites and the ability for our customers to receive a fax
or email message directly from the user who has found the site. In the second
quarter of fiscal 2000, we intend to market this product on a wholesale basis
for business-to-business applications.
o Facilities and System Integration Services. We offer individual
customer consultation services with regard to the design and implementation of
complete telecommunications systems to meet customers' specific needs, including
the selection of customer premises equipment, interconnection of local area
networks and wide area networks, and implementation of virtual private networks.
o Hosted Applications. We plan to offer hosted applications to
our customers, especially to small-sized businesses that do not have the
resources to hire their own management information services director. We
anticipate that such application hosting will be important to entities that use
high-speed Internet access services, such as DSL, and will help differentiate us
from other DSL providers that only provide access services.
Business Strategy
Our goal is to be a premier facilities-based integrated
communications provider to small- and medium-sized businesses. We are taking the
following action steps in order to achieve this goal:
o Target Small- and Medium-sized Businesses. We focus our
telecommunications sales efforts for local and long distance services on small-
and medium-sized businesses having two to 100 business lines in any one
location. We believe that these customers prefer a single source for all their
telecommunications services. We have chosen to focus on this segment based on
our ability to obtain ample gross margins on UNE-P for the services provided to
these customers. We also believe that, as compared to larger businesses, the
ILECs and facilities-first CLECs may be less likely to apply significant
resources to obtaining or retaining these customers. We expect to attract and
retain these customers through telemarketers and agents, by offering bundled
local and long distance services at competitive rates, as well as enhanced
telecommunication services, by responsive customer service and support and by
offering new and innovative products, such as our yellow pages directory Web
sites known as QuillPages.
<PAGE>
o Achieve Market Share with Competitive Pricing. We always price
our services at a discount to the exact same services provided by an ILEC. We
believe we know what the ILECs charge because we have access to the rates they
have filed with the various state public service commissions, and we typically
review the telephone bill of a potential customer before we switch them to our
network so that we are aware of the prices they were paying and of any
contractual obligations. We anticipate that some ILECs may reduce their prices
as increased competition begins to erode their market share. We believe,
however, that we will be able to compete as prices decrease, because of our low
network costs and because we will be providing a variety of bundled
telecommunications services and will not have to rely on price alone to maintain
our core customer base.
o Develop Brand Awareness. With the change of our name to eLEC
Communications Corp., we are applying for the right to do business under the
brand name eLEC Communications in all of the states in which we operate. We want
to invoice the customers of our wholly-owned subsidiaries, Essex, WebQuill and
Telecarrier, under the eLEC Communications name, and use the eLEC name to create
and develop a brand awareness in the territories in which we operate. We are
positioning eLEC as a high quality, service-orientated company that provides
reliable telecommunications quality, service and advice at competitive prices.
o Rapidly Deploy New Customers. We intend to take advantage of
our ability to rapidly provision new accounts in our existing service areas, and
to rapidly enter new service areas because of our low capital requirements to
enter new states. Our choice of states on which to focus will depend on when the
particular state adopts the use of UNE-P. We anticipate that Pennsylvania and
Texas will be the next two major states that we target. We typically provision a
new account within two or three days after we have received a letter of
authorization to place a new customer on our network. We know of no
facilities-first carrier that can provision lines this quickly.
o Provide our Customers More than Local Telephone Services.
Although our focus is on the more than $50 billion local exchange market, and we
anticipate that the sales growth and margins associated with this market will
represent our core business, the additional products and services we offer,
including Internet access, email addresses, Web site design and Web site
hosting, yellow pages directory listing, DSL access, applications hosting and
virtual private networks, will be an important attraction to our customers. We
believe the more services we can provide, the more integral we will become to
our customers.
Sales and Marketing Strategies
We offer an integrated package of local exchange, local access,
domestic and international long distance, and calling cards and a full suite of
Internet access, Web site design and Web site hosting to small- and medium-sized
businesses. Virtually all of our customers have no telecommunications manager
and look to us to suggest an appropriate telecommunications solution. Each
account is assigned a customer service representative and we answer the
telephone during business hours with a live person instead of sending our
customers through several voice mail loops before reaching a person to whom they
can speak. We have a three-tiered sales and marketing strategy to sell to our
target market.
o Telemarketing Programs. We use third-party telemarketing firms
to sell our smaller accounts. Most accounts in this group choose our telephone
service because they do not like the customer service they receive from their
ILEC and because they will save money using our services. We have proven that
this strategy works for us, as almost all of our first 10,000 customer lines
<PAGE>
came from the telemarketing channel, and most of the organic growth at our
affiliate, Access One, came from third-party telemarketers. This method allows
us to keep our marketing costs variable-based and minimizes the need to have
fixed overhead committed to our sales force.
o Agent and Interconnect Company Programs. We also use agents and
interconnect companies to generate leads for new customers. We pay a success fee
to the agents and interconnect companies for recommending our services. Most of
these referrals are current equipment customers or long distance customers of
the agent or interconnect company. Therefore, it is important that the agents
and interconnect companies understand the benefits of the services that we offer
because they do not want to tarnish an existing customer relationship by
inappropriately recommending us. We find that our pricing and the flexibility of
our services, combined with our special customer service group for the
interconnect companies, allows us to satisfy the needs of the referrals we
receive in this distribution channel. Two executives from our recently acquired
subsidiary, Telecarrier, have extensive established business relationships with
interconnect companies. Many of their current accounts were referrals from
established business relationships, and we believe our Telecarrier employees
will continue to develop for us this market segment.
o Wholesale Programs. We offer special wholesale pricing for
accounts with several hundred local access lines. One such customer has agreed
to provide us with a minimum of 9,000 local access lines, and we anticipate that
during fiscal 2000 we will be able to attract other wholesale customers who will
bring us thousands of new lines. We use a direct sales effort to sell in this
market. Separate customer service representatives are assigned to support this
customer base.
This sales and marketing strategy minimizes the need for us to
invest in fixed sales and marketing overhead. Unlike the facilities-first CLECs,
who need to rapidly attract customers for their underutilized telecommunications
equipment, and who invest substantial amounts of salary and rent expense to open
sales offices in their targeted markets, we do not have the same pressure to
find qualified leads for our facilities. Furthermore, under UNE-P, our reach is
ubiquitous, as we can serve any customer that is being served by the ILEC. A
facilities-first CLEC typically searches only for customers that it can
provision on the switches and fiber that it has installed in the hope of finding
customers to utilize such equipment. Consequently, we believe our deferred-build
strategy not only saves us from unnecessarily building a network without
customers, it also allows us to more wisely expend our sales and marketing
dollars by limiting the amount of fixed overhead that is required to rapidly
grow our business.
<PAGE>
Competition in the Telecommunications Industry
Local Telecommunications Market
The local telecommunications market is a highly competitive
environment and is dominated by the Regional Bell Operating Companies ("RBOCs")
and other ILECs. Based upon the geographical locations in which we currently
sell services, Bell Atlantic Corporation ("Bell Atlantic") and BellSouth are our
largest competitors. Both entities have "win-back" programs through which they
approach former customers lost to a CLEC or other competitor in an attempt to
have the former customers switch back to the RBOC. Most of our actual and
potential competitors, including most of the facilities-first CLECs, have
substantially greater financial, technical, marketing and other resources
(including brand name recognition) than we do. Furthermore, the continuing trend
toward business alliances in the telecommunications industry and the lack of
substantial barriers to entry in the data and Internet services markets could
help to generate substantial new competition. We anticipate that we will be able
to compete based upon our pricing, reliability, customer service and rapid
ability to provision accounts and respond to customer requests. Our established
competitors, such as the RBOCs, are able to compete effectively because they
have long-term existing relationships with their customers, strong name
recognition, abundant financial resources, and the ability to cut prices of
certain services by subsidizing such services with revenues generated from other
products. Although the Telecommunications Act reduced barriers to entry into the
local market, future regulatory decisions could provide RBOCs with more pricing
flexibility, which would result in increased price competition.
We also face competition in the local market from new entrants to
the fixed wireless market, such as Winstar Communications, Inc., Teligent, Inc.
and NextLink Communications, Inc. Many of these entrants have the strategy of
bypassing the RBOCs in order to provide local access to their customers. By not
having to rely on the RBOC for local service connections, the fixed wireless
companies are able to keep more of their sales dollar for themselves. However,
if this access method becomes more price competitive and reliable, we believe we
will have the flexibility, with our current local customer base, to switch all
or a portion of our customer base to the wireless facilities by negotiating
appropriate terms with one or more wireless carriers.
In addition to competition from RBOCs, other CLECs and wireless
entities, several other entities currently offer or are capable of offering
local service, such as long distance carriers, cable television companies,
electric utilities and microwave carriers. These entities, upon entering into
appropriate interconnection agreements or resale agreements with ILECs, can
offer single source local and long distance services like those we offer. For
example, long distance carriers, such as AT&T Corp., MCI WorldCom and Sprint
Corporation, among other carriers, have each begun to offer local
telecommunications services in major U.S. markets using the unbundled network
elements platform or by reselling the ILECs' services.
Long Distance Telecommunications Market
The long distance market, in comparison to the local market, has
relatively insignificant barriers to entry and has been populated by numerous
entities that compete for the same customers by frequently offering promotional
incentives and lower rates. We compete with numerous such companies who do not
offer any service other than long distance, and we compete with established
major carriers such as AT&T and MCI WorldCom. We believe our bundled package of
local services and a variety of data services will help us compete in this
<PAGE>
market. We will also have to maintain high quality and low cost services to
compete effectively. In many instances, we must be in a position to reduce our
rates to remain competitive. Such reduction could be harmful to us if we do not
also provide other services to our long distance customers. With the advent of
long distance voice services over the Internet, and our launch of Voice over DSL
during fiscal year 2000, we anticipate substantial price reductions in long
distance services for those customers who purchase a bundled package from us
that includes routing the long distance voice traffic over the Internet.
Internet and Other Data Services
The Internet and data service industry is intensely competitive.
We receive significant competition in the delivery of Internet services to
small-and medium-sized businesses, our target market. Other ISPs, ILECs and
CLECs are attempting to provide various dial-up, dedicated and high-speed
Internet access services. We believe we can remain competitive to a certain
niche because we also provide Web site design, Web site hosting, E-commerce
sites, auction sites, yellow-pages service directory, DSL services and hosted
applications, in addition to being a local telecommunications company. We
anticipate that this diverse product range will help us attract new customers
and reduce customer churn.
Government Regulation
Local and long distance telecommunications services are subject
to regulation by the FCC and by state regulatory authorities. Among other
things, these regulatory authorities impose regulations governing the rates,
terms and conditions for interstate and intrastate telecommunications services
and require us to file tariffs for interstate and international service with the
FCC and obtain approval for intrastate service provided in the states in which
we currently market our services. We must obtain and maintain certificates of
public convenience and necessity from regulatory authorities in the states in
which we operate. We are also required to file and obtain prior regulatory
approval for tariffs and intrastate services. In addition, we must update or
amend the tariffs and, in some cases, the certificates of public convenience and
necessity, when rates are adjusted or new products are added to the local and
long distance services we offer. Changes in existing laws and regulations,
particularly regulations resulting in increased price competition, may have a
significant impact on our business activities and on our future operating
results. We are also subject to Federal Trade Commission regulation and other
federal and state laws relating to the promotion, advertising and direct
marketing of our products and services. Certain marketing practices, including
the means to convert a customer's long distance telephone service from one
carrier to another, have recently been subject to increased regulatory review of
both federal and state authorities. Even though we have implemented procedures
to comply with applicable regulations, increased regulatory scrutiny could
adversely affect the transitioning of customers and the acquisition of new
customer bases. Amendments to existing statutes and regulations, adoption of new
statutes and regulations and expansion of our operations into new geographic
areas and new services could require us to alter our methods of operation or
obtain additional approvals, at costs which could be substantial. There can be
no assurance that we will be able to comply with applicable laws, regulations
and licensing requirements. Failure to comply with applicable laws, regulations
and licensing requirements could result in civil penalties, including
substantial fines, as well as possible criminal sanctions.
<PAGE>
Backlog
When we invoice our customers for our telecommunications
services, we invoice features and services in advance and usage in arrears. Due
to the nature of our contractual agreements with the RBOCs, there is typically
only an immaterial amount of backlog of unprovisioned customers at any given
time, as a customer is typically switched from the RBOC to our network within
two days of processing the provisioning order. As of February 15, 2000, we had
orders from two customers for approximately 14,000 lines for which we were
waiting to receive the provisioning information. Such lines may take up to one
month to provision because of the large quantity of lines requested to be
provisioned from just two customers. We are working with our customers to
provision blocks of lines at a time so that there is an orderly transition of
lines to our network.
eLEC's Retail Services
Our retail division is operated by our wholly-owned subsidiary,
AVI, which is headquartered in Dallas, Texas. The objective of our retail
division is to be a leading supplier of travel-related and telecommunications
products to pilots and flight attendants. We operate in three retail stores that
sell travel-related products primarily to American Airline employees, including
the official pilot uniform and study guides for pilots. The stores also sell
identification cards, uniform supplies and travel needs to flight attendants. In
addition, the stores rent pagers to flight attendants who are on reserve duty
and offer Internet access services and local and long distance telephone
services. We plan to use the knowledge and experience gained with American
Airlines to provide similar products and services to employees of other airlines
and to develop effective E-commerce sites.
We believe professional airline crew members are excellent
targets for online retail purchases, as they are constantly mobile and
frequently stay in touch with family and job-related duties via the Internet. We
have developed and will continue to develop E-commerce sites to augment our
in-store sales with sales to these and other online purchasers. We currently
market our travel related products through the E-commerce sites, www.avishop.com
and www.800bags.com.
The target market for the retail division is professional airline
crew members. Currently, we sell to pilots and flight attendants from American,
Delta and Southwest Airlines. The business with American Airlines is the
largest, as it includes selling the American Airlines pilot uniform and various
approved apparel for both pilots and flight attendants. Two of the three retail
locations we utilize are leased from American Airlines. Retail sales employees
service walk-in customers and phone orders, and warehouse personnel process
Internet orders.
The sale of product to crew members has not demonstrated any
seasonality, as the customers are using the products on a daily basis as part of
their normal work routine.
Our retail division operates without a backlog, as Internet
orders and catalog orders are typically shipped within one day of receipt.
We purchase products for our retail division from various
domestic suppliers who have license agreements to sell product displaying the
American Airlines, Inc. logo or trade name. We also buy non-logo product from a
variety of domestic sources.
<PAGE>
The competition for retail sales to professional airline crew
members is highly fragmented and has few barriers to entry. Our ability to
compete effectively is directly related to the level of cooperation and
publicity that airlines generate for our retail outlets. Currently, we enjoy an
advantage with American Airlines because we are allowed to sell certain products
to American Airlines' employees on a payroll deduct program and we are allowed
to sell pilot uniforms. These agreements, in addition to two leases from
American Airlines for retail sites in Dallas, Texas, help to limit the extent of
competition in the Dallas area. However, we compete nationwide against several
online retailers and against retail stores in various cities that are important
airline hubs.
Intellectual Property
We rely on a combination of copyright, trademark and trade secret
laws and contractual restrictions to establish and protect our intellectual
property. We do not currently have any registered copyrights or trademarks. All
key employees have signed confidentiality agreements and we intend to require
each newly hired employee to execute a confidentiality agreement. These
agreements provide that confidential information developed by or with an
employee or consultant, or disclosed to such person during his or her
relationship with us, may not be disclosed to any third party except in certain
specified circumstances. These agreements also require our employees to assign
their rights to any inventions to us. The steps taken by us may not, however, be
adequate to prevent misappropriation of our proprietary rights or technology.
We use several service marks in our business and intend to apply
to register such service marks to protect our usage of such marks. There can be
no assurance that we will be able to secure significant protection for all or
any of our service marks. Our competitors or others could adopt product or
service marks similar to our marks, or try to prevent us from using our marks,
thereby impeding our ability to build brand identity and possibly lead to
customer confusion.
We have received correspondence from an unrelated third party
claiming that our use of the mark "Essex" in connection with telephone services
infringes one of the company's United States registered trademarks and
requesting that we cease and desist from using the Essex mark. We have responded
by denying any infringement and no legal proceedings have been commenced against
us with respect to this matter.
We are also aware of several other parties that use marks that
are the same or similar to marks that we use, though in most instances, to the
best of our knowledge, these parties are not in the same business as we are.
There can be no assurance that others with marks similar to our marks will not
bring suit to prevent us from using a particular mark. Defending or losing any
litigation relating to intellectual property rights could materially adversely
affect our business, results of operations and financial condition.
Other Affiliates
In addition to our investment in Access One, we have made
investments in other entities for which we have performed Web site design
services and may have future strategic relationships. At February 15, 2000, we
had investments in the following entities: (See Note 14 of Notes to Financial
Statements).
<PAGE>
RiderPoint, Inc. RiderPoint specializes in the development of
comparative rating insurance software and sells motorcycle insurance through its
wholly-owned subsidiary, RP Insurance Agency, Inc. RiderPoint provides fully
integrated insurance solutions for carriers, agents, dealers and consumers
through its innovative integration of the insurance process with Internet
technology. Through its comparison rating insurance Web site,
www.riderpoint.com, consumers are able to receive instant online motorcycle
insurance quotes from top-rated insurance carriers, which gives the consumer the
ability to comparatively shop for and purchase motorcycle insurance at one
location.
SkyClub Communications Holding Corp. SkyClub offers digital
satellite systems for the reception of direct television (over 200 channels of
programming) and high speed Internet services. SkyClub features direct to home
(DTH) satellite products from Hughes Network Systems, RCA, Sony and other
licensed DIRECTV manufacturers. SkyClub markets satellite services that include
DirecTV and DirecPC's Turbo Internet, which provides customers with high-speed
(up to 400 Kbps) Internet services. SkyClub also recently began offering DIRECTV
PARA TODOS(TM) to Spanish speaking communities.
Employees
At February 15, 2000, we employed 63 employees, of which 59 were
employed on a full-time basis and five were employed on a part-time basis. At
such date, 17 of our employees were employed in our executive offices in
Norwalk, Connecticut; 28 were employed in Melville, New York, at our
wholly-owned subsidiary, Essex; 12 were employed in our retail division stores
in Dallas, Texas; five were employed in Edison, New Jersey, at our
telecommunications subsidiary, Telecarrier; and one was employed in Mississauga,
Canada. We are not subject to any collective bargaining agreement and believe
that our relationship with our employees is good.
<PAGE>
Item 2. - Properties
The following table sets forth pertinent facts concerning our
material properties at February 15, 2000, all of which are owned or leased by us
or one of our subsidiaries:
<TABLE>
<CAPTION>
Property Owned:
Location Use Approximate Square Feet
- -------------------------------------------------------------------------------------------
<S> <C> <C>
1321 Blundell Road Rental property (2) 35,000 (leases out 35,000 SF)
Mississauga
Ontario, Canada L4Y 1M6
<CAPTION>
Properties Leased:
Approximate Lease Annual
Location Use Square Feet Expires Rent(1)
-------- --- ----------- ------- -------
<C> <C> <C> <C> <C>
509 Westport Ave Executive Office 14,000 2/28/05 $132,000
Norwalk, CT 06851
48 South Service Road Office 5,486 4/30/03 $ 93,000
Melville, NY 11747
1090 King Georges Post Rd Sales Office 2,500 10/31/01 $ 40,000
Edison, NJ 08837
24 Richmond Hill Avenue Office 3,000 4/06/00 $ 42,000
Stamford, CT 06901
1930 W. Airfield Drive Warehouse 2,000 7/31/00 $ 39,000
DFW Airport, TX 75261
Terminal C Retail 1,700 8/24/00 $ 30,000
DFW Airport, TX 75261
8412 Sterling Suite B Warehouse 2,470 9/30/00 $ 15,000
Irving, TX 75063
37 North Avenue Office 2,400 expired $ 38,400
Norwalk, CT 06851
</TABLE>
- ------------------
(1) We are required to pay our proportionate share of any increase during the
term of the lease in real estate taxes and expenses of maintaining the
premises computed on the basis of the percentage of the total square
footage of the premises occupied by us.
(2) The property owned in Mississauga, Canada was formerly used as a warehouse
for our luggage operations that have been discontinued. It is fully rented
to two tenants.
<PAGE>
Our owned and leased space is fully utilized for the purposes set
forth in the table above under the caption "Use," except for the new space in
Norwalk, Connecticut which is currently being developed as our new executive
offices and a network operating center. We believe the existing properties are
suitable and adequate for our existing business.
Item 3. - Legal Proceedings
Other than the license and regulatory proceedings that routinely
occur for telecommunication entities, as described under "Government
Regulation," we are not currently a party to any legal proceeding that we
believe will have a material adverse effect on our financial condition or
results of operations.
Item 4 - Submission of Matters to a Vote of Security Holders
We held our 1999 Annual Meeting of Shareholders on November 10,
1999. The following are descriptions of the matters voted on and the results of
such meeting:
Number of Shares
----------------
Matter Voted On For Against Abstain
- --------------- --- ------- -------
1. Election of Directors
Joel Dupre 9,895,868 44,496
Eric M. Hellige 9,897,968 42,396
Paul H. Riss 9,896,978 43,386
Anthony Scalice 9,896,978 43,386
2. Proposal to change the name
of the Company to eLEC
Communications Corp. 9,907,332 30,332 2,700
3. Approval of an amendment
to the Sirco International Corp.
1995 Employee Stock Option Plan
to increase the number of shares
of Common Stock reserved for
issuance thereunder by
1,200,000 shares. 5,581,798 242,234 9,200
<PAGE>
Part II
Item 5. - Market for the Company's Common Equity and Related Stockholder Matters
Our common stock trades on The Nasdaq Small Cap Stock
Market(R)under the symbol ELEC. The high and low sales price for each quarterly
period of our last two fiscal years are listed below:
High Low
---- ---
Fiscal 1998
-----------
1st Quarter $5.750 $1.563
2nd Quarter 7.188 3.563
3rd Quarter 6.750 1.000
4th Quarter 1.969 0.656
Fiscal 1999
-----------
1st Quarter $4.000 $0.750
2nd Quarter 6.000 1.250
3rd Quarter 2.594 1.313
4th Quarter 3.219 1.250
As of February 15, 2000, there were 215 holders of record of the
common stock and approximately 3,200 beneficial holders.
We have not declared any cash dividends during the past fiscal
year with respect to the common stock. The declaration by our Board of Directors
of any cash dividends in the future will depend upon the determination of as to
whether, in light of our earnings, financial position, cash requirements and
other relevant factors existing at the time, it appears advisable to do so. We
do not plan to declare any dividends on our common stock in the foreseeable
future.
During the fourth quarter of fiscal 1999, we acquired from
RiderPoint, Inc. 500,000 shares of common stock of RiderPoint, Inc., in
consideration of the issuance by us of 300,000 shares of our common stock; we
issued 1,255,555 shares of our common stock, in conjunction with a private
placement to raise $1,412,500; we issued 100,000 shares of our common stock to
the former shareholders of Essex in conjunction with the attainment of certain
performance objectives agreed to in connection with the acquisition of Essex; We
issued 272,000 shares of our common stock to Joel Dupre, the Chairman of the
Board to cancel indebtedness to Mr. Dupre and others; and we issued 69,000
shares of our common stock in conjunction with the acquisition of Peconic Telco,
Inc. Such transactions were effected pursuant to Section 4(2) of the Securities
Act of 1933, as amended.
<PAGE>
Item 6. - Selected Financial Data
The following selected financial information has been taken from
our consolidated financial statements. The information set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and related
notes included elsewhere in this report.
<TABLE>
<CAPTION>
Fiscal Years Ended November 30,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Earnings Statement:
Net Sales $ 4,170 $ 1,485 $ 276 $ -- $ --
Gross Profit 1,167 541 92 -- --
Income(Loss) From C ontinuing
Operations Before Provision
for Income Taxes (3,562) (2,204) (105) -- --
Income(Loss)From
Discontinued Operations (3,943) (2,772) (2,763) 622 (996)
Net Income (Loss) (7,506) (4,977) (2,868) 622 (996)
Net Income (Loss) From
Continuing Operations
per Common Share:
Basic (0.41) (0.43) (0.03) -- --
Diluted (0.41) (0.43) (0.03) -- --
Cash Dividends -- -- -- -- --
Balance Sheet:
Working Capital $ (101) $ 334 $ 5,107 $ 1,553 $ 1,142
Property, Plant, Equipment 212 835 827 888 650
Total Assets 7,297 11,029 14,042 9,577 10,013
Long-Term Debt(Less Current
Maturities) 198 291 4,522 348 590
Stockholders' Equity 3,458 3,754 3,216 2,780 1,897
</TABLE>
<PAGE>
Item 7. - Management's Discussions and Analysis of Financial Condition and
Results of Operations
Certain statements set forth below under this caption constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Please refer to page 3 of this Annual Report on
Form 10-K for additional factors relating to such statements.
Item 7. Management's Analysis and Discussion of Financial Condition and
Results of Operations
Fiscal Year 1999 Compared to Fiscal Year 1998
Continuing operations
Net sales for fiscal 1999 increased by approximately $2,686,000
or approximately 181%, to approximately $4,170,000 as compared to approximately
$1,484,000 reported in fiscal 1998. The following table presents our net sales
by industry segment for the fiscal years ended November 30, 1999 and 1998:
<TABLE>
<CAPTION>
Fiscal years ended
November 30,
------------
Industry segment 1999 1998 Increase
- ---------------- ---------- ---------- ----------
<S> <C> <C> <C>
Retail sales $1,895,000 $1,111,000 $ 784,000
Telecommunications 2,275,000 373,000 1,902,000
---------- ---------- ----------
Total $4,170,000 $1,484,000 $2,686,000
========== ========== ==========
</TABLE>
Net sales of our telecommunications division, which consisted of
the operations of Essex and WebQuill, increased by approximately $1,902,000, or
approximately 510%, to approximately $2,275,000 in fiscal 1999 as compared to
approximately $373,000 in fiscal 1998. This increase was attributable to the
rapid growth in the number of installed access lines provisioned by us during
the third and fourth quarters of fiscal 1999. Installed access lines amounted to
approximately 2,400 on August 1, 1999 and grew to approximately 9,100 lines on
November 30, 1999. Revenue for each installed access line averages approximately
$50 per month.
Net sales of our retail division, consisting of the operations of
Airline Venture, Inc. ("AVI"), increased by approximately $784,000, or
approximately 71%, to approximately $1,895,000 in fiscal 1999 as compared to
approximately $1,111,000 in fiscal 1998. The increase was partially attributable
to the acquisition in January 1999 of Tag Air and partially attributable to
increased product offerings. AVI operates three retail stores in Texas for
professional airline flight crew members and sells pilot uniforms, study guides
and travel products. Its products are also sold on the E-commerce sites
www.avishop.com and www.800bags.com.
<PAGE>
The Company's gross profit increased by approximately $626,000,
to approximately $1,167,000 reported in fiscal 1999 from approximately $540,000
reported in fiscal 1998, and the gross profit percentage decreased to 28% in
fiscal 1999 from 36% reported in fiscal 1998. The decrease in gross profit
percentage was primarily attributable to the significant increase in sales of
our telecommunications division, which has lower margins than our retail sales
division. Gross profit percentages amounted to 41% for the retail division and
17% for the telecommunications division, respectively, for fiscal 1999. We
expect the retail division's gross margin to continue at its current level and
the telecommunication division's gross margin to increase as Essex converts its
customer base from a resale service offering to the Unbundled Network Elements
Platform ("UNE-P") service offering that is now available through Bell Atlantic
Corporation in the States of New York and Massachusetts. Approximately 56% of
our customer lines were converted from resale to UNE-P as of November 30, 1999.
Furthermore, effective February 17, 2000, the FCC has mandated that the UNE-P
service offering be offered in every state. This ruling should help us convert
more of our installed access lines to UNE-P and obtain higher gross margins in
our telecommunications division. We estimate that in most states, the gross
profit achieved from the UNE-P service offering should be approximately 40%, as
compared to a resold line, which generates a gross margin of approximately 9%.
Selling, general and administrative expenses increased by
approximately $1,559,000, or approximately 132%, to approximately $2,741,000 in
fiscal 1999 as compared to approximately $1,182,000 in fiscal 1998. A major
portion of the increase was directly attributable to increased labor and
facility expenses incurred by our telecommunications division. This increase in
expense is directly related to the significant increase in sales in fiscal 1999
as compared to fiscal 1998.
Interest expense from continuing operations amounted to
approximately $15,000 in fiscal 1999. There was less than $1,000 of interest
expense from our continuing operations during fiscal 1998.
At November 30, 1999, we were the largest shareholder of Access
One Communications Corp. ("Access One"), owning approximately 21% of Access
One's capital stock. As our investment in Access One is accounted for under the
equity method of accounting, we are required to include our portion of Access
One's net loss, up to the amount of our investment in Access One, in our results
of operations. In fiscal 1999, we have recorded a loss of approximately
$1,662,000 as compared to a loss of approximately $1,423,000 in fiscal 1998. We
have been advised by Access One that their losses related to funding aggressive
customer growth and the related costs associated with hiring employees to
provision lines and provide customer service. As a result of the losses, our
investment is now carried at $0.
Discontinued operations
On August 11, 1999, we sold certain assets and assigned certain
licenses of our domestic luggage division to Interbrand L.L.C., an unrelated
accessories company, in furtherance of our previously announced plans to
discontinue the operations of our wholesale luggage segment. In addition to
purchasing inventory, equipment and other assets, Interbrand also hired certain
of our employees, including our current Chairman of the Board, Joel Dupre. Upon
being hired by Interbrand, Mr. Dupre resigned his position as our Chief
Executive Officer, and we no longer employ him.
<PAGE>
The operating results of our wholesale luggage segment have been
accounted for as a discontinued operation and the results of operations have
been excluded from continuing operations in our consolidated statements of
operations for all periods presented, including the prior period financial
statements in which we have restated the operating results of our wholesale
luggage segment as a discontinued operation. Interest expense relating to
borrowings by our former wholesale luggage segment is included as operating
expenses of such discontinued segment. For fiscal 1999, we reported a loss from
discontinued operations of approximately $3,179,000 and a loss on disposal of
discontinued operations of approximately $764,000. A cumulative loss on foreign
currency translation adjustment of approximately $572,000, which formerly was
presented as a separate component of shareholder's equity, is now reflected as a
loss related solely to the discontinued segment.
Fiscal Year 1998 Compared to Fiscal Year 1997
Net sales for fiscal 1998 increased by approximately $1,209,000
to approximately $1,485,000 as compared to approximately $276,000 reported in
fiscal 1997. Net sales of our retail division, consisting of the operations of
AVI, increased by approximately $835,000 in fiscal 1998 to approximately
$1,111,000 from approximately $276,000 in fiscal 1997 as we reported a full year
of retail operations in fiscal 1998 as compared to only three months in fiscal
1997.
Net sales of our telecommunications division amounted to
approximately $374,000 in fiscal 1998, its first year of operation. Essex
operated as a reseller of local telephone services and value-added products in
the states of Connecticut, Massachusetts, New Jersey, New York and Virginia.
WebQuill, which was acquired in August 1998, provided dial-up and dedicated
Internet access, Web design, hosting and E-commerce development to small-and
medium-sized businesses.
Our gross margin increased in fiscal 1998 by approximately
$448,000 to approximately $540,000 from approximately $92,000 in fiscal 1997.
The gross margin percentage increased to 36% in fiscal 1998, as compared to 33%
in fiscal 1997. The increase in gross margin percentage is primarily due to the
44% gross margin from the retail division in fiscal 1998 as compared to 33% in
fiscal 1997. The increases both in gross margin and gross margin percentage of
the retail division are attributable to the operation of that business for a
full year in fiscal 1998, as compared to a partial year of operations in fiscal
1997, which included start-up costs and operational expenses related to
establishing appropriate vendor relationships and product offerings. The
telecommunications division reported a gross margin of 14% in its first year of
operations.
Selling general and administrative expenses increased in fiscal
1998 by approximately $993,000, or approximately 525%, to approximately
$1,182,000 from approximately $189,000 reported in fiscal 1997. This increase in
expenses was primarily attributable to our telecommunications operations, which
were not in operation in fiscal 1997, and to our retail division, which was only
in operation for three months in fiscal 1997.
Interest expense amounted to less than $1,000 in fiscal 1998 as
compared to no interest expense in fiscal 1997. Both divisions operated without
requiring a lending facility.
<PAGE>
At the end of fiscal 1998, we were the largest shareholder of
Access One, owning approximately 31%. As our investment in Access One is
accounted for under the equity method of accounting, we were required to include
our portion of Access One's net loss in our results of operations. For fiscal
1998, we recorded a loss of approximately $1,423,000 relating to our investment
in Access One. We have been advised by Access One that Access One's losses in
fiscal 1998 were primarily the result of funding aggressive customer growth and
the related costs associated with hiring employees to verify and provision
lines, to staff a customer service operation and to develop a management
information system. In addition, in fiscal 1998, Access One purchased local
telephone service from BellSouth at a wholesale discount of 16.8% and passed on
almost half of its discount to its customer base. The gross profit on this
business was not large enough to cover the selling, general and administrative
expenses associated with operating a local telephone company.
Liquidity and Capital Resources
At November 30, 1999, the Company had cash and cash equivalents
of approximately $591,000 and a working capital deficit of approximately
$101,000, an increase of approximately $239,000 and a decrease of approximately
$435,000, respectively, over amounts reported at November 30, 1998. The decrease
in working capital resulted primarily from the losses incurred from our former
luggage segment and the costs associated with disposing of that segment.
Net cash provided by (used in) operating activities (including
discontinued operations) aggregated approximately $610,000, $1,783,000 and
($6,627,000) in fiscal 1999, 1998 and 1997, respectively. The decrease in the
net cash provided by operating activities in fiscal 1999 as compared to fiscal
1998 is primarily due to our ability to reduce our accounts receivable balances
in fiscal 1998 by approximately $1,289,000, as compared to a reduction in fiscal
1999 of approximately $213,000. Although we disposed of a substantial portion of
the assets of our luggage division in August 1999, by November 30, 1999, we were
successful in increasing the sales of our telecommunications division and
consequently created new accounts receivable balances. The increase in net cash
provided by operating activities (which primarily reflected the operations of
our discontinued luggage division) in fiscal 1998 as compared to fiscal 1997,
primarily reflected a decrease in inventory and accounts receivable offset by
the increase in our net loss from operations. The reduction in inventory levels
was primarily due to our ability to better manage purchases relative to sales
forecasts and the lack of import quota purchase constraints in fiscal 1998 that
existed in fiscal 1997. The reduction in accounts receivable primarily reflects
tighter credit and collection policies.
Net cash used in investing activities aggregated approximately
$95,000, $158,000 and $58,000 in fiscal 1999, 1998 and 1997, respectively. The
principal uses of cash from investing activities in fiscal 1999, 1998 and 1997
were for the purchase of fixed assets. In addition, we used approximately
$24,000 for the 1999 acquisition of Peconic Telco, Inc. and $150,000 for the
1998 payment of certain obligations in conjunction with the acquisition of
WebQuill. In fiscal 1999, 1998 and 1997, the principal sources of net cash
provided by investing activities were proceeds from the sale of a subsidiary.
<PAGE>
Net cash (used in) provided by financing activities aggregated
approximately ($270,000), ($1,399,000) and $6,391,000 in fiscal 1999, 1998 and
1997, respectively. In fiscal 1999, net cash used in financing activities
resulted in the repayment of a revolving credit line of approximately
$2,769,000, which was partially offset by the proceeds from a private placement
of common stock of approximately $2,026,000, a loan from an officer in the net
amount of approximately $227,000, the proceeds from the issuance of preferred
stock in the amount of approximately $196,000 and the proceeds from the exercise
of stock options of approximately $44,000. In fiscal 1998, net cash used in
financing activities resulted from a repayment of a revolving credit line of
approximately $2,528,000, which was partially offset by proceeds of
approximately $18,000 from the exercise of stock options, proceeds of
approximately $651,000 from a private equity placement and proceeds of
approximately $468,000 from the exercise of stock warrants. In fiscal 1997,
repayments of short-term debt of approximately $1,601,000 were offset by an
increase of approximately $5,714,000 in net cash provided by a revolving credit
facility. This increase was the result of a working capital agreement (see
below) under which we were able to borrow up to 80% of the dollar amount of our
eligible accounts receivable and 50% of our eligible inventory. During fiscal
1997, we also received approximately $166,000 in proceeds from the exercise of
stock options; approximately $609,000 in proceeds from a private equity
placement; and approximately $1,509,000 in proceeds from the exercise of stock
warrants.
On December 17, 1996, we entered into a financing agreement with
Coast Business Credit ("Coast"), a division of Southern Pacific Thrift and Loan
Association, pursuant to which Coast made available to us a line of credit of
$7,000,000 with advances based on 80% of our eligible accounts receivable and
50% of our eligible inventory. This loan was scheduled to mature on December 31,
1999, and was paid in full on December 29, 1999.
On March 3, 1999, our subsidiary, Essex, entered into a
Receivable Sale Agreement with Receivables Funding Corp. ("RFC") that provides
for Essex to sell up to $500,000 of its eligible receivables to RFC on a
periodic basis and to grant RFC a security interest in the receivables purchased
by RFC. The Receivables Sale Agreement does not transfer the risk of loss to
RFC, and has been treated by us as a financing for financial statement purposes.
As of November 30, 1999, Essex was indebted to RFC for the principal amount of
approximately $198,000. Essex borrows from RFC at approximately five percentage
points above the prime rate, which was 8.5% per annum at November 30, 1999. In
December 1999, Essex increased the amount of eligible receivables it can sell to
RFC to $1,000,000.
Our Canadian subsidiary has a mortgage on its real property in
the amount of $304,000. The mortgage is payable in monthly installments of
approximately $3,000, which includes interest at the rate of 10.25% per annum,
with a balloon payment of approximately $291,000 in the year 2000. We have
received an appraisal of the building of approximately $1,000,000, and we intend
to sell the building in an orderly manner during fiscal 2000. The rental income
from the current tenants covers the debt service and maintenance requirements of
the building.
In fiscal 1999, our capital expenditures amounted to
approximately $121,000. We expect to make additional capital expenditures of
approximately $350,000 for equipment for our telecommunications division over
the next 12 months. Such expenditures will be made in conjunction with the
establishment of a network operating center in Norwalk, Connecticut and with the
planned expansion to become a nationwide CLEC. We anticipate we will be able to
finance equipment purchases through equipment leases or with working capital.
<PAGE>
At February 15, 2000 we owned approximately 21% of Access One,
which had at such date approximately 60,000 installed access lines and revenues
of approximately $3,000,000 per month. Although Access One has approximately 750
shareholders, it is not publicly traded, there is no readily ascertainable
market for its stock, and the shares held by us bear a restrictive legend
stating that the shares have not been registered under the Securities Act of
1933. Despite the trading restriction, we have received offers to purchase a
portion of our Access One stock for amounts ranging from $4.00 to $5.00 per
share and subsequent to November 30, 1999, we sold 17,000 shares of stock in
this price range. At February 15, 2000 we owned 3,918,500 shares of Access One
and warrants to purchase 500,000 additional shares at $1.20 per share. Our
investment in Access One is recorded on our books by the equity method of
accounting and is carried at $0 as of November 30, 1999.
We believe that the retail division's working capital and cash
flow from operations will be sufficient to meet the cash and capital
requirements for our retail division for the next 12 months. Our plan for the
growth of our telecommunications division includes an aggressive strategy to
finish fiscal 2000 with more than 65,000 installed access lines. Although we
anticipate that we will have reached profitability on a monthly basis at this
level of operation, we will need to expend cash and we expect to incur
additional losses before we are able to grow our business to a profitable level.
Subsequent to November 30, 1999, we received net proceeds of approximately
$2,000,000 from the exercise of warrants and from a private placement of our
common stock. We believe our cash and cash equivalents at February 28, 2000
provide us with enough liquidity to carry out our fiscal 2000 growth plans. The
inability to carry out our plans may result in the continuance of unprofitable
operations, which would adversely affect our financial condition and results of
operations.
Impact of Year 2000
The Year 2000 ("Y2K") issue is the result of computer-controlled
systems using two digits rather than four to define the applicable year. For
example, computer programs that have time sensitive software may recognize a
date using "00" as the year 1900 instead of the year 2000. This reading could
result in a system failure or miscalculations and cause a disruption in
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activity.
Since 1998, we have devoted significant efforts to address Y2K
issues. We have developed a comprehensive, company-wide plan to identify,
evaluate and remediate Y2K issues. In addition to the planning and testing that
occurred throughout fiscal 1999, our technical support team reevaluated all our
equipment during the month of December 1999, to assure the maintenance of
uninterrupted service to our customers. In addition, our plan included a review
of the Y2K readiness of our vendors and suppliers who have material
relationships with us. The major phases of the plan with respect to each of
these categories included an inventory of all hardware and software components
with possible date implications, an assessment of the Y2K readiness of all Web
sites and E-commerce sites, the remediation of all Y2K issues which have been
identified in the assessment phase, and validation testing and certification as
to Y2K compliance.
<PAGE>
Our estimate of the total cost of our Y2K compliance efforts,
based on amounts expended to date, plus estimated amounts of additional
remediation costs, if any, is immaterial to the operations of the Company. The
estimated Y2K costs have not been independently verified and may vary in the
event of unforeseen Y2K remediation costs or costs related to the unanticipated
costs from a third party vendor. Certain costs budgeted for the procurement of
upgrades or replacements of servers and business information systems have not
been included in this amount since these upgrades or replacements were being
made by us independent of Y2K readiness. The estimated Y2K costs did not include
our internal costs, such as compensation and benefits of employees delegated Y2K
responsibilities, related to our Y2K plan since such costs are not internally
allocated by us. We expect to fund any additional Y2K compliance efforts with
cash flows from operations.
We have contacted various mission-critical external parties and
have conducted testing procedures with certain of these external parties in
order to confirm Y2K readiness. Some of our internal data networks are
interconnected with, or dependent upon, systems operated by third parties,
including telecommunications/data service providers and public utilities. Since
external parties are responsible for addressing their own Y2K readiness, we are
only able to determine at this time an estimate as to the extent to which any
such conditions exist, and if they do exist, the extent to which they may have a
material impact on our results of operations, financial condition or liquidity.
Subsequent to December 31, 1999, we experienced no significant events, nor
received any significant reports indicating any material Y2K issues. We are
unaware of any uncorrected problems regarding the Y2K issue at this time, but
will continue to monitor for any potential problems throughout 2000.
New Accounting Standards
In 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard 130, "Reporting Comprehensive Income"
("Statement 130"). Statement 130 establishes standards for the reporting and
display of comprehensive income and its components in financial statements.
Comprehensive income, as defined, is the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. The provisions of Statement 130 are effective for
periods beginning after December 15, 1997. Accordingly, we adopted this standard
for our fiscal year ending November 30, 1999.
In 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards 131, "Disclosures about Segments of
an Enterprise and Related Information" ("Statement 131"), which establishes
standards for segment reporting and disclosure of additional information on
products and services, geographic areas and major customers. The provisions of
Statement 131 are effective for periods beginning after December 15, 1997.
Accordingly, we adopted this standard for our fiscal year ending November 30,
1999.
Item 7A. - Quantitative and Qualitative Disclosure About Market Risk
Our debt is currently limited to $1,000,000 under our current
borrowing arrangements and such borrowings are at an effective rate of five
percent over the prime rate. We currently do not use interest rate derivative
instruments to manage our exposure to interest rate changes.
<PAGE>
Item 8. - Financial Statements and Supplementary Data
The financial statements and supplementary data to be provided
pursuant to this Item 8 are included under Item 14 of this Report.
Item 9. - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
Part III
Item 10. - Directors and Executive Officers of the Company
The information required by this Item is incorporated here by
reference to our definitive proxy statement for our 2000 Annual Meeting of
Stockholders.
Item 11. - Executive Compensation
The information required by this Item is incorporated here by
reference to our definitive proxy statement for our 2000 Annual Meeting of
Stockholders.
Item 12. - Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated here by
reference to our definitive proxy statement for our 2000 Annual Meeting of
Stockholders.
Item 13. - Certain Relationships and Related Transactions
The information required by this Item is incorporated here by
reference to our definitive proxy statement for our 2000 Annual Meeting of
Stockholders.
<PAGE>
PART IV
Item 14. - Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
2. Financial Statement schedules
3. Exhibits
(3) Articles of Incorporation and By-laws
(a) Certificate of Incorporation, as amended, incorporated
by reference to the Company's Registration Statement on
Form S-1 filed with the Securities and Exchange
Commission on August 27, 1969 under Registration Number
2-34436.
(b) Certificate of Amendment of the Certificate of
Incorporation, incorporated by reference to the
Company's definitive proxy statement filed with the
Securities and Exchange Commission in connection with
the Company's Annual Meeting of Shareholders held in
May, 1984.
(c) Certificate of Amendment to the Certificate of
Incorporation, incorporated by reference to Exhibit
3(b) to the Company's Annual Report on Form 10-K for
the year ended November 30, 1988.
(d) Certificate of Amendment to the Certificate of
Incorporation, incorporated by reference to Exhibit
3(e) to the Company's Annual Report on Form 10-K for
the year ended November 30, 1994, as amended.
(e) Certificate of Amendment of the Certificate of
Incorporation, incorporated by reference to Exhibit 3
to the Company's Quarterly Report on Form 10-Q for the
quarter ended August 31, 1995.
(f) Certificate of Amendment of the Certificate of
Incorporation, incorporated by reference to Exhibit 3.1
to the Company's Quarterly Report on Form 10-Q for the
quarter ended August 31, 1998.
(g) Certificate of Amendment of the Certificate of
Incorporation, incorporated by reference to Exhibit 3.2
to the Company's Quarterly Report on Form 10-Q for the
quarter ended August 31, 1998.
(h) Certificate of Amendment of the Certificate of
Incorporation, incorporated by reference to Exhibit
3(1) to the Company's Current Report on Form 8-K dated
November 16, 1999.
(i) By-laws, amended and restated as of December 1996,
incorporated by reference to Exhibit 3(e) to the
Company's Annual Report on Form 10-K for the year ended
November 30, 1996.
(10) Material Contracts
(a) 1995 Stock Option Plan, incorporated by reference to
Exhibit 10(I) to the Company's Annual Report on Form
10-K for the year ended November 30, 1995, as amended.
(b) 1996 Restricted Stock Award Plan, incorporated by
reference to Exhibit A to the Company's Proxy Statement
dated October 24, 1996.
<PAGE>
(c) Employment Agreement, dated November 5, 1996 between
the Company and Paul Riss, incorporated by reference to
Exhibit 10(f) to the Company's Annual Report on Form
10-K for the year ended November 30, 1996. (d)
Agreement and Plan of Merger dated January 21, 2000
between eLEC Communications Corp., eLEC Communications
Sub I, Inc., and Telecarrier Services, Inc., Michael
Lagana and Zina Hassel, incorporated by reference to
Exhibit 2.1 to the Company's Current Report on Form
8-K, dated January 21, 2000.
(22) Subsidiaries of Company - The significant subsidiaries of
Company, all of which are wholly-owned by Company and
included in its consolidated financial statements, are as
follows:
<TABLE>
<CAPTION>
Name Jurisdiction of Organization
---- ----------------------------
<S> <C>
American Telecom LLC Connecticut
Airline Ventures, Inc. Texas
Essex Communications, Inc. New York
Peconic Telco, Inc. New York
Sirco Industries, Limited Hong Kong
Sirco International (Canada) Limited Canada
Telecarrier Services, Inc. Delaware
WebQuill Internet Services LLC Connecticut
</TABLE>
(23) Consent of Nussbaum Yates & Wolpow, P.C.
(27) Financial Data Schedule
(b) Reports on Form 8-K.
We filed a Current Report on Form 8-K dated August 11, 1999
reporting the approval by our Board of Directors of a
corporate name change to eLEC Communications Corp., subject to
shareholder approval, and providing the pro forma financial
information with respect to the previously reported sale of
certain assets of our former luggage division pursuant to the
asset purchase agreement with Interbrand L.L.C. (Items 2 and
7).
We filed a Current Report on Form 8-K dated November 16, 1999
reporting the change of our corporate name from Sirco
International Corp. to eLEC Communications Corp. (Item 5).
<PAGE>
We filed a Current Report on Form 8-K dated January 21, 2000
reporting our acquisition of Telecarrier Services, Inc. At the
time of the filing it was impracticable for us to provide the
required pro forma financial information, if any, with respect
to such transaction. We intend to file such information, if
required, by amendment to the Form 8-K as soon as practicable,
but in any event within 60 days of the filing of the initial
Form 8-K.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized on the 28th day of February 2000.
eLEC COMMUNICATIONS CORP.
(Company)
By: /s/ Paul H. Riss
-----------------
Paul H. Riss
Chief Executive Officer
Pursuant to the requirements of the Securities
Exchange Act of 1934, this Report has been signed below by the
following persons on behalf of the Company and in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Paul H. Riss Chief Executive Officer February 28, 2000
----------------
Paul H. Riss Chief Financial Officer
(Principal Accounting Officer)
Director
/s/ Joel Dupre Chairman of the Board of Directors February 28, 2000
--------------
Joel Dupre
/s/ Eric M. Hellige Director February 28, 2000
-------------------
Eric M. Hellige
/s/ Anthony Scalice Director February 28, 2000
-------------------
Anthony Scalice
</TABLE>
<PAGE>
FORM 10-K
ITEM 14(a)(1) AND (2)
eLEC COMMUNICATIONS, INC. AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of eLEC Communications, Inc. and
Subsidiaries are included in Item 8:
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors F-2
Consolidated balance sheets - November 30, 1999 and 1998 F-3 - F-4
Consolidated statements of operations - Years ended November 30, 1999,
1998 and 1997 F-5
Consolidated statements of stockholders' equity - Years ended
November 30, 1999, 1998 and 1997 F-6 - F-7
Consolidated statements of cash flows - Years ended November 30, 1999,
1998 and 1997 F-8 - F-9
Notes to consolidated financial statements - Years ended November
30, 1999, 1998 and 1997 F-10 - F-34
The following consolidated financial statement schedules of eLEC Communications,
Inc. and Subsidiaries are included in Item 14(d):
Schedule II - Valuation and qualifying accounts - Years ended
November 30, 1999, 1998 and 1997 F-35
Access one Communications Corp. and Subsidiaries:
Report of Independent Auditors F-36
Consolidated balance sheets - October 31, 1999 and 1998 F-37
Consolidated statements of operations - Years ended
October 31, 1999 and 1998 F-38
Consolidated statements of stockholders' equity (deficiency) -
Years ended October 31, 1999 and 1998 F-39
Consolidated statements of cash flows - Years ended
October 31, 1999 and 1998 F-40
Notes to consolidated financial statements - Years ended
October 31, 1999 and 1998 F-41 - F-54
</TABLE>
All other schedules are omitted because they are not required, are
inapplicable, or the information is included in the financial statements or
notes thereto.
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders
eLEC Communications, Inc.
Norwalk, Connecticut
We have audited the accompanying consolidated balance sheets of eLEC
Communications, Inc. (formerly known as Sirco International Corp.) and
Subsidiaries as of November 30, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
ended November 30, 1999, 1998 and 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of eLEC Communications, Inc. and its subsidiaries as of
November 30, 1999 and 1998, and the consolidated results of their operations and
their consolidated cash flows for the years ended November 30, 1999, 1998 and
1997, in conformity with generally accepted accounting principles.
We have also audited Schedule II for each of the years in the period ended
November 30, 1999. In our opinion, this schedule presents fairly, in all
material respects, the information required to be set forth therein.
/s/NUSSBAUM YATES & WOLPOW, P.C.
--------------------------------
NUSSBAUM YATES & WOLPOW, P.C.
Melville, New York
February 21, 2000 (February 25, 2000 as
to the last paragraph of Note 15)
F-2
<PAGE>
<TABLE>
<CAPTION>
eLEC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1999 AND 1998
ASSETS
1999 1998
----------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 591,299 $ 352,489
---------- -----------
Accounts receivable, principally trade - net of
allowance of $424,000 and $337,000 in 1999
and 1998 1,245,078 1,565,727
Inventories 876,460 4,397,635
Prepaid expenses 52,636 199,805
Other current assets 177,680 36,791
Land and building held for sale 596,304 --
Recoverable income taxes -- 149,902
---------- -----------
Total current assets 3,539,457 6,702,349
---------- -----------
Property, plant and equipment - at cost:
Land -- 185,279
Building -- 459,788
Machinery and equipment 322,734 941,127
Leasehold improvements -- 320,132
---------- -----------
322,734 1,906,326
Less accumulated depreciation and amortization 111,036 1,070,852
---------- -----------
211,698 835,474
---------- -----------
Other assets:
Investment in and advances to subsidiary 424,575 464,573
Goodwill, net of accumulated amortization of $352,966
and $110,302 in 1999 and 1998 1,554,370 1,377,958
Investment in affiliate under equity method 0 1,476,434
Investments under cast method 1,469,929 ---
Other 97,108 172,254
---------- -----------
3,545,982 3,491,219
---------- -----------
Total assets $7,297,137 $11,029,042
---------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
(Continued)
<PAGE>
<TABLE>
<CAPTION>
eLEC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
NOVEMBER 30, 1999 AND 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
1999 1998
------------- ----------
<S> <C> <C>
Current liabilities:
Loans payable to financial institutions and
current maturities of long-term debt $ 523,695 $ 3,193,344
Due to related parties 34,725 519,596
Accounts payable 1,302,714 993,779
Accrued expenses and taxes 1,779,704 1,661,420
------------ -----------
Total current liabilities 3,640,838 6,368,139
------------ -----------
Long-term debt, less current maturities 197,772 290,994
------------ -----------
Due to related parties and accounts payable refinanced -- 615,829
------------ -----------
Commitments and contingencies
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Stockholders' equity:
Preferred stock, Series A, $.10 par value;
1,000,000 shares authorized, 700
shares issued in 1998 (none
in 1999), liquidation preference $1,000 per share -- 70
Preferred stock, Series B, $.10 par value;
1,300 shares authorized, 196
shares issued in 1999,
liquidation preference $1,000 per share 20 --
Common stock, $.10 par value; 20,000,000 shares
authorized in 1999 and 1998, 11,287,164 and
6,343,316 shares issued in 1999 and 1998 1,128,715 634,331
Capital in excess of par value 18,808,397 12,851,015
Deficit (16,370,088) (8,864,535)
Treasury stock at cost, 11,000 shares (27,500) (27,500)
Treasury stock held by equity investee -- (159,396)
Accumulated other comprehensive income (loss),
accumulated foreign currency translation
adjustment (81,017) (679,905)
------------ -----------
Total stockholders' equity 3,458,527 3,754,080
------------ -----------
Total liabilities and stockholders' equity $ 7,297,137 $11,029,042
------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
eLEC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Telecommunications services $ 2,275,474 $ 373,885 $ --
Specialty retail travel products 1,894,557 1,111,339 275,871
----------- ----------- -----------
Total revenues 4,170,031 1,485,224 275,871
----------- ----------- -----------
Costs and expenses:
Costs of telecommunication services 1,884,949 321,430 --
Cost of specialty retail travel product sales 1,117,749 623,242 183,505
Selling, general and administrativ 2,741,264 1,181,873 188,860
Depreciation and amortization 330,054 139,451 8,678
Equity in loss of Access One Communications
Corp 1,661,630 1,423,300 --
----------- ----------- -----------
Total costs and expenses 7,735,646 3,689,296 381,043
----------- ----------- -----------
Loss from operations (3,565,615) (2,204,072) (105,172)
Other income (expense):
Interest expense (15,419) (467) --
Interest income 18,546 -- --
----------- ----------- -----------
Loss from continuing operations (3,562,488) (2,204,539) (105,172)
----------- ----------- -----------
Discontinued operations:
Loss from discontinued operations (3,179,361) (2,772,464) (2,762,993)
Estimated loss on disposal of discontinued
operations (763,704) -- --
----------- ----------- -----------
Loss from discontinued operations (3,943,065) (2,772,464) (2,762,993)
----------- ----------- -----------
Net loss ($7,505,553) ($4,977,003) ($2,868,165)
----------- ----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Basic and diluted loss per share:
Continuing operations ($ .41) ($ .43) ($ .03)
Discontinued operations ($ .45) ($ .53) ($ .85)
----------- ----------- -----------
Net loss ($ .86) ($ .96) ($ .88)
----------- ----------- -----------
Weighted-average number of common shares
outstanding 8,717,554 5,184,748 3,243,392
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
eLEC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
Capital
Preferred Stock Common Stock In Excess of
Shares Amount Shares Amount Par Value Deficit Stock
------ ------ ------ ------ --------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, November 30, 1996 -- $-- 2,630,400 $ 263,040 $ 4,136,014 ($1,019,367) ($27,500)
Net loss -- -- -- -- -- (2,868,165) --
Translation adjustment -- -- -- -- -- -- --
Comprehensive income (loss) -- -- -- -- -- -- --
Exercise of stock options -- -- 145,000 14,500 151,750 -- --
Issuance of common stock in
private placement -- -- 400,000 40,000 569,000 -- --
Exercise of warrants -- -- 700,000 70,000 1,439,104 -- --
Stock issued for equity
investment in Access One
Communications Corp. -- -- 425,000 42,500 1,457,500 -- --
Treasury stock acquired by
equity investee -- -- -- -- -- -- --
--- --- --------- ----------- ----------- ----------- --------
Balance, November 30, 1997 -- -- 4,300,400 430,040 7,753,368 (3,887,532) (27,500)
Net loss -- -- -- -- -- (4,977,003) --
Translation adjustment -- -- -- -- -- -- --
Comprehensive income (loss) -- -- -- -- -- -- --
Exercise of stock options -- -- 15,000 1,500 16,688 -- --
Stock issued for debt retirement -- -- 260,000 26,000 1,144,000 -- --
Exercise of warrants -- -- 212,000 21,200 446,704 -- --
Stock issued for acquisition of
Essex Communications, Inc. -- -- 350,000 35,000 702,820 -- --
Stock issued for acquisition of
Webquill Internet Services, LLC -- -- 375,000 37,500 637,500 -- --
Issuance of preferred stock 700 70 -- -- 651,315 -- --
Stock issued for services -- -- 30,916 3,091 19,520 -- --
Stock issued for equity investment
in Access One Communications -- -- 800,000 80,000 1,479,100 -- --
Reduction in treasury stock held
by equity investee -- -- -- -- -- -- --
--- --- --------- ----------- ----------- ----------- --------
Balance, November 30, 1998 700 70 6,343,316 634,331 12,851,015 (8,864,535) (27,500)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Accumulated
Treasury Other
Stock Held Comprehensive Total
by Equity Income Stockholders'
Investee (Loss) Equity
-------- ------ ------
<S> <C> <C> <C>
Balance, November 30, 1996 $ -- ($571,691) $ 2,780,496
Net loss -- -- (2,868,165)
Translation adjustment -- (61,060) (61,060)
-----------
Comprehensive income (loss) -- -- (2,929,225)
Exercise of stock options -- -- 166,250
Issuance of common stock in
private placement -- -- 609,000
Exercise of warrants -- -- 1,509,104
Stock issued for equity
investment in Access One
Communications Corp. -- -- 1,500,000
Treasury stock acquired by
equity investee (420,000) -- (420,000)
----------- --------- -----------
Balance, November 30, 1997 (420,000) (632,751) 3,215,625
Net loss -- -- (4,977,003)
Translation adjustment -- (47,154) (47,154)
-----------
Comprehensive income (loss) -- -- (5,024,157)
Exercise of stock options -- -- 18,188
Stock issued for debt retirement -- -- 1,170,000
Exercise of warrants -- -- 467,904
Stock issued for acquisition of
Essex Communications, Inc. -- -- 737,820
Stock issued for acquisition of
Webquill Internet Services, LLC -- -- 675,000
Issuance of preferred stock -- -- 651,385
Stock issued for services -- -- 22,611
Stock issued for equity investment
in Access One Communications -- -- 1,559,100
Reduction in treasury stock held
by equity investee 260,604 -- 260,604
----------- --------- -----------
Balance, November 30, 1998 (159,396) (679,905) 3,754,080
(Continued)
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
eLEC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
Capital
Preferred Stock Common Stock In Excess of
Shares Amount Shares Amount Par Value Deficit
------ ------ ------ ------ --------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, November 30, 1998 700 70 6,343,316 634,331 12,851,015 (8,864,535)
Net loss (7,505,553)
Translation adjustment, including
a reclassification adjustment of
$572,170 related to dissolution of
Hong Kong subsidiary -- -- -- -- -- --
Comprehensive income (loss) -- -- -- -- -- --
Stock issued for services -- -- 25,000 2,500 35,000 --
Issuance of common stock -- -- 1,890,055 189,005 1,836,719 --
Exercise of stock options -- -- 37,000 3,700 40,050 --
Stock issued for debt retirement -- -- 1,484,780 148,478 1,945,953 --
Stock issued for acquisition of
Tag Air, Inc. -- -- 149,210 14,921 158,014 --
Stock issued for acquisition of
Peconic Telco, Inc. -- -- 69,000 6,900 113,850 --
Stock issued for investment in
Riderpoint, Inc. -- -- 550,000 55,000 1,201,250 --
Stock issued for investment in
Skyclub Communications -- -- 120,149 12,015 158,801 --
Stock issued for equity investment
in Access One Communications
Corp -- -- 1,420,000 142,000 1,689,800 --
Access One Communications Corp.
put exercise -- -- (1,400,000) (140,000) (1,666,000) --
Reduction in treasury stock held
by equity investee -- -- -- -- -- --
Stock issued for performance con-
ditions of Essex Communications -- -- 225,000 22,500 212,650 --
Conversion of Series A preferred
stock to common stock (700) (70) 373,654 37,365 (37,295) --
Issuance of Series B preferred stock 196 20 -- -- 195,909 --
Adjustment of expenses incurred
in raising equity -- -- -- -- 72,681 --
----------- ---------- ---------- ------------ ------------
Balance, November 30, 1999 196 $ 20 11,287,164 $1,128,715 $ 18,808,397 ($16,370,088)
--------- ----------- ---------- ---------- ------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Accumulated
Treasury Other
Stock Held Comprehensive Total
Treasury by Equity Income Stockholders'
Stock Investee (Loss) Equity
----- -------- ------ ------
<S> <C> <C> <C> <C>
Balance, November 30, 1998 (27,500) (159,396) (679,905) 3,754,080
Net loss (7,505,553)
Translation adjustment, including
a reclassification adjustment of
$572,170 related to dissolution of
Hong Kong subsidiary -- -- 598,888 598,888
----------
Comprehensive income (loss) -- -- -- (6,906,665)
Stock issued for services -- -- -- 37,500
Issuance of common stock -- -- -- 2,025,774
Exercise of stock options -- -- -- 43,750
Stock issued for debt retirement -- -- -- 2,094,431
Stock issued for acquisition of
Tag Air, Inc. -- -- -- 172,935
Stock issued for acquisition of
Peconic Telco, Inc. -- -- -- 120,750
Stock issued for investment in
Riderpoint, Inc. -- -- -- 1,256,250
Stock issued for investment in
Skyclub Communications -- -- -- 170,816
Stock issued for equity investment
in Access One Communications
Corp -- -- -- 1,831,800
Access One Communications Corp.
put exercise -- -- -- (1,806,000)
Reduction in treasury stock held
by equity investee -- 159,396 -- 159,396
Stock issued for performance con-
ditions of Essex Communications -- -- -- 235,150
Conversion of Series A preferred
stock to common stock -- -- -- --
Issuance of Series B preferred stock -- -- -- 195,929
Adjustment of expenses incurred
in raising equity -- -- -- 72,681
-------- ----------- --------- -----------
Balance, November 30, 1999 ($27,500) $ -- ($ 81,017) $ 3,458,527
-------- ----------- --------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
eLEC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Operating activities:
Net loss ($7,505,553) ($4,977,003) ($2,868,165)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 375,958 227,005 110,168
Abandonment of property plant and equipment 227,232 -- --
Translation adjustment related to liquidation
of Hong Kong subsidiary 572,170 -- --
Loss on equity investment including goodwill
amortization of $375,000 in 1999 and 1998 1,661,630 1,423,300 --
Stock issued for services 37,500 22,611 --
Provision for losses on accounts receivable
and other assets 108,000 299,000 278,000
Loss on sale of property, plant and equipment 7,499 -- 7,012
Estimated gain on sale of land and building
of discontinued operations (169,650) -- --
Changes in operating assets and liabilities,
net of effects of acquisitions and other
transactions:
Accounts receivable 213,107 1,289,333 (594,077)
Inventories 3,526,891 3,275,479 (3,325,876)
Prepaid expenses 146,827 42,988 12,926
Other current assets (140,889) 6,595 79,014
Other assets 75,146 41,839 (60,538)
Accounts payable, related parties and
accrued expenses 1,324,545 156,498 182,538
Income taxes 149,902 (24,930) (448,240)
----------- ----------- -----------
Net cash provided by (used in) operating activities 610,315 1,782,715 (6,627,238)
----------- ----------- -----------
Investing activities, net of effects of acquisitions:
Purchases of property, plant and equipment (120,935) (57,765) (87,045)
Proceeds from sale of property, plant and equipment 9,840 -- 3,607
Cash inflow from agreement to sell subsidiary 39,998 50,224 25,700
Payment of certain obligations of WebQuill Internet
Services, LLC -- (150,000) --
Acquisition of Peconic Telco, Inc., net of cash acquired (24,053) -- --
----------- ----------- -----------
Net cash used in investing activities (95,150) (157,541) (57,738)
----------- ----------- -----------
</TABLE>
(Continued)
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
<TABLE>
<CAPTION>
eLEC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Financing activities:
Repayment of loans payable to financial
institutions and short-term loans payable to
related parties, net $ -- $ -- ($1,600,821)
Proceeds from (repayment of) revolving credit
line, net (2,768,944) (2,527,977) 5,714,056
Repayment of long-term debt, net of exchange rate 6,073 (8,470) (6,550)
Officer loan, net of repayment 227,000 -- --
Proceeds from exercise of stock options 43,750 18,188 166,250
Proceeds from private placement of common stock 2,025,774 -- 609,000
Proceeds from exercise of warrants -- 467,904 1,509,104
Proceeds from issuance of preferred stock 195,929 651,385 --
----------- ----------- -----------
Net cash provided by (used in) financing activities (270,418) (1,398,970) 6,391,039
----------- ----------- -----------
Effect of exchange rate changes on cash (5,937) 12,095 18,084
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents 238,810 238,299 (275,853)
Cash and cash equivalents at beginning of year 352,489 114,190 390,043
----------- ----------- -----------
Cash and cash equivalents at end of year $ 591,299 $ 352,489 $ 114,190
----------- ----------- -----------
Cash paid during the year for:
Interest $ 297,209 $ 502,005 $ 510,869
----------- ----------- -----------
Income taxes $ -- $ -- $ 300,015
----------- ----------- -----------
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
See Notes 2, 3, 7 and 8.
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
eLEC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
1. Description of Business and Summary of Accounting Principles
Description of Business and Concentration of Credit Risk
eLEC Communications, Inc. ("eLEC" or the "Company") (formerly known
as Sirco International Corp.) presently has two active business
segments. The first active business segment, and the principal focus
of the Company, is as a competitive local exchange carrier through
its wholly-owned subsidiaries, Essex Communications, Inc. ("Essex")
and WebQuill Internet Services LLC ("WebQuill"), to resell and
provide low cost alternative telecommunication services and other
bundled services, focusing on small and medium-sized business users.
The second active business segment is as a specialty retail business
through its wholly-owned subsidiary, Airline Ventures, Inc. ("AVI"),
that sells travel products, uniforms and study guides via retail
stores, E-commerce sites and a Web site primarily to professional
airline crew members. Trade receivables potentially subject the
Company to credit risk. The Company extends credit to its customers
based upon an evaluation of the customer's financial condition and
credit history and generally does not require collateral.
As part of its telecommunications strategy, the Company has acquired
an ownership interest in Access One Communications, Inc. ("Access"),
which is a competitive local exchange carrier and reseller of
telecommunication services to businesses and residential customers in
the southeastern United States. The Company's investment in Access is
accounted for on the equity method.
During the fiscal year ended November 30, 1999, the Company
discontinued the operations of its wholesale luggage business segment
which, in prior years, had represented substantially all of the
business operations of the Company (see "Discontinued Operations").
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries after elimination of
significant intercompany balances and transactions. Investments in
20% to 50% owned affiliated companies are accounted for on the equity
method. Investments of less than 20% in companies that do not have
readily determinable fair values are carried at cost.
Inventories
Inventories, consisting primarily of finished goods purchased for
resale, are stated at the lower of cost (first-in, first-out and
average) or market.
F-10
<PAGE>
eLEC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
1. Description of Business and Summary of Accounting Principles (Continued)
Property, Plant and Equipment and Depreciation
Depreciation is computed primarily by use of accelerated and
straight-line methods over the estimated useful lives of the assets.
The estimated useful lives are 20 years for building, 5 to 10 years
for machinery and equipment, and the life of lease for leasehold
improvements.
Foreign Currency Translation
Assets and liabilities of the Company's foreign subsidiaries are
translated at year-end exchange rates, and income and expenses are
translated at average exchange rates prevailing during the year with
the resulting adjustments accumulated in stockholders' equity.
Income Taxes
The Company accounts for income taxes according to the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." Under the liability method specified
by SFAS 109, deferred tax assets and liabilities are determined based
on the difference between the financial statement and tax bases of
assets and liabilities as measured by the enacted tax rates which
will be in effect when these differences reverse and the effect of
net operating loss carryforwards. Deferred tax expense is the result
of changes in deferred tax assets and liabilities. A valuation
allowance has been established to reduce the deferred tax assets as
it is more likely than not that such portion of the deferred tax
assets will not be realized.
Revenue Recognition
Revenue from providing telecommunication related services is
recognized in the period related services are provided. Revenue from
the Company's specialty retail business and from the Company's
discontinued luggage business is recognized upon shipment or delivery
of merchandise.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income by
the weighted-average number of shares outstanding. Diluted earnings
(loss) per share includes the dilutive effect of stock options,
warrants and convertible preferred stock. Such options, warrants and
convertible preferred stock have not been included in the
computations as they were antidilutive in 1999, 1998 and 1997, but
may become dilutive in the future.
F-11
<PAGE>
eLEC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
1. Description of Business and Summary of Accounting Principles (Continued)
Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Goodwill and Other Intangible Assets
The excess cost over net assets acquired (goodwill) is being
amortized on a straight-line basis over 7 years. Goodwill and other
intangible assets are periodically reviewed for impairment based on
an assessment of current and future levels of operating income and
cash flows, as well as other factors.
Impairment of Long-Lived Assets
The Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future
net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceeds the fair value. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
Use of Estimates
In preparing financial statements in conformity with generally
accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
F-12
<PAGE>
eLEC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
1. Description of Business and Summary of Accounting Principles (Continued)
Advertising
Advertising costs are expensed as incurred. Advertising expense,
principally related to discontinued operations, amounted to
approximately $48,000 in 1999, $78,000 in 1998, and $55,000 in 1997.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of significant financial instruments:
o Cash and Cash Equivalents
The carrying amount approximates fair value because of the short
maturity of those instruments.
o Investments in and Advances to Subsidiary
The fair value of investments in and advances to subsidiary is
estimated based on discounted cash flow analyses using
estimated interest rates and an appropriate allowance for
uncollectibility. The carrying amount approximates its fair
value.
o Long-Term Debt
The fair value of the Company's long-term debt is estimated
based on current rates offered to the Company for debt of the
same remaining maturities and approximates the carrying
amount.
The Company has no instruments with significant off-balance-sheet
risk.
Recent Accounting Pronouncements
Effective December 1, 1998 the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." SFAS 130 establishes standards for
the display of comprehensive income and its components in a full set
of financial statements. Comprehensive income (loss) includes all
changes in equity during a period except those resulting from the
issuance of shares of stock and distributions to shareholders.
F-13
<PAGE>
eLEC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
1. Description of Business and Summary of Accounting Principles (Continued)
Recent Accounting Pronouncements (Continued)
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which established
accounting and reporting standards for derivative instruments and for
hedging activities. In June 1999, the FASB issued SFAS No. 137 which
deferred the effective date of SFAS No. 133 for the Company to the
beginning of its fiscal 2001. Presently, the Company has no use of
derivative financial instruments and believes that SFAS No. 133 will
not have a material impact on its results of operations.
Reclassifications
Certain amounts have been reclassified to conform to the 1999
presentation.
2. Acquisitions
On February 27, 1998, the Company acquired all of the outstanding
shares of common stock of Essex in exchange for 250,000 shares of the
Company's common stock and warrants to purchase up to 225,000 shares
of the Company's common stock at $2.75 per share, of which warrants
to purchase 75,000 shares vested immediately and warrants to purchase
150,000 shares will vest if certain performance conditions are met,
of which 75,000 became vested during the fiscal year ended November
30, 1999. In addition, if certain performance conditions are met, up
to 600,000 additional shares of common stock may be issued. As of
November 30, 1999, 325,000 of such shares had been issued to the
former shareholders of Essex as certain performance conditions were
met. The transaction was accounted for as a purchase. The purchase
price exceeded the fair value of net assets acquired by approximately
$737,000, which is being amortized on a straight-line basis over 7
years. The results of operations of Essex are included in the
accompanying financial statements from the date of acquisition.
On August 14, 1998, the Company acquired all of the membership
interests of WebQuill in exchange for 525,000 shares of the Company's
common stock (of which 375,000 shares were delivered to the sellers
and 150,000 shares were deposited in an escrow account and will be
delivered upon attainment of certain performance conditions) and the
payment of $150,000 of Webquill's obligations. As of November 30,
1999, such conditions were not met. The transaction was accounted for
as a purchase. The purchase price exceeded the fair value of net
assets acquired by approximately $750,000, which is being amortized
on a straight-line basis over 7 years. The results of operations of
WebQuill are included in the accompanying financial statements from
the date of acquisition.
F-14
<PAGE>
eLEC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
2. Acquisitions (Continued)
In January 1999, the Company acquired all of the outstanding shares
of Tag Air, Inc. ("Tag Air") in exchange for 149,210 shares of the
Company's common stock valued at approximately $173,000 in a
transaction accounted for as a purchase. Tag Air is a retailer that
sells name brand luggage, apparel and travel-related accessories to
airline pilots and flight crews. This transaction was accounted for
as a purchase. The purchase price exceeded the fair value of net
assets acquired by approximately $47,000, which is being amortized on
a straight-line basis over seven years. On November 17, 1999, the
Company acquired all of the outstanding shares of common stock of
Peconic Telco, Inc. ("Peconic") in exchange for 69,000 shares of its
common stock, valued at $120,750, plus a cash payment of $28,000.
Peconic is an installer of telephones and telephone equipment. The
purchase price exceeded the fair value of net assets acquired by
approximately $135,000, which is being amortized on a straight-line
basis over seven years. Pro forma financial statements of the Tag Air
and Peconic acquisitions as if they occurred as of December 1, 1997
have not been presented since the results were not material.
On April 6, 1999, the Company issued 250,000 shares of its common
stock, valued at $412,500, in exchange for a 19% interest in
RiderPoint Inc. ("RiderPoint"). On November 30, 1999, an additional
300,000 shares, valued at $862,500, were issued, thereby increasing
its ownership in Riderpoint to 27% on such date. RiderPoint is a
developer, marketer, and administrator of insurance and financial
service programs. On May 25, 1999, the Company issued 120,149 shares
of its common stock, valued at $170,816, in exchange for a 19%
interest in Skyclub Communications Holding Corp. ("Skyclub"). Skyclub
provides digital satellite systems for the reception of direct
television and high-speed Internet services. The investment is
carried at cost.
3. Loans Payable to Financial Institutions and Long-Term Debt
In connection with the financing of its discontinued luggage
business, the Company had entered into a financing agreement with
Coast Business Credit, a division of Southern Pacific Thrift and Loan
Association. As of November 30, 1999 and 1998, the Company had a loan
outstanding of $219,363 and $3,186,079 under the agreement. The loan
was repaid in full in December 1999. The loan, which was available to
the Company based upon a portion of the eligible inventory and
accounts receivable of the discontinued luggage business, had an
interest rate of 2% above the prime rate, was collateralized by a
security interest in substantially all assets of the Company, and
contained various restrictions, including a restriction on the
payment or declaration of any cash dividends.
F-15
<PAGE>
eLEC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
3. Loans Payable to Financial Institutions and Long-Term Debt (Continued)
On March 3, 1999, Essex entered into a Receivable Sales Agreement
("the Agreement") with Receivables Funding Corporation ("RFC"). The
Agreement provides for Essex to sell up to $500,000 ($1,000,000
effective December 1999) of its eligible receivables (as defined) to
RFC on a periodic basis and to grant RFC a security interest in the
receivables purchased by RFC. As of November 30, 1999, approximately
$198,000 was outstanding under the Agreement. The Agreement, in
substance, does not transfer the risk of loss to RFC, and has been
treated as a financing for financial statement purposes. In
substance, Essex borrows under the Agreement at approximately five
percentage points above the prime rate. The Agreement has a
termination date of the earlier of (a) March 3, 2001; (b) a
termination event as defined in the Agreement; (c) the occurrence of
an event of seller default as defined in the Agreement; or (d) ninety
days following the Company's delivery of written notice to RFC
setting forth the Company's desire to terminate the Agreement and the
payment of a termination fee (as defined).
The Company's Canadian subsidiary has a real property mortgage of
approximately $368,000, payable in monthly installments of
approximately $3,138 including interest at 10.25% with a balloon
payment of approximately $291,000 in the year 2000. Substantially all
of the assets of the Canadian subsidiary have been pledged as
collateral for the above loans. The Canadian subsidiary has agreed to
certain financial covenants (current ratio, debt-to-equity ratio,
debt service coverage) and may not pay dividends to the parent.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1999 1998
------- -----------
<S> <C> <C>
Loan payable to Coast $219,363 $3,186,079
Loan payable to RFC 197,772 -
Subsidiary mortgage payable 304,332 298,259
--------- ------------
721,467 3,484,338
Less current maturities 523,695 3,193,344
--------- -----------
$197,772 $ 290,994
-------- -----------
</TABLE>
F-16
<PAGE>
eLEC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
3. Loans Payable to Financial Institutions and Long-Term Debt (Continued)
Principal payments are due as follows:
Year ended November 30,
2000 $523,695
2001 197,772
---------
$721,467
========
4. Income Taxes
At November 30, 1999, the Company had net operating loss
carryforwards for Federal income tax purposes of approximately
$15,000,000 expiring in the years 2001 through 2019. There is an
annual limitation of approximately $187,000 on the utilization of
approximately $2,300,000 of such net operating loss carryforwards
under the provisions of Internal Revenue Code Section 382.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax assets
and liabilities as of November 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---------- -----------
Deferred tax assets:
<S> <C> <C>
Net operating loss carryforwards $5,250,000 $ 3,250,000
Allowance for doubtful accounts and accruals 120,000 270,000
Inventory 10,000 230,000
Depreciation 80,000 100,000
---------- -----------
5,460,000 3,850,000
Deferred tax liabilities:
Installment sale of investment -- (50,000)
---------- -----------
Valuation allowance 5,460,000 (3,800,000)
---------- -----------
Net deferred tax assets $ -- $ --
---------- -----------
</TABLE>
The valuation allowance at November 30, 1997 was $3,040,000.
F-17
<PAGE>
eLEC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
4. Income Taxes (Continued)
The following is a reconciliation of the tax provisions for the three
years ended November 30, 1999 with the statutory Federal income tax rates:
<TABLE>
<CAPTION>
Percentage of Pre-Tax Income
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory Federal income tax rate (34.0%) (34.0%) (34.0%)
State and local income taxes, net of Federal
income tax benefit -- .1
Equity loss on investment in Access One (7.5) (9.7) --
Utilization of foreign tax loss carryforwards/
carryback -- (3.2) (4.3)
Operating losses generating no current tax
benefit, United States 41.5 43.7 34.0
Other items, net -- -- .1
---- ---- ----
-- (3.2%) (4.1%)
---- ---- ----
</TABLE>
5. Pension Plans
The Company has a defined benefit plan covering substantially all of
its domestic employees. The benefits provided are primarily based
upon years of service and compensation, as defined. The Company's
funding policy is to contribute annually the minimum amount required
to cover the normal cost and to fund supplemental costs, if any, from
the date each supplemental cost was incurred. Contributions were
intended to provide not only for benefits attributed to service to
date, but also for those expected to be earned in the future. Plan
assets consist primarily of investments in money market funds.
Effective June 30, 1995, the plan was frozen, ceasing all benefit
accruals and resulting in a plan curtailment.
F-18
<PAGE>
eLEC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
5. Pension Plans (Continued)
Net periodic pension cost (gain) included the following components:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Interest cost on projected benefit obligation $ 57,734 $ 56,393 $ 57,257
Return on assets( 61,874) (63,704) (66,110)
Net amortization and deferral (584) (4,112) (4,112)
-------- -------- --------
($ 4,724) ($11,423) ($12,965)
-------- -------- --------
</TABLE>
Following is a summary of significant actuarial assumptions used:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Weighted-average discount rates 7.0% 7.0% 7.5%
Rates of increase in compensation levels 5.0% 5.0% 5.0%
Expected long-term rate of return on assets
8.0% 8.0% 8.0%
</TABLE>
The following table sets forth the Plan's funded status and amounts
recognized in the Company's statement of financial position at:
<TABLE>
<CAPTION>
November 30,
1999 1998
--------- ---------
<S> <C> <C>
Accumulated benefit obligation, including vested
benefits of $835,772 and $820,734 at November
30, 1999 and 1998, respectively ($837,685) ($823,568)
-------- --------
Projected benefit obligation for service rendered
to date ($869,592) ($823,568)
Plan assets at fair value, primarily money market
funds 744,098 786,343
--------- ---------
Plan assets in excess of (deficiency in) unfunded
projected benefit obligation (125,494) (37,225)
--------- ----------
Accrued pension cost ($125,494) ($ 37,225)
-------- ---------
</TABLE>
F-19
<PAGE>
eLEC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
6. Commitments
The Company conducts a substantial portion of its operations
utilizing leased facilities. Rent expense, charged to operations, was
$705,000, $825,000 and $704,000 in 1999, 1998 and 1997, respectively.
In addition to the annual rent, the Company pays real estate taxes,
insurance and other occupancy costs on its leased facilities.
The minimum annual rental commitments under all operating leases
including a lease entered into on February 4, 2000 that have
remaining non-cancelable terms in excess of one year are
approximately as follows:
Year ended November 30,
2000 $ 291,000
2001 275,000
2002 294,000
2003 229,000
2004 169,000
Thereafter 43,000
-------------
$ 1,301,000
The Company had previously entered into various licensing agreements
under which it had obtained the right to market children's bags, tote
bags and related products with trade names. The terms of such
agreements varied through 2001. The agreements provided for royalties
based upon net sales with certain stated minimum annual amounts. In
connection with the discontinued operation, the Company has
negotiated releases on certain of these obligations and has accrued
for the estimated liability remaining on those obligations for which
the Company has not yet obtained a release. Royalty expense amounted
to $208,000, $545,000 and $660,000 in fiscal 1999, 1998 and 1997,
respectively. As of November 30, 1999 and 1998, approximately
$447,000 and $560,000, respectively, had been accrued for unpaid
royalties.
F-20
<PAGE>
eLEC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
7. Related Party Transactions
As of November 30, 1998, the Company owed its Chairman, Mr. Joel
Dupre ("Dupre"), approximately $8,000. During 1999, the Company
borrowed an additional $235,000 from Dupre, resulting in a balance
due of approximately $243,000. On September 10, 1999, the Company
issued 272,000 shares of common stock (with a market value of
approximately $357,000) and Dupre agreed to cancel indebtedness of
$204,000, and Dupre also agreed to repay certain luggage creditors
approximately $153,000 of the Company's indebtedness to such
creditors, relieving the Company of its obligations to such
creditors. As of November 30, 1999, the Company owes Dupre
approximately $35,000, which is payable upon demand, and bears
interest at 8%.
The Company imported substantially all of its luggage segment
inventory from foreign vendors. In May 1998, the Company issued
260,000 shares to foreign vendors valued at $1,700,000 or $4.50 per
share in satisfaction of certain existing trade accounts payable to
foreign vendors. Included in this amount were 155,556 shares issued
to companies controlled by then existing shareholders. The agreement
with such vendors provided that if the vendors were to sell such
shares within one year at a price below $4.50 per share (subject to a
$2.25 floor), up to an additional 260,000 shares would be issued to
the vendors. Subsequent thereto, the Company incurred additional
obligations to foreign vendors, and the price of the Company's common
stock fell substantially below $4.50 per share. During fiscal 1999,
the Company agreed to issue 1,152,780 shares of the Company's common
stock in complete satisfaction of indebtedness to such vendors. In
fiscal 1999, the Company recorded an increase in stockholders' equity
of approximately $1,803,000 related to this issuance along with a
related decrease in accounts payable.
During the years ended November 30, 1999, 1998 and 1997, the Company
purchased approximately $809,000, $2,287,000 and $891,000,
respectively, of luggage and backpack products from companies
controlled by stockholders. During the years ended November 30, 1999,
1998 and 1997, the Company incurred buying commission of
approximately $103,000, $312,000 and $208,000, respectively, to
companies controlled by stockholders. As of November 30, 1999 and
1998, there was outstanding $11,312 and $926,205 to such related
parties.
F-21
<PAGE>
eLEC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
8. Discontinued Operations
On July 19, 1999, the Board of Directors of the Company adopted a
plan to discontinue the Company's luggage business as part of the
Company's strategic focus on telecommunications and Internet
services. The expected manner of disposal of the luggage business is
by sale of assets. As of November 30, 1999, a substantial portion of
the luggage business had already been disposed of, and the Company
anticipates that the remainder of the luggage business will be fully
disposed of by June 30, 2000. The luggage business segment has been
accounted for as discontinued operations in accordance with
Accounting Principles Board Opinion (APB) 30, which, among other
provisions, requires the plan of disposal to be carried out within
one year. The estimated loss on disposal of the luggage business
included a charge of $572,170 applicable to a previously recorded
foreign translation adjustment for the Company's Hong Kong subsidiary
which was dissolved during 1999. Interest expense allocated to the
discontinued operation is based on the direct borrowings of such
operations and amounted to approximately $306,000 in 1999, $514,000
in 1998, and $574,000 in 1997.
The operating results and remaining assets of the discontinued
operations are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Sales $ 6,774,265 $ 15,552,285 $ 15,732,112
Net loss (3,943,065) (2,772,464) (2,762,993)
Net loss per share of common stock (.45) (.53) (.85)
<CAPTION>
1999 1998
<S> <C> <C>
Current assets $1,300,726 $6,156,872
Property and equipment net 426,654 686,662
Other assets 9,118 94,986
---------- ----------
$1,736,498 $6,938,520
========== ==========
</TABLE>
F-22
<PAGE>
eLEC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997 F-23
9. Segment Reporting
Effective for the fiscal year ended November 30, 1999, the Company
adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information." Prior period amounts have been restated to
conform to the requirements of this statement. The accounting
policies of the operating segments are the same as those described in
the summary of accounting policies. The Company evaluates the
performance of its operating segments based on the operating income
of the respective business units. Geographical information is not
presented, as the continuing operations of the Company operate solely
within the United States. A summary of business data for the
Company's reportable segments for the fiscal years 1999, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
Retail Investments
Related Carried Total of
Telecom- Travel Under Cost Continuing
munications Products Method Operations
----------- -------- ------ ----------
<S> <C> <C> <C> <C> <C>
Revenue (external 1999 $ 2,275,474 $ 1,894,557 $ - $ 4,170,031
customers) 1998 373,885 1,111,339 - 1,485,224
1997 - 275,871 - 275,871
Segment income (loss) 1999 (1) ($3,619,345) $ 56,857 $ - ($ 3,562,488)
1998 (1) (2,116,530) (88,009) - (2,204,539)
1997 - (105,172) - (105,172)
Segment assets 1999 $2,750,759 $ 915,376 $ 1,894,504 $ 5,560,639
1998 3,239,015 386,934 464,573 4,090,522
1997 1,080,000 - 514,797 1,594,797
Depreciation and 1999 (2) $ 667,667 $ 37,387 $ - $ 705,054
amortization 1998 (2) 504,370 11,790 - 516,160
1997 - 5,145 - 5,145
Interest expense 1999 $ 15,419 $ - $ - $ 15,419
1998 467 - - 467
1997 - - - -
Segment capital 1999 $ 72,501 $ 48,434 $ - $ 120,935
expenditures 1998 39,713 - - 39,713
1997 - 45,127 - 45,127
</TABLE>
(1) Losses from the investment in Access have been included in the
Telecommunications business.
(2) Includes amortization of goodwill related to investment in Access of
$375,000 in 1999 and 1998.
<PAGE>
<TABLE>
<CAPTION>
Discontinued
Operations
of Luggage Total
Segment Company
------- -------
<S> <C> <C> <C>
Revenue (external 1999 $ 6,774,265 $ 10,944,296
customers) 1998 15,552,245 17,037,469
1997 15,732,112 16,007,983
Segment income (loss) 1999 (1) ($ 3,943,065) ($ 7,505,553)
1998 (1) (2,772,464) (4,977,003)
1997 (2,762,993) (2,868,165)
Segment assets 1999 $ 1,736,498 $ 7,297,137
1998 6,938,520 11,029,042
1997 12,446,851 14,041,648
Depreciation and 1999 (2) $ 45,904 $ 750,958
amortization 1998 (2) 85,845 602,005
1997 105,023 110,168
Interest expense 1999 $ 305,518 $ 320,937
1998 513,566 514,033
1997 573,544 573,544
Segment capital 1999 $ - $ 120,935
expenditures 1998 18,052 57,765
1997 41,918 87,045
</TABLE>
(1) Losses from the investment in Access have been included in the
Telecommunications business.
(2) Includes amortization of goodwill related to investment in Access of
$375,000 in 1999 and 1998.
F-23
<PAGE>
eLEC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
9. Segment Reporting (Continued)
Major Customers of Discontinued Operations
Sales to one customer amounted to 31%, 23%, and 27% of net sales in
fiscal 1999, 1998 and 1997, respectively. Sales to another customer
amounted to 19%, 23% and 17% of net sales in fiscal 1999, 1998 and
1997, respectively. Sales to another customer amounted to 14% of net
sales in fiscal 1997.
10. Investment In and Advances to Subsidiary
Effective July 15, 1992, the Company entered into an agreement to
sell all of the stock of its then wholly-owned subsidiary, Sirco
Leatherwares Limited (the "Subsidiary"). In exchange for the stock,
the Company received a non-interest bearing $650,000 note. The note
is guaranteed by an officer of the Subsidiary who is also an officer
of the buyer and, until December 1996, served on the Board of
Directors of the Company. The agreement also requires the Company to
forgive a portion of the amounts due to it from the Subsidiary. The
Company's ability to collect the note receivable and the balance of
the receivable from the Subsidiary is dependent upon cash flows from
the Subsidiary's operations and/or the buyer's ability to refinance
the obligations. As the risks and other incidents of ownership have
not transferred to the buyer with sufficient certainty, this
transaction has not been accounted for as a sale for accounting
purposes.
The Company recorded a loss on this transaction in fiscal 1992, as
the present value of the amounts to be received under the note and
the revised accounts receivable were less than (i) the carrying value
of the Company's investment in the Subsidiary plus (ii) the amounts
receivable from the Subsidiary.
The non-interest bearing $650,000 note received in exchange for stock
in the Subsidiary ("the Stock Note") was due in thirty-two equal
quarterly installments of $20,213 beginning in August 1992. During
fiscal 1996, the parties agreed to a one-year payment moratorium as
to the Stock Note. On February 6, 1997, the parties agreed to modify
the remaining repayment terms and to resume payments. The note, as
modified, is to be repaid as follows: $10,156 on February 7, 1997,
$10,156 on March 10, 1997, four quarterly payments of $10,156
commencing on May 1, 1997 and ending on February 1, 1998, five
quarterly payments of $20,313 commencing on May 1, 1998 and ending on
May 1, 1999, and four quarterly payments of $50,781 commencing on
August 1, 1999 and ending on May 1, 2000. Payments are being received
on a current basis.
F-24
<PAGE>
eLEC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
10. Investment In and Advances to Subsidiary (Continued)
Also, pursuant to the agreement to sell the Company's investment in
the Subsidiary, the Subsidiary agreed to pay interest quarterly at
8.5% per annum on a receivable of approximately $720,000. If the
Subsidiary is not in default on the payment of interest, the Company
will forgive a portion of the receivable, in amounts as defined,
through May 1, 2000. An amount of $60,000 was forgiven in 1998, and
$50,000 in each of 1997 and 1996. The total amount forgiven will be
$420,000. The remaining receivable of approximately $300,000 is
payable in ten equal quarterly installments commencing in August
2000. Amounts outstanding after May 1, 2000 will bear interest at the
prime rate.
At November 30, 1998, the aggregate principal balance of $665,000 due
on the above notes has been reduced for imputed interest of
approximately $40,000 and an allowance of approximately $160,000 for
uncollectibility, resulting in a net balance of $465,000 at November
30, 1998.
During the fiscal year ended November 30, 1999, the notes were
consolidated into a new note. The new note requires quarterly
payments ranging from $17,840 to $34,350 through November 1, 2005.
The present value of the new note, with interest imputed at 7.25%,
was approximately $500,000, which has a remaining balance of
approximately $465,000 at November 30, 1999. An allowance of $40,000
has been established for potential uncollectibility, resulting in a
net carrying value of approximately $425,000 at November 30, 1999.
11. Stockholders' Equity
The Company accounts for its stock option plans under APB Opinion No.
25, "Accounting for Stock Issued to Employees," under which no
compensation expense is recognized. In fiscal 1997, the Company
adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123), for
disclosure purposes; accordingly, no compensation expense has been
recognized in the results of operations for its stock option plans as
required by APB Opinion No. 25.
On August 17, 1995, the stockholders of the Company (i) approved an
increase in the number of authorized shares of common stock from
3,000,000 shares to 10,000,000 shares; (ii) authorized the Company to
issue 1,000,000 shares of preferred stock, par value $.10 per share,
with rights and privileges to be determined by the Board of
Directors; and (iii) approved the 1995 Stock Option Plan of the
Company (the "Plan"). The Plan provides for the grant of incentive
stock options, non-qualified stock options, tandem stock appreciation
rights, and stock appreciation rights exercisable in conjunction with
stock options to purchase a specified number of shares of common
stock. During fiscal 1997, the stockholders of the Company approved
an amendment to the Plan to increase the number of shares of common
stock that may be issued to 1,200,000 shares. In 1999, the
stockholders of the Company approved an amendment to the Plan to
increase the number of shares of common stock that may be issued to
2,400,000 shares.
F-25
<PAGE>
eLEC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
11. Stockholders' Equity (Continued)
In June 1998, the Company issued 700 shares of Series A preferred
stock "Series A shares" having a par value of $.10 per share. Each
Series A share is convertible at the option of the holder into common
shares at a conversion rate of 300 shares of common stock through May
31, 1999; after May 31, 1999, $1,000 divided by the lesser of $3.33
or the market price of the Company's common stock subject to a floor
of $1.67. The Company may cause the conversion of the Series A shares
at any time after May 31, 1999 based upon the above conversion
formula. The preferred shares have the same voting and dividend
rights as common shares based upon the number of shares of common
stock into which the preferred stock is convertible to. The preferred
shares have a liquidation preference of $1,000 per share. During
1999,at the election of the shareholders, all of the Series A shares
were converted into common shares, resulting in the issuance of
373,654 shares of common stock.
During 1999, the Company established a new series of stock, Series B
Preferred stock, $.10 par value. The Company may issue up to 1,300
shares of the Series B Preferred stock, and such stock in entitled to
receive dividends when as, and if dividends are declared by the
Company on its common stock. Each holder of Series B preferred stock
has the right, at the option of the holder, to convert each share of
such stock into 1,000 shares of common stock. The Company has the
right to convert each share of Series B preferred stock into common
stock at the same conversion ratio. The conversion price of shares of
Series B preferred stock is subject to adjustment in the event of any
reclassification, subdivision or combination of the Company's
outstanding common stock into a greater or smaller number of shares
by a stock split, stock dividend or other similar event. In the event
of a dissolution, liquidation or winding up of the Company, the
holders of Series B preferred stock are entitled to receive, if
available, prior and in preference to the holders of common stock, an
amount equal to $1,000 per share. Thereafter, any remaining assets,
if any, would be distributed ratably to the holders of common stock.
The holders of shares of Series B preferred stock are entitled to
that number of votes on all matters presented to shareholders equal
to the number of shares of common stock then issuable upon conversion
of such shares of preferred stock. Without the approval of the
holders of at least a majority of the Series B preferred stock then
outstanding voting separately as a class, the Company may not amend
its Certificate of Incorporation in any way that adversely affects
the rights and preferences of the holders of the Series B preferred
stock as a class. During 1999, 196 shares of Preferred Series B were
issued, resulting in net proceeds to the Company of $195,929.
F-26
<PAGE>
eLEC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
11. Stockholders' Equity (Continued)
The following is a summary of outstanding options:
<TABLE>
<CAPTION>
Weighted-
Average
Number Exercise Price Exercise
of Shares Per Share Price
--------- --------- -----
<S> <C> <C> <C>
Outstanding December 1, 1996 383,000 $1.00 - $1.6875 $ 1.26
Granted during year ended
November 30, 1997 160,000 $1.94 - $2.13 $ 2.03
Exercised/canceled during year
ended November 30, 1997 (148,000) $1.00 - $1.6875 $ 1.12
--------
Outstanding November 30, 1997 395,000 $1.00 - $2.13 $ 1.63
Granted during year ended
November 30, 1998 299,500 $2.79 - $3.13 $ 2.96
Exercised/canceled during year
ended November 30, 1998 (38,000) $1.00 - $2.84 $ 2.20
--------
Outstanding November 30, 1998 656,500 $1.00 - $3.13 $ 2.20
Granted during year ended
November 30, 1999 1,013,500 $1.00 - $2.25 $ 1.49
Exercised/canceled during year
ended November 30, 1999 (229,000) $1.00 - $2.84 $ 2.46
----------
Outstanding November 30, 1999 1,441,000 $ 1.63
----------
Options exercisable, November
30, 1997 140,000 $1.00 - $1.44 $ 1.33
----------
Options exercisable, November
30, 1998 322,500 $1.00 - $2.13 $ 1.70
----------
Options exercisable, November
30, 1999 661,500 $1.00 - $2.84 $ 1.71
-----------
</TABLE>
F-27
<PAGE>
eLEC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
11. Stockholders' Equity (Continued)
The following table summarizes information about the options
outstanding at November 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- -----------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Outstanding Price
------ ----------- ------------ ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
$1.00 - $1.94 1,120,500 3.85 $1.42 492,500 $1.43
$2.13 - $2.84 320,500 3.72 $2.42 169,000 $2.50
</TABLE>
For disclosure purposes, the fair value of each stock option grant is
estimated on the date of grant using the Black Scholes option-pricing
model with the following weighted-average assumptions used for stock
options granted: annual dividends of $0.00 for all years, expected
volatility of 88% for 1997, 117% for 1998 and 126% for 1999,
risk-free interest rate of 6.03% for 1997, 5.66% for 1998 and 5.53%
for 1999, and expected life of five years for all grants. The
weighted-average fair value of stock options granted in 1999, 1998
and 1997 was $.97, $2.36 and $.91, respectively.
Under the above model, the total value of stock options granted in
1999, 1998 and 1997 was $924,707, $652,976 and $146,041,
respectively, which would be amortized ratably on a pro forma basis
over the related vesting periods, which generally range from five to
ten years. Had the Company determined compensation cost for these
plans in accordance with SFAS No. 123, the Company's pro forma net
loss would have been ($7,655,167) in 1999, ($5,131,886) in 1998, and
($2,906,052) in 1997, and the Company's pro forma loss per share
would be ($.88) for 1999, ($.99) for 1998, and ($.90) for 1997.
In April 1997, the Company raised $609,000, net of placement agent
fees, through the private placement issuance of 400,000 units at
$1.75 per unit, with each unit consisting of one share of common
stock, one common stock Class A warrant exercisable at $2.06 per
share for one year, and one common stock Class B warrant exercisable
at $2.56 per share for one year. Additionally, 120,000 Class A
warrants were granted to the placement agent and a consulting firm in
connection with the transaction. As of November 30, 1998,
substantially all the warrants had been exercised and the remaining
warrants expired.
F-28
<PAGE>
eLEC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
11. Stockholders' Equity (Continued)
On October 24, 1996, the shareholders of the Company adopted the eLEC
Communications, Inc. 1996 Restricted Stock Award Plan (the
"Restricted Stock Award Plan"). An aggregate of 400,000 shares of
common stock of the Company has been reserved for issuance in
connection with awards granted under the Restricted Stock Award Plan.
Such shares may be awarded from either authorized and unissued shares
or treasury shares. The maximum number of shares that may be awarded
under the Restricted Stock Award Plan to any individual officer or
key employee is 100,000. Approximately five employees of the Company
and its subsidiaries are currently eligible to participate in the
Restricted Stock Award Plan. No shares were awarded during 1999, 1998
and 1997.
12. Fourth Quarter Adjustment
During the fourth quarter of the year ended November 30, 1997, the
Company recorded an adjustment of approximately $615,000 to write
down certain inventory.
13. Investment in and Transactions with Affiliates
Access One Communications Corp.
On October 22, 1997, the Company acquired 3,000,000 common shares of
Access One Communications Corp. and Subsidiaries ("Access"), formerly
known as CLEC Holding Corp., in exchange for 375,000 shares of the
Company's common stock, subject to certain price protection
adjustments which required the Company to issue an additional 50,000
shares of common stock.
During fiscal 1998, there were two additional exchanges of shares
with Access. The first exchange occurred on April 23, 1998 when the
Company exchanged 350,000 shares of its common stock for 300,000
shares of Access common stock. This exchange was valued at
$1,233,750. Additionally, Access agreed to reimburse the Company
$150,000 for expenses. The second exchange occurred on September 10,
1998 when the Company exchanged 400,000 shares of its common stock
for 400,000 shares of Access common stock. This exchange was valued
at $221,280. In February 1998, the Company exchanged 50,000 shares of
its common stock for 200,000 shares of Access common stock during
1998 with a private investor. This exchange was valued at $104,070.
F-29
<PAGE>
eLEC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
13. Investment in and Transactions with Affiliates (Continued)
Access One Communications Corp. (Continued)
In March 1999, the Company issued to Access 1,420,000 shares of
common stock in consideration for the issuance by Access to the
Company of 1,775,000 shares of its common stock. In connection with
such transaction, Access was granted an option to put to the Company
for repurchase at any time on or before December 1, 1999 at the
original purchase price, all or a portion of the shares of common
stock it purchased in March 1999. In connection with any such
exercise of its put option, in whole or in part, Access was required
to issue to the Company warrants to purchase 500,000 shares of Access
One common stock at a purchase price of $1.00 per share, which are
carried at no value. Prior to October 31, 1999, Access notifed the
Company of its intention to exercise its option. On December 1, 1999,
Access exercised its option with respect to 1,400,000 shares of our
common stock, which has been reflected in the accompanying financial
statements as of November 30, 1999.
The Company's investment in Access is carried on the equity method of
accounting. At November 30, 1998, the cost of the investment in
Access had been reduced by $159,396, attributable to the Company's
portion (at cost) of the Company's common stock held by Access, with
a corresponding charge to treasury stock. As of November 30, 1998,
the Company owned approximately 28% of Access. The Company, for its
fiscal year ended November 30, 1999 and 1998, included its share of
Access' operations based on Access' year-end of October 31, 1998. All
of the Company's investment at November 30, 1998 represents goodwill,
which was being amortized over seven years, based on original cost.
The Company recorded a loss of $1,661,630 and $1,423,000 (including
goodwill amortization of $375,000 in 1999 and 1998) on its equity in
the operations of Access for the years ended November 30, 1999 and
1998. As of November 30, 1999, the Company's investment in Access has
been reduced to zero.
Access was formed in 1991 and was inactive until September 1997, when
Access acquired 95% of the capital stock of The Other Phone Company,
Inc. ("OPC"), an integrated telecommunications provider based in
Florida. Substantially all of Access' revenues represent the resale
of telephone services pursuant to a resale agreement with one
supplier, BellSouth Corporation.
F-30
<PAGE>
eLEC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
13. Investment in and Transactions with Affiliates (Continued)
Access One Communications Corp. (Continued)
The results of operations for the years ended October 31, 1999, 1998
and 1997 and financial position of Access as of October 31, 1999 and 1998 are
summarized below:
<TABLE>
<CAPTION>
Condensed Income Statement Information
1999 1998 1997
----------- ---------- -----------
<S> <C> <C> <C>
Revenue $15,412,640 $5,811,038 $ 479,516
----------- ---------- -----------
Cost of service 12,177,793 5,045,514 366,243
Gross profit 3,234,847 765,524 113,273
Net loss (4,994,124) (4,761,333) (158,098)
<CAPTION>
Condensed Balance Sheet Information
1999 1998
---- ----
<S> <C> <C>
Current assets, including investment in
eLEC Communications, Inc. common shares
carried at $675,000 and $396,175 at
October 31, 1999 and 1998 $3,111,715 $1,621,223
Non-current assets 852,680 630,394
Goodwill and other intangible assets 2,322,714 1,633,732
Current liabilities 4,806,419 4,200,705
Non-current liabilities 6,837,119 181,124
Stockholders' equity (deficiency) (5,356,429) (496,480)
</TABLE>
In addition, options have been granted by Access to purchase common
shares of Access to the Chief Executive Officer of the Company
(150,000 shares at $1.20 per share) and to another officer of the
Company who serves on the Board of Directors of Access (100,000
shares at $1.00 per share).
F-31
<PAGE>
eLEC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
13. Investment in and Transactions with Affiliates (Continued)
Riderpoint, Inc.
On April 15,1999, the Company purchased 600,000 shares of the voting
stock (19%) of Riderpoint, Inc. ("Riderpoint") by issuing 250,000
shares of its common stock, in a transaction valued at $412,500. On
November 30, 1999, the Company increased its ownership interest in
Riderpoint by purchasing an additional 500,000 shares of the voting
stock of Riderpoint by issuing 300,000 shares of its common stock, in
a transaction valued at $862,500, thereby increasing its ownership
interest in Riderpoint to 27% on such date. For the year ended
November 30, 1999, the investment in Riderpoint was accounted for on
the cost method. Commencing on December 1, 1999, the Company will
begin to account for its investment in Riderpoint on the equity
method of accounting. In 1999, the Company charged Riderpoint a
$75,000 fee for assistance in developing Riderpoint's website.
Riderpoint was incorporated in 1997. Riderpoint has developed an
Internet website which provides an online insurance rating program
for, comparing, and buying motorcycle insurance.
The following summarizes the results of operations and net assets
(unaudited) of Riderpoint.
Condensed Income Statement Information
Year ended December 31,
1999 1998
---- ----
Revenue $251,244 $ 26,539
Costs and expenses 617,452 110,502
--------- ---------
Net loss ($366,208) ($ 83,963)
-------- ---------
F-32
<PAGE>
eLEC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
13. Investment in and Transactions with Affiliates (Continued)
Riderpoint, Inc. (Continued)
Condensed Balance Sheet Information
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Current assets $ 34,319 $ 12,437
Non-current assets (1) 1,196,780 31,813
Current liabilities 198,581 -
Non-current liabilities 90,339 -
Stockholders' equity (2) 942,179 44,250
</TABLE>
(1) Including 400,000 shares of common stock of eLEC at December 31, 1999.
(2) Including, in 1999, $1,275,000 of capital in a capital transaction with
eLEC common stock.
14. Risks and Uncertainties
The Company buys substantially all of the telecommunication services
that it resells from one supplier, Bell Atlantic Corporation, and is,
therefore, highly dependent upon Bell Atlantic Corporation.
Management of the Company believes that its relationship with Bell
Atlantic Corporation is good. Management of the Company believes that
there are less desirable suppliers of telecommunication services in
the geographical location in which the Company conducts business. In
addition, the Company is at risk to regulatory agreements that govern
the rates to be charged to the Company. In light of the foregoing, it
is reasonably possible that the loss of the Company's relationship
with Bell Atlantic Corporation or a significant unfavorable change in
the regulatory agreements structure would have a severe near-term
impact on the Company's ability to conduct its telecommunications
business.
F-33
<PAGE>
eLEC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
15. Subsequent Events
On January 21, 2000, the Company acquired Telecarrier Services, Inc.
("Telecarrier"), a competitive local exchange carrier located in New
Jersey. The acquisition will be accounted for as a purchase and was
effectuated by the Company issuing 500,000 shares of its common stock
for all the issued and outstanding shares of Telecarrier, of which
400,000 shares were issued at the closing of the merger and 100,000
shares were reserved for issuance upon completion of an audit of
Telecarrier's financial statements, and an additional 280,000 shares
of the Company's common stock which will be issued in such amounts
and at such times as set forth in the related merger agreement. In
addition, the Company repaid certain promissory notes of Telecarrier
by issuing a total of 32,000 shares of the Company's common stock and
paying $14,200 in cash.
Subsequent to November 30, 1999 and through February 25, 2000, the
Company received net proceeds of approximately $2,000,000 from the
exercise of warrants for 345,750 shares and a private placement of
538,000 shares of common stock.
F-34
<PAGE>
<TABLE>
<CAPTION>
eLEC COMMUNICATIONS, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
Balance at Charged to Accounts Balance at
Beginning Costs and Written End of
Description of Period Expenses* Off Period
----------- --------- --------- --- ------
<S> <C> <C> <C> <C>
Year ended November 30, 1999:
Allowance for doubtful accounts $ 337,000 $ 205,000 $118,000 $ 424,000
Valuation allowance for deferred
tax asset $3,800,000 $1,650,000 $ -- $5,450,000
Year ended November 30, 1998:
Allowance for doubtful accounts $ 200,000 $ 299,000 $162,000 $ 337,000
Valuation allowance for deferred
tax asset $3,040,000 $ 760,000 -- $3,800,000
Year ended November 30, 1997:
Allowance for doubtful accounts $ 276,000 $ 278,000 $354,000 $ 200,000
Valuation allowance for deferred
tax asset $1,970,000 $1,070,000 -- $3,040,000
</TABLE>
* Net of recoveries
F-35
<PAGE>
Report of Independent Auditors
Board of Directors
Access One Communications Corp.
Orlando, Florida
We have audited the accompanying consolidated balance sheets of Access One
Communications Corp. and subsidiaries as of October 31, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity
(deficiency), and cash flows for the years ended October 31, 1999, 1998 and
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Access
One Communications Corp. and subsidiaries as of October 31, 1999 and 1998, and
the consolidated results of their operations and cash flows for the years ended
October 31, 1999, 1998 and 1997, in conformity with generally accepted
accounting principles.
/s/NUSSBAUM YATES & WOLPOW, P.C.
-------------------------------
NUSSBAUM YATES & WOLPOW, P.C.
Melville, New York
January 28, 2000
F-36
<PAGE>
<TABLE>
<CAPTION>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1999 AND 1998
ASSETS
1999 1998
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 913,596 $ 118,042
Investment securities 675,000 396,175
Accounts receivable, net of allowance for doubtful
accounts of $645,865 and $333,946 in 1999 and 1998 1,472,429 1,057,271
Prepaid expenses and other current assets 50,690 49,735
------------ -----------
Total current assets 3,111,715 1,621,223
------------ -----------
Property and equipment, net 300,206 254,060
------------ -----------
Other assets:
Deferred financing costs, net of accumulated amortization
of $32,908 263,265 --
Purchased customer accounts, net of accumulated
amortization of $626,677 701,021 --
Goodwill, net of accumulated amortization of $568,750
and $293,446 in 1999 and 1998 1,358,428 1,633,732
------------ -----------
Deposits 552,474 376,334
2,875,188 2,010,066
------------ -----------
$ 6,287,109 $ 3,885,349
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Note payable, e.spire Communications, Inc. $ 850,811 $ --
Loans payable, Receivables Funding Corporation -- 1,054,046
Due to related parties -- 185,000
Current portion of long-term debt - 227,291
Accounts payable 3,121,390 2,148,609
Accrued expenses and other current liabilities 834,218 585,759
------------ -----------
Total current liabilities 4,806,419 4,200,705
Long-term debt, less current portion 6,837,119 181,124
------------ -----------
11,643,538 4,381,829
------------ -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Stockholders' equity (deficiency):
Common stock, $.001 par value, authorized 25,000,000
shares; issued and outstanding 12,801,000 and
12,776,000 shares in 1999 and 1998 12,801 12,776
Additional paid-in capital 4,090,605 4,534,905
Accumulated other comprehensive income (loss),
unrealized holding gain (loss) on investment securities 453,720 (124,730)
Accumulated deficit (9,913,555) (4,919,431)
------------ -----------
(5,356,429) (496,480)
------------ -----------
$ 6,287,109 $ 3,885,349
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-37
<PAGE>
<TABLE>
<CAPTION>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Revenue $ 15,412,640 $ 5,811,038 $ 479,516
Cost of service 12,177,793 5,045,514 366,243
------------ ------------ -----------
Gross profit 3,234,847 765,524 113,273
------------ ------------ -----------
Operating expenses:
Selling 998,949 725,574 70,283
Administrative 5,848,935 3,427,414 184,716
------------ ------------ -----------
Total operating expenses 6,847,884 4,152,988 254,999
------------ ------------ -----------
Loss from operations (3,613,037) (3,387,464) (141,726)
------------ ------------ -----------
Other expense:
Interest and loan fees, net of interest income
of $4,130 in 1999 1,166,462 312,869 16,372
Loss on sale of investment securities 214,625 1,061,000 --
------------ ------------ -----------
1,381,087 1,373,869 16,372
------------ ------------ -----------
Net loss ($ 4,994,124) ($ 4,761,333) ($ 158,098)
------------ ------------ -----------
Basic and diluted loss per common share ($ .39) ($ .41) ($ ,05)
------------ ------------ -----------
Weighted average number of common shares
outstanding 12,792,575 11,641,592 3,180,000
------------ ------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-38
<PAGE>
<TABLE>
<CAPTION>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
Accumulated
Other
Additional Comprehensive
Common Stock Paid-in Income
Shares Amount Capital (Loss)
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance, November 1, 1996 2,500,000 $ 2,500 ($ 2,500) $ --
Capital contributed -- -- 100 --
Stock issued to reimburse Chairman for expenses 750,000 750 34,250 --
Stock issued to acquire OPC Acquisition Corp. 4,000,000 4,000 429,251 --
Stock issued pursuant to private placements, net 465,000 465 285,835 --
Stock issued to Sirco International Corp. in exchange
for 425,000 shares of Sirco International Corp. 3,000,000 3,000 1,497,000 --
Net loss for the year ended October 31, 1997 -- -- -- --
----------- --------- ----------- ---------
Balance, October 1, 1997 10,715,000 10,715 2,243,936 --
Net loss for the year ended October 31, 1998 -- -- -- --
Unrealized loss on investment arising during the period -- -- -- (124,730)
Comprehensive income (loss) -- -- -- --
Stock issued to eLEC Communications, Inc. in exchange
for 750,000 shares of eLEC Communications, Inc. 700,000 700 1,454,330 --
Stock issued to related parties in satisfaction of loans
and accrued interest 846,000 846 422,154
Stock issued to president of The Other Phone
Company Inc. for compensation 200,000 200 99,800
Stock issued pursuant to private placements 315,000 315 314,685 --
----------- --------- ----------- ---------
Balance, October 31, 1998 12,776,000 12,776 4,534,905 (124,730)
Net loss for the year ended October 31, 1999 -- -- -- --
Other comprehensive income:
Unrealized holding gains arising during period -- -- -- 382,440
Plus: reclassification adjustment for losses included
in net loss -- -- -- 196,010
Comprehensive income (loss) -- -- -- --
Stock issued to eLEC Communications in exchange
for 1,420,000 shares of eLEC Communications, Inc. 1,775,000 1,775 1,824,700 --
Exercise of put with eLEC Communications, Inc. (1,750,000) (1,750) (1,799,000) --
Purchase of outstanding warrants -- -- (520,000) --
Options granted for consulting services -- -- 50,000 --
----------- --------- ----------- ---------
Balance, October 31, 1999 12,801,000 $ 12,801 $ 4,090,605 $ 453,720
----------- --------- ----------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Accumulated
Deficit Total
--------- -------
<S> <C> <C>
Balance, November 1, 1996 $ -- $ --
Capital contributed -- 100
Stock issued to reimburse Chairman for expenses -- 35,000
Stock issued to acquire OPC Acquisition Corp. -- 433,251
Stock issued pursuant to private placements, net -- 286,300
Stock issued to Sirco International Corp. in exchange
for 425,000 shares of Sirco International Corp. -- 1,500,000
Net loss for the year ended October 31, 1997 (158,098) (158,098)
----------- -----------
Balance, October 1, 1997 (158,098) 2,096,553
-----------
Net loss for the year ended October 31, 1998 (4,761,333) (4,761,333)
Unrealized loss on investment arising during the period -- (124,730)
-----------
Comprehensive income (loss) -- (4,886,063)
-----------
Stock issued to eLEC Communications, Inc. in exchange
for 750,000 shares of eLEC Communications, Inc. -- 1,455,030
Stock issued to related parties in satisfaction of loans
and accrued interest -- 423,000
Stock issued to president of The Other Phone
Company Inc. for compensation -- 100,000
Stock issued pursuant to private placements -- 315,000
---------- -----------
Balance, October 31, 1998 (4,919,431) (496,480)
-----------
Net loss for the year ended October 31, 1999 (4,994,124) (4,994,124)
Other comprehensive income:
Unrealized holding gains arising during period -- 382,440
Plus: reclassification adjustment for losses included
in net loss -- 196,010
-----------
Comprehensive income (loss) -- (4,415,674)
-----------
Stock issued to eLEC Communications in exchange
for 1,420,000 shares of eLEC Communications, Inc. -- 1,826,475
Exercise of put with eLEC Communications, Inc. -- (1,800,750)
Purchase of outstanding warrants (520,000)
Options granted for consulting services -- 50,000
----------- -----------
Balance, October 31, 1999 ($9,913,555) ($5,356,429)
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-39
<PAGE>
<TABLE>
<CAPTION>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ($4,994,124) ($4,761,333) ($ 158,098)
----------- ----------- -----------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,008,950 342,897 22,595
Provision for losses on receivables 1,744,945 592,720 16,590
Loss on sale of securities 214,625 1,061,000 --
Stock issued for compensation 100,000 --
Reimbursement of expenses to eLEC
Communications 75,000 --
Expenses reimbursed through issuance of common
stock -- -- 35,000
Changes in operating assets and liabilities, net of
effect of acquisition in 1997:
Accounts receivable, less amounts purchased (455,745) (1,262,839) (172,679)
Prepaid expenses (955) 5,776 (16,770)
Deferred finance costs (46,174) -- --
Deposits (176,140) (376,334) 3,674
Accounts payable 972,781 1,844,500 159,901
Accrued expenses (1,541) 523,087 44,019
----------- ----------- -----------
Total adjustments 3,260,746 2,905,807 92,330
----------- ----------- -----------
Net cash used in operating activities (1,733,378) (1,855,526) (65,768)
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of securities 85,000 1,373,125 --
Purchase of equipment (120,207 (203,762) (17,969)
Purchased customer accounts and accounts receivable (2,105,519) -- --
Repurchase of warrants (520,000) -- --
Acquisition of OPC -- -- (1,000,000)
----------- ----------- -----------
Net cash provided by (used in) investing activities (2,660,726) 1,169,363 (1,017,969)
----------- ----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cash flows from financing activities:
Repayment of loan payable, bank -- (250,000) --
Borrowings (repayments), Receivable Funding
Corporation, net (1,054,046) 1,054,046 --
Repayment to related parties, net ( 185,000) (239,521) --
Principal payments of long-term debt (408,415) (215,562) (59,822)
Proceeds from issuance of long-term debt 6,837,119 -- 502,442
Proceeds from issuance of common stock and
contribution to capital -- 315,000 719,651
----------- ----------- -----------
Net cash provided by financing activities 5,189,658 663,963 1,162,271
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 795,554 (22,200) 78,534
Cash and cash equivalents, beginning of year 118,042 140,242 61,708
----------- ----------- -----------
Cash and cash equivalents, end of year $ 913,596 $ 118,042 $ 140,242
----------- ----------- -----------
Supplemental disclosure of cash flow information:
Cash paid - interest $ 1,018,313 $ 312,869 $ 4,462
----------- ----------- -----------
Non-cash investing and financing activities (see
Notes 3 and 5)
</TABLE>
See accompanying notes to consolidated financial statements.
F-40
<PAGE>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
1. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of Access One Communications Corp. and its subsidiaries
("the Company"). All significant intercompany balances and
transactions have been eliminated.
Organizational Background
The Company was formerly known as CLEC Holding Corp. ("CLEC"),
formerly PRS SUB II ("PRS"), was incorporated under the laws of the
State of New Jersey in 1991. The Company emerged from bankruptcy,
pursuant to a Bankruptcy Court Order in 1996, and was inactive until
September 1997.
On September 9, 1997, the Company acquired 95% of the common
stock of The Other Phone Company, Inc. ("OPC"), a reseller of local
and long-distance telecommunications services to businesses and
residential customers in the Southeastern United States, principally
in Florida, which began operations in January, 1997. The cost of the
acquisition, which was accounted for as a purchase, was $1,927,178
($1,000,000 paid in cash and the remainder in seller notes (see Note
8), and the entire purchase price of $1,927,178 was allocated to
goodwill. The consolidated financial statements include the results
of operations of OPC since September 9, 1997.
The following unaudited pro forma consolidated results of
operations for the year ended October 31, 1997 assumes the OPC
acquisition occurred as of November 1, 1996:
Net sales $1,723,853
Net loss ($ 561,348)
Loss per share ($ .09)
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased
with an original maturity of three months or less to be cash
equivalents.
F-41
<PAGE>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
1. Summary of Significant Accounting Policies (Continued)
Investment Securities
Marketable equity securities, all of which have represented common
shares of eLEC Communications ("eLEC"), have been categorized as
available for sale and as a result, are stated at fair value.
Unrealized holding gains and losses are included as a component of
stockholders' equity until realized. Realized gains and losses are
determined based on the specific identification method.
Property and Equipment
Property and equipment are stated at cost. Depreciation is being
provided by the straight-line method over the estimated useful lives
of the assets, generally three to seven years. Leasehold improvements
are amortized, using the straight-line method, over the term of the
lease or the useful life of the improvements, whichever is shorter.
Earnings Per Share
For the year ended October 31, 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," which replaces the presentation of primary earnings per share
("EPS") and fully diluted EPS with a presentation of basic EPS and
diluted EPS. Basic EPS excludes common stock equivalents and is
computed by dividing net income (loss) available to common
stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if common stock equivalents such as stock
options and warrants were exercised. The effect of stock options and
warrants on the calculation of earnings per common share was
anti-dilutive in all years but may be dilutive in the future.
Deferred Financing Costs
Deferred financing costs are amortized to interest expense over the
life of the relating financing.
Purchased Customer Accounts
Purchased customer accounts are amortized over three years on a
straight-line basis or the termination of the customer account,
whichever is shorter.
F-42
<PAGE>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
1. Summary of Significant Accounting Policies (Continued)
Goodwill
The excess of the cost of subsidiaries over the equity in underlying
net assets at the dates of acquisition (goodwill) is being amortized
over 7 years.
Impairment of Long-Lived Assets
The Company reviews its intangible assets and other long-lived assets
for impairment at each balance sheet date or whenever events or
changes in circumstances indicate that the carrying amount of an
asset should be assessed. Management evaluates the intangible assets
related to each acquisition individually to determine whether an
impairment has occurred. An impairment is recognized when the
discounted future cash flows estimated to be generated by the
acquired business is insufficient to recover the current unamortized
balance of the intangible asset, with the amount of any such
deficiency charged to income in the current year. Estimates of future
cash flows are based on many factors, including (i) current operating
results of the applicable business, (ii) projected future operating
results of the applicable business, (iii) the occurrence of any
significant regulatory changes which may have an impact on the
continuity of the business, and (iv) any other material factors that
affect the continuity of the applicable business.
Revenue Recognition
Revenues are recognized in the period services are provided to
customers and consist primarily of charges for use of local and
long-distance services.
Income Taxes
The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for
Income Taxes." Under the asset and liability method specified by SFAS
109, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets
and liabilities as measured by the enacted tax rates which will be in
effect when these differences reverse. Deferred tax expense is the
result of changes in deferred tax assets and liabilities. The
principal type of differences between assets and liabilities for
financial statement and tax return purposes are allowances for
doubtful accounts, depreciation and amortization, and net operating
losses.
F-43
<PAGE>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
1. Summary of Significant Accounting Policies (Continued)
Advertising Costs
The Company expenses advertising costs in the period incurred.
Advertising expense was $30,170, $2,267 and $-0- for the years ended
October 31, 1999, 1998 and 1997.
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 reporting period. Actual results
could differ from those estimates.
Fair Value of Financial Instruments
The Company's principal financial instruments consist of cash and
cash equivalents, investment securities, and loans and notes payable.
The Company believes that the carrying amount of such instruments
approximates fair value.
Recently Issued Accounting Standards
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 requires companies to classify items of other
comprehensive income by their nature in a financial statement and
display the accumulated balance of other comprehensive income
separately from retained earnings, and is effective for financial
statements issued for fiscal years beginning after December 15, 1997.
The Company has adopted SFAS No. 130 as reflected in the accompanying
consolidated financial statements.
2. Description of Business and Concentrations
The Company provides local and long-distance telecommunications
services to business and residential c, principally in Florida. The
Company's business is highly competitive and is subject to various
Federal, State and local regulations, including the Federal
Communications Commission and various state public service
commissions.
F-44
<PAGE>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
2. Description of Business and Concentrations (Continued)
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of trade
receivables. The Company's trade receivables are geographically
concentrated with businesses and residential customers primarily
located in the Southeastern United States. The Company continually
evaluates the creditworthiness of its customers; however, it
generally does not require collateral. The Company's allowance for
doubtful accounts is based on historical trends, current market
conditions and other relevant factors.
During the years ended October 31, 1999, 1998 and 1997, the Company
purchased in excess of 90% of its telephone services under a resale
agreement with one supplier, BellSouth. BellSouth is one of only a
few potential suppliers for the Company's local telephone resale
business and, therefore, the loss of the Company's relationship with
BellSouth could adversely affect the Company's ability to continue in
business.
3. Investment Securities
On October 22, 1997, the Company exchanged 3,000,000 shares of its
common stock for 375,000 shares of unregistered eLEC Communications,
Inc. ("eLEC") common stock, subject to certain price protection
adjustments, which required eLEC to issue an additional 50,000 shares
of common stock to the Company. The Company valued the entire 425,000
shares at $1,500,000 at the exchange date and on October 31, 1997,
which represented its estimate of the fair value of the
aforementioned eLEC shares. During fiscal 1998, the aforementioned
425,000 shares were sold for proceeds of $687,500, resulting in a
realized loss of $812,500.
During fiscal 1998, there were two additional exchanges of shares
with eLEC. The first exchange occurred on April 23, 1998 when the
Company exchanged 300,000 of its common stock for 350,000 shares of
eLEC common stock. This exchange was valued at $1,233,750. Of this
first exchange, 265,000 shares were sold for proceeds of $685,625,
resulting in a realized loss of $248,500. The second exchange
occurred on September 10, 1998 when the Company exchanged 400,000
shares of its common stock for 400,000 shares of eLEC common stock.
This exchange was valued at $221,280.
F-45
<PAGE>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
3. Investment Securities (Continued)
In March 1999, the Company issued to eLEC 1,775,000 shares of common
stock in consideration for the issuance by eLEC to the Company of
1,420,000 shares of its common stock. In connection with such
transaction, the Company was granted an option to put to eLEC for
repurchase at any time on or before December 1, 1999 at the original
purchase price, all or a portion of the shares of common stock the
Company purchased in March 1999. In connection with any such exercise
of its put option, in whole or in part, the Company was required to
issue to eLEC warrants to purchase 500,000 shares of the Company
common stock at a purchase price of $1.00 per share. Prior to October
31, 1999, the Company notified eLEC of its intention to exercise the
option and, on December 1, 1999, exercised its option with respect to
1,750,000 shares of the Company's common stock which has been
reflected in the accompanying financial statements as of October 31,
1999. As of October 31, 1999 and 1998, the Company owned 400,000 and
485,000 shares of eLEC's common stock, which represents approximately
4% and 8% of eLEC's common stock, respectively. As of October 31,
1999 and 1998, eLEC owned approximately 31% of the Company's common
stock. During fiscal 1999, the Company sold 85,000 shares of eLEC's
common stock for $85,000, resulting in a realized loss of $214,675.
The Company's investment in eLEC shares are summarized as follows:
<TABLE>
<CAPTION>
Holding
Cost Fair Value Gain (Loss)
------------ ------------ -----------
<S> <C> <C> <C>
October 31, 1999 $221,280 $675,000 $453,720
October 31, 1998 $520,905 $396,175 ($124,730)
</TABLE>
4. Property and Equipment
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Furniture and fixtures $ 81,687 $ 63,916
Office equipment 101,846 101,846
Computer equipment 202,062 152,126
Billing software 72,675 20,175
Leasehold improvements 4,268 4,268
--------- ---------
462,538 342,331
Less accumulated depreciation
and amortization (162,332) (88,271)
--------- ---------
$ 300,206 $ 254,060
--------- ---------
</TABLE>
F-46
<PAGE>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
5. Customer Base Acquisition
During the fiscal year ended October 31, 1999, in two transactions
with a competitor, the Company purchased a customer base of
approximately 17,500 local access lines and the associated accounts
receivable from the competitor for an aggregate purchase price of
approximately $3,600,000. Approximately $2,300,000 of the purchase
price represented accounts receivable, and the remainder, $1,300,000
was allocated to the customer base (intangible asset). Approximately
$2,100,000 of the purchase price was paid in cash, and promissory
notes aggregating approximately $1,500,000 were executed for the
balance of the purchase price. Principal and interest (interest at
10.625%) are payable in equal monthly installments through June 30,
2000. As of October 31, 1999, the principal balance of the note was
$850,811, which reflects adjustments pursuant to the agreement which
reduced the amount outstanding.
6. Loans Payable, Receivable Funding Corporation
The Company had a receivable financing and a senior secured
promissory note with Receivables Funding Corporation ("RFC"). As of
October 31, 1998, the Company had outstanding $1,054,046 under the
agreements with an interest rate of approximately 5.5% above the
prime rate and had collateralized it with a security interest in the
accounts receivable and certain shares of eLEC stock. In connection
with the agreement, the Company granted RFC warrants to purchase
300,000 shares of the Company's stock at $1.00 per share. The
receivables financing was to have expired December 26, 1999 and the
note was to have been paid over 48 months from the date of draw. On
June 30, 1999, the agreement with RFC was terminated as new financing
was obtained from MCG Finance Corporation ("MCG") as described in
Note 8. As consideration for early termination, the Company paid RFC
a termination fee of $180,000 which was charged to expense.
Additionally, the warrants were repurchased for $520,000.
7. Due To Related Parties
Note payable to Chairman of the Company, payable on
demand, interest at 12% $ 20,000
Note payable to eLEC, payable on demand, non-interest
bearing 75,000
Note payable to a subsidiary of eLEC, payable on demand,
interest at 8% 90,000
---------
$ 185,000
==========
The above amounts were repaid during fiscal 1999.
F-47
<PAGE>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
8. Long-Term Debt
Borrowings Under MCG Credit Facility Agreement
On June 30, 1999, the Company entered into a Credit Facility
Agreement ("the Facility") with MCG Finance Corporation ("MCG") and
other lenders that may subsequently be added to the agreement,
collectively referred to as "the Lenders." Under the terms of the
Facility, the Company may request periodic advances from June 30,
1999 through November 30, 1999, a maximum of $7.5 million. The
maturity date of the Facility is June 30, 2002. The Company is
required to pay an origination fee of $250,000, of which $125,000 is
due June 2000 and the balance due June 2001. On November 30, 1999,
the maximum amount that the Company may borrow under the Facility was
increased to $15,000,000 to be requested through November 2000. The
maximum amount of credit available under the Facility, however, shall
not exceed a multiple of a portion of the Company's collections, as
defined in the Facility.
For purposes of determining interest, the Company may designate and
subdivide the outstanding principal balance under the Facility into a
maximum of three portions. The outstanding balance under each such
portion will bear interest fluctuating at two alternative rate
indexes, the prime rate plus 11% or, at the three-month London
Interbank Offered Rate ("LIBOR") plus 9%. The applicable rate index
for each portion may be changed by the Company periodically, as
defined in the Facility. Interest payable under the Facility is
subdivided into two components, current interest, and deferred
interest. Current interest on each principal portion is due and
payable monthly at the prime rate plus 8%, or at the LIBOR rate plus
6%, depending on the rate assigned to the related portion of the
loan. Deferred interest, accrues, calculated at 3%, and shall be due
and payable in full in one lump sum, (at the election of the Lenders)
upon the occurrence of any of the following events: (a) June 30,
2002, (b) the date that all obligations under the Facility are paid
in full and the related loan documents are terminated, or (c) the
occurrence of any event of default, as defined. Upon such occurrence,
the Lenders may accept actual cash payment of such deferred interest,
or may retain the right to exercise certain rights it has under the
option under the terms set forth in an Option and Warrant Agreement.
If the Lenders exercise the option in accordance with the Option and
Warrant Agreement, then the Lenders shall not be entitled to receive
payment of such accrued deferred interest, but may, at their
election, treat such accrued deferred interest as the exercise price
paid for the warrant shares if and when such warrants are exercised.
The option to acquire warrants will allow MCG to purchase shares of
the Company representing 10% of the issued and outstanding shares of
capital stock and voting rights of the Company on a fully diluted
basis. The option is exercisable immediately and may be exercised by
MCG at any time prior to the earlier of the following (1) June 30,
2009 and (2) the date on which MCG accepts payment of the deferred
interest.
F-48
<PAGE>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
8. Long-Term Debt (Continued)
Borrowings Under MCG Credit Facility Agreement (Continued)
As of October 31, 1999, the interest rate on the loan was 16.3%,
including the deferred interest portion.
In connection with the November 30, 1999 amendment, MCG was granted
warrants to purchase 400,000 shares of common stock at $1.55 per
share, exercisable immediately through November 30, 2009.
As collateral, The Company has granted the Lender a security interest
in substantially all assets of the Company. As additional collateral
for the Facility, certain shareholders gave a security interest in
all of their equity ownership interests in the Company. The Facility
contains various covenants and ratios. Among others, the Company must
maintain (1) an escalating minimum number of access lines, (2) an
escalating minimum gross profit margin percentage, (3) a minimum
operating cash flow (as defined), (4) an escalating amount of minimum
revenue, (5) a leverage ratio of funded debt (as defined) to
qualifying collections (as defined) of 4.5 to 1 through December 31,
1999 and 4.25 to 1.0 thereafter, and (5) an attrition rate (as
defined) of not more than 5% from September 30, 1999 through December
31, 1999 and 4% thereafter. In addition, the Company (1) has an
annual limitation on capital expenditures of $250,000, (2) cannot
create borrowings, indebtedness, guarantees, liens, other than as
defined in the Facility, and (3), cannot merge with another entity or
declare or make any payment or distribution with respect to, or incur
any liability for the purchase acquisition, redemption or retirement
of, any of its equity interests or as a dividend, return of capital
or other payment or distribution of any kind to any holder of any
such equity.
Other
Long-term debt outstanding on October 31, 1998 consisted of notes
payable to John Murray related to the purchase of 95% of OPC. The
note was paid in full during fiscal 1999.
F-49
<PAGE>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
9. Income Taxes
At October 31, 1999, the Company has an operating loss carryforward
of approximately $7,000,000 which is available to offset future
taxable income. A valuation allowance has been recognized to offset
the full amount of the deferred tax asset of approximately $2,800,000
and $1,200,000 at October 31, 1999 and 1998 due to the uncertainty of
realizing the benefit of the loss carryforwards. The loss
carryforwards will expire in March 2019.
The valuation allowance at October 31, 1997 was $30,000.
The Company's effective income tax rate differs from the federal
statutory rates as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate 34.0% 34.0% 34.0%
Utilization of net operating loss carryforwards (34.0) (34.0) (34.0)
----- ----- -----
-- -- --
----- ----- -----
</TABLE>
10. Commitments and Contingencies
Leases
On October 21, 1999, the Company executed a noncancelable lease for a
new facility to commence in December 1999. The commencement date of
the lease is later. The lease expires five years after the
commencement date. The Company will be responsible for a pro rate
share of operating expenses for the building. With the exception of
real estate taxes, insurance and utilities, Landlord shall cap
increases in operating expenses at five percent (5%) per annum.
The Company also leases other office facilities and certain equipment
under operating leases that expire through 2004. The leases require
minimum annual rental and certain other expenses including
maintenance and taxes. Rent expense for the years ended October 31,
1999, 1998 and 1997 was approximately $107,000, $86,000 and $7,000.
F-50
<PAGE>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
10. Commitments and Contingencies (Continued)
Leases (Continued)
As of October 31, 1999, the Company's future minimum rental
commitments are as follows:
2000 $213,238
2001 185,386
2002 196,076
2003 198,966
2004 142,434
--------
$936,100
========
11. Stockholders' Equity
Stock Issued for Compensation
On December 1, 1997, pursuant to an employment agreement, the Company
issued 200,000 shares of unregistered common stock to the new
President of OPC. Compensation expense of $100,000 was recorded in
fiscal 1998 for these shares.
Stock Options
On October 22, 1997, the Company, pursuant to the eLEC Stock Purchase
Agreement, granted to eLEC's nominee to the Board of Directors
options to purchase up to 100,000 shares of common stock for up to
three years at an exercise price of $1.00 per share.
On December 1, 1997, the Company granted options to the President of
OPC to purchase 800,000 shares of common stock for up to three years
at an exercise price of $.50 per share.
In December 1997, January 1998 and February 1998, the Company granted
options to employees to purchase 200,000 shares of common stock at an
exercise price of $1.00 per share. These options were issued to four
officers of OPC. Options to purchase 50% of the shares of common
stock will vest at the one-year anniversary of grant, 25% at the
two-year anniversary of grant and the balance of 25% at the
three-year anniversary of grant. These options will expire in five
years.
In June 1999, the Company adopted the 1999 Stock Option Plan. Under
the Plan, the Company may grant options to its employees, directors
and consultants for up to 1,600,000 shares of its common stock,
subject to adjustment. Incentive stock options may be granted at no
less than the fair market value of the Company's stock on the date of
grant, and in the case of an optionee who owns directly or indirectly
more than 10% of the outstanding voting stock, 110% of the market
price on the date of the grant. The maximum term of an option is ten
years.
F-51
<PAGE>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
12. Stockholders' Equity (Continued)
Stock Options (Continued)
Also, in June 1999, the Company granted options to employees to
purchase 351,000 shares of common stock and options to a consultant
to purchase 100,000 shares of common stock at an exercise price
ranging from $1.50 to $1.65. Options to purchase the shares vest
equally over three years. These options will expire in ten years. The
Company recorded expense of $50,000 in connection with the options
granted the consultant who is also a shareholder.
No options were exercised during the years ended October 31, 1999,
1998 and 1997.
The following is a summary of outstanding options:
<TABLE>
<CAPTION>
Weighted-
Average
Number Exercise Price Exercise
of Shares Per Share Price
--------- --------- -----
<S> <C> <C> <C>
Outstanding, November 1, 1996 -- $ -- $ --
Granted during the year ended
October 31, 1997 100,000 $ 1.00 $ 1.00
---------
Outstanding October 31, 1997 100,000 $ 1.00 $ 1.00
Granted during the year ended
October 31, 1998 1,000,000 $.50 - $1.00 $ .60
Canceled during the year
ended October 31, 1998 (50,000) $ 1.00 $ 1.00
---------
Outstanding October 31, 1998 1,050,000 $.50 - $1.00 $ .62
Granted during the year ended
October 31, 1999 451,000 $1.50 - $1.65 $ 1.53
---------
Outstanding October 31, 1999 1,501,000 $.50 - $1.65 $ .89
---------
Options exercisable, October
31, 1998 900,000 $.50 - $1.00 $ .56
---------
Options exercisable, October
31, 1999 975,000 $.50 - $1.00 $ .59
---------
</TABLE>
F-52
<PAGE>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
11. Stockholders' Equity (Continued)
The following table summarizes information about the options
outstanding at October 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- ---------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Outstandin Price
------ ----------- ------------ ----- ---------- -----
<S> <C> <C> <C> <C> <C>
$ .50 800,000 3.08 $ .50 800,000 $ .50
$1.00 250,000 3.10 $1.00 175,000 $1.00
$1.50 - $1.65 451,000 9.62 $1.53 - -
</TABLE>
SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS No.
123"), established a fair value method of accounting for employee
stock options and similar equity instruments. The fair value method
requires compensation cost to be measured at the grant date, based on
the value of the award, and recognized over the service period. SFAS
No. 123 allows companies to either account for stock-based
compensation under the provision of SFAS No. 123 or under the
provisions of APB No. 25, "Accounting for Stock Issued to Employees"
("APB No. 25"). The Company has elected to account for its
stock-based compensation in accordance with the provisions of APB No.
25 and has provided pro forma disclosures of net loss as if the fair
value method has been adopted.
For disclosure purposes, the fair value of each stock option grant is
estimated on the date of grant using the Black Scholes option-pricing
model with the following weighted average assumptions used for stock
options granted: annual dividends of $0.00 for all years, expected
volatility of 0% for all years, risk-free interest rate of 5.80% for
fiscal 1999, 5.96% for fiscal 1998 and 6.33% for fiscal 1997, and
expected life of ten years for options granted during fiscal 1999 and
five years for all other grants. The weighted-average fair value of
stock options granted in fiscal 1999, 1998 and 1997 was $.63, $.15
and $.27, respectively.
Under the above model, the total value of stock options granted in
fiscal 1999, 1998 and 1997 was $220,803, $139,569 and $26,772,
respectively, which would be amortized ratably on a pro forma basis
over the related vesting periods, which range from immediate vesting
to three years. Had the Company determined compensation cost for
these plans in accordance with SFAS No. 123, the Company's pro forma
net loss would have been ($5,071,314) in fiscal 1999, ($4,876,001) in
fiscal 1998 and ($184,870) in fiscal 1997, the Company's pro forma
loss per share would be ($.40) for fiscal 1999, ($.42) for fiscal
1998 and $.06 for fiscal 1997.
F-53
<PAGE>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
11. Stockholders' Equity (Continued)
Stock Warrants
On September 9, 1997, in connection with borrowings from related
parties, the Company granted warrants to such related parties to
purchase 500,000 shares of common stock. The exercise price is $1.20
for a period of three years. On December 25, 1997, the Company
granted warrants to purchase 25,000 shares of common stock to an
individual. The exercise price is $1.20 for a period of three years.
The Company has determined that the warrants did not have any
significant value at the date of issuance and, accordingly, no
portion of the proceeds of the related debt was allocated to the
warrants. None of the warrants were exercised during the years ended
October 31, 1999, 1998 and 1997.
12. Subsequent Events
On November 29, 1999, the Company acquired OmniCall, Inc.
("OmniCall"), a competitive local exchange carrier located in South
Carolina. The acquisition will be accounted for as a purchase and was
effectuated by the Company issuing 6,493,776 of its common stock for
all the issued and outstanding shares of OmniCall. The purchase price
will be allocated to the assets acquired and the liabilities assumed
based upon their estimated fair values
F-54
Consent of Independent Auditors
-------------------------------
We have issued our report dated February 21, 2000 (except for
Note 15, as to which the date is February 25, 2000), accompanying the
consolidated financial statements and schedule included in the Annual Report of
eLEC Communications, Inc. and Subidiaries on Form 10-K for the year ended
November 30, 1999. We hereby consent to the incorporation by reference of said
report in Registration Statement No. 333-19611 of eLEC Communications, Inc. on
Form S-8 and in Registration Statements No. 333-77485 and 333-94535 of eLEC
Communications, Inc. on Form S-3.
/s/NUSSBAUM YATES & WOLPOW, P.C.
- --------------------------------
NUSSBAUM YATES & WOLPOW, P.C.
Melville, New York
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Balance
Sheet and Income Statement and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-END> NOV-30-1999
<CASH> 591,299
<SECURITIES> 0
<RECEIVABLES> 1,669,078
<ALLOWANCES> 424,000
<INVENTORY> 876,460
<CURRENT-ASSETS> 3,539,457
<PP&E> 322,734
<DEPRECIATION> 111,036
<TOTAL-ASSETS> 7,297,137
<CURRENT-LIABILITIES> 3,640,838
<BONDS> 197,772
0
20
<COMMON> 1,128,715
<OTHER-SE> 2,329,792
<TOTAL-LIABILITY-AND-EQUITY> 7,297,137
<SALES> 4,170,031
<TOTAL-REVENUES> 4,188,577
<CGS> 0
<TOTAL-COSTS> 3,002,698
<OTHER-EXPENSES> 4,732,948
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,419
<INCOME-PRETAX> (3,562,488)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,562,488)
<DISCONTINUED> (3,943,065)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,505,553)
<EPS-BASIC> (0.86)
<EPS-DILUTED> (0.86)
</TABLE>
