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, 2000
[_] 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
(State or other jurisdiction (IRS employer identification no.)
of incorporation or organization)
509 Westport Avenue, Norwalk, Connecticut 06851
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (203) 750-1000.
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
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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, 2001, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $11,837,313.
As of February 15, 2001, there were 14,842,421 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 2001
Annual Meeting of Stockholders, are incorporated by reference into Part III.
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
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 operations 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 product 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 ("CLEC") industry. We offer small- and
medium-sized businesses an integrated set of telecommunications products and
services, including local exchange, local access, domestic and international
long distance telephone, enhanced voice, data and a full suite of Internet
services. We plan to build a nationwide local access platform covering the 48
continental states. As of February 15, 2001, we had signed interconnection
agreements with incumbent local exchange carriers ("ILECs") in 48 states, and we
had
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received approval from state regulators to operate in 28 states. We also provide
high speed Internet access via digital subscriber lines ("DSL"), and we plan to
offer DSL services to our customers nationwide in anticipation of eventually
provisioning voice traffic 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 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 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.
At February 15, 2001, in excess of 70% of our installed access lines
were provisioned on the unbundled network elements platform ("UNE-P") service
offering. 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 circuit-switched equipment 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 substantiated 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 follow a "customer-first" or "deferred-build"
approach. 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. In addition, we are successfully
provisioning DSL services from our network operations center in Norwalk,
Connecticut, without having any of our own equipment in the field. We find that
equipment installation is time consuming and costly, and frequently cannot be
justified by the revenues associated with that equipment, especially in today's
rapidly changing technological environment. Instead, we are first building a
customer base while we lease DSL access multiplexers ("DSLAMs") from other
carriers, and route DSL traffic through our own virtual private networks
utilizing asynchronous transfer mode ("ATM") technology. This strategy limits
our exposure to both stranded equipment costs and technological obsolescence
costs, while giving us the ability to market and sell new customers in a cost
effective manner.
We have worked extensively to build our back office systems and we are
continuing to develop and customize our information systems and procedures. We
believe we can better serve our customers if we have developed proprietary
technology and procedures that give us a competitive advantage in terms of
reducing the costs of marketing, provisioning, processing large order volumes
and providing customer service. We believe that the ability to successfully
manage the process of converting customers from an ILEC's network to the eLEC
network is one of the key functions required to succeed as a competitive
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local exchange carrier. Consequently, we have devoted, and continue to devote,
significant resources to developing our proprietary information systems to
further facilitate the rapid and successful provisioning and billing of
customers. Our proprietary back office systems allow us to enter, schedule,
provision and track a customer's order from point of sale through the billing
and collection process, and are web enabled. Our systems electronically
interface with the systems used by the applicable ILEC. We believe the existence
and functioning of our systems is critical to the successful scaling of our
business. We also use our systems to support the operations of other CLECs (see
"wholesale marketing division"), who have been unable to provision and bill
their local access customers by themselves.
We believe we can provide competitive service under the UNE-P service
offering in each of the 48 states in which we have applied to operate as a CLEC.
We currently utilize the UNE-P service offering in nine states: Florida,
Kentucky, Massachusetts, New Jersey, New York, Pennsylvania, Rhode Island, West
Virginia and Virginia. Our marketing efforts focus on small- and medium-sized
businesses in the states that have been the quickest to implement UNE-P, and our
nationwide expansion will coincide with both the licensing of eLEC to operate in
a state and the existence of the UNE-P service offering in that state. Although
every state is required by the Telecommunications Act to provide the UNE-P
service offering, some states have been slower in adopting provisions that allow
a CLEC to utilize this offering. We anticipate that all 48 states that we have
targeted will be offering UNE-P before the end of 2001. We believe UNE-P is the
preferable platform for any CLEC to operate under, as it allows a CLEC to
provide service with significantly lower capital requirements than either
fiber-based or wireless systems, and to offer services to a broader customer
base more quickly and at a lower price. The ability to quickly provision
accounts and to deliver reliable service at a lower price than offered by the
ILECs should provide us with certain competitive advantages as we market our
services to small- and medium-sized businesses.
Development of Business
We were incorporated in the State of New York under the name Sirco
Products Co. Inc. in 1964 and developed a line of high quality handbags, totes,
luggage and sport bags. 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. 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,
in 1997, we acquired a retail operation, Airline Ventures, Inc. ("AVI"), that
sells travel and aviation related products to professional airline crew members.
In October 1997, we began incubating small high-growth-potential
companies, and 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. Access One was purchased by Talk.com Inc.
("Talk"), a publicly-traded telecommunications company, in August 2000, and we
received approximately 2.2 million shares of common stock and warrants in
exchange for our investment in Access One.
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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 had approximately
40,000 lines as of February 15, 2001, including lines for which we have
contracts to install.
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. We have migrated the WebQuill employees
and operating platform into our CLEC operations and have developed our Internet
operations into a full-service, value-added platform providing national dial-up
access, dedicated access and high-speed DSL access in anticipation of offering
bundled services to our customers that will include both local telephone service
and DSL service. Additionally, we have focused a substantial amount of our
information technology efforts on developing our own internal systems that now
include a Web-enabled proprietary back office system to provision customers for
our local telephone service and provide customer service.
Due to our increased focus on developing a full suite of
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 the assets of our U.S.
luggage operations in August 1999. Since such time, we have liquidated the
remaining assets of our Canadian luggage business. Our luggage segment has been
classified as a discontinued operation in our income statement, and this segment
has reported significant net operating losses in fiscal 1999 and 1998. In fiscal
2000 we recorded a net gain from discontinued operations due to the settlement
of various debts at less than their previously accrued amounts and the sale of a
building in Canada for a higher price than our carrying value for such asset.
See Note 10 of the Notes to Consolidated Financial Statements.
In furtherance of our strategy to incubate promising young companies,
in the first half of fiscal 1999, we took equity positions in two other
companies that were looking for growth capital, RiderPoint, Inc. and Skyclub
Communications Holding Corp. Our investments in both companies were sold to a
publicly-traded company, CyberOpticsLabs Inc. ("Cyber"), in February 2001, as
part of a transaction for an aggregate of 1.4 million shares of Cyber common
stock.
In January 2000, we acquired a New Jersey-based CLEC, Telecarrier
Services, Inc. ("Telecarrier"). Telecarrier operated as a CLEC in the states of
Massachusetts, New Jersey, New York and Rhode Island and provided long distance
service in 13 states. Telecarrier currently provides us with marketing support
for the provisioning of more complex accounts, which are typically business
customers with ten or more local access lines. See "Sales and Marketing
Strategies."
In October 2000, we acquired Line One, Inc. ("Line One"), a
telemarketing firm with approximately 70 seats. Line One is now our internal
marketing engine for our telemarketing channel, which contacts small businesses
and offers our telecommunications services. We believe telemarketing will be
particularly effective because of the ubiquitous reach that the UNE-P service
offering gives us. Line One also manages third-party telemarketing firms that we
retain.
Information concerning sales, business segment operations and
identifiable assets attributable to each of our reportable industry segments can
be found in Note 11 of the Notes to Consolidated Financial Statements and is
incorporated herein by reference.
5
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 an in-house telemarketing
staff and third-party telemarketers to attract small-business accounts
(typically less than ten telephone lines for each account), we use third-party
agents and interconnect companies to attract medium-sized business accounts
(typically ten to 100 telephone lines in size), and we use our own management
team to attract wholesale accounts (typically 100 telephone 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 that they can
purchase directly from us all of their communications requirements. 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, 866), calling card, and
other enhanced services.
o Internet and Data Services. We offer dedicated and dial-up Internet
access services via conventional modem connections, ISDN, T1 and higher
speed dedicated connections. In addition, we are beginning to provision
DSL services and we have agreements with three ILECs and one data
service provider to utilize their DSLAMs to provision our customers
through an ATM cloud.
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 Facilities and System Integration Services. We offer individual
customers consultation services with regard to the design and
implementation of complete telecommunications systems to meet their
specific needs, including the selection of equipment, interconnection
of local area networks and wide area networks, and implementation of
virtual private networks.
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o Hosted Applications. We are beginning 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
actions steps 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 elected to
focus on this segment because of our ability to obtain under the UNE-P
platform ample gross margins on 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, as well
as enhanced telecommunication services, at competitive long distance
rates, by responsive customer service and support and by offering new
and innovative products.
o Develop Brand Awareness. With our recent name change to eLEC
Communications Corp., we are qualifying to do business as eLEC
Communications in all of the states in which we operate. We want to
invoice the customers of our wholly-owned subsidiaries, under the eLEC
Communications name, and use our name to create and develop a brand
awareness in the territories in which we operate. We are positioning
ourselves as a high quality, service-orientated company that provides
quality and reliable telecommunications 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 several factors, such as the population in the
state and our ability to utilize the UNE-P service offering. Although
UNE-P is mandated by the Telecommunications Act, it is not yet
available in all states. For example, even though we had several
customers in Virginia, we were unable to transfer such customers to the
UNE-P platform until January 2001, as UNE-P was not effective in
Virginia until that time. We anticipate Texas and Colorado will be the
next two major states that we target. We have signed interconnection
agreements with the major ILEC in each of the 48 continental states, so
that we are ready to enter these states once we have the state's public
service commission approval. Once an ILEC has programmed its internal
systems to accept us as a UNE-P provider (which may take up to 60
days), we typically can utilize the ILEC's internal infrastructure to
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.
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o Achieve Market Share with Competitive Pricing. We always price our
services at a discount to the same services provided by an ILEC. We can
ascertain 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 it to our network to compare the prices it was paying and any
contractual obligations to which it was subject. 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 Provide our Customers More than Local Telephone Services. Although our
focus is on the approximately $100 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, DSL access, applications hosting and
virtual private networks, will be an important attraction to our
customers. We believe the more services we provide, the more important
we will be 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. We manage
our sales force and our customer care representatives to meet the needs of the
three markets that we target.
o Small- and Medium-Sized Businesses Through Telemarketing. We use
in-house and third-party telemarketing firms to sell our smaller
accounts. Most accounts in this group choose our telephone service
because they are not satisfied with 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 came from third-party telemarketers. In October
2000, we purchased Line One, a telemarketing company, so that we can
better control, monitor and develop this marketing channel. In order to
achieve our business plan, we expect to employ the services of several
third-party telemarketing firms in addition to our in-house staff. This
strategy allows us to keep much of our selling cost as a variable cost
as we are not burdened with excessive fixed overhead that occurs when
the entire staff is in-house.
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
and selling 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 our services. We find that our pricing and
the flexibility of our services, combined with our
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special customer service group for the interconnect companies, allows
us to satisfy the needs of the referrals we receive in this
distribution channel. The employees from our wholly owned subsidiary,
Telecarrier, have extensive established business relationships with
interconnect companies and other communications agents. Many of their
current accounts were referrals from established business
relationships, and the 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 provided
us with approximately 9,000 local access lines in three states. The
three ILECs that formerly serviced this customer sent the customer one
monthly invoice for each line, or approximately 9,000 invoices each
month. By comparison, we send a total of two invoices for the 9,000
lines. In addition, we are able to send the invoices electronically so
that the customer can more easily review the account activity. Our
wholesale program also includes providing local telephone provisioning
and billing services for other CLECs, long distance carriers or
Internet service providers. Provisioning and billing local access
services requires complex back office systems, which many carriers do
not have. We can take advantage of our in-house proprietary technology
to provision and bill the customers of another carrier. We currently
provide this service for two unaffiliated CLECs, and we are in
discussions with several other carriers. We use a direct sales effort
to sell in this market.
Our 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 typically invest substantial amounts in salary and rent
expense to open sales offices in their targeted markets, we are not pressured to
over-spend 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 to
find customers to utilize such equipment. Consequently, 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.
For the year ended November 30, 2000, one customer accounted for
approximately $2,780,000, or 23% of the telecommunication segment revenue. For
the years ended November 30, 1999 and 1998, no one customer accounted for more
than 10% of the telecommunication segment revenue.
Competition in the Telecommunications Industry
Local Telecommunications Market
The local telecommunications market is a highly competitive environment
and is dominated by ILECs. Based upon the geographical locations in which we
currently sell services, Verizon 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 their services. 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
9
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 ILECs, 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 ILECs 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
XO Communications, Inc. Many of these entrants have the strategy of bypassing
the ILECs in order to provide local access to their customers. By not having to
rely on the ILEC for local service connections, the fixed wireless companies are
able to keep for themselves more of their sales dollars. However, if this access
method becomes more price competitive and reliable, we believe we have the
flexibility, with our current local customer base, to switch most of or a
portion of our customer base to the wireless facilities if we are able to
negotiate appropriate terms with one or more wireless carriers.
In addition to competition from ILECs, 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 many such companies that 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
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.
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 hosting, E-commerce sites, 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.
10
Government Regulation
Local and long distance telecommunications services are subject to
regulation by the Federal Communications Commission ("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 local
or 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.
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 ILECs, there is typically only a minor
amount of backlog of unprovisioned customers at any given time, as a customer is
typically switched from the ILEC to our network within two or three days of
processing the provisioning order. As of February 15, 2001, we had a backlog of
less than 1,000 unprovisioned lines.
Our Retail Services
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 to American
Airline, Delta and Southwest Airlines employees, including name brand luggage,
apparel and other travel related accessories, as well as job related
necessities, such as air maps, study guides and flight kits, to professional
airline crew members. 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.
11
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 site www.avishop.com.
The target market for the retail division is professional airline crew
members. The business with American Airlines employees 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 that 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.
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 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.
Employees
At February 15, 2001, we employed approximately 340 employees, of whom
approximately 140 were employed on a full-time basis and approximately 200 were
employed on a part-time basis. We are not subject to any collective bargaining
agreement and believe that our relationship with our employees is good.
12
Item 2. - Properties
The following table sets forth pertinent facts concerning our material
properties at February 15, 2001, all of which are owned or leased by either eLEC
or one of its subsidiaries:
Property Owned:
Location Use Approximate Square Feet
--------------------------------------------------------------------------------
543 Main Street In-bound and out-bound 40,000
New Rochelle, NY 10801 call center
Properties Leased:
Approximate Lease Annual
Location Use Square Feet Expires Rent(1)
----------------------------------------------------------------------------------------------------
509 Westport Ave Network Operations 14,000 2/28/05 $132,000
Norwalk, CT 06851 Center
48 South Service Road Office 5,500 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
Terminal C Retail 1,700 8/24/01 $ 55,000
DFW Airport, TX 75261
1930 W. Airfield Drive Warehouse 2,000 7/31/01 $ 39,000
DFW Airport, TX 75261
6355 MetroWest Boulevard Office 3,600 5/31/01 $ 66,000
Orlando, FL 32835
------------------
(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 we occupy.
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 New
Rochelle, New York, which is currently being developed as our new executive
offices and an in-bound and out-bound call center. We anticipate that
approximately 250 employees will work in this facility and are currently
planning workspaces for approximately 170 employees. We believe our existing
properties are suitable and adequate for our current business needs.
13
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 did not submit any matter to a shareholders vote during the fourth
quarter of fiscal 2000.
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 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
Fiscal 2000
-----------
1st Quarter $5.125 $2.000
2nd Quarter 7.188 2.250
3rd Quarter 3.469 1.750
4th Quarter 2.719 0.750
As of February 15, 2001, there were 262 holders of record of our common
stock and approximately 3,900 beneficial holders.
We have not declared any cash dividends during the past fiscal year
with respect to our common stock. The declaration of any cash dividends in the
future will depend upon the determination of our board of directors 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 2000, we acquired from RiderPoint,
Inc. 600,000 shares of common stock of RiderPoint, Inc., in consideration of the
issuance by us of 300,000 shares of our common stock; we issued 400,000 shares
of our common stock in conjunction with the acquisition of Line One Inc.; we
issued 50,000 shares of our common stock to ASU, Inc. in settlement of
litigation regarding previous consulting services to AVI; and we issued 50,000
shares of our common stock to World Trade Partners, Inc. in exchange for
financial consulting services. Such transactions were effected pursuant to
Section 4(2) of the Securities Act of 1933, as amended.
14
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.
Fiscal Years Ended November 30,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In thousands, except per share amounts)
Earnings Statement:
Net Sales $ 13,877 $ 4,170 $ 1,485 $ 276 $ -
Gross Profit 3,805 1,167 541 92
Loss from
Continuing Operations (6,351) (3,562) (2,204) (105) -
Income (Loss) From
Discontinued Operations 977 (3,943) (2,772) (2,763) 622
Net Income (Loss) (5,374) (7,505) (4,977) (2,868) 622
Net Income (Loss) From
Continuing Operations
per Common Share:
Basic (0.48) (0.41) (0.43) (0.03) 0.23
Diluted (0.48) (0.41) (0.43) (0.03) 0.23
Cash Dividends - - - -
Balance Sheet:
Working Capital $ 2,056 $ (101) $ 334 $ 5,107 $ 1,553
Property, Plant, Equipment 2,035 212 835 827 888
Total Assets 14,867 7,297 1,109 14,042 9,577
Long-Term Debt (Less Current
Maturities) 1,716 198 291 4,522 348
Stockholders' Equity 8,632 3,458 3,754 3,216 2,780
15
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 1 of this Report for
additional factors relating to such statements.
Fiscal Year 2000 Compared to Fiscal Year 1999
Revenues for fiscal 2000 increased by approximately $9,707,000, or
approximately 233%, to approximately $13,877,000 as compared to approximately
$4,170,000 reported in fiscal 1999. The increase in revenues was primarily
attributable to an increase of approximately $9,620,000 in telecommunications
revenues, as a result of the growth in the number of telephone lines we service
from approximately 9,000 lines provisioned by us as of December 1, 1999 to
approximately 34,000 lines at November 30, 2000. Revenue for each installed
local access line on the UNE-P service offering averages approximately $48 per
month whereas revenue for each local access line that is resold averages
approximately $40 per month. Approximately 19,000 local access lines at November
30, 2000 were provisioned on the UNE-P service offering and 15,000 were resale
lines. We anticipate that our average revenue per line will increase in fiscal
2001 as a result of the conversion of 8,000 resale lines to the UNE-P service
offering during the first quarter of fiscal 2001. We also anticipate that we
will be able to increase the number of features and services that we offer to
each customer through a fiscal 2001 upsell campaign, so that our average revenue
per line in fiscal 2001 may approach $50 per line.
Our gross profit in fiscal 2000 increased by approximately $2,638,000,
or approximately 226%, to approximately $3,805,000 from approximately
$1,167,000. The gross profit percentage decreased to 27% in fiscal 2000 from 28%
in fiscal 1999. The decrease in gross profit percentage was attributable to the
significant increase in sales of our telecommunications division, which
represented 86% of our total revenues in fiscal 2000, compared to 55% of our
total revenues in fiscal 1999. Even though we experienced higher gross margins
in our telecommunications division in fiscal 2000, the gross margins of that
division were lower than those of our retail sales division. Gross profit
percentages in telecommunications increased to 26% in fiscal 2000, compared to
17% in fiscal 1999, and our retail sales division's gross profit percentages
decreased to 38% in fiscal 2000, as compared to 41% in fiscal 1999. The increase
in the telecommunications division's gross profit percentage was attributable to
a higher percentage of our lines utilizing the UNE-P service offering in fiscal
2000, as compared to fiscal 1999. We anticipate that the further conversion of
lines to the UNE-P service offering will result in a continuing increase in the
gross profit percentage in fiscal 2001 but not as rapidily as experienced in
fiscal 2000. Our cost of sales varies in each state, depending upon the pricing
structure established by the state's public service commission. We anticipate
that in most states we may be able to achieve a gross profit percentage of
approximately 40%.
Selling general and administrative expenses increased by approximately
$6,274,000, or approximately 229%, to approximately $9,015,000 in fiscal 2000 as
compared to approximately $2,741,000 in fiscal 1999. This increase was primarily
attributable to increased labor and facilities expenses incurred by our
telecommunications division. The increase in expense was directly related to the
significant increase in telecommunications revenues in fiscal 2000 as compared
to fiscal 1999.
Interest expense from continuing operations amounted to approximately
$127,000 in fiscal 2000, as compared to approximately $15,000 in fiscal 1999.
The increased interest expense was the result of higher borrowing levels during
fiscal 2000.
16
At November 30, 2000, we were the largest shareholder of RiderPoint,
owning approximately 37% of RiderPoint's capital stock. As our investment in
RiderPoint is accounted for under the equity method of accounting, we were
required to include our portion of RiderPoint's net loss in our results of
operations. Similarly, at November 30, 1999, we were the largest shareholder of
Access One, owning approximately 21% of Access One's capital stock. In fiscal
2000, we recorded a loss of $605,553 on our equity investment in RiderPoint. In
fiscal 1999, we recorded a loss of $1,661,630 on our equity investment in Access
One. During fiscal 2000, we exchanged our equity interest in Access One for
shares of Talk, and in fiscal 2001, we sold our equity investment in RiderPoint.
We no longer have an affiliate that we record under the equity method of
accounting.
As of November 30, 2000, we determined that our investment in
RiderPoint was impaired. RiderPoint had significant and recurring operating and
cash flow losses, and had not established any significant revenue base. As a
result of this determination, we recorded a loss from impairment of investments
of approximately $1,106,000 in fiscal 2000.
We recorded a gain from the sale of securities in fiscal 2000 of
approximately $1,422,000. This gain resulted from the sale of stock derived from
our investment in Access One. No stock sales were made during fiscal 1999.
We recorded a gain from discontinued operations in fiscal 2000 of
approximately $977,000, as compared to a loss from discontinued operations in
fiscal 1999 of approximately ($3,943,000). The gain reflected primarily the sale
of a building in Canada for more than its carrying value and the settling of
debts from our domestic luggage division, which had been discontinued in fiscal
1999, for less than their previously accrued amounts.
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. Net sales of our telecommunications division
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 we provisioned during the third and fourth quarters of fiscal 1999.
Installed access lines amounted to approximately 1,600 at December 1, 1998,
approximately 2,400 on August 1, 1999 and approximately 9,000 lines at November
30, 1999.
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 our acquisition of a competitor in January 1999 and partially attributable to
sales of licensed sports bags carrying the Gold's Gym logo that commenced in the
third quarter of fiscal 1999.
Our gross profit increased by approximately $626,000, to approximately
$1,167,000 in fiscal 1999 from approximately $540,000 in fiscal 1998, and our
gross profit percentage decreased to 28% in fiscal 1999 from 36% in fiscal 1998.
The decrease in gross profit percentage was primarily attributable to the
significant increase in revenues of our telecommunications division, which had
lower margins than
17
our retail sales division. Approximately 56% of our customer lines were
converted from resale to UNE-P as of November 30, 1999.
Selling and general and administrative expenses increased by
approximately $1,750,000, or approximately 57%, to approximately $3,072,000 in
fiscal 1999 as compared to approximately $1,322,000 in fiscal 1998. A major
portion of the increase was directly attributable to expenses incurred by our
telecommunications division. This increase in expense was directly related to
the significant increase in revenues in fiscal 1999 as compared to fiscal 1998.
Interest expense from continuing operations amounted to approximately
$18,000 in fiscal 1999. There was no interest expense from continuing operations
during fiscal 1998.
At November 30, 1999, we were the largest shareholder of Access One,
owning approximately 21% of Access One's capital stock. As our investment in
Access One was accounted for under the equity method of accounting, we were
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
recorded a loss of approximately $1,662,000 as compared to a loss of $1,423,000
in fiscal 1998.
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 unaffiliated
accessories company ("Interbrand"), and announced that we would discontinue the
operations of our wholesale luggage segment. In addition to purchasing
inventory, equipment and other assets, Interbrand also hired certain employees,
including our current Chairman of the Board, Joel Dupre. Upon being hired by
Interbrand, Mr. Dupre resigned as our Chief Executive Officer and as our
employee.
The operating results of our former wholesale luggage segment have been
accounted for as a discontinued operation and the results of operations of that
segment 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 the 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, was reflected as a
loss related solely to the discontinued segment.
Liquidity and Capital Resources
At November 30, 2000, we had cash and cash equivalents of approximately
$510,000 and working capital of approximately $2,056,000, a decrease of
approximately $81,000 and an increase of approximately $ 2,157,000,
respectively, over amounts reported at November 30, 1999. The increase in
working capital results primarily from the sale of all owned shares of Access
One to Talk. The marketable securities we own of Talk, which are not held by our
working capital lender as collateral in connection with a financing agreement,
are considered a current asset, whereas our investment in Access One was not
liquid and not a current asset.
18
Net cash (used in) provided by operating activities (including
discontinued operations) aggregated approximately ($5,509,000), $610,000 and
$1,783,000 in fiscal 2000, 1999 and 1998, respectively. The principal uses of
cash from operating activities in fiscal 2000 were an increase of approximately
$2,055,000 in accounts receivable resulting from the significant increase in
revenues reported by our telecommunications division and approximately
$5,374,000 relating to the loss for the period. The decrease in the net cash
provided by operating activities in fiscal 1999 as compared to fiscal 1998 of
approximately $1,172,000 was primarily the result of a reduction in accounts
receivable due to the sale of our discontinued luggage division.
Net cash provided by (used in) investing activities aggregated
approximately $213,000, ($95,000) and ($158,000) in fiscal 2000, 1999 and 1998,
respectively. The principal uses of cash from investing activities in fiscal
2000, 1999 and 1998 was approximately $1,218,000 for the purchase of fixed
assets in fiscal 2000, $24,000 for the fiscal 1999 acquisition of Peconic Telco,
Inc. and $150,000 for the fiscal 1998 acquisition of WebQuill. In fiscal 2000,
the principal sources of net cash provided by investing activities were proceeds
from the sale of marketable securities of approximately $1,312,000, the proceeds
from the sale of a subsidiary of approximately $58,000 and cash of approximately
$39,000 and $23,000, respectively, received from the acquisitions of Telecarrier
and Line One. In 1999 and 1998, the principal source of net cash provided by
investing activities was the proceeds from the sale of a subsidiary of
approximately $40,000 and $50,000, respectively.
Net cash provided by (used in) financing activities aggregated
approximately $5,213,000, ($270,000) and ($1,399,000) in fiscal 2000, 1999 and
1998, respectively. In fiscal 2000, net cash provided by financing activities
resulted from the proceeds of a revolving credit facility of approximately
$1,453,000, the proceeds from the exercise of stock options of approximately
$372,000, the proceeds from a private placement of stock of approximately
$1,692,000 and the proceeds from the exercise of warrants of approximately
$1,752,000. 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 proceeds from a private placement of common stock of
approximately $2,026,000, 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 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 2000, we had approximately $1,443,000 in capital
expenditures. In December 2000, we purchased a 40,000 square foot building in
New Rochelle, New York for $1,500,000. The seller financed $1,100,000 of the
purchase with a five-year mortgage loan. We expect to make additional capital
expenditures related to the acquisition of this building so that it can serve as
an in-bound and out-bound call center, our second network operations center and
our corporate headquarters. We anticipate that expenditures in fiscal 2001 will
exceed $500,000 for equipment, furniture and fixtures. Equipment purchases are
anticipated to be financed through equipment leases or with working capital.
On October 23, 2000, we converted our existing receivable sales
agreement between RFC Capital Corporation ("RFC") and Essex, to a loan and
security agreement with RFC. The new loan agreement initially provides for a
loan facility of up to $5,000,000 based upon a borrowing eligibility formula
contained in the agreement. Loans under the loan agreement bear interest at a
rate per annum
19
equal to the prime rate plus 4.5% (14% at November 30, 2000), and require an
annual fee of $75,000. The loan agreement contains various financial and
operating covenants on the part of Essex, including restrictions on borrowings,
payment of dividends, asset dispositions and capital expenditures. Essex may
increase the maximum loan amount available under the loan agreement if RFC, in
its sole discretion, agrees in writing to such increase, in minimum increments
of $1,000,000 to a maximum loan amount of up to $10,000,000, subject to the
formula restrictions, by paying additional fees. All amounts payable under the
loan agreement are secured by substantially all of the assets of Essex. eLEC,
the parent company of Essex, has guaranteed the repayment of all borrowings
under the loan agreement, and has pledged as collateral 1,000,000 shares of
common stock of Talk. The loan agreement has a termination date of the earlier
of (a) October 23, 2003; (b) the occurrence of a termination event (as defined);
(c) the occurrence of an event of seller default (as defined); or (d) 90 days
following payment by Essex of a termination fee (as defined). In addition, upon
execution of the loan agreement, we granted RFC warrants to purchase 200,000
shares of our common stock.
Telecarrier has a $150,000 line of credit with a bank that terminates
on demand. At November 30, 2000, $150,000 was outstanding under the line of
credit. Amounts drawn on the line of credit bear interest at 9.75% per annum,
and are payable monthly. The line of credit is secured by substantially all the
assets of Telecarrier, and is payable on demand, subject to 60 days' written
notice.
Line One has a $140,000 line of credit with a bank that terminates on
December 14, 2002. At November 30, 2000, approximately $55,000 was outstanding
under the line of credit. The bank has requested that all borrowings be repaid
or that eLEC, Line One's parent company, reapply for the line of credit. Amounts
drawn on the line of credit bear interest at a rate per annum equal to the prime
rate plus 1% (10.5% at November 30, 2000).
At February 15, 2001, we beneficially owned approximately 1.8 million
shares of Talk (NASDAQ:TALK). Of such shares, approximately 1.3 million shares
can be sold by us with the permission of our lender to raise money for our
working capital needs. Approximately 200,000 additional shares are held in
escrow and we have the right to purchase approximately 300,000 additional shares
if we exercise a warrant. The warrant exercise price is $2.10 per share and, at
February 15, 2001, was not in-the-money, as Talk common stock was trading at
approximately $2.00 per share at such date. At February 15, 2001, we also owned
1.4 million shares of CyberOpticsLabs Inc. (OTCBB:CYOL). These shares are
"restricted securities" and will not be eligible for sale in the public markets
until February 2002. We anticipate that our shares of Talk will be sold from
time to time primarily to fund our current operating losses and our growth.
Although line acquisition and operating costs can change, we anticipate that
variable marketing costs associated with obtaining new local access lines from
new customers will average approximately $50 a line in fiscal 2001. Given the
costs of servicing our existing lines, we project that we can operate at a
breakeven level on a monthly basis at approximately 80,000 local access lines.
However, if we attempt to grow more rapidly and incur marketing costs that we
believe would allow us to increase our number of local access lines in service
by 10,000 lines a month (which would require our variable marketing costs to
increase by approximately $500,000 per month), we project that our monthly
breakeven level would be reached at approximately 125,000 local access lines.
Our rate of growth and our ability to reach a monthly breakeven level is highly
dependent upon the amount of capital available to us. Although we have a working
capital facility that allows us to borrow based upon a multiple of our cash
collections, we believe this facility alone will not be sufficient to provide us
with the growth capital we need to achieve the growth rates that our back office
systems can support. As a result, the price that we receive from selling our
shares of Talk common stock will impact our growth rate in fiscal 2001.
20
Management believes that the working capital and cash flow from
operations of our retail division will be sufficient to meet the cash and
capital requirements of our retail division for the next 12 months. Our plan for
the growth of our telecommunications division includes an aggressive strategy to
obtain as many new local access lines as our cash resources allow. We will need
to expend cash and incur additional losses before we are able to grow our
telecommunications business to a profitable level. We believe our cash and cash
equivalent assets at February 28, 2001 will provide us with sufficient liquidity
to grow our business and carry out many of our expansion plans. However, as
discussed above, many of our liquid assets consist of marketable securities. As
the market relating to such securities could vary widely during the year, we may
ultimately monetize some or all of such securities at prices that will not
generate sufficient cash to enable us to carry out our fiscal 2001 operating
plans. The inability to carry out our operating plans may result in the
continuance of unprofitable operations, which would adversely affect our
financial condition and results of operations.
New Accounting Standards
In December 1999, the staff of the Securities and Exchange Commission
issued its Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition. SAB
No. 101 provides guidance on the measurement and timing of revenue recognition
in financial statements of public companies. Changes in accounting policies to
apply the guidance of SAB No. 101, as amended by SAB No. 101B, must be adopted
by recording the cumulative effect of the change in our fiscal quarter ending
November 30, 2000. The initial adoption of SAB No. 101 did not have a material
impact on our financial position or results of operations.
The Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" in June 1998.
This statement, as amended, is effective in fiscal years beginning after June
15, 2000, although early adoption is permitted. This statement requires the
recognition of the fair value of any derivative financial instruments on the
balance sheet. Changes in fair value of the derivative and, in certain
instances, changes in the fair value of an underlying hedged asset or liability,
are recognized through either income or as a component of other comprehensive
income. The adoption of SFAS 133 is not expected to have a significant impact on
the Company's financial position or results of operations.
Item 7A. - Quantitative and Qualitative Disclosure About Market Risk
Our debt is currently limited to $5,000,000 under our borrowing
arrangements and such borrowings are at an effective rate of approximately five
percent over the prime rate. We currently do not use interest rate derivative
instruments to manage our exposure to interest rate changes.
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.
21
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 2001 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 2001 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 2001 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 2001 Annual Meeting of Stockholders.
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 30, 1995.
(f) Certificate of Amendment of Certificate of
Incorporation filed February 17, 1999.
22
(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.
(c) 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 Form 8-K,
dated January 21, 2000.
(22) Subsidiaries - The significant wholly-owned subsidiaries are
as follows:
Name Jurisdiction of Organization
---- ----------------------------
Airline Ventures, Inc. Texas
Essex Communications, Inc. New York
Line One, Inc. New York
TelcoSoftware.com Corp. Delaware
Telecarrier Services, Inc. New Jersey
(23) Consent of Nussbaum Yates & Wolpow, P.C.
(27) Financial Data Schedule
(b) Reports on Form 8-K.
none
23
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 2001.
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.
Signature Title Date
---------------------- ----------------------------------- ------------------
/s/ Paul H. Riss Chief Executive Officer February 28, 2001
---------------------- Chief Financial Officer
Paul H. Riss (Principal Accounting Officer)
Director
/s/ Joel Dupre Chairman of the Board of Directors February 28, 2001
----------------------
Joel Dupre
/s/ Eric M. Hellige Director February 28, 2001
----------------------
Eric M. Hellige
/s/ Jonathan M. Berg Director February 28, 2001
----------------------
Jonathan M. Berg
24
eLEC Communications Corp.
-------------------------
Item No. Item Description November 30, 2000
-------- ---------------- -----------------
5-02(1) Cash and cash items $ 509,657
5-02(2) Marketable securities 1,619,822
5-02(3)(a)(1) Notes and accounts receivable-trade 3,634,932
5-02(4) Allowances for doubtful accounts 831,044
5-02(6) Inventory 529,933
5-02(9) Total current assets 6,575,646
5-02(13) Property, plant and equipment 2,622,398
5-02(14) Accumulated depreciation 587,281
5-02(18) Total assets 14,866,830
5-02(21) Total current liabilities 4,519,308
5-02(22) Bonds, mortgages and similar debt 1,715,723
5-02(28) Preferred stock-mandatory redemption 0
5-02(29) Preferred stock-no mandatory redemption 12
5-02(30) Common stock 1,464,242
5-02(31) Other stockholder's equity 7,167,545
5-02(32) Total liabilities and stockholder's equity 14,866,830
5-03(b)1(a) Net sales of tangible products 13,876,965
5-03(b)1 Total revenue 15,299,007
5-03(b)2(a) Cost of tangible goods sold 10,071,536
5-03(b)2 Total costs and expenses applicable to sales and revenue 9,780,294
5-03(b)3 Other costs and expenses 605,553
5-03(b)5 Provision for doubtful accounts and notes 0
5-03(b)(8) Interest and amortization of debt discount 127,309
5-03(b)(10) Income/loss before taxes and other items. (6,350,770)
5-03(b)(11) Income tax expense 0
5-03(b)(14) Income/loss continuing operations (6,350,770)
5-03(b)(15) Discontinued operations 976,624
5-03(b)(17) Extraordinary items 0
5-03(b)(18) Cumulative effect-change in accounting principles 0
5-03(b)(19) Net income or loss (5,374,146)
5-03(b)(20) Earnings per share-basic (.41)
5-03(b)(20) Earnings per share-diluted (.41)
"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."
FORM 10-K
ITEM 14(a)(1) AND (2)
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of eLEC Communications Corp. and
Subsidiaries are included in Item 8:
Report of Independent Auditors F-2
Consolidated balance sheets - November 30, 2000 and 1999 F-3 - F-4
Consolidated statements of operations - Years ended November 30,
2000, 1999 and 1998 F-5
Consolidated statements of stockholders' equity - Years ended
November 30, 2000, 1999 and 1998 F-6 - F-8
Consolidated statements of cash flows - Years ended November 30,
2000, 1999 and 1998 F-9 - F-10
Notes to consolidated financial statements - Years ended November
30, 2000, 1999 and 1998 F-11 - F-38
The following consolidated financial statement schedules of eLEC Communications
Corp. and Subsidiaries are included in Item 14(d):
Schedule II - Valuation and qualifying accounts - Years ended
November 30, 2000, 1999 and 1998 F-39
F-1
Report of Independent Auditors
The Board of Directors and Shareholders
eLEC Communications Corp.
Norwalk, Connecticut
We have audited the accompanying consolidated balance sheets of eLEC
Communications Corp. and Subsidiaries as of November 30, 2000 and 1999, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years ended November 30, 2000, 1999 and 1998. 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 auditing standards generally accepted
in the United States. 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 Corp. and its subsidiaries as of
November 30, 2000 and 1999, and the consolidated results of their operations and
their consolidated cash flows for the years ended November 30, 2000, 1999 and
1998, in conformity with accounting principles generally accepted in the United
States.
We have also audited Schedule II for each of the years in the period ended
November 30, 2000. In our opinion, this schedule presents fairly, in all
material respects, the information required to be set forth therein.
NUSSBAUM YATES & WOLPOW, P.C.
Melville, New York
February 15, 2001
F-2
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 2000 AND 1999
ASSETS
2000 1999
--------------- ---------------
Current assets:
Cash and cash equivalents $ 509,657 $ 591,299
Accounts receivable, principally trade - net of
allowance of $831,000 and $424,000 in 2000
and 1999 2,803,888 1,245,078
Investment securities 1,619,822 -
Inventories 529,933 876,460
Prepaid expenses and other current assets 579,107 230,316
Land and building held for sale 533,239 596,304
-------------- --------------
Total current assets 6,575,646 3,539,457
-------------- --------------
Property, plant and equipment, net 2,035,117 211,698
-------------- --------------
Other assets:
Other investments 100,000 1,469,929
Goodwill, net of accumulated amortization of
$894,192 and $352,966 in 2000 and 1999 3,421,512 1,554,370
Investment securities, non-current 2,000,000 -
Other 734,555 521,683
-------------- --------------
6,256,067 3,545,982
-------------- --------------
Total assets $14,866,830 $ 7,297,137
-------------- --------------
(Continued)
See accompanying notes to consolidated financial statements.
F-3
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
NOVEMBER 30, 2000 AND 1999
LIABILITIES AND STOCKHOLDERS' EQUITY
2000 1999
-------------- --------------
Current liabilities:
Secured short-term borrowings $ 150,000 $ -
Current maturities of long-term debt 398,709 523,695
Due to related parties - 34,725
Accounts payable 2,364,977 1,302,714
Accrued expenses 1,294,457 1,611,105
Taxes payable 311,165 168,599
-------------- --------------
Total current liabilities 4,519,308 3,640,838
------------- -------------
Long-term debt, less current maturities 1,715,723 197,772
------------- --------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.10 par value; 1,000,000
shares authorized, Series B issued, 116
and 196 shares in 2000 and 1999,
liquidation preference $1,000 per share 12 20
Common stock, $.10 par value; 50,000,000 and
20,000,000 shares authorized in 2000 and 1999;
14,642,421 and 11,287,164 shares issued in
2000 and 1999 1,464,242 1,128,715
Capital in excess of par value 25,319,457 18,808,397
Deficit (21,744,234) (16,370,088)
Treasury stock at cost, 11,000 shares (27,500) (27,500)
Accumulated other comprehensive income (loss) 3,619,822 (81,017)
------------- --------------
Total stockholders' equity 8,631,799 3,458,527
------------- --------------
Total liabilities and stockholders' equity $14,866,830 $ 7,297,137
------------- --------------
See accompanying notes to consolidated financial statements.
F-4
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998
2000 1999 1998
------------- ------------ ------------
Revenues:
Telecommunications services $11,895,948 $2,275,474 $ 373,885
Specialty retail travel products 1,981,017 1,894,557 1,111,339
------------- ------------ ------------
Total revenues 13,876,965 4,170,031 1,485,224
------------- ------------ ------------
Costs and expenses:
Costs of telecommunication services 8,840,397 1,884,949 321,430
Cost of specialty retail travel product sales 1,231,139 1,117,749 623,242
Selling, general and administrative 9,014,653 2,741,264 1,181,873
Depreciation and amortization 765,641 330,054 139,451
Equity in loss of Access One Communications
Corp. - 1,661,630 1,423,300
Equity in loss of RiderPoint, Inc. 605,553 - -
------------- ------------ ------------
Total costs and expenses 20,457,383 7,735,646 3,689,296
------------- ------------ ------------
Loss from operations (6,580,418) (3,565,615) (2,204,072)
------------- ------------ ------------
Other income (expense):
Interest expense (127,309) (15,419) (467)
Interest income 40,541 18,546 -
Gain on sale of investment securities 1,422,042 - -
Loss from impairment of investments (1,105,626) - -
------------- ------------ ------------
Total other income (expense) 229,648 3,127 (467)
------------- ------------ ------------
Loss from continuing operations (6,350,770) (3,562,488) (2,204,539)
------------- ------------ ------------
Discontinued operations:
Gain (loss) from discontinued operations - (3,179,361) (2,772,464)
Estimated gain (loss) on disposal of discontinued
operations 976,624 (763,704) -
------------- ------------ ------------
Gain (loss) from discontinued operations 976,624 ( 3,943,065) ( 2,772,464)
------------- ------------ ------------
Net loss ($ 5,374,146) ($7,505,553) ($4,977,003)
------------- ------------ ------------
Basic and diluted income (loss) per share:
Continuing operations ( .48) ($ .41) ($ .43)
Discontinued operations $ .07 ($ .45) ($ .53)
------------- ------------ ------------
Net loss ($ .41) ($ .86) ($ .96)
------------- ------------ ------------
Weighted-average number of common shares
outstanding 13,206,506 8,717,554 5,184,748
------------- ------------ ------------
See accompanying notes to consolidated financial statements.
F-5
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998
Preferred Stock Common Stock Capital
---------------- ----------------------- In Excess of
Shares Amount Shares Amount Par Value Deficit
------ ------ --------- -------- ------------ ------------
Balance, November 30, 1997 - $ - 4,300,400 $430,040 $7,753,368 ($3,887,532)
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)
------ -------- ----------- --------- ------------ ------------
Accumulated
Treasury Other
Stock Held Comprehensive Total
Treasury by Equity Income Stockholders'
Stock Investee (Loss) Equity
--------- ----------- ---------- ----------
Balance, November 30, 1997 ($27,500) ($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 ($27,500) ($159,396) ($679,905) $3,754,080
-------- ----------- ---------- ----------
(Continued)
See accompanying notes to consolidated financial statements.
F-6
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998
Preferred Stock Common Stock Capital
----------------- ---------------------- In Excess of
Shares Amount Shares Amount Par Value Deficit
------ ------ --------- --------- ------------ ------------
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)
====== ====== ========== ========== ============ =============
Accumulated
Treasury Other
Stock Held Comprehensive Total
Treasury by Equity Income Stockholders'
Stock Investee (Loss) Equity
--------- ----------- ---------- -----------
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 - - - 2,025,724
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
========= =========== ========== ==========
(Continued)
See accompanying notes to consolidated financial statements.
F-7
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998
Preferred Stock Common Stock Capital
------------------- ----------------------- In Excess of
Shares Amount Shares Amount Par Value Deficit
------ ------ --------- ---------- ------------ ------------
Balance, November 30, 1999 196 $20 11,287,164 $1,128,715 $18,808,397 ($16,370,088)
Net loss - - - - - - (5,374,146)
Translation adjustment, reclassification
adjustment related to discontinued
operations of Canadian subsidiary - - - - - -
Unrealized gain on investment securities - - - - - -
Comprehensive income (loss) - - - - - -
Issuance of common stock - - 777,000 77,700 1,614,300 -
Exercise of stock options - - 202,285 20,229 375,584 -
Exercise of warrants - - 688,972 68,898 1,682,712 -
Stock issued in settlement of liabilities 107,000 10,700 211,132 -
Stock issued for services - - 50,000 5,000 38,750 -
Stock issued for acquisition of
Telecarrier Services, Inc. - - 500,000 50,000 1,087,500 -
Stock issued for acquisition of assets
of Telecom Software Solutions, Inc. - - 100,000 10,000 278,750 -
Stock issued for acquisition of Line
One, Inc. - - 400,000 40,000 292,500 -
Stock issued for equity investment
in RiderPoint, Inc. - - 300,000 30,000 311,250 -
Stock issued for performance condi-
tions of Webquill Internet Services,
LLC - - 150,000 15,000 313,125 -
Conversion of Series B preferred
stock to common stock (80) (8) 80,000 8,000 (7,992) -
Issuance of warrants in connection with
financing agreement - - - - 313,449 -
------ ------ ---------- ---------- ------------ ------------
Balance, November 30, 2000 116 $12 14,642,421 $1,464,242 $25,319,457 ($21,744,234)
====== ====== ========== ========== ============ ============
Accumulated
Other
Comprehensive Total
Treasury Income Stockholders'
Stock (Loss) Equity
--------- ------------ -------------
Balance, November 30, 1999 ($27,500) ($ 81,017) $3,458,527
----------
Net loss - - (5,374,146)
Translation adjustment, reclassification
adjustment related to discontinued
operations of Canadian subsidiary - 81,017 81,017
Unrealized gain on investment securities - 3,619,822 3,619,822
----------
Comprehensive income (loss) - - (1,673,307)
Issuance of common stock - - 1,692,000
Exercise of stock options - - 395,813
Exercise of warrants - - 1,751,610
Stock issued in settlement of liabilities - - 221,832
Stock issued for services - - 43,750
Stock issued for acquisition of
Telecarrier Services, Inc. - - 1,137,500
Stock issued for acquisition of assets
of Telecom Software Solutions, Inc. - - 288,750
Stock issued for acquisition of Line
One, Inc. - - 332,500
Stock issued for equity investment
in RiderPoint, Inc. - - 341,250
Stock issued for performance condi-
tions of Webquill Internet Services,
LLC - - 328,125
Conversion of Series B preferred
stock to common stock - - -
Issuance of warrants in connection with
financing agreement - - 313,449
--------- ------------ -------------
Balance, November 30, 2000 ($27,500) $3,619,822 $8,631,799
========= ============ =============
See accompanying notes to consolidated financial statements.
F-8
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998
2000 1999 1998
---------------- -------------- --------------
Operating activities:
Net loss ($5,374,146) ($7,505,553) ($4,977,003)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 765,641 375,958 227,005
Abandonment of property plant and equipment - 227,232 -
Translation adjustment related to liquidation
of Hong Kong subsidiary - 572,170 -
Translation adjustment related to discontinued
operations of Canadian subsidiary 81,017 - -
Loss on impairment of long-lived assets 1,105,626 - -
Gain on sale of investment securities (1,422,042) - -
Loss on equity investment including goodwill
amortization of $234,398 in 2000 and
$375,000 in 1999 and 1998 605,553 1,661,630 1,423,300
Stock issued for services 43,750 37,500 22,611
Provision for losses on accounts receivable
and other assets 781,000 108,000 299,000
Loss on sale of property, plant and equipment - 7,499 -
Gain on sale of land and building
of discontinued operations (336,935) (169,650) -
Changes in operating assets and liabilities,
net of effects of acquisitions
and other transactions:
Accounts receivable (2,055,420) 213,107 1,289,333
Inventories 346,527 3,526,891 3,275,479
Prepaid expenses and other current assets (307,020) 5,938 49,583
Other assets (246,309) 75,146 41,839
Accounts payable, accrued expenses and taxes 503,931 1,474,447 131,568
----------- ----------- -----------
Net cash provided by (used in) operating activities (5,508,827) 610,315 1,782,715
----------- ----------- -----------
Investing activities, net of effects of acquisitions:
Proceeds from sale of investment securities 1,311,850 - -
Purchases of property, plant and equipment (1,218,264) (120,935) (57,765)
Proceeds from sale of property, plant and equipment - 9,840 -
Cash inflow from agreement to sell subsidiary 58,216 39,998 50,224
Payment of certain obligations of WebQuill Internet
Services, LLC - - (150,000)
Acquisitions, net of cash acquired 61,924 (24,053) -
----------- ----------- -----------
Net cash provided by (used in) investing activities 213,726 (95,150) (157,541)
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-9
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998
2000 1999 1998
----------- ----------- -----------
Financing activities:
Proceeds from (repayment of) revolving credit
line, net $1,452,534 ($2,768,944) ($2,527,977)
Repayment of long-term debt, net of exchange rate (54,212) 6,073 (8,470)
Officer loan, net of repayment - 227,000 -
Proceeds from exercise of stock options 371,528 43,750 18,188
Proceeds from private placement of common stock 1,692,000 2,025,774 -
Proceeds from exercise of warrants 1,751,609 - 467,904
Proceeds from issuance of preferred stock - 195,929 651,385
----------- ----------- -----------
Net cash provided by (used in) financing activities 5,213,459 (270,418) (1,398,970)
----------- ----------- -----------
Effect of exchange rate changes on cash - (5,937) 12,095
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents (81,642) 238,810 238,299
Cash and cash equivalents at beginning of year 591,299 352,489 114,190
----------- ----------- -----------
Cash and cash equivalents at end of year $ 509,657 $ 591,299 $ 352,489
----------- ----------- -----------
Cash paid during the year for:
Interest $ 114,530 $ 297,209 $ 502,005
----------- ----------- -----------
Income taxes $ - $ - $ -
----------- ----------- -----------
Supplemental disclosure of non-cash investing and financing activities:
See Notes 2, 4, 5, 9 and 10.
See accompanying notes to consolidated financial statements.
F-10
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998
1. Description of Business and Summary of Accounting Principles
------------------------------------------------------------
Description of Business and Concentration of Credit Risk
eLEC Communications Corp. ("eLEC" or the "Company") is a full-service
telecommunications company that focuses on developing integrated
telephone service in the emerging competitive local exchange carrier
("CLEC") industry. The Company offers small and medium-sized businesses
an integrated set of telecommunications products and services, including
local exchange, local access, domestic and international long distance
telephone, enhanced voice, data and a full suite of Internet services.
The Company plans to build a nationwide local access platform covering
the 48 continental states. As of February 15, 2001, the Company had
signed interconnection agreements with incumbent local exchange carriers
("ILECs") in 48 states, and had received approval from state regulators
to operate in 28 states. The Company also provides high speed Internet
access via digital subscriber lines ("DSL"), and plans to offer DSL
services to customers nationwide in anticipation of eventually being able
to provision voice traffic over DSL.
The Company presently has two active business segments. The first, and
the principal focus of the Company, is as a competitive local exchange
carrier to resell and provide low cost alternative telecommunication
services and other bundled services, focusing on small and medium-sized
business users. The second is as a specialty retailer 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.
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").
F-11
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998
1. Description of Business and Summary of Accounting Principles (Continued)
------------------------------------------------------------------------
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.
Investment Securities
In accordance with generally accepted accounting principles, the Company
follows Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities", which requires
that investment securities be classified as trading, held-to-maturity or
available-for-sale. Investment securities consist of equity securities
classified as available-for-sale and are carried at fair value with
unrealized gains or losses to be reported in a separate component of
shareholders' equity. Restricted investment securities consist of
securities held by RFC Capital Corporation ("RFC") as collateral in
connection with the financing agreement described in Note 5.
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 twenty years for buildings, five to ten 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.
F-12
1. Description of Business and Summary of Accounting Principles (Continued)
------------------------------------------------------------------------
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
eliminate 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
Revenues from voice, data and other telecommunication-related services
are recognized in the period in which subscribers use the related
services. Revenues from equipment sales and related installation charges,
which have not been significant to date, are recognized upon delivery and
completion of the installation of the related equipment and acceptance by
the customer, at which point legal title passes to the customer. Revenues
for carrier interconnection and access are recognized in the period in
which the service is provided. The Company believes that it is entitled
to derive reciprocal compensation revenue amounts from the Regional Bell
Operating Companies ("RBOC's"). However, the Company has been unable to
obtain the necessary information from the RBOC's in order to evaluate its
ability to bill reciprocal compensation revenue. Accordingly, the Company
has concluded that reciprocal compensation revenue will be recognized
only at such time in the future that the Company has sufficient
information to evaluate that (1) the revenue process for reciprocal
compensation has been completed and the revenue has been earned; (2) the
amount of such revenue that has been earned can be quantified and that
such amount is realizable, due and payable to the Company; and (3) the
ultimate collectibility of such revenue is reasonably assured. Revenue
from the Company's specialty retail business and from the Company's
discontinued luggage business is recognized upon shipment or delivery of
merchandise to the customer, at which time legal title passes.
The Securities and Exchange Commission ("SEC") issued Staff Accounting
Bulletin ("SAB") 101, Revenue Recognition in Financial Statements, in
December 1999. The SAB summarizes certain of the SEC staff's views in
applying generally accepted accounting principles to revenue recognition
in financial statements. During the current year, the Company performed a
comprehensive review of its revenue recognition policies and determined
that they are in compliance with SAB 101.
F-13
1. Description of Business and Summary of Accounting Principles (Continued)
------------------------------------------------------------------------
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 2000, 1999 and 1998, but may become dilutive in the
future.
Cash and 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 seven 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 forecasted net undiscounted
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
discounted cash flows or appraised values, depending upon the nature of
the assets.
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-14
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
$34,000 in 2000, $48,000 in 1999 and $78,000 in 1998.
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 Investment Securities
The fair value of the Company's investment in marketable equity
securities is based upon the quoted market price.
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.
F-15
1. Description of Business and Summary of Accounting Principles (Continued)
------------------------------------------------------------------------
Recent Accounting Pronouncements
The Financial Accounting Standards Board issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities" in June 1998. This
statement, as amended, is effective in fiscal years beginning after June
15, 2000, although early adoption is permitted. This statement requires
the recognition of the fair value of any derivative financial instruments
on the balance sheet. Changes in fair value of the derivative and, in
certain instances, changes in the fair value of an underlying hedged
asset or liability, are recognized through either income or as a
component of other comprehensive income. The adoption of SFAS 133 is not
expected to have a significant impact on the Company's financial position
or results of operations.
Reclassification
Certain 1999 and 1998 amounts have been reclassified to conform to the
2000 presentation.
2. Acquisitions
------------
Year Ended November 30, 1998
On February 27, 1998, the Company acquired all of the outstanding shares
of common stock of Essex Communications, Inc. ("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, warrants to
purchase 75,000 shares vested during the fiscal year ended November 30,
1999 upon the attainment of certain performance conditions, and warrants
to purchase 75,000 shares will vest if certain additional performance
conditions are met. In addition, if certain performance conditions are
met, up to 600,000 additional shares of common stock may be issued. As of
November 30, 2000 and 1999, 325,000 of such shares had been issued to the
former shareholders of Essex. The transaction was accounted for as a
purchase. The purchase price exceeded the fair value of the net assets
acquired by approximately $737,000, which is being amortized on a
straight-line basis over seven years. The results of operations of Essex
are included in the accompanying financial statements from the date of
acquisition.
F-16
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998
2. Acquisitions (Continued)
------------------------
Year Ended November 30, 1998 (Continued)
On August 14, 1998, the Company acquired all of the membership interests
of WebQuill Internet Services LLC ("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 to be delivered upon attainment of certain performance
conditions) and the payment of $150,000 of Webquill's obligations. During
2000, the performance conditions were met and the shares were released
from escrow. 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 seven years. The results of operations of WebQuill are included in
the accompanying financial statements from the date of acquisition.
Year Ended November 30, 1999
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 the 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 the net assets
acquired by approximately $135,000, which is being amortized on a
straight-line basis over seven years. The results of operations of Tag
Air and Peconic are included in the accompanying financial statement from
the date of acquisition.
In April 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 the Company's
ownership in RiderPoint to 27% on said date (see Note 15). On October 23,
2000, an additional 300,000 shares valued at $341,250 were issued,
increasing the Company's ownership interest in RiderPoint to 36.7% on
said date. RiderPoint has developed an Internet website which provides an
online insurance rating program for comparing and buying motorcycle
insurance. 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.
F-17
2. Acquisitions (Continued)
------------------------
Year Ended November 30, 1999 (Continued)
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 began to account for its investment in RiderPoint on the equity
method of accounting.
See Note 16 for the Company's subsequent disposition of its interests in
RiderPoint and Sky Club.
Year Ended November 30, 2000
On January 21, 2000, the Company acquired Telecarrier Services, Inc.
("Telecarrier"), a competitive local exchange carrier located in New
Jersey for 500,000 shares of its common stock valued at $1,137,500 plus
other consideration for all the issued and outstanding shares of
Telecarrier, and an additional 280,000 shares of the Company's common
stock may be issued upon the attainment of certain performance
conditions. The purchase price exceeded fair value of the net assets
acquired by approximately $1,274,000, which is being amortized on a
straight-line basis over seven years. The acquisition was accounted for
under the purchase method of accounting and, accordingly, the results of
operations of the acquired business are included in the financial
statements from the date of acquisition.
On April 4, 2000, the Company purchased substantially all the assets of
Telecom Software Solutions, Inc. ("Telecom") for 100,000 shares of its
common stock, valued at $288,750. Telecom is in the business of
designing, developing and licensing computer software and billing systems
for the telecommunications industry. The purchase price exceeded the fair
value of the net assets acquired by approximately $277,000, which is
being amortized on a straight-line basis over seven years.
On October 13, 2000, the Company acquired all the outstanding shares of
common stock of Line-One, Inc. ("Line-One") for 400,000 shares of the
Company's common stock, valued at approximately $332,500. Line-One is
engaged in the business of telemarketing. In addition, there are
contingent cash payments and stock options vesting on attainment of
certain performance conditions. The purchase price exceeded the fair
value of the net assets acquired by approximately $480,000, which is
being amortized on a straight-line basis over seven years. The
acquisition was accounted for under the purchase method of accounting
and, accordingly, the results of operations of the acquired business is
included in the financial statements from the date of acquisition.
F-18
2. Acquisitions (Continued)
------------------------
Year Ended November 30, 2000 (Continued)
The following unaudited pro forma financial information for the years
ended November 30, 2000 and 1999, assumes all acquisitions occurred as of
December 1, 1998, giving effect to the amortization of goodwill. The pro
forma results have been prepared for comparative purposes only and are
not indicative of the results of operations that may occur in the future
or that would have occurred had the acquisitions been effected on
December 1, 1998.
Pro forma (unaudited)
Year ended November 30,
2000 1999
------------- --------------
Revenues $16,833,125 $11,315,050
Loss from continuing operations (6,627,146) (3,892,180)
Income (loss) from discontinued operations 976,624 (3,943,065)
------------- --------------
Net loss ($5,650,522) ($7,835,245)
------------- --------------
Basic and diluted net income (loss) per common share:
Continuing operations ($ .50) ($ .45)
Discontinued operations .07 ( .45)
------------- --------------
Net loss ($ .43) ($ .90)
------------- --------------
3. Investment Securities
---------------------
Details as to investment securities at November 30, 2000 are as follows:
Fair Unrealized
Cost Value Holding Gain
---- ----- ------------
Equity securities $ - $3,619,822 $3,619,822
The Company's investment securities consisted of 1,809,911 common shares
of Talk.com, Inc. ("Talk") (See Note 13), valued at $2.00 per share.
187,691 of such shares were placed in escrow until August 2001. 1,000,000
of such shares were held in escrow by a lender to secure long-term debt
(see Note 5), and are classified as a non-current asset. In addition, the
Company holds a non-marketable warrant to purchase 285,714 Talk shares at
$2.10 per share, expiring in 2005. The Talk shares have been subject to
signifcant market fluctuations.
F-19
4. Property, Plant and Equipment
-----------------------------
2000 1999
-------------- -------------
Machinery and equipment $ 735,380 $222,272
Computer equipment and software 1,030,208 27,000
Furniture and fixtures 253,196 73,462
Leasehold improvements 203,614 -
Assets designated for capital expenditure (Note 10) 400,000 -
-------------- -------------
2,622,398 322,734
Less accumulated depreciation and amortization 587,281 111,036
-------------- -------------
$ 2,035,117 $211,698
-------------- -------------
5. Long-Term Debt
--------------
On October 23, 2000, the Company converted the existing receivable sales
agreement between RFC Capital Corporation ("RFC") and Essex, to a loan
and security agreement with RFC. The new loan agreement initially
provides for a loan facility of up to $5,000,000 based upon a borrowing
eligibility formula contained in the agreement. Loans under the agreement
bear interest at a rate per annum equal to the prime rate plus 4.5% (the
interest rate was 14% at November 30, 2000), and the agreement requires
an annual fee of $75,000. The loan agreement contains various financial
and operating covenants on the part of Essex, including restrictions on
borrowings, payment of dividends, asset dispositions and capital
expenditures. Essex may increase the maximum loan amount available under
the loan agreement if RFC, in its sole discretion, agrees in writing to
such increase, in minimum increments of $1,000,000 to a maximum loan
amount of up to $10,000,000, subject to the formula restrictions, by
paying additional fees. All amounts payable under the loan agreement are
secured by substantially all of the assets of Essex. eLEC, the parent
company of Essex, has guaranteed the repayment of all borrowings under
the loan agreement, and has pledged as collateral for such guarantee
1,000,000 shares of common stock of Talk. The loan agreement has a
termination date of the earlier of (a) October 23, 2003; (b) the
occurrence of a termination event (as defined); (c) the occurrence of an
event of seller default (as defined); or (d) 90 days following payment by
Essex of a termination fee (as defined). In addition, upon execution of
the loan agreement, we granted RFC warrants to purchase 200,000 shares of
our common stock. The warrants expire on October 23, 2010. The fair
market value of the warrants granted to RFC of $313,449 was determined by
the use of the Black-Scholes method and has been accounted for as
additional interest expense over the term of the agreement.
F-20
5. Long-Term Debt
--------------
Line-One has a $140,000 line of credit with a bank. Amounts drawn on the
line bear interest at prime plus 1%, and 1/36th of the outstanding
principal plus interest is payable monthly. The line matures on December
14, 2002.
In connection with the financing of its discontinued luggage business,
the Company had entered into a secured financing agreement with Coast
Business Credit, a division of Southern Pacific Thrift and Loan
Association, with interest at 2% above prime. The loan was repaid in full
in December 1999.
The Company's Canadian subsidiary had a real property mortgage of
approximately $368,000, payable on demand with interest at 10.25%. In
December 2000, the mortgage was repaid as the property was sold (see Note
10).
Long-term debt consists of the following:
2000 1999
------------- ------------
Loan payable to RFC, net of unamortized
discount of $304,742 in 2000 $1,564,927 $197,772
Line of credit, bank 55,552 -
Loan payable to Coast - 219,363
Canadian subsidiary mortgage payable 283,920 304,332
Equipment loans payable in aggregate monthly
installments of $4,940 including interest
ranging from 5% to 17% maturing in 2004 210,033 -
------------ ------------
2,114,432 721,467
Less current maturities 398,709 523,695
------------ ------------
$1,715,723 $197,772
------------ ------------
F-21
5. Long-Term Debt (Continued)
--------------------------
Principal payments are due as follows:
Year ended November 30,
2001 $ 398,709
2002 115,579
2003 1,591,986
2004 8,158
------------
$ 2,114,432
============
6. Income Taxes
------------
At November 30, 2000, the Company had net operating loss carryforwards
for Federal income tax purposes of approximately $15,000,000 expiring in
the years 2001 through 2020. There is an annual limitation of
approximately $187,000 on the utilization of approximately $2,000,000 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, 2000 and 1999 are as follows:
2000 1999
-------------- -------------
Deferred tax assets:
Net operating loss carryforwards $5,260,000 $5,250,000
Allowance for doubtful accounts and accruals 270,000 120,000
Depreciation 20,000 80,000
------------- -------------
5,550,000 5,450,000
Valuation allowance (5,550,000) (5,450,000)
------------- -------------
Net deferred tax assets $ - $ -
============= =============
The valuation allowance at November 30, 1998 was $3,800,000.
F-22
6. Income Taxes (Continued)
------------------------
The following is a reconciliation of the tax provisions for the three
years ended November 30, 2000 with the statutory Federal income tax
rates:
Percentage of Pre-Tax Income
2000 1999 1998
-------- -------- ---------
Statutory Federal income tax rate (34.0%) (34.0%) (34.0%)
Equity loss on investment in Access One - (7.5) (9.7)
Equity loss on investment in RiderPoint (3.8) - -
Utilization of foreign tax loss carryforwards/
carryback - - (3.2)
Operating losses generating no current tax
benefit, United States 37.8 41.5 43.7
-------- -------- ---------
- - (3.2%)
======== ======== =========
7. Pension Plans
-------------
The Company has a defined benefit plan covering two active and a number
of former 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-23
7. Pension Plans (Continued)
-------------------------
Net periodic pension cost (gain) included the following components:
2000 1999 1998
--------- --------- ---------
Interest cost on projected benefit obligation $57,891 $57,734 $56,393
Return on assets (59,045) (61,874) (63,704)
Net amortization and deferral 3,761 (584) (4,112)
-------- -------- ---------
$2,607 ($4,724) ($11,423)
-------- -------- ---------
Following is a summary of significant actuarial assumptions used:
2000 1999 1998
-------- -------- --------
Weighted-average discount rates 7.0% 7.0% 7.0%
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%
The following table sets forth the Plan's funded status and amounts
recognized in the Company's statement of financial position at:
November 30,
2000 1999
---------- ----------
Accumulated benefit obligation, including vested
benefits of $833,048 and $835,772 at November
30, 2000 and 1999, respectively ($833,048) ($837,685)
---------- ----------
Projected benefit obligation for service rendered
to date ($754,818) ($869,592)
Plan assets at fair value, primarily money market
funds 574,632 744,098
---------- ----------
Plan assets in excess of (deficiency in) unfunded
projected benefit obligation (180,186) (125,494)
---------- ----------
Accrued pension cost ($180,186) ($125,494)
---------- ----------
F-24
8. Commitments
-----------
The Company conducts a substantial portion of its operations utilizing
leased facilities. Rent expense was $511,000, $705,000 and $825,000 in
2000, 1999 and 1998, 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 that
have remaining non-cancelable terms in excess of one year are
approximately as follows:
Year ended November 30,
2001 $678,000
2002 484,000
2003 298,000
2004 205,000
2005 50,000
On December 7, 2000, the Company acquired a facility in New Rochelle, New
York, which will serve as the Company's future headquarters. The purchase
price of the facility was $1,500,000, of which $1,100,000 was evidenced
by a mortgage from the seller, and the remainder of the purchase price
was paid in cash at closing (See Note 10). The mortgage requires interest
payments only on a monthly basis through December 2005, when the entire
principal balance becomes due. The interest rate is 10% through December
2001, and 11% for the remaining period.
F-25
9. 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; 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. During the year ended November 30, 2000, AVI purchased
approximately $92,000 of goods from a company controlled by Dupre.
The Company imported substantially all of its discontinued 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 and 1998, the Company purchased
approximately $809,000 and $2,287,000, respectively, of luggage and
backpack products from companies controlled by stockholders. During the
years ended November 30, 1999 and 1998, the Company incurred buying
commissions of approximately $103,000 and $312,000, respectively, to
companies controlled by stockholders. As of November 30, 1999, there was
outstanding $11,312 to such related parties.
F-26
10. 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. As of
November 30, 1999, a substantial portion of the luggage business had
already been disposed of and the remaining portion was disposed of during
fiscal 2000. The luggage business segment has been accounted for as
discontinued operations in accordance with Accounting Principles Board
Opinion (APB) 30. The related real estate, which is classified as assets
held for sale, was in contract for sale at November 30, 2000 and was
disposed of on December 5, 2000. The Company has designated $400,000 of
the proceeds for the purchase of a new facility (Note 8) and such amount
is included in Property and Equipment. The Company recognized a gain on
discontinued operations of $976,624 in 2000 for additional amounts
received in excess of the carrying value of the real estate and the
reversal and settlement of previously recorded liabilities of
approximately $720,000. The gain is also net of $81,017 applicable to a
previously recorded foreign translation adjustment for the Company's
Canadian subsidiary, which is expected to be dissolved in 2001. The 1999
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 was
based on the direct borrowings of such operations and amounted to
approximately $30,000 in 2000, $306,000 in 1999, and $514,000 in 1998.
The operating results and remaining assets of the discontinued operations
are summarized as follows:
2000 1999 1998
--------------- -------------- --------------
Sales $ - $ 6,774,265 $15,552,285
Net gain (loss) 976,624 (3,943,065) (2,772,464)
Net gain (loss) per share of common stock .07 ( .45) ( .53)
2000 1999
--------------- -----------------
Current assets $533,239 $ 1,300,726
Property and equipment net 400,000 426,654
Other assets - 9,118
--------------- -----------------
$933,239 $ 1,736,498
--------------- -----------------
F-27
11. Segment Reporting
-----------------
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 2000, 1999 and
1998 are as follows:
Retail Investments Discontinued
Related Carried Total of Operations
Telecom- Travel Under Cost Continuing of Luggage Total
munications Products Method Operations Segment Company
----------- ------------ ------------ ---------- ------------- --------------
Revenue (external 2000 $11,895,948 $1,981,017 $ - $13,876,965 $ - $13,876,965
customers) 1999 2,275,474 1,894,557 - 4,170,031 6,774,265 10,944,296
1998 373,885 1,111,339 - 1,485,224 15,552,245 17,037,469
Segment income (loss) 2000 (1) ($ 6,363,907) $ 13,137 $ - ($ 6,350,770) $ 976,624 ($ 5,374,146)
1999 (1) (3,619,345) 56,857 - (3,562,488) (3,943,065) (7,505,553)
1998 (1) (2,116,530) (88,009) - (2,204,539) (2,772,464) (4,977,003)
Segment assets 2000 $12,579,936 $ 887,296 $ 466,359 $13,933,591 $ 933,239 $14,866,830
1999 2,750,759 915,376 1,894,504 5,560,639 1,736,498 7,297,137
1998 3,239,015 386,934 464,573 4,090,522 6,938,520 11,029,042
Depreciation and 2000 $ 730,600 $ 35,041 $ - $ 765,641 $ - $ 765,641
amortization 1999 292,667 37,387 - 330,054 45,904 375,958
1998 127,661 11,790 - 139,451 87,554 227,005
Interest expense 2000 $ 127,309 $ - $ - $ 127,309 $ 31,800 $ 159,109
1999 15,419 - - 15,419 305,518 320,937
1998 467 - - 467 513,566 514,033
Segment capital 2000 $ 1,424,577 $ 18,723 $ - $ 1,443,300 $ - $ 1,443,300
expenditures 1999 72,501 48,434 - 120,935 - 120,935
1998 39,713 - - 39,713 18,052 57,765
Equity in net loss of
investees accounted 2000 $ 605,553 $ - $ - $ 605,553 $ - $ 605,553
for under equity 1999 1,661,630 - - 1,661,630 - 1,661,630
method 1998 1,423,300 - - 1,423,300 - 1,423,300
(1) Losses from the investment in Access and RiderPoint have been
included in the Telecommunications business.
F-28
11. Segment Reporting (Continued)
-----------------------------
Significant Sales Concentrations
For the year ended November 30, 2000, one customer accounted for
approximately $2,780,000, or 23% of the telecommunication segment
revenue. For the years ended November 30, 1999 and 1998, no one customer
accounted for more than 10% of the telecommunication segment revenue.
Although the Company has not quantified the amount, the Company believes
that more than 10% of the revenue derived from the retail-related travel
products segment for all years presented represents sales to pilots of
American Airlines.
12. 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. During fiscal 2000, the stockholders of the
Company approved an amendment to the Plan to increase the number of
common stock that may be issued to 3,400,000 and approved an increase in
the number of authorized shares of common stock from 20,000,000 to
50,000,000 shares.
F-29
12. 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 was 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
could cause the conversion of the Series A shares at any time after May
31, 1999 based upon the above conversion formula. The preferred shares
had the same voting and dividend rights as common shares based upon the
number of shares of common stock into which the preferred stock was
convertible. The preferred shares had 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 was authorized to issue up
to 1,300 shares of the Series B Preferred stock, and such stock is
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.
During 2000, certain of the Series B shareholders elected to convert
their shares to common shares, resulting in the issuance of 80,000 shares
of common stock.
F-30
12. Stockholders' Equity (Continued)
--------------------------------
The following is a summary of outstanding options:
Weighted-
Average
Number Exercise Price Exercise
of Shares Per Share Price
------------- ------------------ -------------
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 $1.00 - $2.84 $1.63
Granted during year ended
November 30, 2000 1,805,000 $1.19 - $4.49 $1.70
Exercised/canceled during year
ended November 30, 2000 (218,785) $1.00 - $2.94 $2.21
---------
Outstanding November 30, 2000 3,027,215 $1.19 - $4.49 $1.68
---------
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
---------
Options exercisable, November
30, 2000 1,072,991 $1.35 - $2.84 $1.63
---------
F-31
12. Stockholders' Equity (Continued)
--------------------------------
The following table summarizes information about the options outstanding
at November 30, 2000:
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
------------------ ----------- ------------ --------- ----------- -----
>
$1.19 - $1.94 2,360,721 4.19 $1.37 852,997 $1.41
$2.00 - $2.94 540,494 3.54 $2.40 219,994 $2.46
$4.19 - $4.94 126,000 4.30 $4.42 -- $ --
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 117% for 1998, 126% for 1999 and 124% for 2000, risk-free
interest rate of 5.66% for 1998, 5.53% for 1999 and 5.80% for 2000, and
expected life of five years for all grants. The weighted-average fair
value of stock options granted in 2000, 1999 and 1998 was $1.47, $.97and
$2.36, respectively.
Under the above model, the total value of stock options granted in 2000,
1999 and 1998 was $2,652,858, $924,707 and $652,976, 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 ($5,889,131) in
2000, ($7,655,167) in 1999, and ($5,131,886) in 1998, and the Company's
pro forma loss per share would be ($.45) for 2000, ($.88) for 1999, and
($.99) for 1998.
On October 24, 1996, the shareholders of the Company adopted the eLEC
Communications Corp. 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. No shares were
awarded during 2000, 1999 and 1998.
F-32
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. ("Access"), a competitive local exchange
carrier, 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 with a private investor. This exchange was valued at
$104,070.
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 notified 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 the Company's common stock, which has
been reflected in the accompanying financial statements as of November
30, 1999.
The Company's investment in Access was 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, 1999 and 1998. All of the
Company's investment at November 30, 1998 represented 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 had been reduced
to zero.
F-33
13. Investment in and Transactions with Affiliates (Continued)
----------------------------------------------------------
Access One Communications Corp. (Continued)
On August 9, 2000, pursuant to tax-free merger agreement between Access
and Talk, the Company exchanged its remaining shares and warrants in
Access for 1,876,911 shares of Talk plus a warrant to acquire an
additional 285,714 Talk shares at $2.10 per share, expiring in 2005. The
Company did not reflect any gain on this transaction as it did not result
in the culmination of an earnings process. 187,691 of the Company's Talk
shares have been placed in escrow for a period of one year ending on
August 9, 2001 to secure certain representations and warranties made by
the shareholders of Access one in connection with the transaction.
During the year ended November 2000, prior to the aforementioned
exchange, the Company sold 745,042 shares of Access and subsequent to the
merger, the Company sold 57,000 shares of Talk stock. Since the Company's
investment in Access One had already been reduced to zero value
(accounted for on the equity method), the sales resulted in a net gain of
$1,422,042. Included in the above were 99,640 shares sold on behalf of a
related party for which no gain has been recorded,
The results of operations for the years ended October 31, 1999 and 1998
and financial position of Access as of October 31, 1999 are summarized
below:
Condensed Income Statement Information
--------------------------------------
1999 1998
----------- ----------
Revenue $15,412,640 $5,811,038
Cost of service 12,177,793 5,045,514
Gross profit 3,234,847 765,524
Net loss (4,994,124) (4,761,333)
F-34
13. Investment in and Transactions with Affiliates (Continued)
----------------------------------------------------------
Access One Communications Corp. (Continued)
Condensed Balance Sheet Information
-----------------------------------
1999
------------
Current assets, including investment in
eLEC Communications Corp. common shares
carried at $675,000 at October 31, 1999 $ 3,111,715
Non-current assets 852,680
Goodwill and other intangible assets 2,322,714
Current liabilities 4,806,419
Non-current liabilities 6,837,119
Stockholders' equity (deficiency) (5,356,429)
In addition, options had 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 the former current Chief Executive Officer of
the Company who served on the Board of Directors of Access (100,000
shares at $1.00 per share).
Based upon the information contained in Talk's SEC filings, Access
incurred a loss through the merger date. Since the Company's investment
in Access had already been reduced to $-0-, no further loss was recorded
during the year ended November 30, 2000.
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. RiderPoint was
incorporated in 1997. 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.
F-35
13. Investment in and Transactions with Affiliates (Continued)
----------------------------------------------------------
RiderPoint, Inc. (Continued)
The following summarizes the results of operations and net assets
(unaudited) of RiderPoint.
Condensed Income Statement Information (Unaudited)
--------------------------------------------------
Year ended December 31,
2000 1999
------------- -----------
Revenue $ 77,531 $ 192,494
Costs and expenses 1,218,532 558,702
------------- -----------
Net loss ($1,141,001) ($ 366,208)
------------- -----------
For the year ended November 30, 2000, the Company recorded a loss of
$605,553, representing its portion of the RiderPoint loss for the year of
$371,155 plus amortization of goodwill of $234,398. During the year ended
November 30, 2000, the Company charged RiderPoint $106,000 for services
rendered to RiderPoint, and advanced RiderPoint $105,000. All advances
are non-interest bearing and are included in Prepaid Expenses and Other
Current Assets. The Company has received a guarantee from RiderPoint's
new parent regarding payment of the amounts due the Company (see Note
16).
Condensed Balance Sheet Information (Unaudited)
-----------------------------------------------
December 31, December 31,
2000 1999
----------------- ----------------
Current assets (1) $ 209,136 $ 34,319
Non-current assets (2) 164,960 1,196,780
Current liabilities 371,840 198,581
Non-current liabilities 69,025 90,339
Stockholders' equity (deficiency) (66,769) 942,179
(1) Including 300,000 shares of common stock of eLEC at December 31, 2000.
(2) Including 400,000 shares of common stock of eLEC at December 31, 1999.
F-36
14. Risks and Uncertainties
-----------------------
The Company buys substantially all of the telecommunication services that
it resells from two RBOCs, Verizon and BellSouth, and is, therefore,
highly dependent upon Verizon and BellSouth. Management of the Company
believes that its relationship with Verizon and BellSouth 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 Verizon and BellSouth 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.
The Company has been billed for certain amounts from the RBOC's in
certain states, which are disputed by the Company. The Company contends
that the related invoicing of taxes, subscriber line charges, other fees
and features are not in accordance with the agreements between the
Company and the RBOCs. The Company has not paid for or accrued
approximately $400,000 of such disputed amounts, and management of the
Company believes that the Company will prevail in these disputes.
15. Quarterly Financial Data (Unaudited)
------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------- -------------- ------------- -------------
Revenue $ 2,226,233 $ 3,156,395 $4,078,312 $4,416,025
Gross profit $ 741,777 $ 880,156 $1,160,818 $1,022,678
Net loss ($ 648,900) ($ 1,361,983) ($ 130,264) ($3,232,999)
Net loss per share ($ .06) ($ .10) ($ .01) ($ .24)
16. Asset Impairments
-----------------
As of November 30, 2000, the Company determined that its investment in
RiderPoint was impaired. RiderPoint had significant and recurring
operating and cash flow losses, and had not established any significant
revenue base.
F-37
16. Asset Impairments (Continued)
-----------------------------
On February 2, 2001, the Company, as part of an effort to focus on its
core businesses, announced that it had entered into an agreement to sell
and thereby divest itself of all of its holdings in RiderPoint (carried
under the equity method), Webquill (a wholly owned subsidiary) and
Skyclub (an investment carried under the cost method) in exchange for
1,400,000 unregistered common shares of Cyberopticlabs, Inc. ("Cyber"),
approximately 5% of the total shares then outstanding. Prior to the sale,
the Company had merged the employees and businesses of Webquill into its
operations; thus the sale of Webquill represented only the sale of its
name and an inactive entity. Cyber is controlled by entitites owned by an
employee of the Company and members of his family. Cyber is a
publicly-held company whose shares are quoted in the over-the-counter
bulletin board market. However, there is an extremely limited public
float, and minimal trading activity.
Due to (1) the thinly traded nature of the Cyber shares; (2) the fact
that the Cyber shares are not registered and are restricted for a
one-year period; (3) the difficulty in determining the value of the
Company's investments; and (4) the Company belief that its investments
had been significantly impaired, the Company wrote down its investments
in RiderPoint and Sky Club to $100,000. Accordingly, the Company has
recorded an impairment loss of approximately $1,106,000.
Also, due to the thinly-traded nature of the Cyber shares, such shares
will not be accounted for as a marketable equity security in accordance
with Statement of Financial Accounting Standards No. 115. Until such time
as Cyber has a significant level of trading activity, thereby
establishing a true market value (or evidence indicating a permanent
impairment), the Company will carry its investment in Cyber at $100,000
(cost).
F-38
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998
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
-------------------------------------------- -------- -------- -------- --------
Year ended November 30, 2000:
Allowance for doubtful accounts $ 424,000 $ 781,000 $374,000 $ 831,000
Valuation allowance for deferred
tax asset $ 5,450,000 $ 100,000 $ - $ 5,550,000
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
* Net of recoveries
F-39