ERIC M. HELLIGE
DIRECT TEL: 212-326-0846
DIRECT FAX: 212-798-6380
ehellige@pryorcashman.com
May 25, 2005
VIA EDGAR
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Attention: Filing Desk
Larry Spirgel, Assistant Director
Re: eLEC Communications Corp.
Amendment No. 2 on Form 10-KSB/A
to the Form 10-KSB for the fiscal year
ended November 30, 2004
Amendment No. 1 on Form 10-QSB/A
To the Form 10-QSB for the quarter
ended February 28, 2005
Ladies and Gentlemen:
On behalf of eLEC Communications Corp., a corporation organized under the
laws of the State of New York (the "Company"), and in connection with the
Company's Annual Report on Form 10-KSB for the fiscal year ended November 30,
2004 (the "Annual Report") and the Company's Quarterly Report on Form 10-QSB for
the quarter ended February 28, 2005 (the "Quarterly Report"), we hereby file by
EDGAR transmission (i) a copy of the Company's Amendment No. 2 on Form 10-KSB/A
to the Annual Report and (ii) a copy of the Company's Amendment No. 1 on Form
10-QSB/A to the Quarterly Report.
This letter contains our responses to the Staff letter dated May 17, 2005
furnishing the comments of the Securities and Exchange Commission (the
"Commission") on the Annual Report, as amended by Amendment No. 1 on Form
10-KSB/A, and the Quarterly Report. The numbered responses below correspond to
the numbered paragraphs of such comment letter. For the convenience of the
Staff, we have set forth on Annex A to this letter the text of Item 8A of
Securities and Exchange
Commission
May 25, 2005
Page 2
the Annual Report, as amended by the Amendment No. 2 on Form 10-KSB/A filed
herewith, and have marked such text to reflect all changes made to Item 8A of
the Annual Report as amended by Amendment No. 1 on Form 10-KSB/A, and we have
set forth on Annex B to this letter the text of Item 3 of the Quarterly Report,
as amended by Amendment No. 1 on Form 10-QSB/A filed herewith, and have marked
such text to reflect all changes made to Item 3 of the Quarterly Report as
originally filed. Capitalized terms not otherwise defined in this letter have
the meanings ascribed to them in the Annual Report or Quarterly Report, as the
case may be.
Responses
---------
1. Item 8A of the Annual Report has been revised to amend the Company's
conclusion as to the effectiveness of its disclosure controls and procedures by
deleting "except as set forth in paragraph (b) below" and affirmatively stating
that, for the reasons stated, the Company's disclosure controls and procedures
were not effective as of the end of the period covered by the report.
2. Item 3 of the Quarterly Report has been revised to state that, for the
reasons stated, the Company's disclosure controls and procedures were not
effective as of the end of the quarter covered by the report.
3. Item 3 of the Quarterly Report has been revised to disclose that, during
the first quarter of fiscal 2005, the Company made one change to its internal
control over financial reporting that materially affected, or was reasonably
likely to materially affect, its internal control over financial reporting.
The Company believes it has fully responded to the comments of the
Commission. If the Commission has any questions or further comments with respect
to the Annual Report, as amended, or the Quarterly Report, as amended, the
Company respectfully requests that such comments be directed to the undersigned
as soon as practicable as the Company would like to have the Company's
Registration Statement on Form SB-2 (Reg. No. 333-123696) declared effective by
the Commission as soon as practicable. The undersigned would welcome the
opportunity to discuss such questions or comments (or discuss further any of the
Company's responses) in advance of any written response of the Commission.
Very truly yours,
/s/Eric M. Hellige
------------------
Eric M. Hellige
cc: Paul H. Riss
Nussbaum Yates & Wolpow, P.C.
ANNEX A
Item 8A. Controls and Procedures.
(a) 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, for the reasons set forth below, our disclosure controls and procedures
were not effective. We are presently taking the necessary steps to improve the
effectiveness of such disclosure controls and procedures.
(b) Internal Control Over Financial Reporting. There have not been any
changes in our 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
fourth quarter of 2004 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting. In
connection with our year-end November 30, 2004 audit, our management became
aware of a lack of segregation of duties within our accounting and
administrative departments due to the small number of employees performing our
financial and administrative functions. Management believes the lack of
segregation of duties, in the aggregate, amounts to a material weakness in our
internal control over financial reporting. We will continue to evaluate the
employees involved, the additional control procedures in place to help
compensate for the lack of segregation of duties, the risks associated with such
lack of segregation and whether the potential benefits of adding employees to
clearly segregate duties justifies the expense associated with such increases.
We are also evaluating our internal controls systems so that when we are
required to do so, our management will be able to report on, and our independent
auditors to attest to, our internal controls, as required by Section 404 of the
Sarbanes-Oxley Act of 2002. We will be performing the system and process
evaluation and testing (and any necessary remediation) required in an effort to
comply with the management certification and auditor attestation requirements of
Section 404 of the Sarbanes-Oxley Act. In connection with our year-end November
30, 2004 audit, we have identified the following control deficiencies and issues
with our internal controls over financial reporting that we believe amount in
the aggregate to a significant deficiency in our internal controls over
financial reporting:
o We are aware that many of the internals controls that are in place are
undocumented controls. Although we have documented many of our systems
and processes, we will need to expend a substantial amount of time to
obtain the full documentation required to be in compliance with
Section 404 of the Sarbanes-Oxley Act of 2002.
o After the end of our fiscal year, when we were preparing state tax
returns for telecommunication taxes, we identified that we had been
overstating telecom taxes payable for certain taxes that were paid by
us directly to our carrier instead of being paid directly to the
taxing authorities. We have adjusted our controls to mitigate this
type of event from occurring in future periods.
Due to the voluminous nature of state and local telecom taxes and the
small quantity of taxes payable to certain municipalities, we do not
remit all our telecom taxes in a timely manner. Certain taxes that we
should be remitting on a monthly basis, we remit quarterly or
semi-annually because many of the checks and returns that we are
processing are for payments of less than $50. We are aware of other
telephone companies that follow this process. We continue to monitor
the responses, if any, we receive from the tax authorities regarding
late filings and we do not intend to remit such taxes on a timely
manner in the future, unless we determine that it would be more
cost-effective to us to do so.
ANNEX B
Item 3. Controls and Procedures.
(a) Disclosure Controls and Procedures. We maintain disclosure controls and
procedures designed to ensure that information required to be disclosed in our
reports under the Securities Exchange Act of 1934, as amended ( the "Exchange
Act") is recorded, processed, summarized and reported within the time periods
specified in the Exchange Act, and that such information is accumulated and
communicated to our management, including our chief executive officer/chief
financial officer, as appropriate to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
In connection with the completion of its audit of, and the issuance of an
unqualified report on, our consolidated financial statements for the fiscal year
ended November 30, 2004, our independent auditors, Nussbaum Yates and Wolpow,
P.C. ("NYW"), communicated to our Audit Committee that the following matters
involving our internal controls and operations were considered to be "reportable
conditions", as defined under standards established by the American Institute of
Certified Public Accountants or AICPA:
o Lack of quantity of staff, which led to issues related to lack of
segregation of duties, inadequate supervision, timeliness of financial
reporting and year end closing process;
o Lack of quantity of staff, which led to issues related to the timely
preparation and filing of municipal telecommunications tax returns;
and
o Lack of quantity of staff, which led to tax payments being classified
as cost of services and an overstatement of telecommunications taxes
payable
Reportable conditions are matters coming to the attention of our
independent auditor that, in its judgment, relate to significant deficiencies in
the design or operation of internal controls and could adversely affect our
ability to record, process, summarize and report financial data consistent with
the assertions of management in the financial statements. In addition, NYW has
advised us that it considers the first matter noted above, which relates to the
lack of a segregation of duties, to be a "material weakness" that may increase
the possibility that a material misstatement in our financial statements might
not be prevented or detected by our employees in the normal course of performing
their assigned functions.
As required by SEC Rule 13a-15(b), we carried out an evaluation under the
supervision and with the participation of our management, including our chief
executive officer/chief financial officer, of the effectiveness of the design
and operations of our disclosure controls and procedures. Based on the
foregoing, our chief executive officer/chief financial officer determined that,
as of the end of the quarter covered by this report, the deficiencies identified
by NYW caused our disclosure controls and procedures not to be effective.
However, we are actively seeking to remedy the deficiencies identified herein,
including hiring additional staff to assure segregation of duties, additional
review procedures and, timeliness of financial reporting, as well as preparing
and filing telecommunications tax returns on a monthly basis, instead of
quarterly or semi-annually. Our chief executive officer/chief financial officer
did not note any other material weakness or significant deficiencies in our
disclosure controls and procedures during this evaluation. We continue to
improve and refine our internal controls. This process is ongoing.
(b) Internal Control Over Financial Reporting. Other than for the matters
discussed above, our chief executive officer/chief financial officer has
determined that our internal controls and procedures were effective as of the
end of the period covered by this report. In the first quarter of fiscal 2005,
we made one change in our internal control over financial reporting that
materially affected, or is reasonably likely to materially affect, our internal
controls over financial reporting. During fiscal year 2004, we reported that we
had been overstating our telecommunications taxes payable for certain taxes we
had paid directly to our carrier. We have changed the way we analyze our carrier
bills and our tax liability accounts so that both our cost of services and taxes
payable accounts are not overstated, and we have enhanced the training of
personnel involved in the various processes. We believe these actions have
remediated the reported deficiency.