SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended May 31, 2001.
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.
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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 914-632-8005
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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:
14,942,421 shares of Common Stock, par value $.10 per share, as of July 1, 2001.
PART 1. FINANCIAL INFORMATION
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Item 1. Financial Statements
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eLEC Communications Corp. and Subsidiaries
Condensed Consolidated Balance Sheets
May 31, 2001 Nov. 30, 2000
------------ -------------
(Unaudited) (See note)
Assets
Current assets:
Cash and cash equivalents $ 479,873 $ 509,657
Accounts receivable 4,126,728 2,803,888
Investment securities 538,182 1,619,822
Inventory 417,511 529,933
Prepaid expenses and other current assets 565,014 579,107
Land and building held for sale -- 533,239
------------ ------------
Total current assets 6,127,308 6,575,646
------------ ------------
Property, plant and equipment, net 3,887,219 2,035,117
------------ ------------
Other assets
Other investments 240,000 100,000
Goodwill 3,099,560 3,421,512
Investment securities, non-current 1,400,000 2,000,000
Other 710,944 734,555
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5,450,504 6,256,067
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Total assets $ 15,465,031 $ 14,866,830
============ ============
Liabilities and stockholders' equity
Current liabilities:
Secured short-term borrowings $ 150,000 $ 150,000
Current maturities of long-term debt 146,133 398,709
Accounts payable 2,857,826 2,364,977
Accrued expenses 2,819,462 1,294,457
Taxes payable 576,070 311,165
------------ ------------
Total current liabilities 6,549,491 4,519,308
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Long-term debt, less current maturities 4,920,176 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,
14,942,421 and 14,642,421 shares issued in 2001 and 2000 1,494,242 1,464,242
Capital in excess of par value 25,429,467 25,319,457
Retained earnings (deficit) (24,828,720) (21,744,234)
Treasury stock at cost, 11,000 shares (27,500) (27,500)
Accumulated other comprehensive income 1,927,873 3,619,822
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Total stockholders' equity 3,995,364 8,631,799
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Total liabilities and stockholders' equity $ 15,465,031 $ 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 and Comprehensive Loss
(Unaudited)
For the Six Months Ended For the Three Months Ended
May 31, 2001 May 31, 2000 May 31, 2001 May 31, 2000
------------- ------------- ------------- -------------
Revenues $ 10,368,456 $ 5,382,628 $ 5,637,809 $ 3,156,395
Cost of revenues 6,515,483 3,760,693 3,459,644 2,276,237
------------ ------------ ------------ ------------
Gross profit 3,852,973 1,621,935 2,178,165 880,158
------------ ------------ ------------ ------------
Costs and expenses:
Selling and general and administrative 7,023,072 3,235,968 3,602,314 1,971,610
Depreciation and amortization 487,637 300,268 252,264 194,903
Equity in loss of investee -- 162,969 -- 85,648
------------ ------------ ------------ ------------
Total costs and expenses 7,510,709 3,699,205 3,854,578 2,252,161
------------ ------------ ------------ ------------
Loss from operations (3,657,736) (2,077,270) (1,676,413) (1,372,003)
------------ ------------ ------------ ------------
Other (income) expense:
Interest expense 305,999 26,874 173,576 7,711
Interest income (13,702) (25,982) (7,896) (17,731)
Miscellaneous income, net (865,547) (67,279) (231,379) --
------------ ------------ ------------ ------------
(573,250) (66,387) (65,699) (10,020)
------------ ------------ ------------ ------------
Net loss (3,084,486) (2,010,883) (1,610,714) (1,361,983)
Other comprehensive loss - unrealized loss on
marketable securities (828,957) -- (95,248) --
------------ ------------ ------------ ------------
Comprehensive loss ($ 3,913,443) ($ 2,010,883) ($ 1,705,962) ($ 1,361,983)
============ ============ ============ ============
Basic and diluted loss per share ($ 0.21) ($ 0.16) ($ 0.11) ($ 0.10)
============ ============ ============ ============
Weighted average number of common shares 14,809,199 12,582,006 14,931,421 13,426,574
outstanding ============ ============ ============ ============
See notes to the condensed consolidated
financial statements
3
eLEC Communications Corp. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Six Months Ended
May 31, 2001 May 31, 2000
------------ ------------
Net cash used in operating activities: ($2,426,318) ($2,351,649)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (1,184,415) (555,997)
Proceeds from sale of marketable securities 895,649 --
Acquisition of Telecarrier Services Inc. -- (7,718)
Proceeds from sale of property 933,238 --
Proceeds from agreement to sell subsidiary 29,108 29,108
----------- -----------
Net cash provided by (used in) investing activities 673,580 (534,607)
----------- -----------
Cash flows from financing activities:
Increase (decrease) in loans payable to financial institutions 2,006,874 (280,575)
Pay-off of Canadian mortgage (283,920) --
Proceeds from exercise of warrants -- 1,751,609
Proceeds from private placement of common stock -- 1,379,500
Proceeds from exercise of stock options -- 225,750
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Net cash provided by financing activities 1,722,954 3,076,284
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Effect of exchange rate changes on cash -- 27,959
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(Decrease) increase in cash and cash equivalents (29,784) 217,987
Cash and cash equivalents at beginning of period 509,657 591,299
----------- -----------
Cash and cash equivalents at the end of period $ 479,873 $ 809,286
=========== ===========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 303,141 $ 41,889
----------- -----------
Income taxes -- --
----------- -----------
See notes to the condensed consolidated financial statements.
4
eLEC COMMUNICATIONS CORP.
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Notes To Condensed Consolidated Financial Statements (Unaudited)
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Note 1-Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six-month period ended May 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-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% (11.5% at May 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 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 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 fair market value
of the warrants has been accounted for as an additional interest expense over
the term of the agreement. At May 31, 2001, approximately $3,653,000 was
outstanding under the agreement.
5
Note 3-Investment Securities
Details as to investment securities at May 31, 2001 are as follows:
Fair Unrealized
Cost Value Holding Gain
---- ----- ------------
Equity securities $10,308 $1,938,182 $1,927,873
Our investment securities consisted of 1,384,415 common shares of Talk valued at
$1.40 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 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 May 31, 2001, we sold 115,000 shares of Talk, realizing
a gain of $207,414, which is included under the caption "Miscellaneous income,
net" on the Condensed Consolidated Statements of Operations and Comprehensive
Loss.
Note 4-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 Six Months Ended For the Three Months Ended
May 31, 2001 May 31, 2000 May 31, 2001 May 31, 2000
------------- ------------- ------------- -------------
Telecommunications
Revenues $ 9,298,177 $ 4,405,354 $ 5,084,633 $ 2,654,511
Net loss ($ 3,175,628) ($ 2,039,870) ($ 1,665,845) ($ 1,354,931)
Specialty retail
Revenues $ 1,070,279 $ 977,274 $ 553,176 $ 501,884
Net income (loss) $ 91,142 $ 28,987 $ 55,131 ($ 7,052)
Total
Revenues $ 10,368,456 $ 5,382,628 $ 5,637,809 $ 3,156,395
Net loss ($ 3,084,486) ($ 2,010,883) ($ 1,610,714) ($ 1,361,983)
6
Note 5- Major Customer
During the six and three-months ended May 31, 2001, we had telecommunications
revenue from one customer that accounted for approximately 20% and 17%,
respectively, of our telecommunications revenue.
Note 6 - 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 May 31, 2001, we had an unrealized gain on our ownership of Talk of
approximately $1,927,873. 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 7- 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 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 three
and six months ended May 31, 2001.
In addition, options and warrants where the exercise price was greater than the
average market price of the common shares of approximately 3,360,000 and
3,230,000 for the three and six-month periods ended May 31, 2001, were excluded
from the computation of diluted loss per share.
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" 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 (10) 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.
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
8
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 38 states and are fully operational
on UNE-P in 12 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.
9
Six Months Ended May 31, 2001 Compared to Six Months Ended May 31, 2000
Results of operations
Our net revenues for the six-month period ending May 31, 2001 increased by
approximately $4,986,000, or approximately 93%, to approximately $10,369,000 as
compared to approximately $5,383,000 reported for the six-month period ending
May 31, 2000.
Net revenues of our telecommunications division increased by approximately
$4,893,000, or approximately 111%, to approximately $9,298,000 for the six-month
period ending May 31, 2001 from approximately $4,405,000 reported in the
six-month period ending May 31, 2000. The increase was attributable to the
continued rapid growth in the number of billed telephone lines that we
provisioned from approximately 22,000 installed access lines as of May 31, 2000
to approximately 45,000 lines as of May 31, 2001.
Net revenues of our specialty retail sales division, consisting of the
operations of Airline Ventures, Inc. ("AVI"), increased for the six-month period
ending May 31, 2001 by approximately $93,000, or approximately 10%, to
approximately $1,070,000 from approximately $977,000 reported in the six-month
period ending May 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.
Our gross profit for the six-month period ending May 31, 2001 increased by
approximately $2,231,000 to approximately $3,853,000 from approximately
$1,622,000 reported in the six-month period ending May 31, 2000, and the gross
profit percentage increased to 37.2% from 30.1% reported in the prior fiscal
period.
For the six-month period ending May 31, 2001, the gross profit percentage of our
telecommunications division increased to approximately 36.7% from 27.4% 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 line 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 35% or higher, as we expand into new geographical territories.
However, our costs of providing services vary in each state and our blended
gross margins may be impacted by our concentration of customers in each state in
which we operate.
Our specialty retail division recorded a gross profit percentage of
approximately 40.8% for the six-month period ending May 31, 2001 as compared to
approximately 42.5% reported in the prior fiscal period. 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
$3,787,000, or approximately 117%, to approximately $7,023,000 for the six-month
period ending May 31, 2001 from approximately $3,236,000 reported in prior
fiscal period. A major portion of this increase was attributable to the costs of
our expanded marketing efforts and to the labor and facility expenses incurred
by our telecommunications division. This increase in expense is directly related
to the significant increase in telecommunications revenues in the six-month
period ending May 31, 2001 as compared to the prior fiscal period in 2000.
10
At May 31, 2001, we had no ownership interest in RiderPoint, Inc. ("RiderPoint")
as compared to our ownership interest of approximately 27% at May 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 six-month period ending May 31, 2000,
we recorded a loss of approximately $163,000 relating to our investment in
RiderPoint.
Our operating loss increased by approximately $1,581,000, or approximately 76%,
to approximately $3,658,000 for the six-month period ending May 31, 2001 from
approximately $2,077,000 reported in the prior fiscal period. The net operating
loss of our telecommunications division increased by approximately $1,612,000 to
approximately $3,717,000 for the six-month period ending May 31, 2001 as
compared to approximately $2,106,000 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. Our specialty retail sales division reported an operating profit
of approximately $60,000 for the six-months ended May 31, 2001 as compared to an
operating profit of approximately $29,000 in the prior fiscal period.
Our six-month operating loss of approximately $3,658,000, for the period ending
May 31, 2001, consists of an operating loss of approximately $1,676,000 for the
three months ended May 31, 2001, as compared to an operating loss of
approximately $1,981,000 for the three months ended February 28, 2001. We
anticipate the quarterly operating loss to continue to decrease in the third
fiscal quarter of 2001, as we have reduced various overhead costs and
telemarketing costs in July 2001 by approximately $150,000 per month.
Interest expense for the six-month period ending May 31, 2001 increased by
approximately $279,000 from the amount reported in the six-month period ending
May 31, 2000 primarily due to increased average borrowings.
Miscellaneous income for the six-month period ending May 31, 2001 of $866,000
resulted primarily from the sale of Talk shares.
Three Months Ended May 31, 2001 Compared to Three Months Ended May 31, 2000
Results of operations
Our net revenues for the three-month period ending May 31, 2001 increased by
approximately $2,482,000, or approximately 79%, to approximately $5,638,000 as
compared to approximately $3,156,000 reported for the three-month period ending
May 31, 2000.
11
Net revenues of our telecommunications division increased by approximately
$2,430,000, or approximately 92%, to approximately $5,085,000 for the
three-month period ending May 31, 2001 from approximately $2,655,000 reported in
the six-month period ending May 31, 2000. The increase was attributable to the
continued growth of the customer base.
Net revenues of our specialty retail sales division, AVI, increased for the
three-month period ending May 31, 2001 by approximately $51,000, or
approximately 10%, to approximately $553,000 from approximately $502,000
reported in the three-month period ending May 31, 2000.
Our gross profit for the three-month period ending May 31, 2001 increased by
approximately $1,298,000 to approximately $2,178,000 from approximately $880,000
reported in the three-month period ending May 31, 2000, and the gross profit
percentage increased to 38.6% from 27.9% reported in the prior fiscal period.
For the three-month period ending May 31, 2001, the gross profit percentage of
our telecommunications division increased to approximately 38.4% from 25.2%
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 35% or higher, as we expand into new geographical
territories. However, our costs of providing services vary in each state and our
blended gross margins may be impacted by our concentration of customers in each
state in which we operate.
Our specialty retail division recorded a gross profit percentage of
approximately 40.9% for the three-month period ending May 31, 2001 as compared
to approximately 42.1% reported in the prior fiscal period. 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
$1,630,000, or approximately 83%, to approximately $3,602,000 for the
three-month period ending May 31, 2001 from approximately $1,972,000 reported in
prior fiscal period. A major portion of this increase was attributable to the
costs of our expanded marketing efforts and to the labor and facility expenses
incurred by our telecommunications division. This increase in expense is
directly related to the significant increase in telecommunications revenues in
the three-month period ending May 31, 2001 as compared to the prior fiscal
period in 2000. As discussed above, in an effort to reduce selling, general and
administrative costs, we have reduced various overhead and telemarketing costs
in July 2001 by approximately $150,000 per month.
At May 31, 2001, we had no ownership interest in RiderPoint as compared to our
ownership interest of approximately 27% at May 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 three-month period ending May 31, 2000, we recorded a
loss of approximately $86,000 relating to our investment in RiderPoint.
Our operating loss increased by approximately $304,000, or approximately 22%, to
approximately $1,676,000, for the three-month period ending May 31, 2001 from
approximately $1,372,000 reported in the prior fiscal period. The net operating
loss of our telecommunications division increased by approximately $346,000 to
approximately $1,711,000 for the three-month period ending May 31, 2001 as
compared to approximately $1,365,000 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. Our specialty retail sales division reported an operating profit
of approximately $36,000 for the three-months ended May 31, 2001 as compared to
an operating loss of approximately $7,000 in the prior fiscal period.
Interest expense for the three-month period ending May 31, 2001 increased by
approximately $166,000 from the amount reported in the three-month period ending
May 31, 2000 primarily due to increased average borrowings.
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Miscellaneous income for the three-month period ending May 31, 2001 of $231,000
resulted primarily from the sale of Talk shares.
Liquidity and Capital Resources
At May 31, 2001, we had cash and cash equivalents available of approximately
$480,000, and negative working capital of approximately $423,000, a decrease of
approximately $329,000 and $1,283,000, respectively, from amounts reported in
the prior fiscal period. During the six-months ending May 31, 2000, we received
net proceeds of approximately $3,357,000 from the exercise of warrants, from a
private placement of our common stock and an exercise of stock options. At May
31, 2001, we owned 1,384,415 shares of Talk, at a market value of $1,938,182.
However, 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 $2,426,000 and
$2,352,000 in the six-month periods ending May 31, 2001 and 2000, respectively.
The principal use of cash in fiscal 2001 and 2000 was approximately $3,084,000
and $2,011,000, respectively, relating to the losses for the periods.
Net cash provided by (used in) investing activities aggregated approximately
$674,000 and ($535,000) in the six-month periods ending May 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
$896,000, the proceeds from the sale of property of approximately $933,000 and
the proceeds from the 1992 sale of a subsidiary of approximately $29,000. This
was partially offset by the purchase of property and equipment of approximately
$1,184,000. Net cash used in fiscal 2000 was for the purchase of fixed assets
and the acquisition of Telecarrier, amounting to approximately $556,000 and
$8,000, respectively. The source of cash provided from investing activities in
the first fiscal quarter of 2000 was the proceeds of approximately $29,000 from
the 1992 sale of a subsidiary.
Net cash provided by financing activities aggregated approximately $1,723,000
and $3,076,000 in the six-month periods ending May 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 $2,007,000, 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 a private equity placement of
approximately $1,380,000, the exercise of warrants of approximately $1,752,000,
the exercise of stock options of approximately $225,000, partially offset by a
reduction in borrowings from financial institutions of approximately $281,000.
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% (11.5% at May 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
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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. The fair market value
of the warrants has been accounted for as an additional interest expense over
the term of the agreement. At May 31, 2001, approximately $3,653,000 was
outstanding under the agreement.
For the six-month period ending May 31, 2001, our capital expenditures amounted
to approximately $2,284,000, 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 we will need to spend an additional $200,000 in fiscal 2001 for equipment,
furniture and fixtures. Equipment purchases are anticipated to be financed
through equipment leases or with working capital.
At July 10, 2001, we beneficially owned approximately 1.8 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 one million of
such shares. 187,691 of such shares are held in escrow and 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 July 10, 2001, was not in-the-money,
as the closing price of Talk common stock was $0.86 per share at such date. At
July 10, 2001, we also owned 1.4 million 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 a loan
facility with RFC 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.
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 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 for the third fiscal quarter. With
the overhead reductions we have made, we believe that we will reach an EBITDA
positive level at approximately 60,000 local access lines. We will continue 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
investment securities at May 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
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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 fiscal 2001 operating plans. We also believe that we can receive
additional funding from a private placement of our common stock. However, 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 were notified by NASDAQ that in accordance with Marketplace Rule
4310(c)(8)(B), we had until June 18, 2001 to regain compliance with Rule
4310(c)(4), which requires that our common stock maintain a minimum bid price of
$1.00. We were unable to demonstrate compliance with this rule on or before the
June 18, 2001 deadline, and consequently we received written notification that
our common stock will be delisted. Although we are appealing such delisting
notice, for which we have been given a hearing date of August 2, 2001, such
notice may further impact our ability to raise capital. The inability to carry
out our fiscal 2001 operating plans may result in the continuance of
unprofitable operations, which would adversely affect our financial condition
and results of operations.
15
eLEC COMMUNICATIONS CORP.
PART II-OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The 2001 Annual Meeting of Shareholders (the "2001 Annual Meeting") was
duly held on May 23, 2001. All director nominees to the Board of
Directors were duly elected at the 2001 Annual Meeting. Set forth below
is a brief description of the other matter voted upon at the 2001 Annual
Meeting and the results of the vote with respect to such matter.
(i) The approval and adoption of our 2001 Non-Employee Director
Stock Option Plan. The information contained in our Proxy
Statement, dated March 23, 2001 at pages 13 through 16 under
the heading "Adoption of the 2001 Non-Employee Director Stock
Option Plan" is incorporated by reference herein.
Votes For.........................11,171,580
Votes Against........................532,568
Votes Abstaining.....................60,294
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K
None.
17
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
eLEC Communications Corp.
July 16, 2001 By: /s/ Paul H. Riss
--------------------------- --------------------------
Date Paul H. Riss
Chief Executive Officer
(Principal Financial and
Accounting Officer)
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