SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended August 31, 2000. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from to . ----------------- --------------------- Commission file number 0-4465 eLEC Communications Corp. - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) New York 13-2511270 - -------------------------------------------------------------------------------- (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 509 Westport Avenue, Norwalk, Connecticut 06851 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code 203-229-2400 ------------ - -------------------------------------------------------------------------------- (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ . Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: 13,827,921 shares of -------------------- common stock, par value $.10 per share, as of October 1, 2000. - -------------------------------------------------------------- PART 1. FINANCIAL INFORMATION ----------------------------- Item 1. Financial Statements - ----------------------------- eLEC Communications Corp. and Subsidiaries Condensed Consolidated Balance Sheets Aug. 31, 2000 Nov. 30, 1999 ------------- ------------- (Unaudited) (See note) Assets Current assets: Cash and cash equivalents $ 1,119,010 $ 591,299 Marketable securities 13,490,298 - Accounts receivable 3,249,225 1,245,078 Inventory 496,688 876,460 Prepaid expenses 61,747 52,636 Other current assets 65,181 177,680 Land and building held for sale 587,133 596,304 ------------- ----------- Total current assets 19,069,282 3,539,457 ------------- ----------- Property and equipment at cost 1,279,204 322,734 Less accumulated depreciation 225,345 111,036 ------------- ----------- Net property and equipment 1,053,859 211,698 ------------- ----------- Other assets 332,081 97,108 Investment in and advances to subsidiary 380,913 424,575 Investments under the equity method 1,019,896 - Investments under cost method 194,929 1,469,929 Goodwill 3,126,842 1,554,370 ------------- ----------- 5,054,661 3,545,982 ------------- ----------- Total assets $ 25,177,802 $ 7,297,137 ============= =========== Liabilities and stockholders' equity Current liabilities: Loans payable to financial institutions and current maturities of long-term debt $ 1,361,704 $ 523,695 Due to related parties - 34,725 Accounts payable 1,467,834 1,302,714 Accrued expenses and taxes 1,638,571 1,779,704 ------------- ----------- Total current liabilities 4,468,109 3,640,838 ------------- ----------- Long-term debt, less current maturities 119,970 197,772 ------------- ----------- Stockholders' equity: Preferred stock, $.10 par value, 1,000,000 shares authorized Series B issued, 116 issued in 2000 and 196 issued in 1999 12 20 Common stock $.10 par value, 50,000,000 shares authorized, 13,825,249 issued (2000), 11,287,164 issued (1999) 1,382,525 1,128,715 Capital in excess of par value 24,340,574 18,808,397 Retained earnings (deficit) (18,511,235) (16,370,088) Treasury stock at cost (27,500) (27,500) Accumulated other comprehensive income 13,405,347 (81,017) ------------- ----------- Total stockholders' equity 20,589,723 3,458,527 ------------- ----------- Total liabilities and stockholders' equity $25,177,802 $7,297,137 ============= =========== See notes to the condensed financial statements Note: The balance sheet at November 30, 1999 has been derived from audited financial statements at that date but does not include all the information and footnotes required by generally accepted accounting principles. 2 eLEC Communications Corp. and Subsidiaries Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited) For the Nine Months Ended For the Three Months Ended Aug. 31, 2000 Aug. 31, 1999 Aug. 31, 2000 Aug. 31, 1999 -------------- -------------- -------------- --------------- Revenues $9,460,940 $2,696,745 $4,078,312 $1,029,455 Cost of revenues 6,678,187 1,845,654 2,917,494 713,846 ----------- ----------- ----------- ----------- Gross profit 2,782,753 851,091 1,160,818 315,609 ----------- ----------- ----------- ----------- Costs and expenses: Selling and general and administrative 5,619,125 1,592,304 2,383,157 685,433 Depreciation and amortization 509,909 222,906 209,641 72,907 Equity in loss of investee 255,104 1,463,472 92,135 419,122 ----------- ----------- ----------- ----------- Total costs and expenses 6,384,138 3,278,682 2,684,933 1,177,462 ----------- ----------- ----------- ----------- Loss from operations (3,601,385) (2,427,591) (1,524,115) (861,853) ----------- ----------- ----------- ----------- Other (income) expense: Interest expense 59,713 11,476 32,839 8,394 Interest income (33,583) (173) (7,601) - Miscellaneous income, net (1,305,013) - (1,237,734) - ----------- ----------- ----------- ----------- (1,278,883) 11,303 (1,212,496) 8,394 ----------- ----------- ----------- ----------- Loss from continuing operations (2,322,502) (2,438,894) (311,619) (870,247) ----------- ----------- ----------- ----------- Loss from discontinued operations - (3,259,999) - (1,614,579) Gain (loss) on disposal of discontinued operations 181,355 (720,230) 181,355 (720,230) ----------- ----------- ----------- ----------- 181,355 (3,980,229) 181,355 (2,334,809) ----------- ----------- ----------- ----------- Net loss (2,141,147) (6,419,123) (130,264) (3,205,056) Other comprehensive income, principally unrealized gain on marketable securities 13,486,364 - 13,494,721 - ----------- ----------- ----------- ----------- Comprehensive income $11,345,217 ($6,419,123) $13,364,457 ($3,205,056) =========== ============ =========== =========== Basic and diluted income (loss) per share Continuing operations ($0.18) ($0.28) (0.02) ($0.09) Discontinued operations 0.01 ( 0.45) 0.01 (0.22) ----------- ----------- ----------- ----------- Net loss ($0.17) ($0.73) ($0.01) ($0.31) =========== ============ =========== =========== Weighted average number of common shares outstanding 12,919,425 8,740,979 13,590,597 10,209,134 =========== ============ =========== =========== See notes to the condensed consolidated financial statements. 3 eLEC Communications Corp. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) For the Nine Months Ended Aug. 31, 2000 Aug. 31, 1999 ------------- ------------- Net cash (used in) provided by operating activities: ($4,362,372) $248,169 ----------- ----------- Cash flows from investing activities: Purchase of property and equipment (637,796) (68,896) Proceeds from sale of marketable securities 1,305,013 -- Other 35,944 30,968 ----------- ----------- Net cash provided by (used in) investing activities 703,161 (37,928) ----------- ----------- Cash flows from financing activities: Increase (decrease) in loans payable to financial institutions and related parties 356,060 (1,284,814) Proceeds from exercise of warrants 1,751,609 -- Proceeds from private placement of common stock 1,829,500 364,100 Proceeds from private placement of preferred stock -- 196,000 Proceeds from exercise of stock options 238,918 291,000 ----------- ----------- Net cash provided by (used in) financing activities 4,176,087 (433,714) ----------- ----------- Effect of exchange rate changes on cash 10,835 54,611 ----------- ----------- Increase (decrease) in cash and cash equivalents 527,711 (168,862) Cash and cash equivalents at beginning of period 591,299 352,489 ----------- ----------- Cash and cash equivalents at the end of period $ 1,119,010 $ 183,627 =========== =========== Supplemental disclosures of cash flow information Cash paid during the period for: Interest $ 63,505 $ 243,997 ----------- ----------- See Part II, Item 2., Changes in Securities, for non-cash financing activities during the nine-month period ending August 31, 2000. See notes to the condensed consolidated financial statements. 4 eLEC COMMUNICATIONS CORP. ------------------------- Notes To Condensed Consolidated Financial Statements (Unaudited) ---------------------------------------------------------------- Note 1-Basis of Presentation - ---------------------------- The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended August 31, 2000 are not necessarily indicative of the results that may be expected for the year ended November 30, 2000. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended November 30, 1999. Note 2-Financing Arrangements - ----------------------------- On March 3, 1999, our subsidiary, Essex Communications, Inc. ("Essex"), entered into a receivable sale agreement with Receivables Funding Corp. ("RFC") that provides for Essex to sell up to $500,000 of its eligible receivables to RFC on a periodic basis and to grant RFC a security interest in the receivables purchased by RFC. The agreement was amended in December 1999 to increase to $1,000,000, and again in August 2000, to increase to $2,000,000 the amount of eligible receivables Essex could sell to RFC. The agreement does not transfer the risk of loss to RFC, and has been treated by us as a financing for financial statement purposes. As of August 31, 2000, Essex had borrowings of approximately $917,000 under the Agreement. Our subsidiary, Telecarrier Services Inc. ("Telecarrier"), has a $150,000 line of credit with a bank. Amounts drawn on the line of credit bear interest at the rate of 9.75% per annum. The line is payable on demand subject to sixty (60) days written notice. At August 31, 2000, the entire line was utilized. Our Canadian subsidiary, Sirco International (Canada) Ltd., has a real property mortgage loan with its bank, National Bank of Canada. The mortgage loan was payable in monthly installments of approximately $3,300, including interest at 10.25% per annum, with a balloon payment of approximately $295,000 due in July 2000. We have informed the National Bank of Canada of our intention to sell this property and the bank has agreed to continue the mortgage loan under a demand note until the property is sold. We are actively pursuing potential buyers for this property and intend to sell the property upon receiving an acceptable offer. At August 31, 2000, the mortgage loan was approximately $295,000. 5 Note 3- Marketable Securities - ----------------------------- On August 9, 2000, pursuant to an agreement between the shareholders of Access One Communications Corp. ("Access One") and Talk.Com Inc. ("Talk"), we exchanged all of our remaining ownership interest in Access One (3,284,598 shares of Access) for 1,876,911 shares of Talk, a company whose shares are traded. As of August 31, 2000, we held 1,876,911 shares of Talk and a warrant to purchase an additional 285,714 shares. On August 31, 2000, Talk shares closed at $ 7.19 per share. In accordance with Statement of Financial Accounting Standards No. 115, we have accounted for this investment in Talk shares as available-for-sale securities, and reported such securities at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Our investment in Talk is subject to potentially significant market fluctuations. Pursuant to the agreement, sale of any of the Talk shares is restricted until October 31, 2000. Further, 187,691 of our Talk shares (10%) have been placed in escrow for a period of one year ending on August 9, 2001 to secure certain representations and warranties made by shareholders of Access One in connection with the transaction. During the quarter ended August 31, 2000, prior to the aforementioned exchange, we sold 745,042 shares of Access. Since our investment in Access had already been reduced to zero value (accounted for on the equity method), the sale resulted in a net gain of $ 1,237,107, which is included in miscellaneous income, net. Included in the above were 99,640 shares sold on behalf of a related party for which no gain has been recorded. Note 4-Discontinued Operations - ------------------------------ On August 11, 1999, we sold certain assets and assigned certain licenses of our former domestic luggage division to Interbrand L.L.C., an unaffilated accessory company, and subsequently discontinued operations of our wholesale luggage segment. The operating results of our former wholesale luggage segment have been accounted for as a discontinued operation and the results of operations have been excluded from continuing operations in the condensed consolidated statements of operations for all periods presented, including the prior period financial statements in which we have restated the operating results of our former wholesale luggage segment as a discontinued operation. Interest expense relating to borrowings by our former wholesale luggage segment is included as operating expenses of such discontinued segment. Operating results of the discontinued operation for the three and nine-month periods ending August 31, 2000 and August 31, 1999 are as follows: For the Nine Months Ended For the Three Months Ended Aug.31, 2000 Aug. 31, 1999 Aug. 31, 2000 Aug. 31, 1999 -------------- --------------- ---------------- ---------------- Revenues $ - $6,267,355 $ - $2,360,489 Cost of revenues - 5,618,226 - 2,139,178 Operating expenses - 3,909,128 - 1,835,890 Loss from discontinued operations - $3,259,999) - ($1,614,579) ---------- ---------- ---------- ----------- 6 Note 5 - Operating Segment Information - -------------------------------------- We are organized into two operating segments, a full-service telecommunications segment and a specialty retail segment. A discussion of segment results is presented in "Item 2". Management's Analysis and Discussion of Financial Condition and Results of Operations. Segment information is summarized as follows: For the Nine Months Ended For the Three Months Ended Aug.31, 2000 Aug. 31, 1999 Aug. 31, 2000 Aug. 31, 1999 ------------- -------------- -------------- -------------- Telecommunications Revenues $7,965,728 $1,331,310 $3,560,374 $532,105 Loss from continuing operations ($2,413,654) ($2,390,672) ($373,784) ($866,408) Specialty retail Revenues $1,495,212 $1,365,435 $517,938 $497,350 Income (loss) from continuing operations $91,152 ($48,222) $62,165 ($3,839) Total Revenue $9,460,940 $2,696,745 $4,078,312 $1,029,455 Loss from continuing operations ($2,322,502) ($2,438,894) ($311,619) ($870,247) Note 6 - Major Customer - ----------------------- During the nine months and three months ended August 31, 2000, we had telecommunications revenue from one customer which accounted for 19.3% and 27.2% of telecommunications revenue. Note 7 - Income Taxes - --------------------- At November 30, 1999, we had net operating loss carryforwards for Federal income tax purposes of approximately $15,000,000 expiring in the years 2001 through 2019. There is an annual limitation of approximately $187,000 on the utilization of approximately $2,300,000 of such net operating loss carryforwards under the provisions of Internal Revenue Code Section 382. As of August 31, 2000, we had an unrealized gain on our ownership of Talk of approximately $13,490,000. Upon the sale of the Talk stock, the net operating loss will be reduced to the extent of any realized gain on the sale. Accordingly, deferred taxes have not been provided on the unrealized gain. 7 Item 2. Management's Analysis and Discussion of Financial Condition and Results ------------------------------------------------------------------------ of Operations ------------- The statements contained in this Report that are not historical facts are "forward-looking statements" that can be identified by the use of forward-looking terminology, such as "estimates," "projects," "plans," "believes," "expects," "anticipates," "intends," or the negative thereof or other variations thereon, or by discussions of strategy that involve risks and uncertainties. We wish to caution the reader of the forward-looking statements, that such statements, which are contained in this Report, reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties and other factors, including, but not limited to, economic, competitive, regulatory, technological, key employee and general business factors affecting our operations, markets, growth, services, products and other factors discussed in our other filings with the Securities and Exchange Commission, and that these statements are only estimates or predictions. No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of risks facing us, and actual events may differ from the assumptions underlying statements that have been made regarding anticipated events. Factors that may cause our actual results, performance or achievements, or industry results, to differ materially from those contemplated by such forward-looking statements include, without limitation: (1) the availability of additional funds to successfully pursue our business plan; (2) our ability to maintain, attract and integrate internal management, technical information and management information systems; (3) the time and expense to construct our planned network operating center and digital subscriber line network; (4) the cooperation of incumbent carriers in implementing the unbundled network elements platform required by the Federal Communications Commission; (5) our ability to market our services to current and new customers and to generate customer demand for our products and services in the geographical areas in which we can operate; (6) our success in gaining regulatory approval to access new markets; (7) our ability to negotiate and maintain suitable interconnection agreements with incumbent carriers; (8) the availability and maintenance of suitable vendor relationships, in a timely manner, at reasonable cost; (9) the impact of changes in telecommunication laws and regulations; (10) the intensity of competition; and (11) general economic conditions. All written and oral forward-looking statements made in connection with this Report that are attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Given the uncertainties that surround such statements, prospective investors are cautioned not to place undue reliance on such forward-looking statements. Overview - -------- eLEC Communications Corp. is a full-service telecommunications company that focuses on developing integrated telephone service in the emerging competitive local exchange carrier ("CLEC") industry. We offer an integrated set of telecommunications products and services, including local exchange, local access, domestic and international long distance telephone, calling cards, paging, Internet access, dedicated access, Web site design, Web site hosting, Internet-based yellow-pages directory listings and other enhanced and value-added telecommunications services tailored to meet the needs of our customers and the growing marketplace demand from small- and medium-sized businesses for reliability and speed. The nature of our telecommunications business is rapidly evolving and has a limited operating history. It has rapidly grown and is now substantially larger in revenues than a specialty retail business we also own, which sells products over the Internet and in three retail stores. As a result, we believe period-to-period comparisons of our revenues and operating results, including our network operations and other operating expenses as a percentage of total revenue, are not 8 meaningful and should not be relied upon as indicators of future performance. We also believe our historical growth rates are not indicative of future growth rates. We primarily utilize the Unbundled Network Elements Platform ("UNE-P") to provide local telephone service to our customers. The UNE-P service offering allows us to lease, on an as-needed basis, multiple unbundled network elements and combine them into our own full service platform. The major categories of network elements include loops, local circuit-switching facilities, operations support systems, network interface devices, transport between central offices, and signaling and call-related databases. We have chosen this platform to grow our customer base because it allows us to rapidly enter new markets with minimal capital expenditures. For example, we can build a customer base without deploying either a local switch or last-mile infrastructure. Instead of buying and maintaining our own equipment in the field, we utilize the reliable equipment owned by the Regional Bell Operating Companies and focus our resources on building a customer base. We are in the process of applying for certification in 48 states to operate as a facilities-based CLEC so that we can operate under the UNE-P service offering in the entire continental United States. We are also building a network operations center in Norwalk, Connecticut to provide us with surveillance and deployment capabilities for high-speed Internet access via Digital Subscriber Lines ("DSL"). We plan to build our own packet-switched data network, initially to be offered to our existing voice customer base, and utilizing the packet-switched technology to route local and long distance voice traffic over the Internet. Building and expanding our business has required and will continue to require us to make significant expenditures in excess of the amounts of cash that our business is generating. As part of our "smart build" network strategy, we defer the purchase of equipment in the field and focus first on building our customer base. We believe our strategy of leasing the circuit-switched networks and building our own packet-switched network, will help our operations to generate positive cash flow much sooner than the strategy used by other CLECs of building a circuit-switched network before a customer base has been established. We have experienced operating losses and generated negative cash flow since we began operating as a CLEC and we expect to continue to generate negative cash flow for a period of time while we continue to expand our network and develop product offerings and our customer base. We cannot assure you that our revenue or customer base will increase or that we will be able to achieve or sustain positive cash flow. 9 Three and Nine Months Ended August 31, 2000 vs. August 31, 1999 - --------------------------------------------------------------- Continuing operations Our net revenues for the three and nine-month periods ended August 31, 2000 increased by approximately $3,049,000 and $6,764,000, respectively, or approximately 296% and 251%, respectively, to approximately $4,078,000 and $9,461,000, respectively, as compared to approximately $1,029,000 and $2,697,000, respectively, reported for the same periods in fiscal 1999. Net revenues of our telecommunications division increased by approximately $3,028,000 and $6,635,000, respectively, or approximately 569% and 498%, respectively, to approximately $3,560,000 and $7,966,000, respectively, for the three and nine-month periods ending August 31, 2000 from approximately $532,000 and $1,331,000, respectively, reported for the same periods in fiscal 1999. The increase was attributable to the rapid growth in the number of installed access lines that we provisioned during the twelve months ended August 31, 2000 from approximately 4,200 installed access lines as of August 31, 1999 to approximately 31,000 installed access lines as of August 31, 2000. Net revenues of our specialty retail division, consisting of the operations of Airline Ventures, Inc. ("AVI"), increased by approximately $21,000 and $130,000, respectively, for the three and nine-month periods ending August 31, 2000 to approximately $518,000 and $1,495,000, respectively, from approximately $497,000 and $1,365,000, respectively, reported in the same fiscal periods in 1999. AVI operates three retail stores in Texas for professional airline flight-crew members and sells pilot uniforms, study guides and travel products. Its products are sold on the E-commerce site, www.avishop.com. Our gross profit for the three and nine-month periods ending August 31, 2000 increased by approximately $845,000 and $1,932,000, respectively, to approximately $1,161,000 and $2,783,000, respectively, from approximately $316,000 and $851,000, respectively, reported in the same fiscal periods in 1999, and the gross profit percentage decreased to 28.5% from 30.7% and to 29.4% from 31.6% for the three and nine months ended August 31, 2000 as compared to the prior fiscal periods. The decrease in gross profit percentage is attributable to the significant increase in telecommunications revenue during the fiscal 2000 periods. Although gross margins for the telecommunications division have increased in the fiscal 2000 periods, they remain lower than the gross margins of the specialty retail division. The telecommunications division recorded gross margins of approximately 26.1% and 26.8% for the three and nine-month periods ending August 31, 2000, as compared to gross margins of approximately 25.9% and 21.5% for the three and nine-month periods ending August 31, 1999. We anticipate that the gross margins in our telecommunications division will increase somewhat in the fourth quarter as we are able to switch more of our customer base to the UNE-P service offering. Approximately 66% of our customers were on the UNE-P service offering as of August 31, 2000. Our specialty retail division has recorded gross margins of approximately 44.6% and 43.2% for the three and nine-month periods ending August 31, 2000, as compared to approximately 35.7% and 41.4% in the comparable periods in 1999. We expect the gross margin of our specialty retail segment to continue at its current level of over 40%. Selling, general and administrative expenses increased by approximately $1,698,000 and $4,027,000, respectively, to approximately $2,383,000 and $5,619,000, respectively, for the three and nine months ending August 31, 2000 from approximately $685,000 and $1,592,000, respectively, reported in prior fiscal periods. A major portion of this increase was attributable to the costs of our expanded marketing efforts and to the labor and facility expenses incurred by our telecommunications division. This increase in operating expenses is directly related to the significant increase in telecommunications revenues in the three and nine months ending August 31, 2000 as compared to the prior fiscal period in 1999. 10 At August 31, 2000, we owned approximately 27% of the capital stock of RiderPoint, Inc. ("RiderPoint"). RiderPoint specializes in the development of comparative rating insurance software and sells motorcycle insurance through its wholly owned subsidiary. As our investment in RiderPoint is accounted for under the equity method of accounting, we are required to include a portion of RiderPoint's net loss in our results of operations. For the three and nine months ending August 31, 2000, we have recorded a loss of approximately $92,000 and $255,000, respectively, relating to our investment in RiderPoint. As of August 31, 1999, we owned 19% of RiderPoint, which was at such date accounted for under the cost method of accounting. At August 31, 1999, we were the largest shareholder of Access One, owning approximately 39% of Access One' capital stock. As our investment in Access One was accounted for under the equity method of accounting, we were required to include a portion of Access One's net loss in our results of operations. For the three and nine months ending August 31, 1999, we recorded losses of approximately $419,000 and $1,463,000, respectively, relating to our investment in Access One. As of November 30, 1999, our investment in Access One was recorded at zero. Subsequent to that date, we no longer recognized any operating losses generated by Access One. We sold approximately 16% of our investment in Access One during the quarter ended August 31, 2000 and recorded a net gain on the sale of approximately $1,237,000. On August 9, 2000, pursuant to an agreement between the shareholders of Access One and Talk, a Company whose shares are publically traded, we exchanged all of our remaining ownership interest in Access One for 1,876,911 shares of Talk and a warrant to purchase 285,714 additional shares of Talk. Interest expense for the three and nine-month periods ending August 31, 2000 increased by approximately $24,000 and $48,000, respectively, from the amount reported in the three and nine-month periods ending August 31, 1999 primarily due to increased average borrowings. Miscellaneous income of approximately $1,305,000 for the nine-month period ending August 31, 2000 resulted from the sale of shares of Access One common stock. Discontinued operations On August 11, 1999, we sold certain assets and assigned certain licenses of our former domestic luggage division to Interbrand L.L.C., an unaffilated accessory company, and subsequently discontinued operations of our wholesale luggage segment. The operating results of our wholesale luggage segment have been accounted for as a discontinued operation and the results of operations have been excluded from continuing operations in the condensed consolidated statements of operations for all periods presented, including the prior period financial statements in which we have restated the operating results of our former wholesale luggage segment as a discontinued operation. Interest expense relating to borrowings by our former wholesale luggage segment is included as operating expenses of such discontinued segment. We reported no results from discontinued operations for the three and nine-month periods ending August 31, 2000 as compared to losses of approximately $1,615,000 and $3,260,000, respectively, for the three and nine-month periods ending August 31, 1999. 11 For the three and nine-month periods ending August 31, 2000, we reported gains on disposal of discontinued operations of approximately $181,000, as compared to losses on disposal of discontinued operations of approximately $720,000 reported in prior fiscal period. The gains were a result of the liquidation of certain liabilities at a discount from the amount originally incurred. Liquidity and Capital Resources At August 31, 2000, we had cash and cash equivalents available of approximately $1,119,000, and working capital of approximately $14,601,000 as compared to cash and cash equivalents available of approximately of $591,000, and negative working capital of approximately $101,000 at November 30, 1999. Net cash (used in) provided by operating activities (including discontinued operations) aggregated approximately ($4,362,000) and $248,000 in the nine months ended August 31, 2000 and 1999, respectively. The increase in net cash used in operating activities in fiscal 2000 was primarily the result of an increase of approximately $2,300,000 in accounts receivable, resulting from the significant increase in revenues recorded by our telecommunications division and the operating loss for the period. Net cash provided by (used in) investing activities aggregated approximately $703,000 and ($38,000) in the nine months ended August 31, 2000 and 1999, respectively. The source of cash provided from investing activities in fiscal 2000 was the proceeds from the sale of marketable securities offset by the purchase of property and equipment. Net cash provided by (used in) financing activities aggregated approximately $4,176,000 and ($434,000) in the nine months ended August 31, 2000 and 1999, respectively. For the period ended August 31, 2000, net cash provided by financing activities resulted primarily from the proceeds of short-term borrowings of approximately $356,000; the proceeds from the exercise of warrants of approximately $1,752,000; the proceeds from a private placement of common stock of approximately $1,830,000; and the proceeds from the exercise of stock options of approximately $239,000. On March 3, 1999, our subsidiary, Essex, entered into a receivable sale agreement with Receivables Funding Corp. ("RFC") that provides for Essex to sell up to $500,000 of its eligible receivables to RFC on a periodic basis and to grant RFC a security interest in the receivables purchased by RFC. The agreement was amended in December 1999 to increase to 12 $1,000,000, and again in August 2000, to increase to $2,000,000 the amount of eligible receivables Essex could sell RFC. The agreement does not transfer the risk of loss to RFC, and has been treated by us as a financing for financial statement purposes. As of August 31, 2000, Essex had borrowings of approximately $917,000 under the Agreement. Our subsidiary, Telecarrier, has a $150,000 line of credit with a bank. Amounts drawn on the line of credit bear interest at the rate of 9.75% per annum. The line is payable on demand subject to sixty (60) days written notice. At August 31, 2000, the entire line was utilized. Our Canadian subsidiary, Sirco International (Canada) Ltd., has a real property mortgage loan with its bank, National Bank of Canada. The mortgage loan was payable in monthly installments of approximately $3,300, including interest at 10.25% per annum, with a balloon payment of approximately $295,000 due in July 2000. We have informed the National Bank of Canada of our intention to sell this property and the bank has agreed to extend the monthly payments on the mortgage loan under a demand note until the property is sold. We are actively pursuing potential buyers for this property and intend to sell the property upon receipt of an acceptable offer. At August 31, 2000, the mortgage loan was approximately $295,000. For the nine months ended August 31, 2000, we added approximately $956,000 in capital expenditures. We plan to make an additional $300,000 in capital expenditures in fiscal 2000 in conjunction with the establishment of a network operations center in Norwalk, Connecticut and with the planned expansion to become a nationwide CLEC. We anticipate financing these expenditures through equipment leases and by using our existing working capital. On August 9, 2000, Talk.com Inc. ("Talk"), an integrated communications provider, merged with Access One. As a result of the merger, we own approximately 1.9 million shares of Talk's common stock and have warrants for approximately 286,000 additional shares. The stock becomes freely tradable after October 31, 2000. At August 31, 2000, our investment in Talk was valued at approximately $13,490,000. Although our operating activities may provide a source of cash in certain periods, to the extent we continue to experience rapid growth in the future, we anticipate that our operating and investing activities will use large amounts of cash in excess of the cash generated from operating activities. Consequently, future rapid growth will require us to liquidate, from time to time, a portion of our investment in Talk, or obtain additional equity or debt financing that may not be available on attractive terms, or at all, or may be dilutive. Although we believe we have negotiated an appropriate debt facility to fund some of our anticipated growth, and we believe we can monetize portions of the Talk stock to fund our remaining growth capital needs, changes in the value or liquidity of the Talk stock may require us to modify, delay or abandon our current business plan, which is likely to materially and adversely affect our business. 13 eLEC COMMUNICATIONS CORP. PART II-OTHER INFORMATION Item 2. Changes in Securities In August 2000, we issued an aggregate of 225,000 shares of our common stock in conjunction with a private equity placement. Such transaction was effected pursuant to Section 4(2) of the Securities Act of 1933, as amended 14 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. (1) Audit Committee Charter approved and adopted by the Board of Directors of the Company, on May 24, 2000. 27-- Financial Data Schedule. (b) Reports on Form 8-K None. 15 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. eLEC Communications Corp. October 16, 2000 By: /s/ Paul H. Riss - ------------------------------------- ------------------------- Date Paul H. Riss Chief Executive Officer (Principal Financial and Accounting Officer) 16 EXHIBIT INDEX No. Description Page No. - --- ----------- -------- 27 Financial Data Schedule. 18 17