As filed with the Securities and Exchange Commission on January 12, 2000
Registration No.:
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
eLEC COMMUNICATIONS CORP.
(Exact name of registrant as specified in its charter)
New York 13-2511270
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
37 North Avenue
Norwalk, Connecticut 06851
(203) 750-1000
(Address, including zip code, and telephone number,
including area code of Registrant's principal executive offices)
Paul H. Riss
Chief Executive Officer
eLEC Communications Corp.
37 North Avenue
Norwalk, Connecticut 06851
(203) 750-1000
(Name, address, including zip code and telephone number,
including area code, of agent for service)
Copy To:
Eric M. Hellige, Esq.
Pryor Cashman Sherman & Flynn LLP
410 Park Avenue
New York, New York 10022
(212) 421-4100
Approximate date of commencement of proposed sale of the securities to
the public: As soon as possible after this Registration Statement becomes
effective.
<PAGE>
If the only securities being registered on this Form are to be offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, please check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule
434, check the following box. [ ]
-------------------------
<TABLE>
<CAPTION>
Calculation Of Registration Fee
========================================================================================================================
Proposed Proposed
Maximum Maximum
Offering Aggregate
Title of Each Class of Amount to Price Per Offering Amount of
Securities to be Registered be Registered Share* Price* Registration Fee
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.10 par value............... 3,287,759 shares $3.875 $12,740,066 $2,548.01
============================================ ===================== =============== ================= ===================
</TABLE>
- -------------
* Calculated in accordance with Rule 457(c) solely for the purpose of
calculating the registration fee (based on the closing price per share of
the Registrant's common stock as reported on the NASDAQ Small Cap market on
January 6, 2000.)
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
PROSPECTUS
- ----------
3,287,759 Shares
eLEC COMMUNICATIONS CORP.
Common Stock
(Par value $.10 Per Share)
---------------------
The shareholders listed in this prospectus are offering and selling up
to 3,287,759 shares of common stock of eLEC Communications Corp. We will not
receive any proceeds from such sale.
Our common stock is listed on the NASDAQ Small Cap market under the
symbol "ELEC." The last reported bid price for the common stock on January 6,
2000, was $3.844 per share. The last reported ask price for the common stock on
such date was $3.906 per share.
The selling shareholders may offer their shares of common stock through
public or private transactions in the over-the-counter markets, on or off the
United States exchanges, at prevailing market prices or at privately negotiated
prices. The selling shareholders may engage brokers or dealers who may receive
commissions or discounts from the selling shareholders.
---------------------
See "Risk Factors" at page 7 of this prospectus for a discussion of
certain material factors which you should consider before investing in the
common stock offered by this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
---------------------
The date of this Prospectus is _____________, 2000.
<PAGE>
This prospectus is part of a registration statement we filed with the
Securities and Exchange Commission ("SEC"). You should rely only on the
information provided or incorporated by reference in this prospectus or any
related supplement. We are not offering to sell or buy the common stock offered
in this document to any person unauthorized or prohibited to do so. The selling
shareholders will not make an offer of these shares in any state where the offer
is not permitted. You should not assume that the information in this prospectus
or any supplement is accurate as of any date other than the date on the front of
those documents.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the SEC. We have filed with the SEC a registration
statement on Form S-3 under the Securities Act to register the offering of the
shares of common stock offered hereby. This prospectus, which constitutes a part
of the registration statement does not contain all of the information set forth
in the registration statement. You may read and copy any document we file at the
SEC's public reference room located 450 Fifth Street, N.W., Washington, D.C.
20549. Please call the SEC at 1-800-SEC-0330 for further information on the
operation of such public reference room. You may also request copies of such
documents, upon payment of a duplicating fee, by writing to the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549 or obtain copies of such documents from the
SEC's web site at http://www.sec.gov.
INCORPORATION BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information we incorporate by reference is
considered to be part of this prospectus and information that we file later with
the SEC will automatically update and supersede this information. We incorporate
by reference the documents listed below and any future filings we make with the
SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended:
(1) Annual Report on Form 10-K for the fiscal year ended November
30, 1998;
(2) Quarterly Reports on Form 10-Q for the fiscal quarters ended
August 31, 1999, May 31, 1999 and February 28, 1999;
(3) Current Reports on Form 8-K dated August 11, 1999 (as amended
by Amendment No. 1 dated October 25, 1999) and November 16,
1999; and
(4) Proxy Statement dated October 6, 1999.
<PAGE>
You may request a copy of these filings (excluding exhibits to such
filings that we have not specifically incorporated by reference in such
filings), at no cost, by writing or telephoning us at the following address:
eLEC Communications Corp.
37 North Avenue Suite 203
Norwalk, Connecticut 06851
Attn: Mr. Paul H. Riss, Chief Executive Officer
(203) 750-1000
This prospectus contains "forward-looking statements" that 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 regarding matters that are not historical facts, 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 we face, and actual events may differ from the
assumptions underlying statements which have been made regarding anticipated
events. All written and oral forward looking statements made in this prospectus
that are attributable to us or persons acting on our behalf are expressly
qualified in their entirety by these cautionary statements. See "Risk Factors."
ABOUT THE COMPANY
We, eLEC Communications Corp., are a telecommunications company that
focuses on developing integrated telephone service in the emerging competitive
local exchange carrier industry. We offer a bundled package of
telecommunications products, including local and long distance telephone,
calling cards, paging, Internet access, dedicated access, Web site design, Web
site hosting, and other enhanced and value-added telecommunications services
tailored to meet the needs of our customers. We also have a retail division that
sells travel products, uniforms and study guides via retail stores, E-commerce
sites and a Web site primarily to professional airline crew members.
Our Telecommunications Business
We first made an investment in a local telephone company in October
1997, when we acquired approximately 28% of Access One Communications, Inc.
("Access One"), a Florida-based competitive local exchange carrier ("CLEC"). We
began our own CLEC business in February 1998 when we acquired 100% of Essex
Communications, Inc. ("Essex"), which was a newly-formed, New York-based CLEC.
Both Essex and Access One resell local telephone service purchased from a
regional Bell operating company ("RBOC"), such as Bell Atlantic Corporation
("Bell Atlantic") or BellSouth Corporation ("BellSouth"). The Telecommunications
Act of 1996 mandated, among other things, that the large incumbent local
telephone companies, such as the RBOCs, allow competitors to use their
telecommunications facilities in such a
2
<PAGE>
manner that the RBOCs would no longer hold a monopoly over the local telephone
service business. Essex and Access One were formed in response to such mandate,
and we plan to build Essex and to help build Access One into local telephone
businesses with certain niches that will allow them to compete effectively as a
telecommunications entity. Although we have a representative on the Board of
Directors of Access One, and we anticipate that Essex and Access One will work
together in instances where it is advantageous to do so, due to our minority
shareholder position in Access One, we can only control the operations of Essex.
We are focusing our marketing efforts on small and medium-sized
businesses with telecommunications usage of less than $2,000 per month. Our
strategy is to continue to increase our customer base by being more flexible,
responsive and innovative to the needs of our target customers than the RBOCs,
which have historically concentrated their sales and marketing efforts on
residential and large business customers. We plan to expand our
telecommunications customer base with a limited amount of capital expenditures
on telecommunications facilities (such as switches, fiber and other
telecommunications equipment). We believe it is more cost efficient to quickly
grow a telecommunications entity with a "leased facilities" strategy in which
the necessary telecommunications facilities are leased from a RBOC. This
strategy will greatly enhance our flexibility in moving our customer base to the
best possible access method, including wireless access. We are now planning our
first data network build-out to carry high-speed Internet access via digital
subscriber lines ("DSL"). We anticipate that our DSL equipment will be able to
carry voice transmissions over the Internet, in addition to high-speed data
transmissions.
Since its inception, Essex, like virtually all other non-facilities
based CLECs, was primarily a reseller of local telephone service from a RBOC.
Following a recent Supreme Court ruling that upheld the Federal Communications
Commission ("FCC") requirements that RBOCs open local phone service to
competition, we have been able to refocus our sales strategy by beginning to
sell direct local access and related products and services as a facilities-based
carrier through facilities leased from Bell Atlantic. As a result, we have
converted most of our resold customer base to the leased facilities platform
with Bell Atlantic in the State of New York, where Bell Atlantic first offered
this leased facilities platform. Our marketing efforts are currently
concentrated on obtaining new customers in both New York and Massachusetts.
These are the two states in which Bell Atlantic is offering the leased
facilities platform. We believe the leased facilities program will eventually be
offered in all states. Access One has secured a leased facilities agreement with
respect to all nine states covered by BellSouth.
We have received certification by the applicable state Public Service
Commission, and we currently operate as a CLEC, in Massachusetts, New York, New
Jersey and Virginia. In addition, we have received certification to operate as a
CLEC in Connecticut and Florida. We may also consider the acquisition of other
CLECs to increase the number of states within which we can operate. We have
determined that many multi-site customer organizations desire consolidated
billing for all their locations. Currently, none of the RBOCs and only a limited
number of CLECs provide multi-site organizations with the option to consolidate
their invoices into a single bill. We offer customers the ability to receive one
invoice for all their locations in a format conducive to internal accounting
system requirements and on a medium of their choice.
3
<PAGE>
In addition to the local telephone service that we provide, we also
offer a bundled package of telecommunications products. We have additional
agreements with other telephone companies pursuant to which we can resell a
variety of other telephone services, including long distance service, voice
mail, paging, calling cards and other value-added features. We believe that our
ability to offer one-stop, integrated communications services will help us to
capture a larger portion of our customers' total expenditures on communication
services and will reduce customer turnover. In furtherance of our bundling
strategy, in August 1998, we acquired WebQuill Internet Services LLC
("WebQuill") to provide Internet access, Web design, E-commerce design and Web
hosting for the customers of Essex and Access One. During 1998, WebQuill entered
into a frame relay cloud agreement with Southern New England Telephone ("SNET")
that allows WebQuill to provide local dial-up access, dedicated 56K frame relay
access and dedicated T-1 access to customers located throughout Connecticut via
a single point of presence ("POP") located in Norwalk, Connecticut. In order to
expand the geographic coverage of our Internet access services, in December
1998, we signed an agreement with another Internet service provider with over
450 POPs, which allows WebQuill's customers to have nationwide dial-up access
throughout the United States. We intend to enter into additional regional
Internet access arrangements and deploy one or more additional Company-owned
POPs during 2000, in order to increase the density of our Internet access
coverage.
In order to provide an additional service to our small business
customers, we have developed "QuillPages," a virtual mall marketing and
Web-hosting program for the Internet that operates as a "yellow-pages" type
directory. We have signed an online distribution and co-branding service
agreement with InfoSpace.com, Inc. for the QuillPages product that will provide
QuillPages' advertisers an extended reach through InfoSpace.com's affiliate
network. We plan to market these Internet yellow-pages sites to medium and small
businesses that are seeking a lower cost option for selling their products and
services on the Internet. We plan to market these sites directly to existing
Access One and Essex customers and primarily through third-party telemarketers
to new customers.
We also design and host more complex and expensive Web sites for larger
businesses and those smaller businesses that intend to concentrate more of their
resources on the development of Internet customer bases. These sites, commonly
referred to as E-commerce sites, facilitate the purchase of goods and services
with minimal use of employee time. E-commerce sites can feature products and
services databases, online database search capabilities, real time inventory
availability and real time credit card processing. In addition, we have
introduced an E-commerce fulfillment service, which we call "E-Complete", that
provides warehousing and shipping services to our E-commerce hosting customers.
We obtain new customers for our telephone services primarily through
telemarketing agencies that are paid only if the prospect becomes a customer. We
do not intend to hire a significant direct sales staff, as the per line cost of
acquiring new accounts is currently substantially lower using third-party
telemarketers than it would be by direct marketing with our own employees. We
are also beginning to use independent sales agents with established customer
bases to promote our local phone and Internet services. To ensure customer
satisfaction, we emphasize personalized care, with each customer having a single
point of contact who is responsible for solving problems and responding to
customer inquiries.
4
<PAGE>
Our Specialty Retail Business
We also operate a specialty retail business that sells travel products,
uniforms and study guides via retail stores, E-commerce sites and a Web site
primarily to professional airline crew members. Our objective for this division
is to become a leading supplier of travel-related and telecommunications
products to pilots and flight attendants. We lease space from American Airlines
for two retail stores that sell travel-related products to American Airline
employees, including the official pilot uniform and study guides for pilots. We
also sell identification cards, uniform supplies and travel needs to flight
attendants at our retail stores. In addition, we rent pagers to flight
attendants who are on reserve duty and offer Internet access services and local
and long distance telephone services. We plan to use the knowledge and
experience gained with American Airlines to provide similar products and
services to employees of other airlines. We currently have small programs with
Delta Airlines and Southwest Airlines to sell products in employee lounges.
We believe professional airline crew members are excellent targets for
online retail purchases, as they are constantly mobile and frequently stay in
touch with family and job-related duties via the Internet. We have developed and
will continue to develop E-commerce sites to augment our in-store sales with
sales to these and other online purchasers. We currently market our
travel-related products through the E-commerce sites, www.avishop.com and
www.800bags.com, and our Web site, www.tagintl.com.
Our Discontinued Wholesale Luggage Business
We have discontinued the operations of our wholesale luggage division
in order to focus our corporate resources on the development of our
telecommunications business, Internet-related businesses, and online retail
operations. We believe the growth opportunities and the ability to create
shareholder value are much greater in our telecommunications and
Internet-related businesses than they are in a wholesale luggage operation.
Although the majority of the assets of our luggage division have been divested,
there can be no assurance that we will be successful in our efforts to dispose
of the remaining assets of our wholesale luggage division in a timely manner.
Recent Business Developments
In November 1999, we concluded a private placement of units consisting
of stock and warrants to raise additional working capital for our business. Each
unit consisted of (a) 50,000 shares of our common stock, (b) warrants to
purchase 25,000 shares of our common stock at an exercise price of $2.50 per
share, and (c) warrants to purchase 25,000 shares of our common stock at an
exercise price of $4.00 per share. In total, 25.11 units were sold at a price of
$56,250 per unit for an aggregate amount of $1,412,500, before expenses
associated with this private placement. We used the proceeds from the private
placement to pay off certain liabilities related
5
<PAGE>
to the discontinuance of our luggage operations. The proceeds also provided us
with working capital to grow our telecommunications business. One of the
liabilities that we paid off was a working capital facility we had with Coast
Business Credit that we had used to fund our luggage division inventory
purchases and working capital needs. We were in default of this agreement at the
time we paid off the loan, but we were able to retire the indebtedness and
terminate the loan facility without any penalties.
In March 1999 we issued to Access One 1,420,000 shares of common stock
in consideration for the issuance by Access One to us of 1,775,000 shares of its
common stock. In connection with such transaction, Access One was granted an
option to put to us for repurchase at any time on or before December 1, 1999 at
the original purchase price, all or a portion of the shares of common stock it
purchased in March 1999. In connection with any such exercise of its put option,
in whole or in part, Access One was required to issue to us warrants to purchase
500,000 shares of Access One common stock at a purchase price of $1.00 per
share. On December 1, 1999, Access One exercised its option with respect to
1,400,000 shares of our common stock. Following such option exercise, we
continue to own 3,935,000 shares of Access One's common stock, which represents
approximately 21.3% of Access One's outstanding shares.
Executive Offices
eLEC Communications Corp. was incorporated under the laws of the State
of New York on July 22, 1964 under the name Sirco Products Co. Inc. Our
executive offices are located at 37 North Avenue, Norwalk, Connecticut 06851 and
our telephone number at that address is (203) 750-1000.
We maintain a website at http://www.elec.net. Information in that
website is not part of this prospectus.
6
<PAGE>
RISK FACTORS
The purchase of our common stock involves a high degree of risk. You
should carefully consider the following risk factors and other information in
this prospectus before deciding to invest in such stock.
We Have a Limited Operating History
Although our company began operations in 1964, the telecommunications
business is new to us. We recently sold a significant portion our luggage
division assets to third parties. This division was losing money, but it
represented a significant portion of our revenues. Accordingly, we have a
limited operating history upon which you may evaluate us, and we are dependent
solely on the revenues of our telecommunications and retail divisions and the
proceeds of additional financings to fund our operations. We face all of the
risks common to companies in their early stage of development in an emerging
industry, including:
o undercapitalization;
o cash shortages;
o high capital expenditures;
o an unproven business model;
o difficulties in managing rapid growth; and
o lack of sufficient customers, revenue, cash flow or
profitability to be self-sustaining.
In addition, since we are in a new business, we have limited experience
in providing some of the products and services we currently offer, including
local and long distance telephone service, Internet access, web development and
hosting services, and electronic commence solutions. Our failure to address any
of the risks described above could have a material adverse effect on our
business, financial condition and results of operations and on the price of our
common stock.
We Anticipate Continued Losses
We have not been profitable since fiscal 1996. We may not become
profitable again or, if we become profitable, we may be unable to sustain
profitability. We reported net losses of approximately $6,419,000, $4,977,000,
and $2,868,000 for the nine months ended August 31, 1999 and the fiscal years
ended November 30, 1998 and 1997, respectively, of which net losses of
approximately $3,980,000, $2,663,000 and $2,763,000, respectively, were
attributable to our discontinued luggage division, and net losses of $1,463,000
and $1,423,000 for the nine months ended August 31, 1999 and the fiscal year
ended November 30, 1998, respectively, were attributable to our ownership
interest in Access One. We expect to continue to incur losses until we can
develop our telecommunications business to a level where it generates sufficient
revenues to cover operating expenses. The limited operating history of our
telecommunications division
7
<PAGE>
makes predicting our future operating results difficult. There can be no
assurance that our future revenues will ever be significant or that our
operations will ever be profitable.
We Have an Unproven Business Model
Our business strategy is unproven and we do not know whether our
business model and strategy will be successful. We intend to lease virtually all
of our telecommunications facilities (such as switches, fiber and other
telecommunications equipment) and to focus on selling directly to small and
medium sized businesses. In contrast, many of our competitors own their own
facilities or are in the process of building or purchasing such facilities. To
be successful, we must convince prospective customers to entrust their data and
voice operations to a company without a long and proven track record. We cannot
assure you that our services will be widely accepted. The prices we charge for
services and products may be higher than those charged by our competitors. In
addition, the prices of communications services and products have fallen
historically, and we expect them to continue to fall. We may be required to
reduce prices periodically to respond to competition and to generate adequate
sales volume. The failure to achieve or sustain adequate pricing levels or to
achieve or sustain a profitable business would have a material adverse effect on
our business, financial condition and results of operations and on the price of
our common stock.
We Have a Need for Additional Financing
Due to our recent losses and our additional requirements for working
capital to establish and grow our telecommunications and retail businesses, over
the past two fiscal years we have sold additional shares of capital stock to
fund our working capital needs. We expect that we will continue to sell our
capital stock or incur additional indebtedness to fund the anticipated growth of
our telecommunications business and implement our business objectives. There can
be no assurance that we will be able to obtain additional funding when needed,
or that such funding, if available, will be available on terms acceptable to us.
If we cannot obtain additional funds when needed, we may be forced to curtail or
cease our activities, which may result in the loss of all or a substantial
portion of your investment.
We Have a Qualified Auditors' Report
The report of our independent auditors on our financial statements for
the year ended November 30, 1998 noted that we are experiencing difficulty in
generating sufficient cash flow to meet our obligations and sustain our
operations and that we have incurred significant losses from our operations. Our
auditors also noted that we were in default of certain debt covenants contained
in our financing agreement that could have resulted in termination of the
agreement and the debt becoming due and payable immediately. The auditors'
report concluded that these factors, among others, raise substantial doubt about
our ability to continue as a going concern. Although we paid our financing
agreement in full on December 30, 1999, these concerns may still exist because
we continue to incur operating losses.
8
<PAGE>
Disappointing Quarterly Revenue or Operating Results Could
Cause the Price of Our Common Stock to Fall
Our quarterly revenue and operating results are difficult to predict
and may fluctuate significantly from quarter to quarter. If our quarterly
revenue or operating results fall below the expectations of investors or
security analysts, the price of our common stock could fall substantially. Our
quarterly revenue and operating results may fluctuate as a result of a variety
of factors, many of which are outside our control, including:
o amount and timing of expenditures relating to the rollout of
our infrastructure and services;
o ability to obtain and the timing of necessary regulatory
approvals;
o rate at which we are able to attract customers within our
target markets and our ability to retain these customers at
sufficient aggregate revenue levels;
o ability to deploy our network on a timely basis;
o availability of financing to continue our expansion;
o technical difficulties or network downtime;
o availability of incumbent carrier collocation facilities and
timing of the installation of our equipment in those
facilities; and
o introduction of new services or technologies by our competitor
and resulting pressures on the pricing of our service.
The Failure of Our Customers to Pay Their Bills on a
Timely Basis Could Adversely Affect Our Cash Flow
Our target customers consist of small and medium sized businesses. We
anticipate having to bill and collect numerous relatively small customer
accounts. We may experience difficulty in collecting amounts due on a timely
basis. Our failure to collect accounts receivable owed to us by our customers on
a timely basis could have a material adverse effect on our business, financial
condition, results of operations and cash flow.
Impact of Year 2000
The Year 2000 issue is the result of computer-controlled systems using
two digits rather than four to define the applicable year. For example, computer
programs that have time sensitive software may recognize a date using "00" as
the year 1900 instead of the year 2000. This reading could result in a system
failure or miscalculations and cause a disruption in operations, including,
among other things, a temporary inability to process transactions, send invoices
or engage in similar normal business activity.
9
<PAGE>
Based on a recent assessment, we believe that the software and hardware
used in our computer controlled systems will function properly with respect to
the dates in the year 2000 and thereafter. We have contacted our significant
suppliers and large customers to determine the extent to which our interface
systems are vulnerable to those third parties' failure to remediate their own
Year 2000 issues. However, there can be no assurance that the systems of other
companies on which our systems rely will be timely converted and would not have
a material adverse effect on our systems.
We have utilized both internal and external resources to reprogram, or
replace, and test the software and hardware for Year 2000 compliance. We believe
we have completed such testing and are Year 2000 compliant. All costs associated
with the Year 2000 project were funded through operating cash flow. Although we
do not anticipate any future costs to complete the Year 2000 modifications, this
assessment is based upon management's best estimates, which were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources, third party modification plans, and other
factors. There can be no assurance that the information provided to our
management team, especially such information received from third-parties, will
not yield actual results that differ materially from those anticipated.
Risks Associated with Telecommunications Division.
In the fourth quarter of fiscal 1997, our Board of Directors decided to
diversify our business by expanding into the telecommunications industry. Since
October 1997, we have made several investments in Access One, a CLEC based in
Florida. In February 1998, we acquired Essex, a newly-formed CLEC, and in August
1998, we acquired WebQuill to add an Internet service provider. See "About The
Company -- the Telecommunication Division." Our diversification strategy
involves significant risks, including, but not limited to, the factors set forth
below.
Short Operating History; Net Losses. Since its inception, Essex has
focused on the development of a customer base and internal management
information systems and has secured the proper authorizations to operate as a
telephone reseller in the States of Connecticut, Florida, New Jersey, New York,
Virginia and Massachusetts. Consequently, in fiscal 1998 and the nine month
period ended August 31, 1999, our telecommunications division incurred operating
losses of approximately $721,000 and $1,023,000, respectively. We began
marketing our telecommunications products in May 1998 and by August 1, 1999 had
approximately 2,200 local access lines. On December 1, 1999, we had
approximately 9,500 local access lines. Because of our limited operating
history, we cannot accurately predict if we will be able to compete successfully
in the telecommunications business. Accordingly, you should consider the
likelihood of the success of our telecommunication division in view of all of
the risks, expenses and delays inherent in establishing a new business,
including, but not limited to, the following:
10
<PAGE>
o general expenses;
o unforeseeable complications and delays;
o implementation of marketing strategies and activities;
o the uncertainty of market acceptance of new products and
services;
o intense competition from larger, more established competitors;
and
o incurring additional net losses before establishing an
adequate customer base.
Raising Additional Capital. We anticipate that the continued expansion
of our telecommunications business will require us to raise additional equity
and/or debt during fiscal 2000. We cannot be certain, however, that we will be
successful in raising sufficient debt or equity on terms that we consider
acceptable. If we are unable to generate sufficient funds, we may be required to
delay or abandon some of our expansion plans, which would have a material
adverse effect on our growth and our ability to compete in the
telecommunications industry.
Risks of Acquisitions. We intend to develop and expand our
telecommunications business. Initially, we intend to acquire additional
telecommunications and related businesses to enter new markets. Among the risks
associated with such strategy, which could materially adversely affect our
business, financial condition, results of operations and profitability, are the
following:
o we may not be able to identify, acquire or profitably manage
such additional businesses;
o we may incur substantial costs, delays or other operational or
financial problems in integrating acquired businesses;
o such acquisitions may adversely affect our operating results;
o such acquisitions may divert management's attention;
o we may not be able to retain acquired key personnel;
o we may encounter unanticipated events, circumstances or legal
liabilities; and
o the value of acquired intangible assets could decrease.
Implementation and Suitable Resale Arrangements. Our development and
expansion of the telecommunications business and our entry into new markets will
depend on our ability to, among other things:
o lease or purchase suitable sites;
o obtain equipment on a timely basis;
o negotiate suitable resale or interconnect arrangements with
incumbent local exchange carriers, or "ILECs," on satisfactory
terms and conditions; and
o finance the expansion of the telecommunications business.
11
<PAGE>
Dependence on Key Personnel and Consultants. A small number of key
management and operating employees and consultants manage our telecommunications
business. Our loss of such employees or consultants or their failure to work
effectively as a team could materially adversely impact our telecommunications
business. Competition for qualified executives in the telecommunications and
data communication industries is intense and there are a limited number of
persons with applicable experience. We believe that our future success in the
telecommunications business significantly depends on our ability to attract and
retain highly skilled and qualified telecommunications personnel.
Reliance on Others. To limit our capital expenditures and support
staff, we rely extensively on third parties. We lease our local exchange network
and our long distance network. As a result, we depend entirely on
facilities-based carriers for the transmission of customer telephone calls.
Under the Telecommunications Act of 1996, we may purchase capacity from
facilities-based carriers by entering into resale agreements with such carriers,
or we may lease the required facilities from such carriers. The risk factors
inherent in this approach include, but are not limited to, the following:
o the inability to negotiate and renew favorable lease or resale
agreements;
o lack of timeliness of the ILEC in processing our orders for
customers seeking to utilize our services;
o dependence on the effectiveness of outside telemarketing
services to attract new customers;
o dependence on third-party contractors to install necessary
equipment and wiring at our customers facilities; and
o dependence on a facilities-based carrier to provide our
customers with repair services and new installation services.
Dependence on Billing Services and Implementation. The accurate and
prompt billing of our customers is essential to our operations and future
profitability. We rely on a third-party vendor to provide billing services for
Essex. Although we believe we have recently developed our own billing system to
replace the third-party, we have not yet finished testing the accuracy of our
own system. This strategy exposes us to various risk factors that include, but
are not limited to, the following:
o the inability to control the management of our billing
services;
o the failure of a third party vendor to provide all of the
billing services that we require;
o dependence upon a third party to rate and print our bills; and
o the possibility of Year 2000 issues of the third-party not
being corrected in time to process our bills properly in the
year 2000.
12
<PAGE>
Competition. We may be competing for local telephone and Internet
access services with ILECs, which currently dominate their local
telecommunications markets, other CLECs and several other local exchange
carriers. The following factors may, among other things, prevent us from
obtaining the share of the telecommunications market necessary to achieve
profitable telecommunications operations:
o ILECs' long-standing relationships with their customers;
o the increase in business combinations and alliances in the
telecommunications industry which may create significant new
competitors;
o the greater financial, personnel and other resources of
existing and potential competitors; and
o the ability of competitors with greater resources and capital
to meet or undercut our proposed lower price structure.
Rapid Technological Change. The telecommunications industry is subject
to rapid and significant changes in technology. While we believe that these
changes will not materially affect our ability to acquire necessary
technologies, we cannot predict the effect of technological changes on our
business.
Regulation. Federal, state and local regulation may affect our
telecommunications business. Since regulation of the telecommunications industry
in general, and the CLEC industry in particular, is frequently changing, we
cannot predict whether, when and to what extent new regulations will affect us.
The following factors, among others, may adversely affect our business,
financial condition and results of operations:
o delays in obtaining required regulatory approvals;
o new court decisions;
o the enactment of new adverse regulations; and
o the establishment of strict regulatory requirements.
Risks Associated with Retail Division.
In August 1997, we began a retail operation known as Airline Ventures,
Inc. ("AVI"), which sells travel products, uniforms and study guides via retail
stores, E-commerce sites and a Web site primarily to professional airline crew
members. We lease space from American
13
<PAGE>
Airlines for two of our stores, and from a Ramada Inn for a third store. The
Ramada Inn provides lodging facilities to American Airlines employees when they
are training at an American Airlines' training facility in Dallas. We plan to
use our physical presence in the American Airlines' facilities and the Ramada
Inn to build a trusted relationship with airline employees so they continuously
make purchases from us at our stores and from our newly-formed Internet shopping
sites. Our strategy includes, but is not limited to, the following risks:
Short Operating History; Certain Net Losses. Since its inception, AVI
has not generated positive cash flow. In fiscal 1998, its first full year of
operations, AVI incurred an operating loss of approximately $170,000. The
operating losses were primarily attributable to expenses related to sales,
marketing and building a management information infrastructure. For the
nine-month period ended August 31, 1999, AVI generated operating profits of
approximately $48,000. Because of our limited operating history with AVI, we
cannot accurately predict if AVI will be able to compete successfully as a
specialty retailer or as an online retailer. Accordingly, you should consider
the likelihood of AVI's success in view of all of the risks, expenses and delays
inherent in establishing a new business, including, but not limited to, the
following:
o general expenses;
o unforeseeable complications and delays;
o implementation of marketing strategies and activities;
o the uncertainty of market acceptance of new products and
services;
o intense competition from larger, more established competitors;
and
o incurring additional net losses before establishing an
adequate customer base.
Reliance on American Airlines. Our relationship with American Airlines
is crucial to the successful operation of our retail business. We have written
contracts or verbal agreements with American Airlines that allow us to perform
several services for employees of American Airlines. The elimination of one or
more of the following items could have a material impact on our operations:
o agreement to lease retail space in American Airlines'
facilities;
o ability to sell products in pilots' and flight attendants'
lounges;
o ability to allow a crew member to buy products on a
payroll-deduct program;
o maintenance of a link between our E-commerce site and an
internal site that is frequently used by American Airlines
employees;
o ability to sell study guides and job-related necessities;
o agreement to sell pilot uniforms directly to pilots; and
o the ability to sell American Airlines' logo product.
14
<PAGE>
Dependence on Key Personnel and Consultants. A small number of key
management and operating employees manage our specialty retail business. Our
loss of such employees could materially adversely impact our business. We
believe that our future success in this business will also depend on our ability
to attract and retain additional key personnel who are also being sought by
other businesses.
Ability to Manage Growth. We plan to grow AVI's business by expanding
our presence in a number of geographical locations and by promoting our
E-commerce sites and Web site. The continued growth of this division will depend
on various factors, including, but not limited to, the following:
o the ability to lease additional stores within airports;
o the ability to expand sales of products to airline employees
of several airlines;
o enhancement of operational, managerial, financial and
information systems;
o the ability to find high quality, low cost sources to
manufacture pilot uniforms;
o continued popularity of airline travel in the United States;
and
o the ability to manage and grow our retail Internet business.
Competition. We compete with many other companies that are selling
travel and job related products to professional airline crew members. We have no
significant market share in this business. The following factors may, among
other things, prevent us from obtaining the share of the specialty retail market
necessary for AVI to achieve profitable operations:
o long-standing relationships our competitors have with their
customers;
o long-standing relationships our competitors have with various
airlines;
o the greater financial, personnel and other resources of
existing and potential competitors; and
o the ability of competitors with greater resources and capital
to meet or undercut our proposed price structure.
Risks Associated with Wholesale Luggage Division.
Our wholesale luggage division has been discontinued and our U.S.
operation has been sold. We are liquidating the assets of our Canadian
operation, which has a building, accounts receivable and inventory. The
divestiture of the remaining Canadian operations requires significant amounts of
management time to close down the operation and aid prospective purchasers in
performing their due diligence procedures. Our decision to discontinue the
wholesale luggage operations created several risks, including, but not limited
to, the following;
15
<PAGE>
o disputes regarding amounts owed to vendors, licensors or
employees;
o erosion of capital if the Canadian inventory and building are
not sold in a timely manner and if accounts receivable are not
collected;
o significant management involvement that could detract from the
growth of our other businesses; and
o the ability to receive adequate compensation for the assets
that are being sold.
Dividend Policy
Generally. We expect to retain earnings, if any, to finance the
expansion and development of our business. Our Board of Directors will decide
whether to make future cash dividend payments. Such decision will depend on,
among other things, the following factors:
o our earnings;
o our capital requirements;
o our operating condition;
o our financial condition; and
o our compliance with various financing covenants to which we
are or may become a party.
No Dividend Payments in Near Future. We were a party to a credit
facility with Coast Business Credit, a division of Southern Pacific Thrift &
Loan Association, that prohibited dividend payments without Coast Business
Credit's prior consent. See "Item 5. Market for the Company's Common Equity and
Related Stockholder Matters" and "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources" in our Annual Report on Form 10-K for the year ended November 30,
1998, which we have included in this prospectus by reference. Although this
credit facility was repaid on December 30, 1999 and not renewed, this type of
facility and this type of dividend limitation are typical in a credit facility
and are indicative of the restrictions we would expect in a future lending
facility.
Limited Public Market and Possible Volatility of Stock Price. Although there is
a public market for our common stock, the market for our common stock is thinly
traded. The trading prices of our common stock could be subject to wide
fluctuations in response to, among other events and factors, the following:
16
<PAGE>
o variations in our operating results;
o sales of a large number of shares by our existing
stockholders;
o announcements by us or others;
o developments affecting us or our competitors; and
o extreme price and volume fluctuations in the stock market.
Effect of Certain Charter Provisions.
Authority of Board of Directors to Issue Preferred Stock. Pursuant to
the terms of our charter, our Board of Directors has the authority to issue up
to 1,000,000 shares of preferred stock in one or more series. Our Board of
Directors may also determine the prices, rights, preferences, privileges and
restrictions, including voting rights, of the shares within each series without
any further shareholder vote or action. In June 1998, our Board of Directors
authorized the issuance of up to 700 shares of Series A preferred stock, which
shares were subsequently issued and have since been converted into shares of
Common Stock. In February 1999, our Board of Directors approved the issuance of
up to 1,300 shares of Series B preferred stock to prospective investors, of
which 196 shares were subsequently issued. The rights of the holders of our
outstanding or newly-issued preferred stock may adversely affect the rights of
the holders of common stock. While the issuance of such preferred stock could
facilitate possible acquisitions and other corporate activities, it could also
impede a third party's ability to acquire control of our company.
Limitation of Liability of Directors. Pursuant to the terms of our
charter and to the extent New York law permits, we and our shareholders may not
hold our directors personally liable for monetary damages in the event of a
breach of fiduciary duty.
Anti-takeover Effects of New York Law.
Certain anti-takeover provisions of New York law could delay or hinder
a change of control of our company. While such provisions generally facilitate
our Board of Directors' ability to maximize shareholder value, they may
discourage takeovers that could be in the best interest of certain shareholders.
Such provisions could adversely affect the market value of our stock in the
future.
USE OF PROCEEDS
The shares of common stock offered hereby are being registered for the
account of the selling shareholders identified in this prospectus. See "Selling
Shareholders." All net proceeds from the sale of the common stock will go to the
shareholders who offer and sell their shares. Accordingly, we will not receive
any part of the proceeds from such sales of the common stock.
17
<PAGE>
SELLING SHAREHOLDERS
The selling shareholders have informed us that the name, address,
maximum number of shares of common stock to be sold and total number of shares
of common stock that each selling shareholder owns are as set forth in the
following table. The selling shareholders may sell all or part of their shares
of common stock pursuant to this prospectus. The offering of such shares of
common stock is not being underwritten on a firm commitment basis. As a result,
we cannot give you estimates as to the number and percentage of shares of common
stock each selling shareholder will hold upon termination of this offering.
<TABLE>
<CAPTION>
Selling Shareholders
--------------------
No. of Shares
No. of Shares of Maximum No. of Percentage of
Common Stock of Shares of Common Stock Common Stock
Beneficially Owned Common Stock to be Owned to be Owned
Name and Address Prior to Offering to be Offered After Offering After Offering (#)
---------------- ----------------- ------------- -------------- ------------------
<S> <C> <C> <C> <C>
Alvin H. Einbender
Revocable Trust.......... 44,444 44,444(a) -- --
230 Park Avenue
New York, NY 10169
James Dinizio, Jr. (b) ..... 29,000 29,000 -- --
39 Sound Road
Greenport, NY 11944
Epinal Corporation, Ltd..... 100,000 100,000(a) -- --
10155 Collins Avenue
Penthouse 6
Bal Harbour, FL 33154
Evansville Limited.......... 800,000 800,000(a) -- --
PO Box 438
Road Town, Tortola
British Virgin Islands
Geils & Co. Inc.(c)........ 70,000 50,000 20,000 *
54 Danbury Road
Suite 318
Ridgefield, CT 06877
Hudson River Investments, Inc.
720 Fifth Avenue 566,666 566,666(a) -- --
New York, NY 10012
Eric Izzo (d) 40,000 40,000 -- --
2300 Pine Tree Road
Cutchogue, NY
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Selling Shareholders
--------------------
No. of Shares
No. of Shares of Maximum No. of Percentage of
Common Stock of Shares of Common Stock Common Stock
Beneficially Owned Common Stock to be Owned to be Owned
Name and Address Prior to Offering to be Offered After Offering After Offering (#)
---------------- ----------------- ------------- -------------- ------------------
<S> <C> <C> <C> <C>
Daniel Jaffe................ 50,000 50,000(a) -- --
141 Great Neck Road
Great Neck, NY 10019
Barry F. Nathanson.......... 400,000 400,000(a) -- --
6 Shore Cliff Place
Great Neck, NY 11023
Cornelius Prior............. 400,000 400,000(a) -- --
PO Box 12030
St. Thomas, VI 00801
Profit Sharing Plan & Trust of
Samuel Benjamin, M.D., Inc.
2219 Balsam Avenue 100,000 100,000(a) -- --
Los Angeles, CA 90064
Riderpoint Inc.(e).......... 400,000 300,000 100,000 *
14 Madison Avenue
Valhalla, NY 10595
SkyClub Communications ......
Holding Corp. (f) 120,149 120,149(a) -- --
6573 Stirling Road
Ft. Lauderdale, FL 33314
TN Capital, Inc. ............ 162,500 152,500 10,000 *
1616 Post Road East
Suite 4222
Fairfield, CT 06430
Andrew Worden............... 50,000 50,000(a) -- --
301 West 57th Street
New York, NY 10019
Xavier Kegels & Partners
B.V.B.A.................. 60,000 60,000 -- --
Gruenplaats 42
2000 Abtwerpen Belgium
Interbrand, L.L.C. ......... 25,000 25,000 -- --
12 West 37th Street
New York, NYY 10018
</TABLE>
- -------------------
# Based upon 11,368,664 shares of common stock outstanding at December
31, 1999.
* Less than 1%.
19
<PAGE>
(a) Of the shares beneficially owned, one half are issuable upon the
exercise of warrants to purchase shares of our common stock.
(b) Mr. Dinizio acquired 29,000 shares of common stock from us in November
1999 in connection with our acquisition of all of the outstanding stock
of Peconic Telco, Inc.
(c) Geils & Co., Inc., an entity that provides us consulting services to
from time to time, received the shares to be sold by it in a private
placement.
(d) Mr. Izzo acquired 40,000 shares of common stock from us in November
1999 in connection with our acquisition of all of the outstanding stock
of Peconic Telco, Inc.
(e) Riderpoint, Inc. ("Riderpoint") acquired 250,000 shares of common stock
from us in April 1999 and 300,000 shares in November 1999. In exchange
for such shares, we received a total of approximately 29% of the
outstanding equity of Riderpoint. Prior to our investment, Mr. Paul
Riss, our Chief Executive Officer, was a member of the Board of
Directors of Riderpoint and held three-year options to purchase up to
50,000 shares of common stock of Riderpoint with an exercise price of
$1.00 per share.
(f) SkyClub Communications Holding Corp.("SkyClub") acquired 120,149 shares
of common stock from us in May 1999. In exchange for these shares, we
received 19% of the outstanding equity of SkyClub.
20
<PAGE>
PLAN OF DISTRIBUTION
The selling shareholders may offer their shares of common stock
directly or through pledgees, donees, transferees or other successors in
interest in one or more of the following types of transactions:
o in the over-the-counter market;
o on any stock exchange on which shares of common stock may be
listed at the time of sale;
o in negotiated transactions; or
o in a combination of any of the above transactions.
The selling shareholders may offer their shares of common stock at any
of the following prices:
o fixed prices which may be changed;
o market prices prevailing at the time of sale;
o prices related to such prevailing market prices; or
o at negotiated prices.
The selling shareholders may sell their shares of common stock by one
or more of the following methods, without limitation:
o a block trade in which the broker-dealer so engaged will
attempt to sell the shares as agent but may position and
resell a portion of the block as principal to facilitate the
transaction;
o a broker or dealer may purchase as principal and resell for
its account pursuant to this prospectus;
o ordinary brokerage transactions and transactions in which the
broker solicits purchasers; and
o face-to-face transactions between the selling shareholders and
purchasers without a broker-dealer.
In effecting sales, brokers or dealers that the selling shareholders
engage may arrange for other brokers or dealers to participate. The selling
shareholders may give such brokers or dealers commissions or discounts in
amounts to be negotiated immediately prior to the sale. Such brokers or dealers
and any other participating brokers or dealers may be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act in
connection with such sales.
21
<PAGE>
In addition, any securities covered by this prospectus that qualify for
sale pursuant to Rule 144 might be sold under Rule 144 rather than pursuant to
this prospectus. The selling shareholders and any broker-dealers acting in
connection with the sale of shares of common stock hereunder may be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act, and
any commissions received by them and any profit realized by them on the resale
of shares of common stock as principals may be deemed underwriting compensation
under the Securities Act.
If and when a selling shareholder notifies us of that he or she has
entered into a material arrangement with a broker-dealer for the sale of shares
of common stock through a block trade, special offering or secondary
distribution or a purchase by a broker or dealer, we will file a supplemental
prospectus, if required pursuant to Rule 424(c) under the Securities Act,
disclosing (1) the name of the selling shareholder and of the participating
broker-dealer(s); (2) the number of shares of common stock involved; (3) the
price at which such shares of common stock were sold; (4) the commissions paid
or discounts or concessions allowed to such broker-dealer(s), where applicable;
(5) that such broker-dealer(s) did not conduct any investigation to verify the
information set out or incorporated by reference in this prospectus; and (6)
other facts material to the transaction.
The selling shareholders reserve the sole right to accept and, together
with any agent of any selling shareholder, to reject in whole or in part any
proposed purchase of the shares of common stock. The selling shareholders will
pay any sales commissions or other seller's compensation applicable to such
transactions.
We have not registered or qualified offers and sales of shares of the
common stock under the laws of any country, other than the United States. To
comply with certain states' securities laws, if applicable, the selling
shareholders will offer and sell their shares of common stock in such
jurisdictions only through registered or licensed brokers or dealers. In
addition, in certain states the selling shareholders may not offer or sell
shares of common stock unless we have registered or qualified such shares for
sale in such states or we have complied with an available exemption from
registration or qualification.
Under applicable rules and regulations under the Exchange Act, any
person engaged in a distribution of shares of the common stock may not
simultaneously engage in market-making activities with respect to such shares of
common stock for a period of two to nine business days prior to the commencement
of such distribution. In addition, the selling shareholders and any other person
participating in a distribution will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including without
limitation, Rules 10b-2, 10b-6 and 10b-7. Such provisions may limit the timing
of purchases and sales of any of the shares of common stock by the selling
shareholders or any such other person. This may affect the marketability of the
common stock and the brokers' and dealers' ability to engage in market-marking
activities with respect to the common stock.
22
<PAGE>
We will pay substantially all of the expenses incident to the
registration of the shares of common stock by filing the registration statement
of which this prospectus is a part, estimated to be approximately $18,000.
DESCRIPTION OF SECURITIES TO BE REGISTERED
Our authorized capital stock consists of 20,000,000 shares of common
stock, par value $.10 per share, and 1,000,000 shares of preferred stock, par
value $.10 per share. As of December 31, 1999, 11,368,664 shares of common stock
were issued and outstanding and 196 shares of Series B preferred stock were
issued and outstanding. In addition, at such date, 2,819,555 shares of common
stock were reserved for issuance upon the exercise of outstanding options and
warrants and the conversion of the outstanding shares of Series B preferred
stock.
Common Stock
Voting, Dividend and Other Rights. Each outstanding share of common
stock will entitle the holder to one vote on all matters presented to the
shareholders for a vote. Holders of shares of common stock will have no
preemptive, subscription or conversion rights. All shares of common stock to be
outstanding following this offering will be duly authorized, fully paid and
nonassessable. Our Board of Directors will determine if and when distributions
may be paid out of legally available funds to the holders. We have not declared
any cash dividends during the past fiscal year with respect to the common stock.
Our declaration of any cash dividends in the future will depend on our Board of
Directors' determination as to whether, in light of our earnings, financial
position, cash requirements and other relevant factors existing at the time, it
appears advisable to do so. In addition, we were a party to a credit facility
that prohibits the payment of dividends without the lender's prior consent.
Rights Upon Liquidation. Upon liquidation, subject to the right of any
holders of the preferred stock to receive preferential distributions, each
outstanding share of common stock may participate pro rata in the assets
remaining after payment of, or adequate provision for, all our known debts and
liabilities.
Majority Voting. The holders of a majority of the outstanding shares of
common stock constitute a quorum at any meeting of the shareholders. A plurality
of the votes cast at a meeting of shareholders elects our directors. The common
stock does not have cumulative voting rights. Therefore, the holders of a
majority of the outstanding shares of common stock can elect all of our
directors. In general, a majority of the votes cast at a meeting of shareholders
must authorize shareholders action other than the election of directors.
However, the Business Corporation Law of the State of New York provides that
certain extraordinary matters, such as a merger or consolidation in which we are
a constituent corporation, a sale or other disposition of all or substantially
all of our assets, and our dissolution, require the vote of the holders of
two-thirds of all outstanding voting shares. Most amendments to our certificate
of incorporation require the vote of the holders of a majority of all
outstanding voting shares.
23
<PAGE>
Preferred Stock
Authority of Board of Directors to Create Series and Fix Rights. Under
our certificate of incorporation, as amended, our Board of Directors can issue
up to 1,000,000 shares of preferred stock from time to time in one or more
series. The Board of Directors is authorized to fix by resolution as to any
series the designation and number of shares of the series, the voting rights,
the dividend rights, the redemption price, the amount payable upon liquidation
or dissolution, the conversion rights, and any other designations, preferences
or special rights or restrictions as may be permitted by law. Unless the nature
of a particular transaction and the rules of law applicable thereto require such
approval, the Board of Directors has the authority to issue these shares of
preferred stock without shareholder approval. As described below, our Board of
Directors has authorized the issuance of up to 1,300 shares of Series B
preferred stock.
Series B Preferred Stock. We have designated 1,300 preferred shares as
"Series B Preferred Stock" and issued 196 of such shares. The Series B preferred
stock is entitled to receive dividends when, as and if dividends are declared by
our Board of Directors on our common stock. Each holder of Series B preferred
stock has the right, at the option of the holder, to convert each share of
Series B preferred stock into 1,000 shares of common stock. We have the right to
convert each share of Series B preferred stock into common stock at the same
conversion ratio. The conversion price of shares of Series B preferred stock is
subject to adjustment in the event of any reclassification, subdivision or
combination of our outstanding common stock into a greater or smaller number of
shares by a stock split, stock dividend or other similar event.
In the event of a dissolution, liquidation or winding up of our
company, the holders of Series B preferred stock are entitled to receive, prior
and in preference to the holders of common stock, an amount equal to $1,000 per
share. Thereafter, our remaining assets will be distributed ratably to the
holders of common stock. The holders of shares of Series B preferred stock are
entitled to that number of votes on all matters presented to shareholders equal
to the number of shares of common stock then issuable upon conversion of such
shares of preferred stock. Without the approval of the holders of at least a
majority of the Series B preferred stock then outstanding voting separately as a
class, we may not amend our Certificate of Incorporation in any way that
adversely affects the rights and preferences of the holders of the Series B
preferred stock as a class.
Potential Dilution of Share Value; Preferences. Any additional issuance
of shares of preferred stock could dilute the earnings per share and book value
of existing shares of common stock. Because our Board of Directors has the
authority to fix the voting rights for any series of preferred stock, the
holders of shares of a new series of preferred stock could be entitled to vote
separately as a class in connection with the approval of certain extraordinary
corporate transactions where New York law does not require such class vote, or
might be given a disproportionately large number of votes. The issuance of
shares of preferred stock could also result in a class of securities outstanding
that would have certain preferences (for example, with respect to dividends or
liquidation), or would enjoy certain voting rights in addition to those of the
common stock.
24
<PAGE>
Potential Frustration in Change of Control . Although we currently have
no such intention, we could use authorized but unissued shares of preferred
stock to hinder a change in control of our company. Any issuance of shares of
preferred stock could dilute the stock ownership of persons seeking to gain
control. Shares of a new series of preferred stock could also be convertible
into a large number of shares of common stock or have other terms that might
make more difficult or costly the acquisition of a controlling interest in our
company. Under certain circumstances, such shares could be used to create voting
impediments or to frustrate persons attempting to effect a takeover or otherwise
gain control. Such shares could be privately placed with purchasers who might
side with the Board of Directors in opposing a hostile takeover bid. In
addition, the Board of Directors could authorize holders of a series of
preferred stock to vote as a class, either separately or with the holders of the
common stock, on any merger, sale or exchange of assets by us or any other
extraordinary corporate transactions. The ability of the Board of Directors to
take such actions might be considered as having an effect of discouraging any
attempt by another person or entity to acquire control of our company.
Transfer Agent
The registrar and transfer agent for our common stock is Registrar and
Transfer Company.
LEGAL MATTERS
Pryor Cashman Sherman & Flynn LLP, New York, New York, will pass upon
certain legal matters in connection with this offering, including the validity
of the issuance of the shares of common stock offered by this prospectus. Pryor
Cashman Sherman & Flynn LLP beneficially owns 35,000 shares of common stock. In
addition, Eric M. Hellige, one of our directors and a member of Pryor Cashman
Sherman & Flynn LLP, beneficially owns 65,500 shares of common stock.
EXPERTS
Our consolidated balance sheets as of November 30, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the three years ended November 30, 1998 appearing in our Annual Report
on Form 10-K for the year ended November 30, 1998, have been audited by Nussbaum
Yates & Wolpow, P.C., independent auditors, as set forth in their report thereon
included therein and incorporated herein by reference. The financial statements
referred to above are incorporated herein by reference in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
25
<PAGE>
================================================================================
No dealer, sales representative, or other person has been authorized to
give any information or to make any representations in connection with this
offering other than those contained in this Prospectus, and if given or made,
such information or representation must not be relied upon as having been
authorized by the Company or any Underwriter. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby by anyone in any jurisdiction in which such offer or
solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so or to any person to whom it is unlawful
to make such offer or solicitation. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstances, create any implication
that there has been no change in the affairs of the Company since the date
hereof or that the information contained herein is correct as of any time
subsequent to the date hereof.
---------------
TABLE OF CONTENTS
Page
Where You Can Find More Information
........................................................................... 1
Incorporation of Certain
Documents by Reference................................................... 1
About the Company........................................................... 2
Risk Factors ............................................................... 7
Use of Proceeds............................................................. 17
Selling Shareholders........................................................ 18
Plan of Distribution........................................................ 21
Description of Securities to be
Registered................................................................ 23
Legal Matters............................................................... 25
Experts..................................................................... 25
================================================================================
<PAGE>
================================================================================
3,287,759 Shares
eLEC COMMUNICATIONS CORP.
Common Stock
---------------
PROSPECTUS
---------------
________, 2000
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. Other Expenses of Issuance and Distribution.
Estimated expenses to be paid by the Company in connection with the
issuance and distribution of the securities being registered are as follows:
Registration Fee........................................ $ 2,548.01
Legal Fees and Expenses................................. $10,000.00
Accounting Fees and Expenses............................ $ 5,000.00
Miscellaneous........................................... $ 451.99
Total ......................................... $18,000.00
ITEM 15. Indemnification of Directors and Officers
Reference is made to Sections 721 through 725 of the Business
Corporation Law of the State of New York (the "BCL"), which provides for
indemnification of directors and officers of New York corporations under certain
circumstances.
Section 722 of the BCL provides that a corporation may indemnify
directors and officers as well as other employees and individuals against
judgments, fines, amounts paid in settlement and reasonable expenses, including
attorneys' fees, in connection with actions or proceedings, whether civil or
criminal (other than an action by or in the right of the corporation, a
"derivation action"), if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. A similar standard is
applicable in the case of derivative actions, except that indemnification only
extends to amounts paid in settlement and reasonable expenses (including
attorneys' fees) incurred in connection with the defense or settlement of such
actions, and the statute does not apply in respect of a threatened action, or a
pending action that is settled or otherwise disposed of, and requires court
approval before there can be any indemnification where the person seeking
indemnification has been found liable to the corporation. Section 721 of the BCL
provides that Article 7 of the BCL is not exclusive of other indemnification
that may be granted by a corporation's certificate of incorporation,
disinterested director vote, shareholders vote, agreement or otherwise.
Article XII of the Registrant's by-laws requires the Registrant to
indemnify its officers and directors to the fullest extent permitted under the
BCL. Article XII of the Registrant's by-laws further provides that no director
of the Registrant shall be personally liable to the Registrant or its
shareholders for monetary damages for breach of fiduciary duty as a director,
except that no indemnification shall be made in respect of (1) a threatened
action, or a pending action which is settled or otherwise disposed of, or (2)
any claim, issue or matter as to which
<PAGE>
such person shall have been adjudged to be liable to the Registrant unless and
only to the extent that the court in which such action or suit was brought or,
if no action was brought, any court of competent jurisdiction determines upon
application that, in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such portion of the settlement
and expenses as the court deems proper.
Section 402(b) of the BCL provides that a corporation's certificate of
incorporation may include a provision that eliminates or limits the personal
liability of the corporation's directors to the corporation or its shareholders
for damages for any breach of a director's duty, provided that such provision
does not eliminate or limit (1) the liability of any director if a judgment or
other final adjudication adverse to the director establishes that the director's
acts or omissions were in bad faith or involved intentional misconduct or a
knowing violation of law or that the director personally gained a financial
profit or other advantage to which the director was not legally entitled or that
the director's acts violated Section 719 of the BCL; or (2) the liability of any
director for any act or omission prior to the adoption of a provision authorized
by Section 402(b) of the BCL. Article Sixth of the Registrant's Certificate of
Incorporation, as amended, provides that no director of the Registrant shall be
liable to the Registrant or its shareholders for any breach of duty in such
capacity except as provided in Section 402(b) of the BCL.
Any amendment to or repeal of the Registrant's Certificate of
Incorporation or by-laws shall not adversely affect any right or protection of a
director or officer of the Registrant for or with respect to any acts or
omissions of such director or officer occurring prior to such amendment or
repeal.
The Registrant maintains directors and officers insurance which,
subject to certain exclusions, insures the directors and officers of the
Registrant against certain losses which arise out of any neglect or breach of
duty (including, but not limited to, any error, misstatement, act, or omission)
by the directors or officers in the discharge of their duties, and insures the
Registrant against amounts which it has paid or may become obligated to pay as
indemnification to its directors and/or officers to cover such losses.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the
Registrant pursuant to the foregoing, the Registrant has been informed that in
the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
Item 16. Exhibits
Exhibit No. Description
- ----------- -----------
5 Opinion of Pryor Cashman Sherman & Flynn LLP
23.1 Consent of Pryor Cashman Sherman & Flynn LLP
(included as part of Exhibit 5.1)
23.2 Consent of Nussbaum Yates & Wolpow, P.C.
24 Powers of Attorney (included in the signature page
of this Registration Statement)
II-2
<PAGE>
Item 17. Undertakings
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the Registration Statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration
Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form
of prospectus filed with the SEC pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no
more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration
Fee" table in the effective Registration Statement;
(iii) To include any material information with
respect to the plan of distribution not previously disclosed
in the Registration Statement or any material change to such
information in the Registration Statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the SEC
by the Registrant pursuant to Section 13 or 15(d) of the Exchange Act that are
incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under
the Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-3
<PAGE>
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the Registration Statement shall be deemed to be a
new Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the provisions described in Item 15 of this
Registration Statement, or otherwise, the Registrant has been advised that in
the opinion of the SEC such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Norwalk, Connecticut on this 12th day of January, 2000.
eLEC COMMUNICATIONS CORP.
By: /s/Paul H. Riss
--------------------------
Paul H. Riss
Chief Executive Officer
<PAGE>
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes Joel
Dupre, Eric M. Hellige and Paul H. Riss, and each of them singly, his true and
lawful attorneys-in-fact with full power to execute in the name of such person,
in the capacities stated below, and to file, such one or more amendments to this
Registration Statement as the Registrant deems appropriate, and generally to do
all such things in the name and on behalf of such person, in the capacities
stated below, to enable the Registrant to comply with the provisions of the
Securities Act of 1933, and all requirements of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming the signature of such
person as may be signed by said attorneys-in-fact, or any one of them, to any
and all amendments to this Registration Statement.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Dated: January 12, 2000 /s/Joel Dupre
------------------------------------
(Joel Dupre)
Chairman of the Board
Dated: January 12, 2000 /s/Paul H. Riss
------------------------------------
(Paul H. Riss)
Chief Executive Officer,
Chief Financial Officer
and Director
Dated: January 12, 2000 /s/Eric M. Hellige
------------------------------------
(Eric M. Hellige)
Director
Dated: January 12, 2000 /s/Anthony Scalice
------------------------------------
(Anthony Scalice)
Director
EXHIBIT 5
January 12, 2000
eLEC Communications Corp.
37 North Avenue
Norwalk, Connecticut 06851
Gentlemen:
We refer to the Registration Statement on Form S-3 (the "Registration
Statement"), to be filed by you with the Securities and Exchange Commission with
respect to the registration under the Securities Act of 1933, as amended (the
"Act"), of 3,287,759 shares of common stock, par value $.10 per share (the
"Shares"), of eLEC Communications Corp. (the "Company") for resale by the
Selling Shareholders (as defined in the Registration Statement).
We are qualified to practice law in the State of New York. We express
no opinion as to, and, for the purposes of the opinion set forth herein, we have
conducted no investigation of, and do not purport to be experts on, any laws
other than the laws of the State of New York and the federal laws of the United
States of America.
We have examined such documents as we considered necessary for the
purposes of this opinion. Based on such examination, it is our opinion that the
Shares have been duly authorized and are legally issued, fully-paid and
non-assessable under the laws of the State of New York (the state of
incorporation of the Company).
We consent to the use of this opinion as an exhibit to the Registration
Statement.
Very truly yours,
/s/PRYOR CASHMAN SHERMAN & FLYNN LLP
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We have issued our report dated February 12, 1999 (except for the last
paragraph of Note 2, as to which the date is February 25, 1999) accompanying the
consolidated financial statements and schedule of eLEC Communications Corp.
(formerly known as Sirco International Corp.) and subsidiaries included in the
Annual Report on Form 10-K for the year ended November 30, 1998, which are
incorporated by reference in this Registration Statement. We consent to the
incorporation by reference in the Registration Statement of the aforementioned
report and schedule and to the use of our name as it appears under the caption
"Experts."
/s/ Nussbaum Yates & Wolpow, P.C.
NUSSBAUM YATES & WOLPOW, P.C.
Melville, New York
January 12, 2000
