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 May 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
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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 203-750-1000
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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: 13,600,249 shares of
common stock, par value $.10 per share, as of July 1, 2000.
<PAGE>
PART 1. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
<TABLE>
<CAPTION>
eLEC Communications Corp. and Subsidiaries
Condensed Consolidated Balance Sheets
May 31, 2000 Nov. 30, 1999
------------ -------------
(Unaudited) (See note)
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 809,286 $ 591,299
Accounts receivable 2,648,753 1,245,078
Inventory 541,123 876,460
Prepaid expenses 90,584 52,636
Other current assets 49,007 177,680
Land and building held for sale 585,614 596,304
------------ ------------
Total current assets 4,724,367 3,539,457
------------ ------------
Property and equipment at cost 878,731 322,734
Less accumulated depreciation 190,740 111,036
------------ ------------
Net property and equipment 687,991 211,698
------------ ------------
Other assets 265,241 97,108
Investment in and advances to subsidiary 395,467 424,575
Investments under the equity method 998,125 --
Investments under cost method 194,929 1,469,929
Goodwill 3,271,160 1,554,370
------------ ------------
5,124,922 3,545,982
------------ ------------
Total assets $ 10,537,280 $ 7,297,137
============ ============
Liabilities and stockholders' equity Current liabilities:
Loans payable to financial institutions and current
maturities of long-term debt $ 450,549 $ 523,695
Due to related parties -- 34,725
Accounts payable 1,746,835 1,302,714
Accrued expenses and taxes 1,666,636 1,779,704
------------ ------------
Total current liabilities 3,864,020 3,640,838
------------ ------------
Long-term debt, less current maturities 25,068 197,772
------------ ------------
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,
13,590,636 issued (2000), 11,287,164 issued (1999) 1,359,064 1,128,715
Capital in excess of par value 23,900,867 18,808,397
Retained earnings (deficit) (18,380,971) (16,370,088)
Treasury stock at cost (27,500) (27,500)
Treasury stock held by equity investee (113,906) --
Accumulated other comprehensive income (loss),
accumulated foreign currency translation adjustment (89,374) (81,017)
------------ ------------
Total stockholders' equity 6,648,192 3,458,527
------------ ------------
Total liabilities and stockholders' equity $ 10,537,280 $ 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
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended For the Three Months Ended
May 31, 2000 May 31, 1999 May 31, 2000 May 31, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 5,382,628 $ 1,667,290 $ 3,156,395 $ 952,380
Cost of revenues 3,760,693 1,131,808 2,276,237 605,485
------------ ----------- ------------ -----------
Gross profit 1,621,935 535.482 880,158 346,895
------------ ----------- ------------ -----------
Costs and expenses:
Selling and general and administrative 3,235,968 910,190 1,971,610 538,383
Depreciation and amortization 300,268 149,999 194,903 61,572
Equity in loss of investee 162,969 1,044,350 85,648 619,649
------------ ----------- ------------ -----------
Total costs and expenses 3,699,205 2,104,539 2,252,161 1,219,604
------------ ----------- ------------ -----------
Loss from operations (2,077,270) (1,569,057) (1,372,003) (872,709)
------------ ----------- ------------ -----------
Other (income) expense:
Interest expense 26,874 3,082 7,711 2,402
Interest income (25,982) (3,492) (17,731) (3,459)
Miscellaneous income, net (67,279) -- -- --
------------ ----------- ------------ -----------
(66,387) (410) (10,020) (1,057)
------------ ----------- ------------ -----------
Loss from continuing operations (2,010,883) (1,568,647) (1,361,983) (871,652)
------------ ----------- ------------ -----------
Loss from discontinued operations -- (1,645,420) -- (824,442)
------------ ----------- ------------ -----------
Net loss ($ 2,010,883) ($3,214,067) ($ 1,361,983) ($1,696,094)
============ =========== ============ ===========
Basic and diluted loss per share
Continuing operations ($ 0.16) ($ 0.20) ($ 0.10) ($ 0.09)
Discontinued operations -- (0.20) (0.09) (0.09)
Net loss ($ 0.16) ($ 0.40) ($ 0.10) ($ 0.18)
============ =========== ============ ===========
Weighted average number of common shares
outstanding 12,582,006 7,998,835 13,426,574 9,428,410
============ =========== ============ ===========
See notes to the condensed consolidated financial
statements
</TABLE>
3
<PAGE>
eLEC Communications Corp. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
May 31, 2000 May 31, 1999
------------- -------------
<S> <C> <C>
Net loss ($2,010,883) ($3,214,067)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 300,268 149,999
Provision for losses in accounts receivable 169,663 70,916
Loss on disposal of fixed assets -- 167,547
Equity in loss of investee 162,969 1,044,350
Changes in operating assets and liabilities:
Accounts receivable (1,573,338) 180,326
Inventory 335,337 568,324
Prepaid expenses (37,948) (81,842)
Other current assets 139,363 13,093
Other assets (168,133) 99,204
Accounts payable and accrued expenses 331,053 393,586
----------- -----------
Net cash used in operating activities: (2,351,649) (608,564)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (555,997) (53,087)
Proceeds from the sale of property and equipment -- 6,000
Acquisition of Telecarrier Services Inc. (7,718)
Proceeds from agreement to sell subsidiary 29,108 --
----------- -----------
Net cash used in investing activities (534,607) (47,087)
----------- -----------
Cash flows from financing activities:
(Decrease) increase in loans payable to financial institutions
and related parties (280,575) 114,172
Proceed from issuance of preferred stock -- 196,000
Proceeds from exercise of warrants 1,751,609 --
Proceeds from private placement of common stock 1,379,500 364,100
Proceeds from exercise of stock options 225,750 32,625
----------- -----------
Net cash provided by financing activities 3,076,284 706,897
----------- -----------
Effect of exchange rate changes on cash 27,959 (27,981)
----------- -----------
Increase in cash and cash equivalents 217,987 23,265
Cash and cash equivalents at beginning of period 591,299 352,489
----------- -----------
Cash and cash equivalents at the end of period $ 809,286 $ 375,754
=========== ===========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest
Continuing operations $ 41,889 $ 3,082
----------- -----------
Discontinued operations -- $ 156,548
-----------
Income taxes -- --
</TABLE>
SeePart II, Item 2., Changes in Securities, for non-cash financing activities
during the six-month period ending May 31, 2000.
See notes to the condensed consolidated financial statements.
4
<PAGE>
eLEC COMMUNICATIONS CORP.
-------------------------
Notes To Condensed Consolidated Financial Statements (Unaudited)
----------------------------------------------------------------
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 six-month period ended May 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.
For the six-month period ending May 31, 2000, there were no significant
non-owner sources of income or expense. Accordingly, a separate statement of
comprehensive income has not been presented herein.
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. In December 1999, Essex increased the amount of eligible
receivables it can sell to RFC to $1,000,000. The Receivables Sales 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 May 31, 2000, Essex had no
borrowings 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 May 31, 2000, the entire line was utilized.
Our Canadian subsidiary, Sirco International (Canada) Ltd., has a real property
mortgage with its bank, National Bank of Canada. The mortgage 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 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 May 31, 2000, the mortgage was
approximately $295,000.
5
<PAGE>
Note 3-Investment in Subsidiary
-------------------------------
In March 2000, we formed a wholly owned subsidiary, TelcoSoftware.com Corp.
("Telco"). On April 4, 2000, Telco purchased all of the assets and business
operations of Telecom Software Solutions, Inc., a telecommunications billing and
software licensing entity, in exchange for 100,000 shares of our common stock
and a cash payment upon the completion of certain events.
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., a non-related 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 six-month periods ending May 31, 2000
and May 31, 1999 are as follows:
<TABLE>
<CAPTION>
For the Six Months Ended For the Three Months Ended
May 31, 2000 May 31, 1999 May 31, 2000 May 31, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ -- $ 3,906,866 $ -- $ 2,134,416
Cost of revenues -- 3,479,048 -- 1,936,363
Operating expenses -- 1,971,443 -- 889,917
Other expense -- 101,795 -- 132,578
---------------- ----------- ------------- -----------
Loss from discontinued operations -- ($1,645,420) -- ($ 824,442)
================ =========== ============= ===========
</TABLE>
6
<PAGE>
Item 2. Management's Analysis and Discussion of Financial Condition and Results
of Operations
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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
7
<PAGE>
our network operations and other operating expenses as a percentage of total
revenue, are not 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, taking into
consideration 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.
Three and Six Months Ended May 31, 2000 vs. May 31, 1999
--------------------------------------------------------
Continuing operations
Our net revenues for the three and six-month periods ended May 31, 2000
increased by approximately $2,204,000 and $3,715,000, respectively, or
approximately 231% and 223%, respectively, to approximately $3,156,000 and
$5,383,000, respectively, as compared to approximately $952,000 and $1,667,000,
respectively, reported for the same periods in fiscal 1999.
8
<PAGE>
Net revenues of our telecommunications division increased by approximately
$2,218,000 and $3,606,000, respectively, or approximately 508% and 451%,
respectively, to approximately $2,655,000 and $4,405,000, respectively, for the
three and six-month periods ending May 31, 2000 from approximately $437,000 and
$799,000, 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 May 31, 2000 from
approximately 2,100 installed access lines as of May 31, 1999 to approximately
24,500 installed access lines as of May 31, 2000.
Net revenues of our specialty retail division, consisting of the operations of
Airline Ventures, Inc. ("AVI"), decreased by approximately $14,000 and increased
by approximately $109,000, respectively, for the three and six-month periods
ending May 31, 2000 to approximately $502,000 and $977,000, respectively, from
approximately $516,000 and $868,000, 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 six-month periods ending May 31, 2000
increased by approximately $533,000 and $1,087,000, respectively, to
approximately $880,000 and $1,622,000, respectively, from approximately $347,000
and $535,000, respectively, reported in the same fiscal periods in 1999, and the
gross profit percentage decreased to 27.9% from 36.4% and to 30.1% from 32.1%
for the three and six months ended May 31, 2000 as compared to the prior fiscal
period. 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 25.2% and 27.4% for the three and six month periods
ending May 31, 2000, as compared to gross margins of approximately 24.8% and
18.5% for the three and six month periods ending May 31, 1999. We anticipate
that the gross margins in our telecommunications division will decrease in the
third quarter until we are able to switch more of our customer base to the UNE-P
service offering. Approximately 65% of our customers were on the UNE-P service
offering as of May 31, 2000. Our specialty retail division has recorded gross
margins of between 42% and 46% for the three and six month periods ending May
31, 2000 and 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
$1,433,000 and $2,326,000, respectively, to approximately $1,972,000 and
$3,236,000, respectively, for the three and six months ending May 31, 2000 from
approximately $538,000 and $910,000, respectively, reported in prior fiscal
period. 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 six months ending May 31, 2000 as compared to the prior fiscal period in
1999.
At May 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 of accounting, we are required to include a portion of RiderPoint's net
loss in our results of operations. For the three and six months ending May 31,
9
<PAGE>
2000, we have recorded a loss of approximately $86,000 and $163,000,
respectively, relating to our investment in RiderPoint. As of May 31, 1999, we
owned 19% of RiderPoint, which was accounted for under the cost method of
accounting.
At May 31, 1999, we were the largest shareholder of Access One Communications
Inc. ("Access One"), owning approximately 30.6% 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 six months ending May 31, 1999, we
recorded losses of approximately $620,000 and $1,044,000, respectively, relating
to our investment in Access One. As of November 30, 1999, our investment in
Access One was recorded at zero. Consequently, we no longer recognize our share
of any operating losses generated by Access One.
Interest expense for the three and six-month periods ending May 31, 2000
increased by approximately $5,000 and $24,000, respectively, from the amount
reported in the three and six-month periods ending May 31, 1999 primarily due to
increased average borrowings.
Miscellaneous income for the six-month period ending May 31, 2000 of $67,000
resulted primarily 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
domestic luggage division to Interbrand L.L.C., a non-related 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 six-month
periods ending May 31, 2000 as compared to losses of approximately $824,000 and
$1,645,000, respectively, for the three and six-month periods ending May 31,
1999.
Liquidity and Capital Resources
-------------------------------
At May 31, 2000, we had cash and cash equivalents available of approximately
$809,000, and working capital of approximately $860,000 as compared to cash and
cash equivalents available of approximately of $376,000, and working capital of
approximately $126,000 at May 31, 1999.
Net cash used in operating activities (including discontinued operations for the
first half of fiscal 1999) aggregated approximately $2,352,000 and $609,000 in
fiscal periods ended May 31, 2000 and 1999, respectively. The increase in net
cash used in operating activities of approximately $1,754,000 was primarily the
result of an increase of approximately $1,573,000 in accounts receivable,
resulting from the significant increase in revenues recorded by our
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<PAGE>
telecommunications division, as compared to the comparable quarterly period in
1999, for which accounts receivable was a source of cash of approximately
$180,000. The impact of this change in accounts receivable was partially offset
by the decrease in the net loss in the first half of fiscal 2000 as compared to
the prior year period. 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. In December 1999, Essex increased the amount of eligible receivables it
can sell to RFC to $1,000,000. The Receivables Sales Agreement does not transfer
the risk of loss to RFC, and has been treated by the Company as a financing for
financial statement purposes. As of May 31, 2000, Essex had no borrowings under
the Agreement.
Net cash used in investing activities aggregated approximately $535,000 and
$47,000 in the six months ended May 31, 2000 and 1999, respectively. Cash used
in investing activities in fiscal 2000 was for the purchase of fixed assets and
the acquisition of Telecarrier. The source of cash provided from investing
activities in fiscal 2000 was the proceeds from the 1992 sale of a subsidiary.
Cash used in investing activities fiscal 1999 was for the purchase of fixed
assets offset by the proceeds from the sale of assets.
Net cash provided by financing activities aggregated approximately $3,076,000
and $707,000 in the six months ended May 31, 2000 and 1999, respectively. For
the period ended May 31, 2000, net cash provided by financing activities
resulted primarily from the proceeds from the exercise of warrants of
approximately $1,752,000; the net proceeds from a private placement of common
stock of approximately $1,380,000; and the proceeds of the exercise of stock
options of approximately $226,000. For the six-month period ended May 31, 1999,
net cash provided by financing activities resulted from the net proceeds of the
issuance of preferred stock of approximately $196,000; the net proceeds from a
private placement of common stock of approximately $364,000 and the proceeds
from the exercise of stock options of approximately $32,000.
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 May 31,
2000, the entire line was utilized.
Our Canadian subsidiary, Sirco International (Canada) Ltd., has a real property
mortgage with its bank, National Bank of Canada. The mortgage 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 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 May 31,
2000, the mortgage was approximately $295,000.
For the six months ended May 31, 2000, we spent approximately $556,000 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.
11
<PAGE>
As of May 31, 2000, we owned approximately 18% of the outstanding capital stock
on a fully-diluted basis of Access One. On March 24, 2000, Talk.com Inc., a
Delaware corporation ("Talk"), Aladdin Acquisition Corp., a Delaware corporation
and a wholly-owned subsidiary of Talk ("Merger Sub"), and Access One, entered
into an Agreement and Plan of Merger (the "Merger Agreement"), which provides,
among other things, for the merger (the "Merger") of Merger Sub with and into
Access One. Upon consummation of the Merger, Access One will become a wholly
owned subsidiary of Talk. Under the terms of the Merger Agreement, Access One
stockholders will receive 0.571428 shares of Talk's common stock in exchange for
each share of Access One common stock held by such stockholders at the effective
time of the Merger. It is expected that, as a result of the Merger, shareholders
of Access One will receive an aggregate of approximately 14.3 million shares of
Talk's common stock, of which we will receive approximately 2.5 million shares.
The transaction has been approved by the Boards of Directors of each of Talk and
Access One, but is contingent upon, among other things, approvals of both Talk's
and Access One's stockholders, certain regulatory approvals (including approval
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and certain
telecommunications regulatory approvals), and other customary conditions. Under
a Voting Agreement entered into on March 24, 2000, the holders of approximately
67.8% of Access One's outstanding common stock have agreed to vote in favor of
the Merger. In connection with the Merger, Access One has also entered into a
five-year agreement to provide certain telecommunications services to Talk and
its subsidiaries. Access One has the right to terminate that agreement if the
merger with Talk is not consummated. Access One shareholders anticipate
receiving Talk common stock that has been registered under the Securities Act of
1933 for resale, subject to an agreement to not sell the stock until three
months after the registration statement is declared effective, or until October
31, 2000, whichever occurs sooner.
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 our investment in Access One
(or Talk), or obtain additional equity or debt financing that may not be
available on attractive terms, or at all, or may be dilutive. If we are unable
to obtain a source of funding on terms that we consider to be attractive, we may
be required 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 April 2000, we issued 100,000 shares of our common stock
in conjunction with the purchase of all the assets and
business of Telecom Software Solutions, Inc. Such
transaction was effected pursuant to Section 4(2) of the
Securities Act of 1933, as amended
In March, April and May 2000, we issued an aggregate of
136,111, 136,111 and 25,000 shares, respectively, of our
common stock in conjunction with the exercise of warrants.
Such transactions were effected pursuant to Section4(2) of
the Securities Act of 1933, as amended
In March 2000, a holder of 80 shares of our Series A
Preferred Stock, par value $.10, converted such shares of
preferred stock into 80,000 shares of our common stock.
Such transaction was effected pursuant to Section 3(a)(9)
of the Securities Act of 1933, as amended.
Item 4. Submission of Matters to a Vote of Security Holders
------- ---------------------------------------------------
The 2000 Annual Meeting of Shareholders (the "2000 Annual
Meeting") was duly held on June 9, 2000. All director
nominees to the Board of Directors were duly elected at the
2000 Annual Meeting. Set forth below is a brief description
of each other matter voted upon at the 2000 Annual Meeting
and the results of vote with respect to each matter.
(i) The approval and adoption of an
amendment to our 1995 Stock Option
Plan to increase the number of shares
of Common Stock that may be issued
there under from 2,400,000 shares to
3,400,000 shares. The information
contained in our Proxy Statement,
dated April 5, 2000 at pages 12
through 14 under the heading
"Amendment to the 1995 Stock Option
Plan" is incorporated by reference
herein.
Votes For.................7,380,592
Votes Against............. 263,695
Votes Abstaining......... 83,420
Non-Vote..................5,895,677
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(ii) The approval and adoption of an
amendment to the Company's Certificate
of Incorporation to increase the
number of authorized shares of Common
Stock from 20,000,000 shares to
50,000,000 shares. The information
contained in our Proxy Statement dated
April 5, 2000 at pages 15 and 16 under
the heading "Increase the Authorized
Capital Stock of the Company" is
incorporated by reference herein.
Votes For...............11,595,341
Votes Against........... 220,269
Votes Abstaining........ 50,300
14
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Item 6. Exhibits and Reports on Form 8-K
------- --------------------------------
(a) Exhibits.
None
27-- Financial Data Schedule.
(b) Reports on Form 8-K
None.
15
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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.
July 14, 2000 By: /s/ Paul H. Riss
------------------- -----------------------------
Date Paul H. Riss
Chief Executive Officer
(Principal Financial and
Accounting Officer)
16
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EXHIBIT INDEX
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No. Description Page No.
--- ----------- --------
27 Financial Data Schedule. 18
17