SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended February 28, 2001.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to
--------------- --------------.
Commission file number 0-4465
eLEC Communications Corp.
--------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
New York 13-2511270
--------------------------------------------------------------------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
543 Main Street New Rochelle, New York 10801
--------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code 914-632-8005
------------
509 Westport Avenue Norwalk, Connecticut 06851
-------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as
of the latest practicable date: 14,942,421 shares of Common Stock, par value
--------------------------------------------
$.10 per share, as of April 1, 2001.
------------------------------------
PART 1. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
eLEC Communications Corp. and Subsidiaries
Condensed Consolidated Balance Sheets
Feb. 28, 2001 Nov. 30, 2000
------------- -------------
(Unaudited) (See note)
Assets
Current assets:
Cash and cash equivalents $ 248,488 $ 509,657
Accounts receivable 3,326,307 2,803,888
Investment securities 733,542 1,619,822
Inventory 392,697 529,933
Prepaid expenses and other current assets 572,041 579,107
Land and building held for sale -- 533,239
------------ ------------
Total current assets 5,273,075 6,575,646
------------ ------------
Property, plant and equipment, net 3,452,922 2,035,117
------------ ------------
Other assets
Other investments 240,000 100,000
Goodwill 3,260,535 3,421,512
Investment securities, non-current 1,468,800 2,000,000
Other 714,234 734,555
------------ ------------
5,683,569 6,256,067
------------ ------------
Total assets $ 14,409,566 $ 14,866,830
============ ============
Liabilities and stockholders' equity
Current liabilities:
Secured short-term borrowings $ 150,000 $ 150,000
Current maturities of long-term debt 103,060 398,709
Accounts payable 2,623,130 2,364,977
Accrued expenses 1,500,711 1,294,457
Taxes payable 425,476 311,165
------------ ------------
Total current liabilities 4,802,377 4,519,308
------------ ------------
Long-term debt, less current maturities 3,736,951 1,715,723
------------ ------------
Stockholders' equity:
Preferred stock, $.10 par value, 1,000,000 shares authorized
Series B issued, 16 and 116 shares in 2001 and 2000 2 12
Common stock $.10 par value, 50,000,000 shares authorized,
14,942,421 and 14,642,421shares issued in 2001 and 2000 1,494,242 1,464,242
Capital in excess of par value 25,429,467 25,319,457
Retained earnings (deficit) (23,218,006) (21,744,234)
Treasury stock at cost, 11,000 shares (27,500) (27,500)
Accumulated other comprehensive income (loss) 2,192,033 3,619,822
------------ ------------
Total stockholders' equity 5,870,238 8,631,799
------------ ------------
Total liabilities and stockholders' equity $ 14,409,566 $ 14,866,830
============ ============
See notes to the condensed consolidated financial statements
Note: The balance sheet at November 30, 2000 has been derived from audited
financial statements at that date but does not include all the information and
footnotes required by generally accepted accounting principles
2
eLEC Communications Corp. and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
For the Three Months Ended
Feb. 28, 2001 Feb. 29, 2000
------------- -------------
Revenues $ 4,730,647 $ 2,226,233
Cost of revenues 3,055,839 1,484,456
------------ ------------
Gross profit 1,674,808 741,777
------------ ------------
Costs and expenses:
Selling, general and administrative 3,420,758 1,264,358
Depreciation and amortization 235,373 105,365
Equity in loss of investee -- 77,321
------------ ------------
Total costs and expenses 3,656,131 1,447,044
------------ ------------
Loss from operations (1,981,323) (705,267)
------------ ------------
Other income (expense):
Interest expense (132,423) (19,163)
Interest income 5,806 8,251
Miscellaneous income, net 634,168 67,279
------------ ------------
507,551 56,367
------------ ------------
Net loss ( 1,473,772) ( 648,900)
Other comprehensive loss - unrealized
loss on marketable securities (794,798) --
------------ ------------
Comprehensive loss ($ 2,268,570) ($ 648,900)
============ ============
Basic and diluted loss per share ($ 0.10) ($ 0.06)
============ ============
Weighted average number of common shares outstanding 14,711,421 11,739,156
============ ============
See notes to the condensed consolidated financial statements
3
eLEC Communications Corp. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Three Months Ended
Feb. 28, 2001 Feb. 29, 2000
------------- -------------
Net cash used in operating activities: ($1,672,591) ($ 760,151)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (794,982) (164,112)
Proceeds from sale of marketable securities 633,033 --
Acquisition of Telecarrier Services Inc. -- (7,718)
Proceeds from sale of property 933,238 --
Proceeds from agreement to sell subsidiary 14,554 14,554
----------- -----------
Net cash provided by (used in) investing activities 785,843 (157,276)
----------- -----------
Cash flows from financing activities:
Increase in loans payable to financial institutions 909,499 187,445
Pay-off of Canadian mortgage (283,920) --
Proceeds from exercise of warrants -- 929,375
Proceeds from private placement of common stock -- 1,379,500
Proceeds from exercise of stock options -- 214,250
----------- -----------
Net cash provided by financing activities 625,579 2,710,570
----------- -----------
Effect of exchange rate changes on cash -- 40,011
----------- -----------
(Decrease) increase in cash and cash equivalents (261,169) 1,833,154
Cash and cash equivalents at beginning of period 509,657 591,299
----------- -----------
Cash and cash equivalents at the end of period $ 248,488 $ 2,424,453
=========== ===========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 132,423 $ 27,200
----------- -----------
Income taxes -- --
----------- -----------
See Part II, Item 2., Changes in Securities, for non-cash financing activities
during the three-month period ending February 28, 2001
See notes to the condensed consolidated financial statements.
4
eLEC COMMUNICATIONS CORP.
Notes To Condensed Consolidated Financial Statements (Unaudited)
Note 1-Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended February 28,
2001 are not necessarily indicative of the results that may be expected for the
year ended November 30, 2001. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended November 30, 2000.
Note 2-Principal Financing Arrangements
On October 23, 2000, we converted our existing receivable sales agreement
between RFC Capital Corporation ("RFC") and our wholly-owned subsidiary, Essex
Communications, Inc. ("Essex"), to a loan and security agreement with RFC. The
new loan agreement initially provides for a loan facility of up to $5,000,000
based upon a borrowing eligibility formula contained in the agreement. Loans
under the loan agreement bear interest at a rate per annum equal to the prime
rate plus 4.5% (13% at February 28, 2001), and require an annual fee of $75,000.
The loan agreement contains various financial and operating covenants on the
part of Essex, including restrictions on borrowings, payment of dividends, asset
dispositions and capital expenditures. Essex may increase the maximum loan
amount available under the loan agreement if RFC, in its sole discretion, agrees
in writing to such increase, in minimum increments of $1,000,000 to a maximum
loan amount of up to $10,000,000, subject to the formula restrictions, by paying
additional fees. All amounts payable under the loan agreement are secured by
substantially all of the assets of Essex. eLEC Communications Corp. ("eLEC"),
the parent company of Essex, has guaranteed the repayment of all borrowings
under the loan agreement, and has pledged as collateral 1,000,000 shares of
common stock of Talk America Holdings, Inc. ("Talk"). The loan agreement has a
termination date of the earlier of (a) October 23, 2003; (b) the occurrence of a
termination event (as defined); (c) the occurrence of an event of seller default
(as defined); or (d) 90 days following payment by Essex of a termination fee (as
defined). In addition, upon execution of the loan agreement, we granted RFC
warrants to purchase 200,000 shares of our common stock. The fair market value
of the warrants has been accounted for as an additional interest expense over
the term of the agreement. At February 28, 2001, approximately $2,770,000 was
outstanding under the agreement.
5
Note 3-Investment Securities
Details as to investment securities at February 28, 2001 are as follows:
Fair Unrealized
Cost Value Holding Gain
---- ----- ------------
Equity securities $10,308 $2,202,341 $2,192,033
Our investment securities consisted of 1,499,415 common shares of Talk valued at
$1.4688 per share. 187,691 of such shares were placed in escrow until August
2001. 1,000,000 of such shares were held in escrow by RFC to secure long-term
debt, and are classified as a non-current asset. In addition, we hold a
non-marketable warrant to purchase 285,714 Talk shares at $2.10 per share,
expiring in 2005. The Talk shares have been subject to market fluctuations.
During the quarter ended February 28, 2001, we sold 316,496 shares of Talk,
realizing a gain of $617,422, which is included under the caption Miscellaneous
income, net on the Condensed Consolidated Statements of Operations and
Comprehensive Loss.
Note 4-Operating Segment Information
We are organized into two operating segments, a full-service telecommunications
segment and a specialty retail segment. A discussion of segment results is
presented in "Item 2. Management's Analysis and Discussion of Financial
Condition and Results of Operations."
Segment information is summarized as follows:
For the Three Months Ended
Feb. 28, 2001 Feb. 29, 2000
------------- -------------
Telecommunications
Revenues $ 4,213,544 $ 1,750,843
Net loss ($ 1,509,783) ($ 684,939)
Specialty retail
Revenues $ 517,103 $ 475,390
Net income $ 36,011 $ 36,039
Total
Revenue $ 4,730,647 $ 2,226,233
Net loss ($1,473,772) ($ 648,900)
Note 6- Major Customer
During the three months ended February 28, 2001, we had telecommunications
revenue from one customer that accounted for 22% of telecommunications revenue.
Note 7 - Income Taxes
At November 30, 2000, we had net operating loss carryforwards for Federal income
tax purposes of approximately $15,000,000 expiring in the years 2001 through
2019. There is an annual limitation of approximately $187,000 on the utilization
of approximately $2,000,000 of such net operating loss carryforwards under the
provisions of Internal Revenue Code Section 382.
6
As of February 28, 2001, we had an unrealized gain on our ownership of Talk of
approximately $2,192,000. Upon the sale of the Talk stock, the net operating
loss will be reduced to the extent of any realized gain on the sale.
Accordingly, deferred taxes have not been provided on the unrealized gain.
.
7
Item 2. Management's Analysis and Discussion of Financial Condition and Results
of Operations
The statements contained in this Report that are not historical
facts are "forward-looking statements" 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 the Company's operations, markets, growth, services, products,
licenses and other factors discussed in the Company's 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 the
Company, and actual events may differ from the assumptions underlying the
statements that have been made regarding anticipated events. Factors that may
cause actual results, performance or achievements of the Company, 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 the Company's business plan; (2) the Company's ability to
maintain, attract and integrate internal management, technical information and
management information systems; (3) the time and expense to construct the
Company's planned network operations center and digital subscriber line network;
(4) the cooperation of incumbent carriers in implementing the unbundled network
elements platform required by the Federal Communications Commission; (5) the
Company's ability to market its services to current and new customers and
generate customer demand for its product and services in the geographical areas
in which the Company can operate; (6) the Company's success in gaining
regulatory approval to access new markets; (7) the Company's ability to
negotiate and maintain suitable interconnection agreements with the incumbent
carriers; (8) the availability and maintenance of suitable vendor relationships,
in a timely manner, at reasonable cost; (9) the impact of changes in
telecommunication laws and regulations; (10) the intensity of competition; and
(10) general economic conditions. All written and oral forward looking
statements made in connection with this Report that are attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by these cautionary statements. Given the uncertainties that surround
such statements, prospective investors are cautioned not to place undue reliance
on such forward-looking statements.
Overview
eLEC is a full-service telecommunications company that focuses on developing
integrated telephone service in the emerging competitive local exchange carrier
("CLEC") industry. We offer an integrated set of telecommunications products and
services, including local exchange, local access, domestic and international
long distance telephone, calling cards, paging, Internet access, dedicated
access, Web site design, Web site hosting, Internet-based yellow-pages directory
listings and other enhanced and value-added telecommunications services tailored
to meet the needs of our customers and the growing marketplace demand from
small- and medium-sized businesses for reliability and speed.
8
The nature of our telecommunications business is rapidly evolving and has a
limited operating history. It has rapidly grown and is now substantially larger
in revenues than a specialty retail business we also own, which sells products
over the Internet and in three retail stores. As a result, we believe
period-to-period comparisons of our revenues and operating results, including
our network operations and other operating expenses as a percentage of total
revenue, are not meaningful and should not be relied upon as indicators of
future performance. We also believe our historical growth rates are not
indicative of future growth rates.
We primarily utilize the Unbundled Network Elements Platform ("UNE-P") to
provide local telephone service to our customers. The UNE-P service offering
allows us to lease from the incumbent local exchange carriers ("ILECs"), on an
as-needed basis, multiple unbundled network elements and combine them into our
own full service platform. We lease a combination of network elements, including
the local loop, a network interface device, where the local loop terminates at
the customer's premises, a switch port that connects the local loop to the
ILEC's switch, the switching functionality of the ILEC's switch, and the
transport of telephone calls between ILEC switches for local calls, or to a long
distance telephone company's point-of-presence for a long distance call. We have
chosen this platform to grow our customer base because it allows us to rapidly
enter new markets with minimal capital expenditures. For example, we can build a
customer base without deploying either a local switch or last-mile
infrastructure. Instead of buying and maintaining our own equipment in the
field, we utilize the reliable equipment owned by the ILECs and focus our
resources on building a customer base.
We have applied for certification in 48 states to operate as a facilities-based
CLEC so that we can utilize the UNE-P service offering in the entire continental
United States. We are also building a network operations center ("NOC") in
Norwalk, Connecticut to provide us with surveillance and deployment capabilities
for high-speed Internet access via Digital Subscriber Lines ("DSL"). We are
currently provisioning DSL on a limited basis and we use the infrastructure of
incumbent carriers to carry traffic on our own packet-switched data network. We
initially plan to offer DSL services to our existing voice customer base, so
that we can eventually use packet-switched technology to route local and long
distance voice traffic over the Internet. We are currently testing local voice
traffic solutions over a packet-switched network through our data switch that is
located in Norwalk.
Building and expanding our business has required and will continue to require us
to make significant expenditures in excess of the amounts of cash that our
business is generating. As part of our "smart build" network strategy, we defer
the purchase of equipment in the field and focus first on building our customer
base. We believe our strategy of leasing the circuit-switched networks and
building our own packet-switched network will help our operations to generate
positive cash flow much sooner than the strategy used by other CLECs of building
a circuit-switched network before a customer base has been established.
We have experienced operating losses and generated negative cash flow since we
began operating as a CLEC and we expect to continue to generate negative cash
flow for a period of time while we continue to expand our network and develop
product offerings and our customer base. We cannot assure you that our revenue
or customer base will increase or that we will be able to achieve or sustain
positive cash flow.
9
Three Months Ended February 28, 2001 vs. Three Months Ended February 29, 2000
Continuing operations
Our net revenues for the three-month period ending February 28, 2001 increased
by approximately $2,505,000, or approximately 113%, to approximately $4,731,000
as compared to approximately $2,226,000 reported for the three-month period
ending February 29, 2000.
Net revenues of our telecommunications division increased by approximately
$2,463,000, or approximately 141%, to approximately $4,214,000 for the
three-month period ending February 28, 2001 from approximately $1,751,000
reported in the three-month period ending February 29, 2000. The increase was
attributable to the continued rapid growth in the number of installed access
lines that we provisioned from approximately 11,000 installed access lines as of
February 29, 2000 to approximately 40,000 installed access lines as of February
28, 2001.
Net revenues of our specialty retail sales division, consisting of the
operations of Airline Ventures, Inc. ("AVI"), increased for the three-month
period ending February 28, 2001 by approximately $42,000, or approximately 9%,
to approximately $517,000 from approximately $475,000 reported in the
three-month period ending February 2, 2000. AVI operates three retail stores in
Texas for professional airline flight crew members and sells pilot uniforms,
study guides and travel products. Its products are sold on the E-commerce site
www.avishop.com.
Our gross profit for the three-month period ending February 28, 2001 increased
by approximately $933,000 to approximately $1,675,000 from approximately
$742,000 reported in the three-month period ending February 29, 2000, and the
gross profit percentage increased to 35.4% from 33.3% reported in the prior
fiscal period. For the three-month period ending February 28, 2001, the gross
profit percentage of our telecommunications division increased to approximately
34.8% from 30.7% reported in the prior fiscal period. The increase in gross
profit percentage is primarily attributable to our ability to reduce the costs
we pay to the incumbent carriers for our service platform. We anticipate that we
will be able to maintain a gross margin of approximately 35% or higher, as we
expand into expand into new geographical territories. However, our costs of
providing services vary in each state and our blended gross margins may be
impacted by our concentration of customers in each state in which we operate.
Our specialty retail division recorded a gross profit percentage of
approximately 40.7% for the three-month period ending February 28, 2001 as
compared to approximately 42.9% reported in the prior fiscal period. We expect
the gross margin of our specialty retail segment to continue at its current
level of over 40%.
Selling, general and administrative expenses increased by approximately
$2,157,000, or approximately 171%, to approximately $3,421,000 for the
three-month period ending February 28, 2001 from approximately $1,264,000
reported in prior fiscal period. A major portion of this increase was
attributable to the costs of our expanding marketing efforts and to the labor
and facility expenses incurred by our telecommunications division. This increase
in expense is directly related to the significant increase in telecommunications
revenues in the three-month period ending February 28, 2001 as compared to the
prior fiscal period in 2000.
10
At February 28, 2001, we had no ownership interest in RiderPoint, Inc.
("RiderPoint") as compared to our ownership interest of approximately 27% at
February 29, 2000. As our investment in RiderPoint was accounted for under the
equity method of accounting, we were required to include a portion of
RiderPoint's operating net loss in our results of operations. For the
three-month period ending February 29, 2000, we recorded a loss of approximately
$77,000 relating to our investment in RiderPoint.
Interest expense for the three-month period ending February 28, 2001 increased
by approximately $113,000 from the amount reported in the three-month period
ending February 29, 2000 primarily due to increased average borrowings.
Miscellaneous income for the three-month period ending February 28, 2001 of
$634,000 resulted primarily from the sale of Talk shares.
Liquidity and Capital Resources
At February 28, 2001, we had cash and cash equivalents available of
approximately $248,000, and working capital of approximately $471,000, a
decrease of approximately $2,176,000 and $1,605,000, respectively, from amounts
reported in the prior fiscal period. During February 2000, we received net
proceeds of approximately $2,000,000 from the exercise of warrants and from a
private placement of our common stock. At February 28, 2001, we owned 1,499,415
shares of Talk, at a market value of $2,192,033. However, 1,000,000 of the
shares of Talk were classified as a non-current asset because they are held in
escrow by a lender in conjunction with a long-term debt facility.
Net cash used in operating activities aggregated approximately $1,673,000 and
$760,000 in the three-month periods ending February 28, 2001 and February 29,
2000, respectively. The principal use of cash in fiscal 2001 and 2000 was
approximately $1,474,000 and $649,000, respectively, relating to the losses for
the periods.
Net cash provided by (used in) investing activities aggregated approximately
$786,000 and ($157,000) in the three-month periods ending February 28, 2001 and
February 29, 2000, respectively. The sources of cash provided by investing
activities in fiscal 2001 were the proceeds from the sale of marketable
securities of approximately $633,000, the proceeds from the sale of property of
approximately $933,000 and the proceeds from the 1992 sale of a subsidiary of
approximately $15,000. This was partially offset by the purchase of property and
equipment of approximately $795,000. Net cash used in fiscal 2000 was for the
purchase of fixed assets and the acquisition of Telecarrier, amounting to
approximately $164,000 and $8,000, respectively. The source of cash provided
from investing activities in the first fiscal quarter of 2000 was the proceeds
of approximately $15,000 from the 1992 sale of a subsidiary.
Net cash provided by financing activities aggregated approximately $626,000 and
$2,711,000 in the three-month periods ending February 28, 2001 and February 29,
2000, respectively. The source of net cash provided by financing activities
resulted primarily from the proceeds of borrowings from financial institutions
of approximately $909,000, offset by the pay-off of our Canadian mortgage of
approximately $284,000. In fiscal 2000, the source of net cash provided by
11
financing activities resulted from the proceeds of a private equity placement of
approximately $1,380,000, the exercise of warrants of approximately $929,000,
the exercise of stock options of approximately $214,000 and borrowings from
financial institutions of approximately $187,000.
On October 23, 2000, we converted our existing receivable sales agreement
between RFC and our wholly-owned subsidiary, Essex, to a loan and security
agreement with RFC. The new loan agreement initially provides for a loan
facility of up to $5,000,000 based upon a borrowing eligibility formula
contained in the agreement. Loans under the loan agreement bear interest at a
rate per annum equal to the prime rate plus 4.5% (13% at February 28, 2001), and
require an annual fee of $75,000. The loan agreement contains various financial
and operating covenants on the part of Essex, including restrictions on
borrowings, payment of dividends, asset dispositions and capital expenditures.
Essex may increase the maximum loan amount available under the loan agreement if
RFC, in its sole discretion, agrees in writing to such increase, in minimum
increments of $1,000,000 to a maximum loan amount of up to $10,000,000, subject
to the formula restrictions, by paying additional fees. All amounts payable
under the loan agreement are secured by substantially all of the assets of
Essex. eLEC, the parent company of Essex, has guaranteed the repayment of all
borrowings under the loan agreement, and has pledged as collateral 1,000,000
shares of common stock of Talk. The loan agreement has a termination date of the
earlier of (a) October 23, 2003; (b) the occurrence of a termination event (as
defined); (c) the occurrence of an event of seller default (as defined); or (d)
90 days following payment by Essex of a termination fee (as defined). In
addition, upon execution of the loan agreement, we granted RFC warrants to
purchase 200,000 shares of our common stock. The fair market value of the
warrants has been accounted for as an additional interest expense over the term
of the agreement. At February 28, 2001, approximately $2,770,000 was outstanding
under the agreement.
For the three-month period ending February 28, 2001, our capital expenditures
amounted to approximately $1,895,000, which included the purchase of a 40,000
square foot building in New Rochelle, New York for $1,500,000. The seller
financed $1,100,000 of the purchase with a five-year mortgage loan, which bears
interest at a rate of 10% per annum for the first year and 11% per annum
thereafter. We expect to make additional capital expenditures related to the
acquisition of this building so that it can serve as an in-bound and out-bound
call center, our second network operations center and our corporate
headquarters. We anticipate that we will need to spend an additional $200,000 in
fiscal 2001 for equipment, furniture and fixtures. Equipment purchases are
anticipated to be financed through equipment leases or with working capital.
At April 10, 2001, we beneficially owned approximately 1.8 million shares of
Talk (NASDAQ:TALK). Of such shares, we can sell approximately 300,000 shares
without permission from RFC. We require RFC's consent to sell one million of
such shares. Approximately 200,000 additional shares are held in escrow and we
have the right to purchase approximately 300,000 additional shares if we
exercise a warrant. The warrant exercise price is $2.10 per share and, at April
10, 2001, was not in-the-money, as the closing price of Talk common stock was
$2.01 per share at such date. At April 10, 2001, we also owned 1.4 million
shares of CyberOpticsLabs Inc. (OTCBB:CYOL). These shares are "restricted
securities" and will not be eligible for sale in the public markets until
February 2002. In addition to the securities that we own, we have a loan
facility with RFC that allows us to borrow based upon a multiple of our cash
collections. We believe this facility alone will not be sufficient to provide us
with the growth capital we need to achieve the growth rates that our back office
12
systems can support. As a result, the price that we receive from selling our
shares of Talk common stock will impact our growth rate in fiscal 2001.
Management believes that the working capital and cash flow from operations of
our retail division will be sufficient to meet the cash and capital requirements
of our retail division for the next 12 months. Our plan for the growth of our
telecommunications division includes an aggressive strategy to obtain as many
new local access lines as our cash resources allow. We will need to expend cash
and incur additional losses before we are able to grow our telecommunications
business to a profitable level. We believe our cash and investment securities at
February 28, 2001, in addition to our loan facility with RFC, will provide us
with sufficient liquidity to grow our business and carry out many of our
expansion plans. However, the market relating to such securities could vary
widely during the year, and we may ultimately monetize some or all of such
securities at prices that will not generate sufficient cash to enable us to
carry out our fiscal 2001 operating plans. We also believe that we could receive
additional funding from a private placement of our common stock. However, there
can be no assurances that we will be able to obtain such funding when needed, or
that such funding, if available, will be obtainable on terms acceptable to us.
Moreover, we have been notified by NASDAQ that in accordance with Marketplace
Rule 4310(c)(8)(B), we have until June 18, 2001 to regain compliance with Rule
4310(c)(4), which requires that our common stock maintain a minimum bid price of
$1.00. If we are unable to demonstrate compliance with this rule on or before
June 18, 2001, we will receive written notification that our securities will be
delisted. Although we are allowed to appeal such delisting notice, such notice
may further impact our ability to raise capital. The inability to carry out our
fiscal 2001 operating plans may result in the continuance of unprofitable
operations, which would adversely affect our financial condition and results of
operations.
13
eLEC COMMUNICATIONS CORP.
PART II-OTHER INFORMATION
Item 2. Changes in Securities
On February 2, 2001, we issued an aggregate of
200,000 shares of our common stock in conjunction
with the purchase of certain investments. Such
transaction was effected pursuant to Sections 4(2)
of the Securities Act of 1933, as amended.
On February 8, 2001, a holder of 100 shares of our
Series A Preferred Stock, par value $.10, converted
such shares of preferred stock into 100,000 shares
of our common stock. Such transaction was effected
pursuant to Sections 3(9) of the Securities Act of
1933, as amended.
14
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K
None.
15
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
eLEC Communications Corp.
April 16, 2001 By: /s/ Paul H. Riss
------------------------- ----------------------------
Date Paul H. Riss
Chief Executive Officer
(Principal Financial and
Accounting Officer)