SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended August 31, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to .
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Commission file number 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 (I.R.S. Employer
of Incorporation or Organization) Identification No.)
509 Westport Avenue, Norwalk, Connecticut 06851
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code 203-229-2400
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(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
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 the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 13,827,921 shares of
--------------------
common stock, par value $.10 per share, as of October 1, 2000.
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<PAGE>
PART 1. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
-----------------------------
eLEC Communications Corp. and Subsidiaries
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
Aug. 31, 2000 Nov. 30, 1999
------------- -------------
(Unaudited) (See note)
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 1,119,010 $ 591,299
Marketable securities 13,490,298 -
Accounts receivable 3,249,225 1,245,078
Inventory 496,688 876,460
Prepaid expenses 61,747 52,636
Other current assets 65,181 177,680
Land and building held for sale 587,133 596,304
------------- -----------
Total current assets 19,069,282 3,539,457
------------- -----------
Property and equipment at cost 1,279,204 322,734
Less accumulated depreciation 225,345 111,036
------------- -----------
Net property and equipment 1,053,859 211,698
------------- -----------
Other assets 332,081 97,108
Investment in and advances to subsidiary 380,913 424,575
Investments under the equity method 1,019,896 -
Investments under cost method 194,929 1,469,929
Goodwill 3,126,842 1,554,370
------------- -----------
5,054,661 3,545,982
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Total assets $ 25,177,802 $ 7,297,137
============= ===========
Liabilities and stockholders' equity
Current liabilities:
Loans payable to financial institutions and current
maturities of long-term debt $ 1,361,704 $ 523,695
Due to related parties - 34,725
Accounts payable 1,467,834 1,302,714
Accrued expenses and taxes 1,638,571 1,779,704
------------- -----------
Total current liabilities 4,468,109 3,640,838
------------- -----------
Long-term debt, less current maturities 119,970 197,772
------------- -----------
Stockholders' equity:
Preferred stock, $.10 par value, 1,000,000 shares authorized
Series B issued, 116 issued in 2000 and 196 issued in 1999 12 20
Common stock $.10 par value, 50,000,000 shares authorized,
13,825,249 issued (2000), 11,287,164 issued (1999) 1,382,525 1,128,715
Capital in excess of par value 24,340,574 18,808,397
Retained earnings (deficit) (18,511,235) (16,370,088)
Treasury stock at cost (27,500) (27,500)
Accumulated other comprehensive income 13,405,347 (81,017)
------------- -----------
Total stockholders' equity 20,589,723 3,458,527
------------- -----------
Total liabilities and stockholders' equity $25,177,802 $7,297,137
============= ===========
</TABLE>
See notes to the condensed financial statements
Note: The balance sheet at November 30, 1999 has been derived from audited
financial statements at that date but does not include all the information and
footnotes required by generally accepted accounting principles.
2
<PAGE>
eLEC Communications Corp. and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended For the Three Months Ended
Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 2000 Aug. 31, 1999
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Revenues $9,460,940 $2,696,745 $4,078,312 $1,029,455
Cost of revenues 6,678,187 1,845,654 2,917,494 713,846
----------- ----------- ----------- -----------
Gross profit 2,782,753 851,091 1,160,818 315,609
----------- ----------- ----------- -----------
Costs and expenses:
Selling and general and administrative 5,619,125 1,592,304 2,383,157 685,433
Depreciation and amortization 509,909 222,906 209,641 72,907
Equity in loss of investee 255,104 1,463,472 92,135 419,122
----------- ----------- ----------- -----------
Total costs and expenses 6,384,138 3,278,682 2,684,933 1,177,462
----------- ----------- ----------- -----------
Loss from operations (3,601,385) (2,427,591) (1,524,115) (861,853)
----------- ----------- ----------- -----------
Other (income) expense:
Interest expense 59,713 11,476 32,839 8,394
Interest income (33,583) (173) (7,601) -
Miscellaneous income, net (1,305,013) - (1,237,734) -
----------- ----------- ----------- -----------
(1,278,883) 11,303 (1,212,496) 8,394
----------- ----------- ----------- -----------
Loss from continuing operations (2,322,502) (2,438,894) (311,619) (870,247)
----------- ----------- ----------- -----------
Loss from discontinued operations - (3,259,999) - (1,614,579)
Gain (loss) on disposal of discontinued
operations 181,355 (720,230) 181,355 (720,230)
----------- ----------- ----------- -----------
181,355 (3,980,229) 181,355 (2,334,809)
----------- ----------- ----------- -----------
Net loss (2,141,147) (6,419,123) (130,264) (3,205,056)
Other comprehensive income, principally unrealized
gain on marketable securities 13,486,364 - 13,494,721 -
----------- ----------- ----------- -----------
Comprehensive income $11,345,217 ($6,419,123) $13,364,457 ($3,205,056)
=========== ============ =========== ===========
Basic and diluted income (loss) per share
Continuing operations ($0.18) ($0.28) (0.02) ($0.09)
Discontinued operations 0.01 ( 0.45) 0.01 (0.22)
----------- ----------- ----------- -----------
Net loss ($0.17) ($0.73) ($0.01) ($0.31)
=========== ============ =========== ===========
Weighted average number of common shares
outstanding 12,919,425 8,740,979 13,590,597 10,209,134
=========== ============ =========== ===========
</TABLE>
See notes to the condensed consolidated
financial statements.
3
<PAGE>
eLEC Communications Corp. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
Aug. 31, 2000 Aug. 31, 1999
------------- -------------
<S> <C> <C>
Net cash (used in) provided by operating activities: ($4,362,372) $248,169
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (637,796) (68,896)
Proceeds from sale of marketable securities 1,305,013 --
Other 35,944 30,968
----------- -----------
Net cash provided by (used in) investing activities 703,161 (37,928)
----------- -----------
Cash flows from financing activities:
Increase (decrease) in loans payable to financial institutions
and related parties 356,060 (1,284,814)
Proceeds from exercise of warrants 1,751,609 --
Proceeds from private placement of common stock 1,829,500 364,100
Proceeds from private placement of preferred stock -- 196,000
Proceeds from exercise of stock options 238,918 291,000
----------- -----------
Net cash provided by (used in) financing activities 4,176,087 (433,714)
----------- -----------
Effect of exchange rate changes on cash 10,835 54,611
----------- -----------
Increase (decrease) in cash and cash equivalents 527,711 (168,862)
Cash and cash equivalents at beginning of period 591,299 352,489
----------- -----------
Cash and cash equivalents at the end of period $ 1,119,010 $ 183,627
=========== ===========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 63,505 $ 243,997
----------- -----------
</TABLE>
See Part II, Item 2., Changes in Securities, for non-cash financing activities
during the nine-month period ending August 31, 2000.
See notes to the condensed consolidated financial statements.
4
<PAGE>
eLEC COMMUNICATIONS CORP.
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Notes To Condensed Consolidated Financial Statements (Unaudited)
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Note 1-Basis of Presentation
----------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine-month period ended August 31, 2000
are not necessarily indicative of the results that may be expected for the year
ended November 30, 2000. For further information, refer to the consolidated
financial statements and footnotes thereto included in our Annual Report on Form
10-K for the year ended November 30, 1999.
Note 2-Financing Arrangements
-----------------------------
On March 3, 1999, our subsidiary, Essex Communications, Inc. ("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 agreement was amended in December 1999 to increase to
$1,000,000, and again in August 2000, to increase to $2,000,000 the amount of
eligible receivables Essex could sell to RFC. The 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 August 31, 2000, Essex had borrowings of approximately
$917,000 under the Agreement.
Our subsidiary, Telecarrier Services Inc. ("Telecarrier"), has a $150,000 line
of credit with a bank. Amounts drawn on the line of credit bear interest at the
rate of 9.75% per annum. The line is payable on demand subject to sixty (60)
days written notice. At August 31, 2000, the entire line was utilized.
Our Canadian subsidiary, Sirco International (Canada) Ltd., has a real property
mortgage loan with its bank, National Bank of Canada. The mortgage loan was
payable in monthly installments of approximately $3,300, including interest at
10.25% per annum, with a balloon payment of approximately $295,000 due in July
2000. We have informed the National Bank of Canada of our intention to sell this
property and the bank has agreed to continue the mortgage loan under a demand
note until the property is sold. We are actively pursuing potential buyers for
this property and intend to sell the property upon receiving an acceptable
offer. At August 31, 2000, the mortgage loan was approximately $295,000.
5
<PAGE>
Note 3- Marketable Securities
-----------------------------
On August 9, 2000, pursuant to an agreement between the shareholders of Access
One Communications Corp. ("Access One") and Talk.Com Inc. ("Talk"), we exchanged
all of our remaining ownership interest in Access One (3,284,598 shares of
Access) for 1,876,911 shares of Talk, a company whose shares are traded. As of
August 31, 2000, we held 1,876,911 shares of Talk and a warrant to purchase an
additional 285,714 shares. On August 31, 2000, Talk shares closed at $ 7.19 per
share. In accordance with Statement of Financial Accounting Standards No. 115,
we have accounted for this investment in Talk shares as available-for-sale
securities, and reported such securities at fair value, with unrealized gains
and losses excluded from earnings and reported in other comprehensive income.
Our investment in Talk is subject to potentially significant market
fluctuations. Pursuant to the agreement, sale of any of the Talk shares is
restricted until October 31, 2000. Further, 187,691 of our Talk shares (10%)
have been placed in escrow for a period of one year ending on August 9, 2001 to
secure certain representations and warranties made by shareholders of Access One
in connection with the transaction.
During the quarter ended August 31, 2000, prior to the aforementioned exchange,
we sold 745,042 shares of Access. Since our investment in Access had already
been reduced to zero value (accounted for on the equity method), the sale
resulted in a net gain of $ 1,237,107, which is included in miscellaneous
income, net. Included in the above were 99,640 shares sold on behalf of a
related party for which no gain has been recorded.
Note 4-Discontinued Operations
------------------------------
On August 11, 1999, we sold certain assets and assigned certain licenses of our
former domestic luggage division to Interbrand L.L.C., an unaffilated accessory
company, and subsequently discontinued operations of our wholesale luggage
segment.
The operating results of our former wholesale luggage segment have been
accounted for as a discontinued operation and the results of operations have
been excluded from continuing operations in the condensed consolidated
statements of operations for all periods presented, including the prior period
financial statements in which we have restated the operating results of our
former 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. Operating results of the
discontinued operation for the three and nine-month periods ending August 31,
2000 and August 31, 1999 are as follows:
<TABLE>
<CAPTION>
For the Nine Months Ended For the Three Months Ended
Aug.31, 2000 Aug. 31, 1999 Aug. 31, 2000 Aug. 31, 1999
-------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenues $ - $6,267,355 $ - $2,360,489
Cost of revenues - 5,618,226 - 2,139,178
Operating expenses - 3,909,128 - 1,835,890
Loss from discontinued operations - $3,259,999) - ($1,614,579)
---------- ---------- ---------- -----------
</TABLE>
6
<PAGE>
Note 5 - Operating Segment Information
--------------------------------------
We are organized into two operating segments, a full-service telecommunications
segment and a specialty retail segment. A discussion of segment results is
presented in "Item 2". Management's Analysis and Discussion of Financial
Condition and Results of Operations.
Segment information is summarized as follows:
<TABLE>
<CAPTION>
For the Nine Months Ended For the Three Months Ended
Aug.31, 2000 Aug. 31, 1999 Aug. 31, 2000 Aug. 31, 1999
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Telecommunications
Revenues $7,965,728 $1,331,310 $3,560,374 $532,105
Loss from continuing operations ($2,413,654) ($2,390,672) ($373,784) ($866,408)
Specialty retail
Revenues $1,495,212 $1,365,435 $517,938 $497,350
Income (loss) from continuing operations $91,152 ($48,222) $62,165 ($3,839)
Total
Revenue $9,460,940 $2,696,745 $4,078,312 $1,029,455
Loss from continuing operations ($2,322,502) ($2,438,894) ($311,619) ($870,247)
</TABLE>
Note 6 - Major Customer
-----------------------
During the nine months and three months ended August 31, 2000, we had
telecommunications revenue from one customer which accounted for 19.3% and 27.2%
of telecommunications revenue.
Note 7 - Income Taxes
---------------------
At November 30, 1999, we 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.
As of August 31, 2000, we had an unrealized gain on our ownership of Talk of
approximately $13,490,000. Upon the sale of the Talk stock, the net operating
loss will be reduced to the extent of any realized gain on the sale.
Accordingly, deferred taxes have not been provided on the unrealized gain.
7
<PAGE>
Item 2. Management's Analysis and Discussion of Financial Condition and Results
------------------------------------------------------------------------
of Operations
-------------
The statements contained in this Report that are not historical facts are
"forward-looking statements" that 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. We wish 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 our operations, markets, growth, services, products and other
factors discussed in our 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 us, and actual events
may differ from the assumptions underlying statements that have been made
regarding anticipated events. Factors that may cause our actual results,
performance or achievements, 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 our
business plan; (2) our ability to maintain, attract and integrate internal
management, technical information and management information systems; (3) the
time and expense to construct our 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) our ability to market our services to current and
new customers and to generate customer demand for our products and services in
the geographical areas in which we can operate; (6) our success in gaining
regulatory approval to access new markets; (7) our ability to negotiate and
maintain suitable interconnection agreements with 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 (11) general economic
conditions. All written and oral forward-looking statements made in connection
with this Report that are attributable to us or persons acting on our 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.
Overview
--------
eLEC Communications Corp. is a full-service telecommunications company that
focuses on developing integrated telephone service in the emerging competitive
local exchange carrier ("CLEC") 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
customers and the growing marketplace demand from small- and medium-sized
businesses for reliability and speed.
The nature of our telecommunications business is rapidly evolving and has a
limited operating history. It has rapidly grown and is now substantially larger
in revenues than a specialty retail business we also own, which sells products
over the Internet and in three retail stores. As a result, we believe
period-to-period comparisons of our revenues and operating results, including
our network operations and other operating expenses as a percentage of total
revenue, are not
8
<PAGE>
meaningful and should not be relied upon as indicators of future performance. We
also believe our historical growth rates are not indicative of future growth
rates.
We primarily utilize the Unbundled Network Elements Platform ("UNE-P") to
provide local telephone service to our customers. The UNE-P service offering
allows us to lease, on an as-needed basis, multiple unbundled network elements
and combine them into our own full service platform. The major categories of
network elements include loops, local circuit-switching facilities, operations
support systems, network interface devices, transport between central offices,
and signaling and call-related databases. We have chosen this platform to grow
our customer base because it allows us to rapidly enter new markets with minimal
capital expenditures. For example, we can build a customer base without
deploying either a local switch or last-mile infrastructure. Instead of buying
and maintaining our own equipment in the field, we utilize the reliable
equipment owned by the Regional Bell Operating Companies and focus our resources
on building a customer base.
We are in the process of applying for certification in 48 states to operate as a
facilities-based CLEC so that we can operate under the UNE-P service offering in
the entire continental United States. We are also building a network operations
center in Norwalk, Connecticut to provide us with surveillance and deployment
capabilities for high-speed Internet access via Digital Subscriber Lines
("DSL"). We plan to build our own packet-switched data network, initially to be
offered to our existing voice customer base, and utilizing the packet-switched
technology to route local and long distance voice traffic over the Internet.
Building and expanding our business has required and will continue to require us
to make significant expenditures in excess of the amounts of cash that our
business is generating. As part of our "smart build" network strategy, we defer
the purchase of equipment in the field and focus first on building our customer
base. We believe our strategy of leasing the circuit-switched networks and
building our own packet-switched network, will help our operations to generate
positive cash flow much sooner than the strategy used by other CLECs of building
a circuit-switched network before a customer base has been established. We have
experienced operating losses and generated negative cash flow since we began
operating as a CLEC and we expect to continue to generate negative cash flow for
a period of time while we continue to expand our network and develop product
offerings and our customer base. We cannot assure you that our revenue or
customer base will increase or that we will be able to achieve or sustain
positive cash flow.
9
<PAGE>
Three and Nine Months Ended August 31, 2000 vs. August 31, 1999
---------------------------------------------------------------
Continuing operations
Our net revenues for the three and nine-month periods ended August 31, 2000
increased by approximately $3,049,000 and $6,764,000, respectively, or
approximately 296% and 251%, respectively, to approximately $4,078,000 and
$9,461,000, respectively, as compared to approximately $1,029,000 and
$2,697,000, respectively, reported for the same periods in fiscal 1999.
Net revenues of our telecommunications division increased by approximately
$3,028,000 and $6,635,000, respectively, or approximately 569% and 498%,
respectively, to approximately $3,560,000 and $7,966,000, respectively, for the
three and nine-month periods ending August 31, 2000 from approximately $532,000
and $1,331,000, respectively, reported for the same periods in fiscal 1999. The
increase was attributable to the rapid growth in the number of installed access
lines that we provisioned during the twelve months ended August 31, 2000 from
approximately 4,200 installed access lines as of August 31, 1999 to
approximately 31,000 installed access lines as of August 31, 2000.
Net revenues of our specialty retail division, consisting of the operations of
Airline Ventures, Inc. ("AVI"), increased by approximately $21,000 and $130,000,
respectively, for the three and nine-month periods ending August 31, 2000 to
approximately $518,000 and $1,495,000, respectively, from approximately $497,000
and $1,365,000, respectively, reported in the same fiscal periods in 1999. 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 sold on the E-commerce site, www.avishop.com.
Our gross profit for the three and nine-month periods ending August 31, 2000
increased by approximately $845,000 and $1,932,000, respectively, to
approximately $1,161,000 and $2,783,000, respectively, from approximately
$316,000 and $851,000, respectively, reported in the same fiscal periods in
1999, and the gross profit percentage decreased to 28.5% from 30.7% and to 29.4%
from 31.6% for the three and nine months ended August 31, 2000 as compared to
the prior fiscal periods. The decrease in gross profit percentage is
attributable to the significant increase in telecommunications revenue during
the fiscal 2000 periods. Although gross margins for the telecommunications
division have increased in the fiscal 2000 periods, they remain lower than the
gross margins of the specialty retail division. The telecommunications division
recorded gross margins of approximately 26.1% and 26.8% for the three and
nine-month periods ending August 31, 2000, as compared to gross margins of
approximately 25.9% and 21.5% for the three and nine-month periods ending August
31, 1999. We anticipate that the gross margins in our telecommunications
division will increase somewhat in the fourth quarter as we are able to switch
more of our customer base to the UNE-P service offering. Approximately 66% of
our customers were on the UNE-P service offering as of August 31, 2000. Our
specialty retail division has recorded gross margins of approximately 44.6% and
43.2% for the three and nine-month periods ending August 31, 2000, as compared
to approximately 35.7% and 41.4% in the comparable periods in 1999. We expect
the gross margin of our specialty retail segment to continue at its current
level of over 40%.
Selling, general and administrative expenses increased by approximately
$1,698,000 and $4,027,000, respectively, to approximately $2,383,000 and
$5,619,000, respectively, for the three and nine months ending August 31, 2000
from approximately $685,000 and $1,592,000, respectively, reported in prior
fiscal periods. A major portion of this increase was attributable to the costs
of our expanded marketing efforts and to the labor and facility expenses
incurred by our telecommunications division. This increase in operating expenses
is directly related to the significant increase in telecommunications revenues
in the three and nine months ending August 31, 2000 as compared to the prior
fiscal period in 1999.
10
<PAGE>
At August 31, 2000, we owned approximately 27% of the capital stock of
RiderPoint, Inc. ("RiderPoint"). RiderPoint specializes in the development of
comparative rating insurance software and sells motorcycle insurance through its
wholly owned subsidiary. As our investment in RiderPoint is accounted for under
the equity method of accounting, we are required to include a portion of
RiderPoint's net loss in our results of operations. For the three and nine
months ending August 31, 2000, we have recorded a loss of approximately $92,000
and $255,000, respectively, relating to our investment in RiderPoint. As of
August 31, 1999, we owned 19% of RiderPoint, which was at such date accounted
for under the cost method of accounting.
At August 31, 1999, we were the largest shareholder of Access One, owning
approximately 39% of Access One' capital stock. As our investment in Access One
was accounted for under the equity method of accounting, we were required to
include a portion of Access One's net loss in our results of operations. For the
three and nine months ending August 31, 1999, we recorded losses of
approximately $419,000 and $1,463,000, respectively, relating to our investment
in Access One. As of November 30, 1999, our investment in Access One was
recorded at zero. Subsequent to that date, we no longer recognized any operating
losses generated by Access One. We sold approximately 16% of our investment in
Access One during the quarter ended August 31, 2000 and recorded a net gain on
the sale of approximately $1,237,000. On August 9, 2000, pursuant to an
agreement between the shareholders of Access One and Talk, a Company whose
shares are publically traded, we exchanged all of our remaining ownership
interest in Access One for 1,876,911 shares of Talk and a warrant to purchase
285,714 additional shares of Talk.
Interest expense for the three and nine-month periods ending August 31, 2000
increased by approximately $24,000 and $48,000, respectively, from the amount
reported in the three and nine-month periods ending August 31, 1999 primarily
due to increased average borrowings.
Miscellaneous income of approximately $1,305,000 for the nine-month period
ending August 31, 2000 resulted from the sale of shares of Access One common
stock.
Discontinued operations
On August 11, 1999, we sold certain assets and assigned certain licenses of our
former domestic luggage division to Interbrand L.L.C., an unaffilated accessory
company, and subsequently discontinued operations of our wholesale luggage
segment.
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 the condensed consolidated statements of
operations for all periods presented, including the prior period financial
statements in which we have restated the operating results of our former
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.
We reported no results from discontinued operations for the three and nine-month
periods ending August 31, 2000 as compared to losses of approximately $1,615,000
and $3,260,000, respectively, for the three and nine-month periods ending August
31, 1999.
11
<PAGE>
For the three and nine-month periods ending August 31, 2000, we reported gains
on disposal of discontinued operations of approximately $181,000, as compared to
losses on disposal of discontinued operations of approximately $720,000 reported
in prior fiscal period. The gains were a result of the liquidation of certain
liabilities at a discount from the amount originally incurred.
Liquidity and Capital Resources
At August 31, 2000, we had cash and cash equivalents available of approximately
$1,119,000, and working capital of approximately $14,601,000 as compared to cash
and cash equivalents available of approximately of $591,000, and negative
working capital of approximately $101,000 at November 30, 1999.
Net cash (used in) provided by operating activities (including discontinued
operations) aggregated approximately ($4,362,000) and $248,000 in the nine
months ended August 31, 2000 and 1999, respectively. The increase in net cash
used in operating activities in fiscal 2000 was primarily the result of an
increase of approximately $2,300,000 in accounts receivable, resulting from the
significant increase in revenues recorded by our telecommunications division and
the operating loss for the period.
Net cash provided by (used in) investing activities aggregated approximately
$703,000 and ($38,000) in the nine months ended August 31, 2000 and 1999,
respectively. The source of cash provided from investing activities in fiscal
2000 was the proceeds from the sale of marketable securities offset by the
purchase of property and equipment.
Net cash provided by (used in) financing activities aggregated approximately
$4,176,000 and ($434,000) in the nine months ended August 31, 2000 and 1999,
respectively. For the period ended August 31, 2000, net cash provided by
financing activities resulted primarily from the proceeds of short-term
borrowings of approximately $356,000; the proceeds from the exercise of warrants
of approximately $1,752,000; the proceeds from a private placement of common
stock of approximately $1,830,000; and the proceeds from the exercise of stock
options of approximately $239,000.
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 agreement
was amended in December 1999 to increase to
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$1,000,000, and again in August 2000, to increase to $2,000,000 the amount of
eligible receivables Essex could sell RFC. The 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 August 31, 2000, Essex had borrowings of approximately
$917,000 under the Agreement.
Our subsidiary, Telecarrier, has a $150,000 line of credit with a bank. Amounts
drawn on the line of credit bear interest at the rate of 9.75% per annum. The
line is payable on demand subject to sixty (60) days written notice. At August
31, 2000, the entire line was utilized.
Our Canadian subsidiary, Sirco International (Canada) Ltd., has a real property
mortgage loan with its bank, National Bank of Canada. The mortgage loan was
payable in monthly installments of approximately $3,300, including interest at
10.25% per annum, with a balloon payment of approximately $295,000 due in July
2000. We have informed the National Bank of Canada of our intention to sell this
property and the bank has agreed to extend the monthly payments on the mortgage
loan under a demand note until the property is sold. We are actively pursuing
potential buyers for this property and intend to sell the property upon receipt
of an acceptable offer. At August 31, 2000, the mortgage loan was approximately
$295,000.
For the nine months ended August 31, 2000, we added approximately $956,000 in
capital expenditures. We plan to make an additional $300,000 in capital
expenditures in fiscal 2000 in conjunction with the establishment of a network
operations center in Norwalk, Connecticut and with the planned expansion to
become a nationwide CLEC. We anticipate financing these expenditures through
equipment leases and by using our existing working capital.
On August 9, 2000, Talk.com Inc. ("Talk"), an integrated communications
provider, merged with Access One. As a result of the merger, we own
approximately 1.9 million shares of Talk's common stock and have warrants for
approximately 286,000 additional shares. The stock becomes freely tradable after
October 31, 2000. At August 31, 2000, our investment in Talk was valued at
approximately $13,490,000.
Although our operating activities may provide a source of cash in certain
periods, to the extent we continue to experience rapid growth in the future, we
anticipate that our operating and investing activities will use large amounts of
cash in excess of the cash generated from operating activities. Consequently,
future rapid growth will require us to liquidate, from time to time, a portion
of our investment in Talk, or obtain additional equity or debt financing that
may not be available on attractive terms, or at all, or may be dilutive.
Although we believe we have negotiated an appropriate debt facility to fund some
of our anticipated growth, and we believe we can monetize portions of the Talk
stock to fund our remaining growth capital needs, changes in the value or
liquidity of the Talk stock may require us to modify, delay or abandon our
current business plan, which is likely to materially and adversely affect our
business.
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eLEC COMMUNICATIONS CORP.
PART II-OTHER INFORMATION
Item 2. Changes in Securities
In August 2000, we issued an aggregate of 225,000 shares of
our common stock in conjunction with a private equity
placement. Such transaction was effected pursuant to Section
4(2) of the Securities Act of 1933, as amended
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
(1) Audit Committee Charter approved and adopted by the Board of Directors
of the Company, on May 24, 2000.
27-- Financial Data Schedule.
(b) Reports on Form 8-K
None.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
eLEC Communications Corp.
October 16, 2000 By: /s/ Paul H. Riss
------------------------------------- -------------------------
Date Paul H. Riss
Chief Executive Officer
(Principal Financial and
Accounting Officer)
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EXHIBIT INDEX
No. Description Page No.
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27 Financial Data Schedule. 18
17
