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, 2001.
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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
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eLEC Communications Corp.
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(Exact Name of Registrant as Specified in Its Charter)
New York 13-2511270
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
543 Main Street
New Rochelle, New York 10801
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code 914-633-6500
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(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ].
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 15,003,782 shares of
Common Stock, par value $.10 per share, as of October 1, 2001.
PART 1. FINANCIAL INFORMATION
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Item 1. Financial Statements
eLEC Communications Corp. and Subsidiaries
Condensed Consolidated Balance Sheets
Aug. 31, 2001 Nov. 30, 2000
------------- -------------
(Unaudited) (See note)
Assets
Current assets:
Cash and cash equivalents $ 357,984 $ 509,657
Accounts receivable 4,092,052 2,803,888
Investment securities 176,229 1,619,822
Inventory 420,764 529,933
Prepaid expenses and other current assets 617,985 579,107
Land and building held for sale -- 533,239
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Total current assets 5,665,014 6,575,646
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Property, plant and equipment, net 3,993,764 2,035,117
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Other assets
Other investments 240,000 100,000
Goodwill 2,938,585 3,421,512
Investment securities, non-current 550,000 2,000,000
Other 674,050 734,555
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4,402,635 6,256,067
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Total assets $ 14,061,413 $ 14,866,830
============ ============
Liabilities and stockholders' equity
Current liabilities:
Secured short-term borrowings $ 150,000 $ 150,000
Current maturities of long-term debt 222,106 398,709
Accounts payable 2,680,416 2,364,977
Accrued expenses 3,485,802 1,294,457
Taxes payable 365,385 311,165
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Total current liabilities 6,903,709 4,519,308
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Long-term debt, less current maturities 5,358,860 1,715,723
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Stockholders' equity:
Preferred stock, $.10 par value, 1,000,000 shares authorized
Series B issued, 16 and 116 shares in 2001 and 2000 2 12
Common stock $.10 par value, 50,000,000 shares authorized,
15,003,782 and 14,642,421 shares issued in 2001 and 2000 1,500,378 1,464,242
Capital in excess of par value 25,423,330 25,319,457
Deficit (25,813,286) (21,744,234)
Treasury stock at cost, 11,000 shares (27,500) (27,500)
Accumulated other comprehensive income 715,920 3,619,822
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Total stockholders' equity 1,798,844 8,631,799
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Total liabilities and stockholders' equity $ 14,061,413 $ 14,866,830
============ ============
See notes to the condensed consolidated financial statements
Note: The balance sheet at November 30, 2000 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
(Unaudited)
For the Nine Months Ended For the Three Months Ended
Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 2001 Aug. 31, 2000
-------------- -------------- -------------- --------------
Revenues $ 16,516,231 $ 9,460,940 $ 6,147,775 $ 4,078,312
Cost of revenues 10,124,651 6,678,187 3,609,168 2,917,494
------------ ------------ ------------ ------------
Gross profit 6,391,580 2,782,753 2,538,607 1,160,818
------------ ------------ ------------ ------------
Costs and expenses:
Selling and general and administrative 10,126,406 5,619,125 3,103,334 2,383,157
Depreciation and amortization 781,706 509,909 294,069 209,641
Equity in loss of investee -- 255,104 -- 92,135
------------ ------------ ------------ ------------
Total costs and expenses 10,908,112 6,384,138 3,397,403 2,684,933
------------ ------------ ------------ ------------
Loss from operations (4,516,532) (3,601,385) (858,796) (1,524,115)
------------ ------------ ------------ ------------
Other income (expense):
Interest expense (506,416) (59,713) (200,417) (32,839)
Interest income 23,508 33,583 9,806 7,601
Miscellaneous income, net 930,388 1,305,013 64,841 1,237,734
------------ ------------ ------------ ------------
447,480 1,278,883 (125,770) 1,212,496
------------ ------------ ------------ ------------
Loss from continuing operations (4,069,052) (2,322,502) (984,566) (311,619)
Gain on disposal of discontinued operations -- 181,355 -- 181,355
------------ ------------ ------------ ------------
Net loss ($ 4,069,052) ($ 2,141,147) ($ 984,566) ($ 130,264)
============ ============ ============ ============
Basic and diluted (loss) income per share
Continuing operations ($ 0.27) ($ 0.18) ($ 0.07) ($ 0.02)
Discontinued operations -- 0.01 -- 0.01
------------ ------------ ------------ ------------
Net loss ($ 0.27) ($ 0.17) ($ 0.07) ($ 0.01)
============ ============ ============ ============
Weighted average number of common shares outstanding
14,871,898 12,919,425 14,966,103 13,590,597
============ ============ ============ ============
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, 2001 Aug. 31, 2000
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Net cash used in operating activities: ($2,897,427) ($4,362,372)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (1,179,167) (637,796)
Proceeds from sale of marketable securities 992,062 1,305,013
Proceeds from sale of property and equipment 933,238 --
Proceeds from agreement to sell subsidiary 43,662 43,662
Acquisition of Telecarrier Services Inc. net of cash received -- (7,718)
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Net cash provided by investing activities 789,795 703,161
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Cash flows from financing activities:
Increase in loans payable to financial institutions net of repayment 2,239,879 356,060
Pay-off of Canadian mortgage (283,920) --
Proceeds from exercise of warrants -- 1,751,609
Proceeds from private placement of common stock -- 1,829,500
Proceeds from exercise of stock options -- 238,918
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Net cash provided by financing activities 1,955,959 4,176,087
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Effect of exchange rate changes on cash -- 10,835
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(Decrease) increase in cash and cash equivalents (151,673) 527,711
Cash and cash equivalents at beginning of period 509,657 591,299
----------- -----------
Cash and cash equivalents at the end of period $ 357,984 $ 1,119,010
=========== ===========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 428,052 $ 63,505
----------- -----------
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, 2001
are not necessarily indicative of the results that may be expected for the year
ended November 30, 2001. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended November 30, 2000.
Note 2-Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No.141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets." These standards become
effective for fiscal years beginning after December 15, 2001, with early
adoption permitted. Beginning in the first quarter of fiscal 2002, goodwill will
no longer be amortized but will be subject to new impairment tests. All other
intangible assets will continue to be amortized over their useful lives. The new
rules also require business combinations initiated after June 30, 2001 to be
accounted for using the purchase method of accounting and goodwill acquired
after June 30, 2001 will not be amortized. Goodwill existing at June 30, 2001,
will continue to be amortized through the current year ended November 30, 2001.
Through the current year, the Company will test goodwill for impairment using
the current method, which uses an undiscounted cash flow test. During the next
fiscal year, the Company will begin to test goodwill for impairment under the
new rules, applying a fair-value-based test. Based on acquisitions completed as
of June 30, 2001, application of the goodwill non-amortization provisions of
these rules is expected to result in a reduction of amortization next year of
approximately $640,000.
Note 3-Principal Financing Arrangements
On October 23, 2000, we converted our existing receivable sales agreement
between RFC Capital Corporation ("RFC") and our wholly-owned subsidiary, Essex
Communications, Inc. ("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 equal to the prime
rate plus 4.5% (11% at August 31, 2001), 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
5
additional fees. All amounts payable under the loan agreement are secured by
substantially all of the assets of Essex. eLEC Communications Corp. ("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 America Holdings, Inc. ("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 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 fair market value
of the warrants has been accounted for as an additional interest expense over
the term of the agreement. At August 31, 2001, approximately $4,229,000 was
outstanding under the agreement.
Note 4-Investment Securities
Details as to investment securities at August 31, 2001 are as follows:
Fair Unrealized
Cost Value Holding Gain
---- ----- ------------
Equity securities $10,309 $726,229 $715,920
Our investment securities consisted of 1,320,415 common shares of Talk valued at
$.55 per share. 1,000,000 of such shares were held in escrow by RFC to secure
long-term debt, and are classified as a non-current asset. In addition, we hold
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 market fluctuations.
During the quarter ended August 31, 2001, we sold 64,000 shares of Talk,
realizing a gain of $62,659, which is included under the caption "Miscellaneous
income, net" on the Condensed Consolidated Statements of Operations and
Comprehensive Loss.
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, 2001 Aug. 31, 2000 Aug. 31, 2001 Aug. 31, 2000
-------------- -------------- -------------- --------------
Telecommunications
Revenues $ 14,947,642 $ 7,965,728 $ 5,649,465 $ 3,560,374
Net loss ($ 4,181,574) ($ 2,413,654) ($ 1,005,946) ($ 373,784)
Specialty retail
Revenues $ 1,568,589 $ 1,495,212 $ 498,310 $ 517,938
Net income $ 112,522 $ 91,152 $ 21,380 $ 62,165
Total
Revenues $ 16,516,231 $ 9,460,940 $ 6,147,775 $ 4,078,312
Net loss ($ 4,069,052) ($ 2,322,502) ($ 984,566) ($ 311,619)
Note 6-Major Customer
During the nine and three months ended August 31, 2001, we had
telecommunications revenue from one customer that accounted for approximately
17% and 15%, respectively, of our telecommunications revenue.
Note 7-Income Taxes
At November 30, 2000, 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 $2,000,000 of such net operating loss carryforwards under the
provisions of Internal Revenue Code Section 382.
As of August 31, 2001, we had an unrealized gain on our ownership of Talk of
approximately $715,920. Upon the sale of the Talk stock, the net operating loss
will be reduced to the extent of any realized gain on the sale. Accordingly,
deferred taxes have not been provided on the unrealized gain.
Note 8-Earnings (Loss) Per Common Share
Basic earnings (loss) per common share is calculated by dividing net income
(loss) by the weighted average number of common shares outstanding during the
period. Diluted earnings (loss) per share is calculated by dividing net income
(loss) by the sum of the weighted average number of common shares outstanding
plus all additional common
8
shares that would have been outstanding if potentially dilutive securities had
been issued unless such inclusion reduced the loss per share. There were no
potentially dilutive securities for the nine and three months ended August 31,
2001 and 2000.
In addition, options and warrants where the exercise price was greater than the
average market price of the common shares of approximately 3,260,000 and
1,570,000 for the nine month period and 3,390,000 and 1,570,000 for the three
month period ended August 31, 2001 and 2000, were excluded from the computation
of diluted loss per share.
Note 9-Comprehensive (loss) income
The components of comprehensive (loss) income were as follows:
For the Nine Months Ended For the Three Months Ended
Aug. 31, 2001 Aug. 31, 2000 Aug. 31, 2001 Aug. 31, 2000
-------------- -------------- -------------- --------------
Net loss ($ 4,069,052) ($ 2,141,147) ($ 984,566) ($ 130,264)
Other comprehensive (loss) income-
unrealized (loss) gain on marketable securities (1,912,910) 13,486,364 (1,122,353) 13,494,721
------------ ------------ ------------ ------------
Comprehensive (loss) income ($ 5,981,962) $ 11,345,217 ($ 2,106,919) $ 13,364,457
============ ============ ============ ============
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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" 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. 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, licenses
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 the 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 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) our ability to market our services to current and
new customers and generate customer demand for our product 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 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 (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 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.
9
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 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 from the incumbent local exchange carriers ("ILECs"), on an
as-needed basis, multiple unbundled network elements and combine them into our
own full service platform. We lease a combination of network elements, including
the local loop, a network interface device, where the local loop terminates at
the customer's premises, a switch port that connects the local loop to the
ILEC's switch, the switching functionality of the ILEC's switch, and the
transport of telephone calls between ILEC switches for local calls, or to a long
distance telephone company's point-of-presence for a long distance call. 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 ILECs and focus our
resources on building a customer base.
We have applied for certification in 48 states to operate as a facilities-based
CLEC so that we can utilize the UNE-P service offering in the entire continental
United States. We have received approvals in 39 states and are fully operational
on UNE-P in 15 states. We have built a network operations center ("NOC") in
Norwalk, Connecticut to provide us with surveillance and deployment capabilities
for high-speed Internet access via Digital Subscriber Lines ("DSL"). We are
currently provisioning DSL on a limited basis and we use the infrastructure of
incumbent carriers to carry traffic on our own packet-switched data network. We
initially plan to offer DSL services to our existing voice customer base, so
that we can eventually use packet-switched technology to route local and long
distance voice traffic over the Internet. We are currently testing local voice
traffic solutions over a packet-switched network through our data switch that is
located in Norwalk.
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.
10
Nine Months Ended August 31, 2001 Compared to Nine Months Ended August 31, 2000
Results of operations
Our net revenues for the nine-month period ending August 31, 2001 increased by
approximately $7,055,000, or approximately 75%, to approximately $16,516,000 as
compared to approximately $9,461,000 reported for the nine-month period ending
August 31, 2000.
Net revenues of our telecommunications division increased by approximately
$6,982,000, or approximately 88%, to approximately $14,948,000 for the
nine-month period ending August 31, 2001 from approximately $7,966,000 reported
in the nine-month period ending August 31, 2000. The increase was attributable
to the continued growth in the number of telephone lines that operate on eLEC's
platform from approximately 31,000 access lines as of August 31, 2000 to
approximately 47,000 lines as of August 31, 2001.
Net revenues of our specialty retail sales division, consisting of the
operations of Airline Ventures, Inc. ("AVI"), increased for the nine-month
period ending August 31, 2001 by approximately $73,000, or approximately 5%, to
approximately $1,568,000 from approximately $1,495,000 reported in the
nine-month period ending August 31, 2000. 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.
We anticipate a decrease in sales in this division for the next twelve months as
a result of the terrorist activities on September 11, 2001. Our primary
customers are pilots and flight attendants from American Airlines, which has
announced workforce reductions of more than 20%. However, we have stores at
facilities where pilots train, and we do not anticipate a significant decrease
in traffic at these stores because we expect an increased effort to give pilots
additional training at these facilities. Also, our sales of American Airlines
logo product and of patriotic items has increased since September 11th. Some of
the proceeds of the sales of these items have been donated to relief efforts
including donations to the families of deceased American Airline employees who
were our customers.
Our gross profit for the nine-month period ending August 31, 2001 increased by
approximately $3,609,000 to approximately $6,392,000 from approximately
$2,783,000 reported in the nine-month period ending August 31, 2000, and the
gross profit percentage increased to 38.7% from 29.4% reported in the prior
fiscal period.
For the nine-month period ending August 31, 2001, the gross profit percentage of
our telecommunications division increased to approximately 38.6% from 26.8%
reported in the prior fiscal period. The increase in gross profit percentage is
primarily attributable to our ability to reduce the costs we pay to the
incumbent carriers for our service platform, coupled with the continued
conversion of existing access lines and the provisioning of new access lines to
the UNE-P platform, which gives us higher margins than the resale platform used
in the prior comparable period. We anticipate that we will be able to maintain a
gross margin of approximately 39% or higher, because we are able to evaluate the
profitability of each line. We access our databases and compare multiple
categories of revenues and expenses for each telephone line that we sell. This
line level analysis allows us to examine our customer base and
11
take corrective actions to eliminate unprofitable accounts, to correct billing
errors and to identify overcharges from the ILEC.
Our specialty retail division recorded a gross profit percentage of
approximately 39.5% for the nine-month period ending August 31, 2001 as compared
to approximately 43.2% reported in the prior fiscal period. We expect the gross
margin of our specialty retail segment to continue at its current level of
approximately 40%.
Selling, general and administrative expenses increased by approximately
$4,507,000, or approximately 80%, to approximately $10,126,000 for the
nine-month period ending August 31, 2001 from approximately $5,619,000 reported
in prior fiscal period. A major portion of this increase was attributable to the
costs of our marketing efforts and to the salaries and facility expenses
incurred by our telecommunications division. This increase in expense is
directly related to the increase in telecommunications revenues in the
nine-month period ending August 31, 2001 as compared to the prior fiscal period
in 2000.
At August 31, 2001, we had no ownership interest in RiderPoint, Inc.
("RiderPoint") as compared to our ownership interest of approximately 27% at
August 31, 2000. As our investment in RiderPoint was accounted for under the
equity method of accounting, we were required to include a portion of
RiderPoint's operating net loss in our results of operations. For the nine-month
period ending August 31, 2000, we recorded a loss of approximately $255,000
relating to our investment in RiderPoint.
Our operating loss increased by approximately $915,000, or approximately 25%, to
approximately $4,516,000 for the nine-month period ending August 31, 2001 from
approximately $3,601,000 reported in the prior fiscal period. The net operating
loss of our telecommunications division increased by approximately $894,000 to
approximately $4,587,000 for the nine-month period ending August 31, 2001 as
compared to approximately $3,693,000 reported in the prior fiscal period. The
increase in operating loss in the current period as compared to the prior period
reflects the increase in costs associated with our efforts to expand our
telecommunications business, partially offset by the increase in revenue and
gross profit. The operating profit of our specialty retail sales division
decreased by approximately $21,000 to approximately $70,000 reported for the
nine-month period ending August 31, 2001 as compared to an operating profit of
approximately $91,000 reported in the prior fiscal period.
Our nine-month operating loss of approximately $4,516,000, for the period ending
August 31, 2001, consists of an operating loss of approximately $859,000 for the
three months ended August 31, 2001, as compared to an operating loss of
approximately $1,676,000 for the three months ended May 31, 2001. We anticipate
the quarterly operating loss to decrease further in the fourth fiscal quarter of
2001, as we continue to analyze gross margins per line and take corrective
action on accounts that are unprofitable.
Interest expense for the nine-month period ending August 31, 2001 increased by
approximately $447,000 from the amount reported in the nine-month period ending
August 31, 2000 primarily due to increased average borrowings.
Miscellaneous income for the nine-month period ending August 31, 2001 of
$930,000 resulted primarily from the sale of Talk shares.
12
Three Months Ended August 31, 2001 Compared to Three Months Ended August 31,
2000
Results of operations
Our net revenues for the three-month period ending August 31, 2001 increased by
approximately $2,070,000, or approximately 51%, to approximately $6,148,000 as
compared to approximately $4,078,000 reported for the three-month period ending
August 31, 2000.
Net revenues of our telecommunications division increased by approximately
$2,090,000, or approximately 59%, to approximately $5,650,000 for the
three-month period ending August 31, 2001 from approximately $3,560,000 reported
in the three-month period ending August 31, 2000. The increase was attributable
to the continued growth of the customer base.
Net revenues of our specialty retail sales division, AVI, decreased for the
three-month period ending August 31, 2001 by approximately $20,000, or
approximately 4%, to approximately $498,000 from approximately $518,000 reported
in the three-month period ending August 31, 2000.
Our gross profit for the three-month period ending August 31, 2001 increased by
approximately $1,378,000 to approximately $2,539,000 from approximately
$1,161,000 reported in the three-month period ending August 31, 2000, and the
gross profit percentage increased to 41.3% from 28.5% reported in the prior
fiscal period.
For the three-month period ending August 31, 2001, the gross profit percentage
of our telecommunications division increased to approximately 41.7% from 26.1%
reported in the prior fiscal period. The increase in gross profit percentage is
primarily attributable to our ability to reduce the costs we pay to the
incumbent carriers for our service platform, coupled with the continued
conversion of existing access lines and the provisioning of new access lines to
the UNE-P platform, which gives us higher margins than the resale platform used
in the prior comparable period. We anticipate that we will be able to maintain a
gross margin of approximately 39% or higher, as noted above.
Our specialty retail division recorded a gross profit percentage of
approximately 36.7% for the three-month period ending August 31, 2001 as
compared to approximately 44.6% reported in the prior fiscal period. We expect
the gross margin of our specialty retail segment to continue at its current
level of approximately 40%.
Selling, general and administrative expenses increased by approximately
$720,000, or approximately 30%, to approximately $3,103,000 for the three-month
period ending August 31, 2001 from approximately $2,383,000 reported in prior
fiscal period. A major portion of this increase was attributable to the costs of
our marketing efforts and to the labor and facility expenses incurred by our
telecommunications division. This increase in expense is directly related to the
increase in telecommunications revenues in the three-month period ending August
31, 2001 as compared to the prior fiscal period in 2000.
At August 31, 2001, we had no ownership interest in RiderPoint as compared to
our ownership interest of approximately 27% at August 31, 2000. As our
investment in RiderPoint was
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accounted for under the equity method of accounting, we were required to include
a portion of RiderPoint's operating net loss in our results of operations. For
the three-month period ending August 31, 2000, we recorded a loss of
approximately $92,000 relating to our investment in RiderPoint.
Our operating loss decreased by approximately $666,000, or approximately 44%, to
approximately $859,000, for the three-month period ending August 31, 2001 from
approximately $1,525,000 reported in the prior fiscal period. The $859,000
quarterly operating loss consisted of corporate overhead costs of approximately
$684,000 and losses from our data operations of approximately $237,000, offset
by income from our CLEC operations of approximately $52,000 and income from our
retail segment of approximately $10,000. The significant decrease in operating
loss in the current period as compared to the prior period reflects the
emergence of our CLEC operations into a business with gross margins that now
adequately cover our CLEC operating expenses.
Our specialty retail sales division reported an operating profit of
approximately $10,000 for the three-months ended August 31, 2001 as compared to
an operating profit of approximately $62,000 in the prior fiscal period.
Interest expense for the three-month period ending August 31, 2001 increased by
approximately $168,000 from the amount reported in the three-month period ending
August 31, 2000 primarily due to increased average borrowings.
Miscellaneous income for the three-month period ending August 31, 2001 of
$65,000 resulted primarily from the sale of Talk shares.
Liquidity and Capital Resources
At August 31, 2001, we had cash and cash equivalents available of approximately
$358,000, and negative working capital of approximately $1,240,000, a decrease
of approximately $761,000 and $15,841,000, respectively, from amounts reported
in the prior fiscal period. At August 31, 2001, we owned 1,320,415 shares of
Talk, at a market value of approximately $726,000, as compared to 1,876,911
shares of Talk, at a market value of approximately $13,490,000 at August 31,
2000. However, at August 31, 2001, 1,000,000 of the shares of Talk were
classified as a non-current asset because they are held in escrow by a lender in
conjunction with a long-term debt facility.
Net cash used in operating activities aggregated approximately $2,897,000 and
$4,362,000 in the nine-month periods ending August 31, 2001 and 2000,
respectively. The principal use of cash in fiscal 2001 and 2000 was
approximately $4,069,000 and $2,141,000, respectively, relating to the losses
for the periods.
Net cash provided by investing activities aggregated approximately $790,000 and
$703,000 in the nine-month periods ending August 31, 2001 and 2000,
respectively. The sources of cash provided by investing activities in fiscal
2001 were the proceeds from the sale of marketable securities of approximately
$992,000, the proceeds from the sale of property of approximately $933,000 and
the proceeds from the 1992 sale of a subsidiary of approximately $44,000. This
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amount was partially offset by the purchase of property and equipment of
approximately $1,179,000. Net cash used in fiscal 2000 was for the purchase of
fixed assets and the acquisition of Telecarrier, amounting to approximately
$638,000 and $8,000, respectively. Sources of cash provided from investing
activities in fiscal 2000 were the proceeds from the sale of marketable
securities of approximately $1,305,000 and the proceeds of approximately $44,000
from the 1992 sale of a subsidiary.
Net cash provided by financing activities aggregated approximately $1,956,000
and $4,176,000 in the nine-month periods ending August 31, 2001 and 2000,
respectively. The source of net cash provided by financing activities resulted
primarily from the proceeds of borrowings from financial institutions of
approximately $2,240,000, offset by the pay-off of our Canadian mortgage of
approximately $284,000. In fiscal 2000, the source of net cash provided by
financing activities resulted from the proceeds of borrowings from financial
institutions of approximately $356,000; the proceeds of a private equity
placement of approximately $1,829,000; the exercise of warrants of approximately
$1,752,000; and the exercise of stock options of approximately $239,000.
On October 23, 2000, we converted our existing receivable sales agreement
between RFC and our wholly-owned subsidiary, 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 equal to the prime rate plus 4.5% (11% at August 31, 2001), 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 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 fair market value of the warrants has been
accounted for as an additional interest expense over the term of the agreement.
At August 31, 2001, approximately $4,229,000 was outstanding under the
agreement.
For the nine-month period ending August 31, 2001, our capital expenditures
amounted to approximately $2,579,000, which included the purchase of 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, which bears
interest at a rate of 10% per annum for the first year and 11% per annum
thereafter. 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 for equipment, furniture and
fixtures for the next twelve months will not exceed $400,000. Equipment
purchases are anticipated to be financed through equipment leases or available
cash.
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At October 1, 2001, we beneficially owned approximately 1.5 million shares of
Talk (Nasdaq:TALK). Of such shares, we can sell approximately 200,000 shares
without permission from RFC. We require RFC's consent to sell 1.0 million of
such shares. We have the right to purchase 285,714 additional shares if we
exercise a warrant. The warrant exercise price is $2.10 per share and, at
October 1, 2001, was not in-the-money, as the closing price of Talk common stock
was $0.43 per share at such date. At October 1, 2001, we also owned 1.4 million
unregistered shares of Cordia Corporation ("Cordia") f/k/a CyberOpticsLabs Inc.
(OTCBB:CORC). These shares are "restricted securities" and will not be eligible
for sale in the public markets until February 2002. In addition to the
securities that we own, we have the loan facility with RFC discussed above. 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 for the remainder of fiscal 2001 and in
fiscal 2002.
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. We are considering the possible
sale of this division, as its operations are not the primary focus of our
business plan and we believe the sale of this division would provide us
available cash that we can use to support our telecommunications operations. Our
plan for the growth of our telecommunications division is to reach a break-even
level as soon as possible. In conjunction with this strategy, we have slowed our
growth and limited our selling, general and administrative expenses. With the
overhead reductions we have made, and with the implementation of a web-based
gross margin analysis tool, we believe that we will reach an EBITDA positive
level at approximately 50,000 local access lines. We will continue to expend
cash and incur additional losses before we are able to grow eLEC to a profitable
level. We believe our cash and investment securities at August 31, 2001, in
addition to our loan facility with RFC, will provide us with sufficient
liquidity to grow our business and carry out many of our expansion plans.
However, the market relating to such securities could vary widely during the
year, and 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 current
operating plans.
We also believe that we can receive additional funding from a private placement
of our common stock. However, given recent market conditions, there can be no
assurances that we will be able to obtain such funding when needed, or that such
funding, if available, will be obtainable on terms acceptable to us. Moreover,
we have been in violation of Nasdaq Rule 4310(c)(4), which requires that our
common stock maintain a minimum bid price of $1.00. Although Nasdaq has issued a
temporary moratorium on the minimum bid price until January 2, 2002, we
currently do not meet the minimum bid requirements. If we continue not to meet
the minimum bid requirements in fiscal 2002, we may face a delisting hearing in
fiscal 2002. Similarly, partially due to the decline in value in the marketable
securities that are listed on our balance sheet, we have incurred unrealized
losses that have resulted in our total equity falling below the $2,500,000
minimum level required to continue our listing on Nasdaq. Should our investments
in marketable securities not appreciate substantially in the next quarter, we
will consider increasing our net worth through a private placement or an
acquisition. Any such delay or developments that impact our Nasdaq listing may
further impact our ability to raise capital and to support our 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.
16
eLEC COMMUNICATIONS CORP.
PART II-OTHER INFORMATION
Item 2. Changes in Securities
On July 10, 2001, we issued an aggregate of 61,361 shares of our
common stock in conjunction with certain per share price
benchmarks in various stockholder subscription agreements. Such
transaction was effected pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K
None.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
eLEC Communications Corp.
October 15, 2001 By: /s/ Paul H. Riss
-------------------- -------------------------
Date Paul H. Riss
Chief Executive Officer
(Principal Financial and
Accounting Officer)
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