SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(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, 2002.
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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( Name of Small Business Issuer 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)
Issuer's Telephone Number, Including Area Code 914-633-6500
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 15,619,282 shares of
Common Stock, par value $.10 per share, as of October 1, 2002.
PART 1. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
-----------------------------
eLEC Communications Corp. and Subsidiaries
Condensed Consolidated Balance Sheets
August 31, 2002
---------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 1,011,375
Accounts receivable 1,571,929
Investment securities 107,138
Other investments 240,000
Prepaid expenses and other current assets 316,883
------------
Total current assets 3,247,325
Property, plant and equipment, net 1,936,522
Other assets 297,388
------------
Total assets $ 5,481,235
============
Liabilities and stockholders' equity deficiency
Current liabilities:
Secured short-term borrowings $ 210,347
Current maturities of long-term debt and capital lease
obligations 257,559
Accounts payable and accrued expenses 12,494,835
Taxes payable 708,404
------------
Total current liabilities 13,671,145
------------
Long-term debt and capital lease obligations, less current
maturities 1,100,000
------------
Stockholders' equity:
Preferred stock, $.10 par value, 1,000,000 shares authorized
Series B issued, 16 shares in 2002 2
Common stock $.10 par value, 50,000,000 shares authorized,
15,619,282 issued in 2002 1,561,928
Capital in excess of par value 25,676,342
Deficit (36,597,511)
Treasury stock at cost, 11,000 shares (27,500)
Accumulated other comprehensive income, unrealized gain on
securities 96,829
------------
Total stockholders' equity deficiency (9,289,910)
------------
Total liabilities and stockholders' equity $ 5,481,235
============
See notes to the condensed consolidated financial statements
2
eLEC Communications Corp. and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
For the Nine Months Ended For the Three Months Ended
Aug. 31, 2002 Aug. 31, 2001 Aug. 31, 2002 Aug.31, 2001
------------- ------------- ------------- ------------
Revenues $ 11,805,200 $ 14,947,642 $ 3,629,517 $ 5,649,465
Cost of revenues 7,789,871 9,175,602 2,305,277 3,293,927
--------- --------- --------- ---------
Gross profit 4,015,329 5,772,040 1,324,240 2,355,538
--------- --------- --------- ---------
Costs and expenses:
Selling, general and administrative 7,286,855 9,602,926 2,290,554 2,938,916
Depreciation and amortization 180,546 755,691 44,327 285,397
------- ------- ------ -------
Total costs and expenses 7,467,401 10,358,617 2,334,881 3,224,313
--------- ---------- --------- ---------
Loss from operations (3,452,072) (4,586,577) (1,010,641) (868,775)
---------- ---------- ---------- --------
Other income (expense):
Interest expense (386,186) (506,416) (87,283) (200,417)
Interest income 16,056 23,508 5,453 9,806
Miscellaneous income, net 1,342,618 887,911 701,376 53,440
--------- ------- ------- ------
972,488 405,003 619,546 (137,171)
------- ------- ------- --------
Loss from continuing operations (2,479,584) (4,181,574) (391,095) (1,005,946)
Gain from discontinued operations -- 112,522 -- 21,380
------- ------- ------- ------
Net loss (2,479,584) (4,069,052) (391,095) (984,566)
Other comprehensive income (loss) -
unrealized gain (loss) on marketable
securities 92,258 (1,912,910) 28,910 (1,122,353)
------ ---------- ------ ----------
Comprehensive loss ($ 2,387,326) ($ 5,981,962) ($ 362,185) ($ 2,106,919)
============ ============ ============ ============
Basic and diluted income (loss) per share
Continuing operations ($ 0.16) ($ 0.28) ($ 0.03) ($ 0.07)
Discontinued operations -- .01 -- --
------------ ------------ ------------ ------------
Net loss ($ 0.16) ($ 0.27) ($ 0.03) ($ 0.07)
============ ============ ============ ============
Weighted average number of common shares outstanding 15,608,282 15,606,818 14,871,898 14,966,103
========== ========== ========== ==========
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, 2002 Aug. 31, 2001
------------- -------------
Net cash provided by (used in) operating activities: $ 2,942,305 ($2,897,427)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (1,179,167)
Proceeds from sale of marketable securities 1,380,911 992,062
Proceeds from sale of property 4,000 933,238
Proceeds from agreement to sell subsidiary 43,662 43,662
------ ------
Net cash provided by investing activities 1,428,573 789,795
--------- -------
Cash flows from financing activities:
(Decrease) increase in loans payable to financial institutions (4,202,119) 2,239,879
Pay-off of Canadian mortgage -- (283,920)
Proceeds from exercise of stock options 45,000 --
------ ---------
Net cash (used in) provided by financing activities (4,157,119) 1,955,959
---------- ---------
Increase (decrease) in cash and cash equivalents 213,759 (151,673)
Cash and cash equivalents at beginning of period 797,616 509,657
------- -------
Cash and cash equivalents at the end of period $ 1,011,375 $ 357,984
=========== ===========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 386,186 $ 428,052
----------- -----------
See notes to the condensed consolidated financial statements.
4
eLEC COMMUNICATIONS CORP.
-------------------------
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-QSB. 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, 2002 are not necessarily
indicative of the results that may be expected for the year ended November 30,
2002. 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, 2001.
Note 2-Principal Financing Arrangements
---------------------------------------
During the third quarter of fiscal 2002, we paid in full all amounts due to our
former lender Textron Financial ("Textron"), formerly known as RFC Capital
Corporation, and all collateral securing such loan was released. Our financing
arrangements consist of a mortgage loan of $1.1 million due in December 2005,
with monthly payments of interest only at the rate of 11% per annum, and no
prepayment penalty, and a $150,000 working capital loan to our wholly-owned
subsidiary, Telecarrier Services, Inc. ("TSI"), which has filed for relief under
Chapter 11 of the United States Bankruptcy Code. See Note 7.
Note 3-Investment Securities
----------------------------
Details as to investment securities at August 31, 2002 are as follows:
Fair Unrealized
Cost Value Holding Gain
---- ----- ------------
Equity securities $10,309 $107,138 $96,829
Our investment securities at August 31, 2002 consisted of 42,515 common shares
of Talk America Holdings Inc. ("Talk") valued at $2.52 per share. The Talk
shares have been subject to market fluctuations and at October 14, 2002 closed
at $2.11 per share.
During the three and nine months ended August 31, 2002, we sold 303,000 and
1,219,900 shares of Talk, respectively, realizing a gain of approximately
$697,000 and $1,381,000 for the respective periods. Of the 1,219,900 shares sold
during the nine-months ended August 31, 2002, 1,000,000 of such shares were
pledged as collateral under our former loan agreement with Textron, the proceeds
of which, amounting to approximately $1,141,000, were used to pay down the loan.
The gain on the sale of Talk stock is included under the caption "Miscellaneous
income, net" on the Condensed Consolidated Statements of Operations and
Comprehensive Loss.
5
Note 4-Major Customer
---------------------
During the three and nine months ended August 31, 2002, no one customer
accounted for more than 10% of revenue. During the three and nine months ended
August 31, 2001, we had revenue from one customer that accounted for
approximately 15% and 17%, respectively, of our revenue.
Note 5-Income Taxes
-------------------
At November 30, 2001, we had net operating loss carryforwards for Federal income
tax purposes of approximately $21,000,000 expiring in the years 2002 through
2021. There is an annual limitation of approximately $187,000 on the utilization
of approximately $1,700,000 of such net operating loss carryforwards under the
provisions of Internal Revenue Code Section 382.
As of August 31, 2002, we had an unrealized gain on our ownership of Talk common
stock of approximately $97,000. Upon the sale of the Talk stock, our 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 6-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 nine months ended August 31, 2002 and 2001.
Note 7-Petition for Relief Under Chapter 11
-------------------------------------------
On July 29, 2002, (the "Petition Date"), TSI, our wholly-owned subsidiary, which
has licenses to resell local and long distance service in three states, filed a
voluntary petition for relief under Chapter 11 of the federal bankruptcy laws in
the United States Bankruptcy Court for the Southern District of New York and was
assigned Case No. 02-20379 (ASH). Under Chapter 11, among over things, actions
to collect certain claims (liabilities subject to compromise) against TSI in
existence prior to the Petition Date are stayed while TSI continues business
operations as a Debtor-in-Possession. Additional claims (liabilities subject to
compromise) may arise subsequent to the Petition Date resulting from rejection
of executory contracts, including equipment leases, and from the determination
by the court (or agreed to by parties in interest) of allowed claims for
contingent and disputed claims. The actions to collect on or enforce the claim
secured by TSI's assets ("Secured Claim") are also stayed, although the holder
of such claim has the right to move the court for relief from the stay. The
Secured Claim is secured primarily by a lien on assets. TSI will also incur
liabilities for, among other things, goods or services provided to it as
Debtor-in-Possession after the Petition Date, as well as costs associated with
the reorganization, including fees and expenses of TSI's bankruptcy attorney. At
August 31, 2002, the Condensed Balance Sheet and Condensed Statement of
Operations of TSI were as follows:
6
Telecarrier Services Inc.
(Debtor-in-Possession)
Condensed Balance Sheet
August 31, 2002
---------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 360,100
Prepaid expenses and other current assets 2,688
-----
Total current assets 362,788
-------
Intercompany receivable 225,092
Allowance for doubtful collection (225,092)
--------
Net intercompany receivable --
--------
Total assets $ 362,788
===========
Liabilities and stockholders' equity deficiency
Liabilities not subject to compromise
Current liabilities:
Accounts payable $ 1,072
Secured borrowings 150,000
-------
Total current liabilities 151,072
-------
Liabilities subject to compromise
Accounts payable 645,551
Accrued expenses 103,249
-------
Total liabilities subject to compromise 748,800
-------
Total liabilities 899,872
-------
Stockholders' equity:
Common stock 4,000
Capital in excess of par value 1,578,686
Deficit (2,119,770)
----------
Total stockholders' equity deficiency (537,084)
--------
Total liabilities and stockholders' deficiency $ 362,788
===========
Telecarrier Services Inc.
(Debtor-in-Possession)
Condensed Statement of Operations
For the Nine Months Ended August 31, 2002
(Unaudited)
Revenues $ --
Cost of revenues --
---------
Gross profit --
---------
Costs and expenses:
Selling, general and administrative 229,272
Reorganization costs 75,000
Depreciation and amortization 7,100
---------
Total costs and expenses 311,372
---------
Loss from operations (311,372)
--------
Other (expense):
Interest expense (7,268)
Miscellaneous expense (32,973)
-------
(40,241)
-------
Net loss ($351,613)
=========
7
Note 8-Subsequent Events
------------------------
On September 3, 2002, we entered into a definitive purchase agreement (the
"Agreement") to sell substantially all of the assets of our wholly-owned
subsidiary, Essex Communications, Inc. ("Essex"), to Essex Acquisition Corp.
("EAC"), a wholly-owned subsidiary of BiznessOnline.com, in exchange for $5.00
and the assumption by EAC of certain liabilities of Essex, which amounted to
approximately $9,800,000 at September 3, 2002, including all obligations due and
payable to Essex's largest vendor, Verizon Services Corp. In addition, EAC has
agreed to fund, at its option, and manage the operations of Essex pursuant to an
interim consulting and funding agreement, until the transaction closes. Upon the
closing of the transaction, EAC will reimburse us $270,000 in respect of amounts
previously paid by us under a guarantee agreement to Essex's former lender. This
reimbursement will allow us to continue operations of our remaining
telecommunications subsidiaries, subject to our receipt of additional accounts
receivable financing. In the third quarter of fiscal 2002, Essex represented
approximately 97% of our total revenues. However, since September 3, 2002, we
have not been selling access lines or marketing services to EAC or Essex.
Instead, we have been selling access lines and adding customers to our
newly-licensed CLEC, New Rochelle Telephone Corp. ("NRTC"). If the sale occurs
as described in the Agreement, it will result in a substantial gain. The closing
of the transaction is subject to receipt of, among other things, applicable
shareholder and regulatory approvals and must be completed by December 31, 2002.
If the transaction fails to close for reasons other than a material uncured
breach of the Agreement by EAC, then Essex will be obligated to pay EAC as
liquidated damages the sum of $1,000,000 in cash and to sell to EAC all customer
lines in the State of New York at a cost of $50 per line.
Terms of the proposed sale are described in our proxy statement dated October 9,
2002, a copy of which has been filed with the Securities and Exchange
Commission.
Note 9-Risks and Uncertainties
------------------------------
We buy substantially all of our telecommunication services from Regional Bell
Operating Companies ("RBOCs"), and are, therefore, highly dependent upon them.
We believe there are less desirable suppliers of telecommunication services in
the geographical locations in which we conduct business. In addition, we are at
risk to regulatory agreements that govern the rates we are to be charged. In
light of the foregoing, it is reasonably possible that the loss of these
relationships with the RBOCs or a significant unfavorable change in the
regulatory agreements structure would have a severe near-term impact on our
ability to conduct our telecommunications business.
In certain states, Essex has been billed for certain amounts from the RBOCs that
are in dispute. We believe that the related invoicing of taxes, subscriber line
charges, other fees and features are not in accordance with the agreements
negotiated with the RBOCs. At August 31, 2002, Essex had not paid for and had
not accrued approximately $3,000,000 of such disputed amounts. We believe the
majority of these disputes will be resolved in conjunction with the negotiations
to sell certain assets of Essex to EAC.
As of August 31, 2002, we reflected undisputed liabilities of Essex to the RBOCs
of approximately $8,900,000, substantially all of which were past due. Essex has
an understanding with the RBOC that provides Essex with the most services to
8
continue to provide service to Essex's customers, as long as Essex is making
payments for its current invoices and certain progress payments toward the past
due amounts. Such agreement is designed to allow Essex to continue operations
until the anticipated closing of the sale of certain assets to EAC. If Essex is
unable to make these payments, it would put Essex at risk to lose the underlying
services that are being provided by the RBOC. Essex's lack of ability to pay
outstanding invoices to an underlying carrier has forced it to abandon local
service in the states of Florida and Kentucky. For the three and nine months
ended August 31, 2002, sales in this region accounted for approximately 4% and
5%, respectively, of total sales as compared to approximately 5% and 7%,
respectively, for the three and nine months ended August 31, 2001.
Future results of operations involve a number of risks and uncertainties.
Factors that could affect future operating results and cash flows and cause
actual results to vary materially from historical results include, but are not
limited to:
- Our business strategy with respect to bundled local and long distance
services may not succeed.
- Failure to obtain working capital financing sufficient to carry out
our plan.
- Failure to manage, or difficulties in managing, our growth, operations
or restructurings, including attracting and retaining qualified
personnel and opening up new territories for our service with
favorable gross margins.
- Dependence on the availability or functionality of incumbent local
telephone companies' networks, as they relate to the unbundled network
element platform or the resale of such services.
- Increased price competition in local and long distance service.
- Failure or interruption in our network and information systems.
- Changes in government policy, regulation and enforcement.
- Failure of our collection management system and credit controls
efforts for customers.
- Inability to adapt to technological change.
- Competition in the telecommunications industry.
- Inability to manage customer attrition and bad debt expense.
- Adverse change in our relationship with third party carriers.
- Failure or bankruptcy of other telecommunications companies upon whom
we rely for services and revenues.
9
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. Management wishes to caution the reader of the forward-looking
statements, that such statements, which are contained in this Report, reflect
our current beliefs with respect to future events and involve known and unknown
risks, uncertainties and other factors, including, but not limited to, economic,
competitive, regulatory, technological, key employee, and general business
factors affecting 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; (2) our success in selling Essex or substantially all of its assets
and the selling price we obtain; (3) our ability to maintain, attract and
integrate internal management, technical information and management information
systems; (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 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 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 Communications Corp. is a full-service telecommunications company that
focuses on developing integrated telephone service in the emerging competitive
local exchange carrier ("CLEC") industry. We offer small businesses and
residential consumers an integrated set of telecommunications products and
services, including local exchange, local access, domestic and international
long distance telephone, and a full suite of features, including items such as
three-way calling, call waiting and voice mail. We have built a scalable
operating platform that can provision a local telephone line, provide dial-tone
to our customers, read usage records, rate telephone calls for billing purposes,
prepare monthly invoices to customers, provide real-time on-line customer
support services at our inbound call centers, capture credit and collection
data, calculate gross margins for each line and perform any moves, adds, changes
and repairs that a customer requests. We utilize universal client technology so
that our employees and agents can access our system from any personal computer
using any Internet browser.
10
We believe that the Telecommunications Act of 1996 (the "Telecommunications
Act"), which opened the local exchange market to competition, has created an
attractive opportunity for CLECs, such as eLEC. Like most CLECs, our entry in
this industry was dependent upon the provisions of the Telecommunications Act
that allow CLECs to lease various elements of the networks of the incumbent
local exchange carriers ("ILECs") that are necessary to provide local telephone
service in a cost-effective manner. This aspect of the Telecommunications Act is
referred to as "unbundling" the ILEC networks, and allows us to lease unbundled
network elements on an as-needed basis and provide such elements to our
customers at a lower cost than that which the ILEC is charging.
Although we believe the opportunity for CLECs is attractive, it is also
challenging. We must contend with federal and state government regulators,
rapidly changing technologies, incumbent carriers that are better staffed and
capitalized than us and real-time business partners that also carry our
customer's phone call, whether it be local, long distance or international.
While we are managing these challenges, we also must provide connectivity,
superior customer service and a culture of continuous improvement. Because of
the complexity of the business, we have focused our energies on simplifying our
working environment and improving performance through automation. We believe one
of the greatest accomplishments in building our business over the past three
years was the development of our own operations support systems ("OSS"). We
believe our OSS is the crucial enabler that allows us to effectively support
customer orders, service delivery, service assurance, billing and collections in
an automated manner.
Other CLECs have invested a substantial amount of capital to buy
circuit-switched equipment and rollout fiber, only to find that their equipment
is severely underutilized and that there is a significant shortfall in their
revenue stream when compared to their capital investment. We refer to this
strategy as a "facilities-first" strategy, because the CLEC has invested in its
equipment and placed the equipment in service before the CLEC has developed a
customer base. Our strategy is a "customer-first," or a "deferred-build"
strategy. We invested our capital in our OSS to support our customers and we
lease facilities on an as-needed basis from ILECs while we build our customer
base. After we have obtained a substantial geographical concentration of
customers, we will make decisions regarding the purchase and installation of our
own network equipment. This strategy allows us to be very flexible with our
customer base as we grow our business. We can move our customer base to
alternative access, if appropriate, and we will not become a captive of our own
underutilized equipment, as can happen with a "facilities-first" CLEC. The
technological advances in equipment and the lowering of equipment prices have
substantiated our deferred-build strategy.
When we lease lines from an ILEC, we use the unbundled network elements platform
("UNE-P") service offering. UNE-P allows us to lease the network elements we
need, such as the local line and the port on a local switch, so we can provide
local dial tone service to our customers. We are capable of providing virtually
all of the same additional voice services provided by any ILEC, such as
three-way calling, call waiting, call forwarding and caller ID. We sell all our
services at a fee that is at least ten percent less than the rate charged by the
ILEC. We typically sell our business customers the identical service they were
buying from the ILEC so our customers see a savings on their telephone bills
when they change to our service. We are currently marketing to residential users
a selection of three flat rate plans that allow them to have access to numerous
calling features for a fixed monthly price.
11
We believe we can provide competitive service under the UNE-P service offering.
We believe UNE-P is the preferable platform under which any CLEC should operate
while it is growing and building a customer base. We have designed our OSS to be
flexible and scalable so that any company that wants to begin providing local
exchange services utilizing UNE-P can rely on our OSS.
Due to the changing capital environments during 2001 and our inability to obtain
sufficient capital to build both a CLEC and an OSS for a UNE-P and resale
customer base, we have been forced to scale back our operations as a CLEC and
have entered into an asset purchase agreement with EAC to sell most of the
assets of Essex to EAC. The sale includes the assumption by EAC of liabilities
of Essex of approximately $9,800,000 at August 31, 2002. We have distributed a
proxy statement to our shareholders in conjunction with such proposed sale
seeking shareholder approval of the proposed sale.
We believe many CLECs have failed because they did not have sufficient revenues
to support the cost of operating the network they built. We also believe other
CLECs have failed because they did not have the back-office systems necessary to
effectively support customer orders, service delivery, service assurance,
billing and collections in an efficient manner. While we have leased networks to
avoid the high cost of building a network and have focused our efforts on
building our OSS, we have not been able to bring our operations to a breakeven
point, and have been struggling with negative working capital for more than one
year, while our losses continue. Due to our financial condition, we have been
unable to apply funds for effective marketing to customers, and, prior to August
31, 2002, we had been unable to obtain the consent of our former lender to the
purchase of any customer bases that would have helped us obtain enough customers
to reach a breakeven level. To help conserve cash, we have scaled back our
telemarketing efforts, which we believe are predictable as to costs and results,
and moved to a more cash-efficient agent model, which requires smaller cash
expenditures up front, but will make it more difficult to predict the timing of
when new customers will sign up for our service.
As a result of our financial condition, we are exploring alternatives to
preserve and generate additional revenues from our OSS. EAC will utilize our OSS
at least until February 2003, to manage and service the customers that it has
agreed to purchase from us. We also have been in discussions regarding the
licensing of our OSS to companies that are seeking to purchase local access
lines, but are not currently a licensed CLEC. We hope to be able to use our
billing platform to generate revenues from our OSS. There can be no assurance
that we will be successful in generating third-party revenues from our OSS, or
that we will be able to satisfactorily dispose of Essex, or one or more of our
other subsidiaries, on satisfactory terms. Failure to sell Essex or its assets
and liabilities on satisfactory terms could cause us to seek to reorganize under
applicable bankruptcy laws. Even if we are successful in disposing of Essex, we
still may be forced to reorganize under applicable bankruptcy laws.
Nine Months Ended August 31, 2002 vs. Nine Months Ended August 31, 2001
-----------------------------------------------------------------------
Our net revenues for the nine-month period ending August 31, 2002 decreased by
approximately $3,143,000, or approximately 21%, to approximately $11,805,000 as
compared to approximately $14,948,000 reported for the nine-month period ending
August 31, 2001. This decrease was directly related to a decrease in the number
of our customers, including the loss of our largest customer, and the number of
access lines that we bill each month. If we sell the assets of Essex by December
12
31, 2002 as we expect to do, we estimate that our revenues for our first quarter
of fiscal 2003 will likely decline by over 90%. In the third quarter of fiscal
2002, Essex represented approximately 97% of our total revenues. However, from
the date we executed the agreement with EAC to sell the assets of Essex, we have
been selling access lines and adding customers through our newly-licensed CLEC,
NRTC, and we plan to telemarket and use agents to add customers in that
subsidiary, as we attempt to rebuild our customer base and grow our business.
Our limited telemarketing has remained effective in attracting the expected
number of new accounts, based upon the number of hours we dial. Currently, we
are not telemarketing for EAC or for Essex, and we anticipate that we will only
be telemarketing to add new accounts for NRTC.
Our gross profit for the nine-month period ending August 31, 2002 decreased by
approximately $1,757,000 to approximately $4,015,000 from approximately
$5,772,000 reported for the nine-month period ending August 31, 2001, and our
gross profit percentage decreased to 34.0% from 38.6% reported in the prior
fiscal period. The change in gross profit is attributable to the decrease in our
customer base. The reduction in gross profit percentage in comparison to the
prior year period is due to our inability to obtain credits from the RBOCs for
billing disputes.
Selling, general and administrative expenses ("SG&A") decreased by approximately
$2,316,000, or approximately 24%, to approximately $7,287,000 for the nine-month
period ending August 31, 2002 from approximately $9,603,000 reported in prior
fiscal period. This decrease in expense is directly related to our efforts,
started in the second half of fiscal 2001, to implement various cost-cutting
measures, which included, among other things, a reduction in staffing in all
areas of our operations and reduced spending on our marketing efforts. We have
closed our network operations center in Norwalk, Connecticut as part of this
cost cutting move, and we no longer offer our own digital subscriber line
service. We continue to evaluate our operations for efficiencies and our
employee staffing requirements, and we expect to implement further SG&A expense
reductions in the remainder of fiscal 2002.
Depreciation and amortization expense decreased by approximately $575,000 to
approximately $181,000 for the nine-month period ending August 31, 2002 from
approximately $756,000 reported in the prior fiscal period. The decrease is
attributed to the impairment charge taken for certain long-lived assets in the
fourth quarter of fiscal 2001.
Interest expense for the nine-month period ending August 31, 2002 decreased by
approximately $120,000 to approximately $386,000 from approximately $506,000
reported in prior fiscal period primarily due to decreased average borrowings,
offset by higher interest rates charged by our former lender.
Miscellaneous income for the nine-month periods ending August 31, 2002 and 2001
of approximately $1,343,000 and $888,000, respectively, resulted primarily from
the sale of Talk shares.
Three Months Ended August 31, 2002 vs. Three Months Ended August 31, 2001
-------------------------------------------------------------------------
Our net revenues for the three-month period ending August 31, 2002 decreased by
approximately $2,019,000, or approximately 36%, to approximately $3,630,000 as
compared to approximately $5,649,000 reported for the three-month period ending
August 31, 2001. As discussed above, the decrease is related to the loss of
customers, including our largest customer. In addition, our financial condition
13
has not allowed us to spend the marketing dollars necessary to obtain new
customers to replace the customers we have lost.
Our gross profit for the three-month period ending August 31, 2002 decreased by
approximately $1,032,000 to approximately $1,324,000 from approximately
$2,356,000 reported in the three-month period ending August 31, 2001, and our
gross profit percentage decreased to 36.5% from 41.7% reported in the prior
fiscal period. The change in gross profit is attributable to the decrease in our
customer base. The reduction in gross profit percentage in comparison to the
prior year period is due to our inability to obtain credits from the RBOCs for
billing disputes.
SG&A expenses decreased by approximately $648,000, or approximately 22%, to
approximately $2,291,000 for the three-month period ending August 31, 2002 from
approximately $2,939,000 reported in the prior fiscal period. This decrease in
expense is directly related to our efforts, started in the second half of fiscal
2001, to implement various cost-cutting measures, which included, among other
things, a reduction in staffing of our telemarketing division and reduced
spending on our marketing efforts. As discussed above, we continue to evaluate
our operations for efficiencies and our employee staffing requirements, and we
expect to implement further SG&A expense reductions in the remainder of fiscal
2002
Depreciation and amortization expense decreased by approximately $241,000 to
approximately $44,000 for the three-month period ending August 31, 2002 from
approximately $285,000 reported in the prior fiscal period. The decrease is
attributed to the impairment charge taken for certain long-lived assets in the
fourth quarter of fiscal 2001.
Interest expense for the three-month period ending August 31, 2002 decreased by
approximately $113,000 to approximately $87,000 from approximately $200,000
reported in the three-month period ending August 31, 2001 primarily due to
decreased average borrowings, offset by higher interest rates charged by our
former lender.
Miscellaneous income for the three-month periods ending August 31, 2002 and 2001
of approximately $701,000 and $53,000, respectively, resulted primarily from the
sale of Talk shares.
Liquidity and Capital Resources
-------------------------------
At August 31, 2002, we had cash and cash equivalents available of approximately
$1,011,000, and negative working capital of approximately $10,424,000.
Approximately $360,000 of our cash balances are contained in TSI, our subsidiary
that is currently operating as a Debtor-in-Possession. The negative working
capital is due to our cumulative losses over the last several years and our lack
of a long-term debt facility to fund our operations. A long-term debt facility
from prior years was paid in full in August 2002. Our lack of a long-term credit
facility to fund our current liabilities has caused our current liabilities to
be significantly higher than in prior years.
Net cash provided by (used in) operating activities aggregated approximately
$2,942,000 and ($2,897,000) in the nine-month periods ending August 31, 2002 and
2001, respectively. The principal source of cash in fiscal 2002 was the loss for
the period of approximately $2,480,000, offset by the increase in accounts
payable and accrued expenses, principally through the delaying of payments to
vendors, of approximately $4,978,000. The principal use of cash in fiscal 2001
14
was the loss for the period of approximately $4,069,000 and an increase in
accounts receivable of approximately $1,685,000, offset by an increase in
accounts payable of approximately $2,593,000
Net cash provided by investing activities aggregated approximately $1,429,000
and $790,000 in the nine-month periods ending August 31, 2002 and 2001,
respectively. The principal source of cash in fiscal 2002 was the proceeds from
the sale of marketable securities of approximately $1,381,000. The principal
sources of cash in fiscal 2001 were the proceeds from the sale of marketable
securities of approximately $992,000 and the proceeds from the sale of property
of approximately $933,000, offset by the purchase of property and equipment of
approximately $1,179,000.
Net cash (used in) provided by financing activities aggregated approximately
($4,157,000) and $1,956,000 in the nine-month periods ending August 31, 2002 and
2001, respectively. In fiscal 2002, net cash used in financing activities
resulted from the repayment of short and long-term debt of approximately
$4,202,000, which was partially offset by the proceeds from the exercise of
stock options of approximately $45,000. In fiscal 2001, net cash provided by
financing activities resulted from increased borrowings of approximately
$2,240,000, partially offset by a mortgage repayment of approximately $284,000.
For the nine-month period ending August 31, 2002, we had no capital
expenditures. We do not expect to make any significant capital expenditures in
the remainder of fiscal 2002 or in fiscal 2003.
At August 31, 2002, we owned approximately 42,515 shares of Talk (NASDAQ:TALK).
We have the right to purchase 285,714 additional shares of Talk for $2.10 per
share under the terms of a warrant that expires in August 2005. At October 14,
2002, Talk common stock was trading at $2.11 per share. At August 31, 2002, we
also owned approximately 270,000 shares of Cordia Corporation (OTCBB:CORG), of
which 223,000 shares are "restricted securities," as defined in the Securities
Act of 1933, as amended. Such shares became eligible for sale in the public
markets, subject to certain limitations, in February 2002.
The report of the independent auditors on our 2001 financial statements
indicates there is substantial doubt about the Company's ability to continue as
a going concern. Management anticipates that, without the sale of a significant
potion of our assets, we must raise at least $5 million to meet the cash
requirements needed to continue operations as described previously in the
Overview section. Given the current market price of our stock and the current
market conditions in the telecom sector, it is doubtful we will be able to
obtain such funding when needed, or that such funding, if available, will be
obtainable on acceptable terms. We therefore believe the best alternative is to
divest most of our assets of Essex to EAC, and our board of directors has
recommended to shareholders that they vote to approve such divestiture. Although
EAC will attempt to negotiate lower payment amounts with our creditors, and has
already done so with several creditors, this divestiture will relieve us of
approximately $9.8 million of liabilities in exchange for the sale of
approximately 20,000 customer lines, plus the related licenses, accounts
receivable and cash balances in Essex. Our failure to complete this transaction
with EAC will most likely require us to file for bankruptcy protection from our
creditors and may lead to the eventual cessation of our business operations.
We are currently working to rebuild our customer base in NRTC, another CLEC that
we own. In order to succeed in our business model, we will require accounts
receivable financing from a
15
conventional lender to fund the growth of this subsidiary. Our failure to obtain
such financing or to otherwise raise the funds necessary to finance our
operations will have an adverse effect on our ability to carry out our business
plan. Our inability to carry out this plan will likely result in the continuance
of unprofitable operations, and the eventual shut down of vendor credit
facilities, which would adversely affect our ability to continue operating as a
going concern.
Item 3. Controls and Procedures
--------------------------------
(a) Within the 90 days prior to the date of this report, we carried
out an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and principal accounting
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon
that evaluation, our Chief Executive Officer and principal accounting
officer concluded that our disclosure controls and procedures are effective
in timely alerting him to material information relating to our company
(including its consolidated subsidiaries) required to be included in our
periodic SEC filings.
(b) There have been no significant changes in our internal controls or
in other factors that could significantly affect our internal controls
subsequent to the date we carried out this evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
PART II-OTHER INFORMATION
-------------------------
Item 5. Other Information
--------------------------
We intend to hold an annual meeting of shareholders during the month of May,
2003. Proposals of shareholders intended for presentation at that annual meeting
and intended to be included in our proxy statement and form of proxy for that
meeting must be received at our executive offices by February 1, 2003.
Item 6. Exhibits and Reports on Form 8-K
-------------------------------------------
(a) Exhibits.
None
(b) Reports on Form 8-K
During the third quarter of fiscal 2002, we filed a Current
Report on Form 8-K reporting that our wholly-owned subsidiary,
Telecarrier Services, Inc, filed, on July 29, 2002, a voluntary
petition for protection under Chapter 11 of the federal bankruptcy
laws with the United States Bankruptcy Court for the Southern District
of New York.
On September 3, 2002, we filed a Current Report on Form 8-K
reporting that we entered in a definitive purchase agreement, dated
September 3, 2002, to sell substantially all of the assets of our
wholly-owned subsidiary, Essex Communications, Inc.
16
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.
Date October 15, 2002 By: /s/ Paul H. Riss
-------------------------
Paul H. Riss
Chief Executive Officer
(Principal Financial and
Accounting Officer)
17
Certifications
I, Paul H. Riss, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of eLEC Communications
Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and I have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to me by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
18
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures based on my
evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of my most
recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: October 15, 2002
/s/ Paul H. Riss
------------------------------------
Paul H. Riss
Chief Executive Officer and Principal
Financial and Accounting Officer
19