UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the quarterly period ended February 29, 2004.
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OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the transition period from to
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Commission file number 0-4465
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eLEC Communications Corp.
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(Exact 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.)
75 South Broadway, Suite 302, White Plains, New York 10601
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code 914-682-0214
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 .
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 16,259,782 shares of Common
---------------------------
Stock, par value $.10 per share, as of April 1 2004.
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PART 1. FINANCIAL INFORMATION
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Item 1. Financial Statements
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eLEC Communications Corp. and Subsidiaries
Condensed Consolidated Balance Sheet
Feb. 29, 2004
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(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 608,710
Accounts receivable, net 779,663
Tax refund receivable 141,617
Prepaid expenses and other current assets 162,140
Due from related party 84,223
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Total current assets 1,776,353
Property, plant and equipment, net 21,533
Other assets 48,000
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Total assets $ 1,845,886
============
Liabilities and stockholders' equity deficiency
Current liabilities:
Short-term borrowings $ 150,000
Current maturities of long-term debt and capital lease obligations 37,629
Accounts payable and accrued expenses 3,062,834
Due to related parties 259,317
Deferred revenue 144,407
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Total current liabilities 3,654,187
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Stockholders' equity deficiency:
Common stock $.10 par value, 50,000,000 shares authorized,
16,265,282 shares issued 1,626,528
Capital in excess of par value 25,636,884
Deficit (29,057,963)
Treasury stock at cost, 5,500 shares (13,750)
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Total stockholders' equity deficiency (1,808,301)
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Total liabilities and stockholders' equity deficiency $ 1,845,886
============
See notes to the condensed consolidated financial statements.
eLEC Communications Corp. and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
For the Three Months Ended
Feb. 29, 2004 Feb. 28, 2003
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Revenues $ 1,873,992 $ 1,347,029
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Costs and expenses:
Costs of services 880,075 757,695
Selling, general and administrative 1,056,712 1,533,415
Depreciation and amortization 3,858 30,816
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Total costs and expenses 1,940,645 2,321,926
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Loss from operations (66,653) (974,897)
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Other income (expense):
Interest expense (2,762) (35,087)
Interest and other income 29,081 85,058
Gain on debt modification 51,474 --
Gain on sale of assets -- 1,596,889
Gain on sale of investment securities and other investments -- 33,836
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77,793 1,680,696
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Net income before income tax benefit 11,140 705,799
Income tax benefit 45,000 --
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Net income 56,140 705,799
Other comprehensive loss - unrealized
loss on marketable securities -- (23,430)
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Comprehensive income $ 56,140 $ 682,369
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Basic and diluted earnings per share $ 0.00 $ 0.05
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Weighted average number of common shares outstanding
Basic 16,257,667 15,608,282
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Diluted 16,568,565 15,626,377
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See notes to the condensed consolidated financial statements.
eLEC Communications Corp. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Three Months Ended
Feb. 29, 2004 Feb. 28, 2003
Net cash used in operating activities: ($ 58,581) ($515,369)
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Cash flows from investing activities:
Proceeds from sale of investment securities and other investments - 100,000
Proceeds from note - 4,549
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Net cash privided by investing activities - 114,549
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Cash flows from financing activities:
Repayment of long-term debt (1,731) (27,389)
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Net cash used in financing activities (1,731) (27,389)
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Decrease in cash and cash equivalents (60,312) (428,209)
Cash and cash equivalents at beginning of period 669,022 938,528
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Cash and cash equivalents at the end of period $608,710 $510,319
======== ========
See notes to the condensed consolidated financial statements.
eLEC COMMUNICATIONS CORP.
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Notes To Condensed Consolidated Financial Statements (Unaudited)
Note 1-Basis of Presentation
----------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB of Regulation
S-B. 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 three-month period ended February 29, 2004
are not necessarily indicative of the results that may be expected for the year
ended November 30, 2004. For further information, refer to the consolidated
financial statements and footnotes thereto included in our Annual Report on Form
10-KSB for the year ended November 30, 2003.
Note 2-Principal Financing Arrangements
---------------------------------------
Short-term borrowings consist of an unsecured line of credit of $150,000, owed
by our wholly owned subsidiary, Telecarrier Services Inc. ("Telecarrier"), from
a finance company, which is due on demand with interest payable monthly at the
prime lending rate plus 2% (6.0% at February 29, 2004). Repayment of this line
of credit is currently stayed as a result of the bankruptcy proceedings of
Telecarrier (See Note 6).
Note 3-Major Customer
---------------------
During the three months ended February 29, 2004 and February 28, 2003, no one
customer accounted for more than 10% of revenue.
Note 4-Income Taxes
-------------------
At November 30, 2003, we had net operating loss carryforwards for Federal income
tax purposes of approximately $19,000,000 expiring in the years 2004 through
2022. There is an annual limitation of approximately $187,000 on the utilization
of approximately $1,300,000 of such net operating loss carryforwards under the
provisions of Internal Revenue Code Section 382.
Note 5- Earnings (Loss) Per Common Share
----------------------------------------
Basic earnings per common share are calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share is calculated by dividing net income 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. A reconciliation
of the shares used in the computation of our basic and diluted earnings per
common share is as follows:
Three Months Ended
2/29/04 2/28/03
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Weighted average common shares outstanding 16,257,667 15,608,282
Dilutive effect of securities 310,898 18,095
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16,568,565 15,626,377
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For the three months ended February 29, 2004 and February 28, 2003, the
computation of diluted earnings per share excluded the effect of the assumed
exercise of approximately 1,500,000 and 1,770,000 outstanding stock options and
warrants that were outstanding because the effect would be anti-dilutive.
Note 6-Subsidiary's Petition for Relief Under Chapter 11
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On July 29, 2002 (the "Petition Date"), Telecarrier, which had licenses to
resell local and long distance telephone service in four states, filed a
voluntary petition for relief under Chapter 11 of the Federal Bankruptcy Code in
the United States Bankruptcy Court for the Southern District of New York. Under
Chapter 11, certain claims (liabilities subject to compromise) against
Telecarrier in existence prior to the filing of the petition for relief under
the Federal Bankruptcy Code, are stayed while Telecarrier continues business
operations as a debtor-in-possession. Telecarrier has filed a plan of
reorganization pursuant to which the capital stock of a reorganized Telecarrier
would be sold either to us or to an unrelated third party, and the proceeds from
the sale of the stock of the reorganized entity would be used to make
distributions to creditors of Telecarrier. While we are unable to predict
whether the plan of reorganization will be consummated, we expect to retain
control of Telecarrier following its expected emergence from bankruptcy in
fiscal 2004. Additional claims (liabilities subject to compromise) may arise
subsequent to the filing date, resulting from rejection of executory contracts,
including leases, and from the determination of the Court (or agreement of
parties-in-interest) of allowed claims for contingencies and other disputed
amounts.
For the three-months ended February 29, 2004, Telecarrier reported a gain of
approximately $51,000 as a result of a court-stipulated reduction in
post-petition liabilities.
As of February 29, 2004, Telecarrier had total assets of approximately $469,000
and total liabilities of approximately $1,358,000, of which approximately
$872,000 represented pre-petition liabilities and approximately $486,000
represented post-petition liabilities. Pre-petition liabilities subject to
compromise are reflected below:
Line of credit $150,000
Trade payables and due to related parties 619,000
Other accrued expenses 103,000
Note 7-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 our relationship with the RBOCs from which we purchase services is
satisfactory. We also believe there are other 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 possible that the loss of one or
more of our 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.
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 manage, or difficulties in managing, our growth, operations
or restructurings, including attracting and retaining qualified
personnel and opening up new territories for its 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 or long distance service.
- Failure or interruption in our network or information systems.
- Changes in government policy, regulation or 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 or bad debt expense.
- Adverse change in our relationship with third party carriers.
- Failure or bankruptcy of other telecommunications companies upon which
we rely for services and revenues.
- Our operations are currently using cash, and our cash position is
deteriorating. We may run out of cash and be unable to conduct
business.
Note 8-Asset Sale
-----------------
On September 3, 2002, we entered into an agreement with Essex Acquisition Corp.
("EAC"), a wholly-owned subsidiary of BiznessOnline.com, Inc. ("Biz"), to sell
substantially all the assets (amounting to $1,102,103 at November 30, 2002) of
our formerly wholly-owned subsidiary, Essex Communications Inc. ("Essex"), for
five dollars plus the assumption of certain liabilities of Essex (amounting to
$10,081,382 at November 30, 2002), including all obligations due and payable to
Essex's largest vendor, Verizon Services Corp. ("Verizon"). EAC entered into an
agreement with Verizon that provided a payment schedule for the liabilities
assumed from Essex and Verizon granted EAC a discount on the assumed liabilities
provided EAC adheres to the payout schedule. EAC also paid us $270,000 to
reimburse us for amounts paid by us to Essex's former lender, Textron Financial,
formerly know as RFC Capital Corporation. The sale to EAC closed on December 31,
2002. As the creditors of Essex did not consent to the assignment of their
claims, Essex had remained liable for substantially all the obligations assumed
in the sale until such time as they were paid. The June 30, 2002 unaudited
financial statements of Biz indicated that Biz had a stockholders' equity
deficiency of approximately $20,500,000 and had negative working capital of
approximately $3,500,000. The most recent independent auditor's report of Biz
(dated 2002) expressed significant doubt about Biz's ability to continue as a
going concern. These factors indicated there was significant uncertainty as to
the ability of Biz and its subsidiaries' to repay the obligations described
above. Accordingly, we did not record any gain until Essex was released from the
assumed obligations. During the period December 1, 2002 through February 28,
2003, EAC had settled liabilities of approximately $1,597,000 and accordingly,
gain was recorded during such period for such amount.
On September 11, 2003, we sold all the outstanding capital stock of Essex to
Glad Holdings, LLC, a New Jersey limited liability company owned by a former
shareholder ("Glad Holdings"), for an aggregate purchase price of $100 and a
general release from Glad Holdings with respect to any and all matters arising
prior to September 11, 2003. Based on all available information and consultation
with counsel, we concluded that it was unlikely that any creditor of Essex would
be able to hold us responsible for any debts or liabilities of Essex. As a
result, we believe we have been released of all the liabilities related to
Essex, which amounted to approximately $7,314,000 on such date, and accordingly,
recorded such amount as gain in the fourth quarter of fiscal 2003.
The following unaudited pro forma summary presents consolidated financial
information of our operations for the three-month periods ended February 29,
2004 and February 28, 2003, as if the sale of Essex's assets had occurred at the
beginning of each period presented. The pro forma amounts include certain
adjustments that eliminate all the operations of Essex for the periods
presented. The pro forma information does not necessarily reflect the actual
results that would have occurred had the sale taken place for the periods
presented, nor is it necessarily indicative of the future results of operations
of the remaining company:
For the Three Months Ended
2/29/04 2/28/03
Revenues $1,873,992 $ 453,833
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Net income (loss) $ 56,140 ($ 597,292)
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Basic and diluted income (loss) per share $ 0.00 ($ 0.04)
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Note 9- Stock-Based Compensation Plans
--------------------------------------
We issue stock options to our employees and outside directors pursuant to
stockholder-approved stock option programs. We account for our stock-based
compensation plans under the intrinsic value method of accounting, as defined by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. No stock-based employee compensation
cost was reflected in net income for the three months ended February 29, 2004
and February 28, 2003, as all options granted under these plans had an exercise
price equal to the fair market value of the underlying common stock on the date
of the grant. For pro forma disclosures, the estimated fair value of the option
was amortized over the vesting periods, which range from immediate vesting to
three years. The following table illustrates the affect on net income (loss) per
share if we had accounted for our stock option and stock purchase plans under
the fair value method of accounting under Statement 123, as amended by Statement
148:
For the Three Months Ended
2/29/04 2/28/03
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Net income, as reported $ 56,140 $ 705,799
Deduct: Total stock-based employee
compensation expense determined
under fair value-based method
for all awards, net of related
tax effects (58,986) (77,547)
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Pro forma net income (loss) ($ 2,846) $ 628,252
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Earnings (loss) per share
Basic, as reported $ .00 $ .05
Basic, pro forma $ .00 $ .04
Diluted, as reported $ .00 $ .05
Diluted, pro forma $ .00 $ .04
Note 10 Related Party Transactions
----------------------------------
Telecarrier had an agreement, effective January 2, 2002, with Telco Services,
Inc. ("Telco"), a corporation owned by a former shareholder, under which Telco
provided Telecarrier with collection, sales and other services. As a result of a
court-stipulated agreement between Telecarrier and Telco, entered into on
February 6, 2004, the amount owed Telco for such services was reduced by
approximately $51,000 and such reduction was reported as a gain for the
three-month period ended February 29, 2004. As of February 29, 2004, $259,317
was owed to Telco. The President of Telco is also the President of Glad Holdings
(See Note 8).
During the three months ended February 29, 2004 and February 28, 2003, we billed
Cordia Corporation ("Cordia"), a related party, $135,322 and $144,397,
respectively, for rent, telemarketing services, telecommunications services,
commissions, and other costs and Cordia billed us $51,099 and $109,908,
respectively, for telecommunications services and other costs. As of February
29, 2004, Cordia owed us $84,223.
Item 2. Management's Analysis and Discussion of Financial Condition and Results
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of Operations
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The statements contained in this Report that are not historical facts are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 with respect to the financial condition, results
of operations and business of the Company, 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 plan; (2) the impact of changes the Federal Communications Commission
or State Public Service Commissions may make to existing telecommunication laws
and regulations; (3) the cooperation of incumbent carriers in implementing the
unbundled network elements platform required by the Federal Communications
Commission; (4) our ability to maintain, attract and integrate internal
management, technical information and management information systems; (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 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
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 Communications Corp. is a full-service telecommunications company that
focuses on developing integrated telephone service in the 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 local features and calling plans. In the states
in which we operate, we compete with the incumbent local carrier and a variety
of other competitive carriers, including companies that were originally long
distance service providers or data service providers. We find that approximately
90% of the local telephone lines in the states in which we are operating are
served by Verizon, AT&T Corp. ("AT&T") or WorldCom Inc., which operates under
the brand name of MCI ("MCI"). Our strategy is to offer the same telephone
products and services offered by Verizon, AT&T and MCI at discounts of 10% to
25%
off their rates. We also strive to provide friendly and helpful customer service
that exceeds the service provided by these large competitors.
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. 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
carrier ("ILEC") 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 telephone call, whether it is local, long distance or international.
At the same time that 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.
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 creating web based "back-office" support
systems so that we can mine data, easily analyze our customer base, and provide
comprehensive customer service to handle repairs, moves, adds and changes to
lines. 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 do not become a captive of our own
underutilized equipment, as can happen with a "facilities-first" CLEC. The
technological advances in equipment and the lowering of equipment prices have
substantiated our deferred-build strategy and have enabled us to better utilize
our limited capital.
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 that we can
provide local dial tone service to our customers. We can provide 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 our services at a
fee that is at least 10% and as much as 25% less than the rate charged by the
ILEC. We also offer a bundled package of local and regional calling minutes with
popular voice service features.
We believe UNE-P is the preferable platform under which any CLEC should operate
while it is growing and building a customer base. In March 2002, UNE-P became
more valuable to us when the costs charged to us for providing local voice
services on the UNE-P service offering in New York State were lowered. We
believe current rates are also very attractive in New Jersey,
Michigan and Pennsylvania. Our primary operating CLEC, New Rochelle Telephone
Corp. ("NRTC"), is selling services in New York State and Pennsylvania, and is
currently achieving gross margins of approximately 50%.
Regulatory Developments
Our ability to continue achieving our current level of gross margins is
dependent upon the pricing structure of the network elements that we obtain from
the ILECs. The requirement that the ILECs provide us with unbundled network
elements at the current rates is the subject of regulatory and judicial actions
that may affect their availability and pricing. Because of a legal challenge
from the ILECs, on March 2, 2004 the U.S. Court of Appeals for the District of
Columbia released a decision that reversed, vacated and remanded the FCC's
Triennial Review Order that is the basis for current pricing and unbundled
network elements availability, and is critical to our business. The FCC, state
public service commissions, or individual CLECs could appeal this decision and
ask the Supreme Court to rule on the case.
On March 31, 2004, the FCC sent a letter to telecom companies urging negotiation
rather than litigation of the issues raised by the FCC's Triennial Review Order.
The letter states that the FCC is seeking a 45-day extension of the stay that
the U.S. Court of Appeals imposed on its decision that overturned parts of the
Triennial Review Order. The FCC letter asked telecom companies to indicate by
April 6, 2004 whether they will participate in negotiations. We have responded
to the FCC in writing by indicating that we will attempt to negotiate commercial
agreements with the ILECs. Several of the ILECs have expressed a willingness to
negotiate. Although we and other CLECs are willing to negotiate our own
agreements, the possibility of appeal to the Supreme Court has been preserved.
Plan of Operation
Our primary methods of obtaining new customer accounts will continue to be
through telemarketing and outside sales agents. We believe these are effective
low-cost methods of building new accounts, and our past history with these
customer acquisition methods is helpful in planning and budgeting our operations
on a going forward basis. While we believe our cash balances are adequate for
continued limited growth, our cash balances are not sufficient to generate the
growth we desire or the growth that our internal operating systems are capable
of handling. We are therefore beginning to explore opportunities for raising
cash through asset-based borrowings or through a modest equity placement.
We do not expect to purchase any significant assets or make any significant
capital expenditures in the next 12 months. We believe our back-office systems
are adequately developed and functioning well, and we anticipate only minor
expenditures to further automate such systems during the next 12 months. We are
continuing to pursue the utilization of a packet-based network, such as Voice
over Internet Protocol ("VoIP"), to carry our local voice traffic. This
technology is used to transmit voice conversations over a data network using the
Internet Protocol. Such data network may be the Internet or may be a managed
network.
While many carriers are providing VoIP for international calls and long distance
calls, we believe very few carriers have implemented VoIP for local telephone
service. We believe the most important trend in the industry will be the
replacement of traditional circuit-switched voice technology with packet-based
networks. Packet switching has tremendous advantages over circuit switching.
Packets can be transmitted over copper wire or over wireless facilities,
packet-
switched equipment is substantially less expensive than circuit-switched
equipment and the price of packet-switched equipment is continually dropping,
even as it becomes technologically more sophisticated. We plan to move toward
this technology over the next six to 12 months, as this technology also allows
us to bypass the ILECs when we provide local telephone service to our customers.
Additionally, VoIP allows for added and integrated new service offerings, such
as integrated messaging, bandwidth on demand and voice emails. While we will
continue to seek and evaluate new technologies, our focus will continue to be on
building our customer base, and not in developing new technology. We plan to
continue our efforts on improving customer service and in maintaining efficient
systems that allow us to sell, provision, bill and collect, as our first
priority is to develop and maintain a stable core UNE-P business that generates
positive cash flow from operations. As we move towards a VoIP product, we
anticipate that we will partner with a carrier's carrier or with another CLEC in
order to provide VoIP local service to our customers. We do not plan to have
substantial equipment purchases, although we may consider sharing a switch with
another service provider.
Three Months Ended February 29, 2004 vs. Three Months Ended February 28, 2003
-----------------------------------------------------------------------------
Our revenue for the three-month period ended February 29, 2004 increased by
approximately $527,000, or approximately 39.1%, to approximately $1,874,000 as
compared to approximately $1,347,000 reported for the three-month period ended
February 28, 2003. Included in our revenue for the three-month period ended
February 28, 2003 were approximately $412,000 in sales reported by NRTC and
Telecarrier and approximately $893,000 in sales reported by our formerly
wholly-owned subsidiary, Essex (See Note 8). Revenue reported by NRTC and
Telecarrier for the three-month period ended February 29, 2004 increased by
approximately $1,462,000, or approximately 354.9%, over the year-ago period. We
anticipate revenues for NRTC and Telecarrier to continue to increase in the
second quarter of fiscal 2004, as we work to add new customers. Our line count
and customer base has continued to grow in the second quarter of 2004 but
additional growth will be directly related to the cash we have available for new
line acquisition costs. See the discussion on liquidity below.
Our gross profit for the three-month period ended February 29, 2004 increased by
approximately $405,000 to approximately $994,000 from approximately $589,000
reported in the three-month period ended February 28, 2003, and our gross profit
percentage increased to 53.0% from 43.8% reported in the prior fiscal period.
The increase in our gross profit and gross profit percentage reflects our sales
strategy to sell in only those states in which we believe we will be able to
achieve a margin of over 40%. The increase in gross profit and gross profit
percentage was attributable to lower buying prices from ILECs in the states in
which we operated during the first fiscal quarter of 2004, compared to the
states in which we were operating during the first fiscal quarter of 2003. NRTC
and Telecarrier are operating in states in which we can purchase unbundled
network elements at prices that are significantly lower than the prices charged
in some of the states in which our formerly wholly-owned subsidiary, Essex, was
operating. Our selling strategy in fiscal 2004 is to continue to penetrate
states that offer the opportunity to achieve higher margins.
Selling, general and administrative expenses ("SG&A") decreased by approximately
$476,000, or approximately 31.1%, to approximately $1,057,000 for the
three-month period ended February 29, 2004 from approximately $1,533,000
reported in prior year fiscal period. Approximately $645,000 of this decrease in
expense was directly related to the sale of our Essex operations and
approximately $32,000 was related to lower occupancy costs as a result of the
sale of our headquarters building in the fourth quarter of fiscal 2003. These
expense reductions were
partially offset by an increase of approximately $31,000 in new line acquisition
costs and approximately $85,000 in legal fees related to bankruptcy proceedings
for Telecarrier. Currently, our SG&A costs are approximately $350,000 per month,
approximately $90,000 of which represents new line acquisition costs.
Depreciation expense decreased by approximately $27,000, to approximately $4,000
for the three months ended February 29, 2004 as compared to approximately
$31,000 for the three months ended February 28, 2003. The decline in
depreciation is primarily attributable the sale of our headquarters building in
the fourth quarter of fiscal 2003 and to the sale of certain assets to EAC on
December 31, 2002.
Interest expense decreased by approximately $32,000, to approximately $3,000 for
the three months ended February 29, 2004 as compared to approximately $35,000
for the three months ended February 28, 2003. The decrease in interest expense
was partially attributable to the repayment of a mortgage note in conjunction
with the sale of our headquarters building in the fourth quarter of fiscal 2003.
Interest and other income decreased by approximately $56,000, to approximately
$29,000 for the three months ended February 29, 2004 as compared to
approximately $85,000 for the three months ended February 28, 2003. The decrease
resulted primarily from a reduction in commission and rental income.
For the three-months ended February 29, 2004, Telecarrier reported a gain of
approximately $51,000 as a result of a court-stipulated reduction in
post-petition liabilities (See Note 6). No such gain was reported for the
three-month period ended February 28, 2003.
Gain on the sale of assets for the three months ended February 28, 2003 was
approximately $1,597,000 (See Note 8). We had no such sale for the three-month
period ended February 29, 2004.
Gain on the sale of investment securities and other investments for the
three-month period ended February 28, 2003 was approximately $34,000, which
resulted from the sale of Cordia shares. No such shares were sold in the
three-month period ended February 29, 2004.
For the three-month period ended February 29, 2004, we recorded a tax benefit of
$45,000, which resulted from the reduction of an estimated accrual of corporate
tax expense for fiscal 2003. No such benefit was recorded for the three-month
period ended February 28, 2003.
Liquidity and Capital Resources
-------------------------------
At February 29, 2004, we had cash and cash equivalents of approximately $609,000
and negative working capital of approximately $1,878,000. Our cash balances at
February 29, 2004 included approximately $160,000 that was in the Telecarrier
bankruptcy estate. This cash was only available for the operations of
Telecarrier.
Net cash used in operating activities aggregated approximately $59,000 and
$515,000 in the three-month periods ended February 29, 2004 and February 28,
2003, respectively. The principal use of cash
in fiscal 2004 was the net change in operating assets and liabilities, which was
partially offset by the income for the period of approximately $56,000. The
principal use of cash in fiscal 2003 was the loss for the period of
approximately $1,165,000, which was offset by the increase in accounts payable,
principally through the delaying of payments to vendors, and the reduction in
accounts receivable of approximately $899,000 and $264,000, respectively.
There were no investing activities in the three-month period ended February 29,
2004. Net cash provided by investing activities aggregated approximately
$115,000 for the three-month period ended February 28, 2003. The principal
source of cash in fiscal 2003 was the proceeds from the sale of investment
securities and other investments of approximately $100,000 and the proceeds of a
note of approximately $15,000.
Net cash used in financing activities aggregated approximately $2,000 and
$27,000 in the three-month periods ended February 29, 2004 and February 28,
2003, respectively. In fiscal 2004 and 2003, net cash used in financing
activities resulted from the repayment of debt.
For the three-month period ended February 29, 2004, there were no capital
expenditures. We do not expect to make any significant capital expenditures over
the next 12 months.
We have stock purchase warrants that entitle us to purchase approximately 95,000
shares of Talk America Holdings Inc. ("Talk"). The warrant exercise price is
$6.30 per share and, at March 29, 2004, our warrants were in-the-money, as Talk
common stock was trading at approximately $8.56 per share at such date. We have
been in discussions with Talk management regarding our intention to exercise the
warrants during fiscal 2004, as we plan to use the proceeds of the warrants to
generate additional cash for line acquisition costs.
The report of the independent auditors on our 2003 financial statements
indicates there is substantial doubt about our ability to continue as a going
concern. The auditors noted a deficit in working capital and continuing losses
from operations. We are continuously working to improve our financial condition
and we are now operating our business with fixed costs that are substantially
lower than our fixed overhead during the previous three years. To maintain our
revenues at the current level, and to further improve our balance sheet, we
anticipate being able to purchase the outstanding capital stock of our wholly
owned subsidiary, Telecarrier, in a transaction that will allow Telecarrier to
emerge from a Chapter 11 bankruptcy. We were the high bidder for the capital
stock of Telecarrier when the bidding period ended on March 29, 2004. We
anticipate the bankruptcy court will approve our purchase of the reorganized
business for a total amount of $325,000. This purchase and reorganization is
projected to eliminate approximately $872,000 in pre-petition liabilities that
are carried on our consolidated balance sheet. If we are successful in
maintaining ownership of a reorganized Telecarrier, we anticipate we will be
able to achieve profitable operations and will be able to further pursue
implementation of VoIP technology to establish an additional network on which to
carry the voice traffic of our customers. The failure to retain our Telecarrier
subsidiary and to settle past due amounts within our financial means will have
an adverse effect on our ability to carry out our business plan. The inability
to carry out this plan may result in 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
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Disclosure Controls and Procedures. Our management, with the participation
of our chief executive officer/chief financial officer, has evaluated the
effectiveness of our disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) as of the end of the period covered by this
report. Based on such evaluation, our chief executive officer/chief financial
officer has concluded that, as of the end of such period, our disclosure
controls and procedures are effective in recording, processing, summarizing and
reporting, on a timely basis, information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act.
Internal Control Over Financial Reporting. There have not been any changes
in the Company's internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
first quarter of 2004 that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
eLEC COMMUNICATIONS CORP.
-------------------------
PART II-OTHER INFORMATION
-------------------------
Item 1. Legal Proceedings
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None
Item 2. Changes in Securities and Purchases of Equity Securities
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None
Item 3. Defaults Upon Senior Securities
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None
Item 4. Submission of Matters to a Vote of Security Holders
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None
Item 5. Other Information
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None
Item 6. Exhibits and Reports on Form 8-K
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(a) Exhibits.
31.1 Certification of our Chief Executive Officer and Chief
Financial Officer, Paul H. Riss, Pursuant to 18 U.S.C.
1350 (Section 302 of the Sarbanes-Oxley Act of 2002)
32.1 Certification of our Chief Executive Officer and Chief
Financial Officer, Paul H. Riss, Pursuant to 18 U.S.C.
1350 (Section 906 of the Sarbanes-Oxley Act of 2002)
(b) Reports on Form 8-K None
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.
April 7, 2004 By: /s/ Paul H. Riss
--------------------- -----------------------
Date Paul H. Riss
Chief Executive Officer
(Principal Financial and
Accounting Officer)