As filed with the Securities and Exchange Commission on May 12, 2006
Registration No. 333-132285
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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AMENDMENT NO. 2 TO FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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eLEC COMMUNICATIONS CORP.
(Exact Name of Registrant as Specified in Its Charter)
New York 4813 13-2511270
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
75 South Broadway, Suite 302
White Plains, New York 10601
(914) 682-0214
(Address and Telephone Number of Principal Executive Offices)
75 South Broadway, Suite 302
White Plains, New York 10601
(Address of Principal Place of Business or Intended Principal Place of Business)
Paul H. Riss, Chief Executive Officer
eLEC Communications Corp.
75 South Broadway, Suite 302
White Plains, New York 10601
(914) 682-0214
(Name, address and telephone number of agent for service)
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Copies to:
Eric M. Hellige, Esq.
Pryor Cashman Sherman & Flynn LLP
410 Park Avenue
New York, New York 10022-4441
Telephone: (212) 421-4100
Facsimile: (212) 326-0806
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Approximate date of commencement of proposed sale to the public: From time to
time after this Registration Statement becomes effective.
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 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, 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, 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(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
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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 the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
ii
The information in this Prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED MAY __, 2006
PROSPECTUS
9,617,320 Shares
ELEC COMMUNICATIONS CORP.
Common Stock
This prospectus relates to the resale of up to 9,617,320 shares of
common stock, of which 8,951,057 shares are issuable upon the conversion of
promissory notes of eLEC Communications Corp. and the payment of the principal
amount of, and interest on, these notes to, or the exercise of outstanding
warrants by, Laurus Master Fund, Ltd., ("Laurus") and 666,263 shares of common
stock are issuable upon the exercise of warrants of eLEC Communications Corp. by
certain selling shareholders identified in this prospectus. All of the shares,
when sold, will be sold by these selling shareholders, including Laurus. The
selling shareholders may sell their shares of common stock from time to time at
prevailing market prices. We will not receive any proceeds from the sale of the
shares of common stock by the selling shareholders.
Our common stock is traded in the over-the-counter market and prices
are reported on the OTC Bulletin Board under the symbol "ELEC."
See "Risk Factors" beginning on page 5 for risks of an investment in
the securities offered by this prospectus, which you should consider before you
purchase any shares.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of the securities or passed
upon the accuracy or adequacy of this prospectus. Any representation to the
contrary is a criminal offense.
The date of this prospectus is __________, 2006
We have not registered the sale of the shares under the securities laws
of any state. Brokers or dealers effecting transactions in the shares of common
stock offered hereby should confirm that the shares have been registered under
the securities laws of the state or states in which sales of the shares occur as
of the time of such sales, or that there is an available exemption from the
registration requirements of the securities laws of such states.
This prospectus is not an offer to sell any securities other than the
shares of common stock offered hereby. This prospectus is not an offer to sell
securities in any circumstances in which such an offer is unlawful.
We have not authorized anyone, including any salesperson or broker, to
give oral or written information about this offering, eLEC Communications Corp.,
or the shares of common stock offered hereby that is different from the
information included in this prospectus. You should not assume that the
information in this prospectus, or any supplement to this prospectus, is
accurate at any date other than the date indicated on the cover page of this
prospectus or any supplement to it.
TABLE OF CONTENTS
Prospectus Summary........................................................... 1
Risk Factors................................................................. 5
Forward-Looking Statements................................................... 18
Use of Proceeds.............................................................. 19
Description of Securities.................................................... 19
Principal Shareholders....................................................... 21
Market Price of Our Common Equity............................................ 22
The Laurus Transactions...................................................... 23
Selling Shareholders......................................................... 25
Plan of Distribution......................................................... 27
Legal Matters................................................................ 28
Experts...................................................................... 28
Where You Can Find More Information.......................................... 28
Incorporation of Certain Information by Reference............................ 29
Information with Respect to the Registrant................................... 29
Material Changes............................................................. 29
Commission Position on Indemnification for Securities Act Liabilities........ 30
ii
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus and may not contain all of the information that you should consider
before investing in the shares. You are urged to read this prospectus in its
entirety, including the information under "Risk Factors" and our consolidated
financial statements and related notes included elsewhere in this prospectus.
Our Company
We are a provider of local and long distance voice telephone services
and integrated Voice over Internet Protocol ("VoIP") telephony services.
Internet Protocol ("IP") telephony is the real time transmission of voice
communications in the form of digitized "packets" of information over the
Internet or a private network, which is analogous to the way in which e-mail and
other data is transmitted. We use proprietary softswitch technology that runs on
Cisco and Dell hardware to provide wholesale telephony services to other service
providers and directly to retail consumers. Our technology enables telecom
service providers, cable operators, wireless carriers, Internet service
providers, resellers or any company seeking to offer premier packet
communications services the ability to provide a feature-rich VoIP service
offering.
The anticipated rollout of worldwide VoIP services is expected to allow
consumers and businesses to communicate at dramatically reduced costs in
comparison to traditional telephony networks. Traditionally, telephony carriers
have built networks based on circuit switching technology, which creates and
maintains a dedicated path for individual telephone calls until the call is
terminated. While circuit-switched networks have provided reliable voice
communications services for more than 100 years, transmission capacity is not
efficiently utilized in a circuit-switched system. Under circuit-switching
technology, when a person makes a telephone call, a circuit is created and
remains dedicated for the entire duration of that call, rendering the circuit
unavailable for the transmission of any other calls. Because of the high cost
and inefficiencies of a circuit-switched network, we have leased
circuit-switched network elements from other carriers in order to provide
wireline services to customers.
Data networks, such as IP networks, utilize packet switching technology
that divides signals into packets and simultaneously routes them over different
channels to a final destination where they are reassembled into the original
order in which they were transmitted. No dedicated circuits are required and a
fixed amount of bandwidth is not needed for the duration of each call. The more
efficient use of network capacity results in the ability to transmit
significantly higher amounts of traffic over a packet-switched network than a
circuit-switched network. Packet-switching technology enables service providers
to converge traditional voice and data networks in an efficient manner by
carrying voice, fax, video and data traffic over the same network. IP networks
are therefore less expensive for carriers to operate, and these cost savings can
be passed on to the consumer in the form of lower costs for local, long distance
and international long distance telephone services.
Because of the network cost savings that are inherent in an IP network,
we have created our own proprietary IP platform and have transitioned into a
facilities-based VoIP service provider. In addition to the cost savings we
obtain from the efficient use of network capacity, we believe our network
equipment costs are lower than most other carriers as our network and technology
require significantly less capital expenditures than a traditional Class 5
telecom switch in a circuit-switched network, and less equipment costs than our
VoIP competitors that utilize a packet-switched network. Our proprietary
softswitch, however, provides more than 20 of the Class 5 call features, voice
mail and enhanced call handling on our own Session Initiation Protocol ("SIP")
server suite. Our VoIP features are controlled by us instead of a software
vendor, as we write the code for any new features that we desire to offer our
customers. We have no software licensing fees and our other variable network
costs continue to drop as we increase our
network traffic and as we attract more pure VoIP users with traffic that does
not incur the cost of originating or terminating on a circuit switched network.
Our SIP servers are part of a cluster of servers, which we refer to as
a server farm, in which each server performs different network tasks, including
back-up and redundant services. We believe the server farm structure can be
easily and cost-effectively scaled as our VoIP business grows. In addition,
servers within our server farm can be assigned different tasks as demand on the
network dictates. If an individual server ceases to function, our server farm is
designed in a manner that subscribers should not have a call interrupted. We
support origination and termination using both the G.711 and G.729 voice codecs.
Codecs are the algorithms that enable us to carry analog voice traffic over
digital lines. There are several codecs that vary in complexity, bandwidth
required and voice quality. We primarily use G.711 and G.729 codecs. G.711 is a
standard to represent 8 bit compressed pulse code modulation samples for signals
of voice frequency. It creates a 64 kilobit per second bitstream, and we find
that approximately 90% of the current VoIP traffic in the United States uses
G.711. We frequently process G.711 VoIP traffic because some of our wholesale
customers do not have the ability to handle G.729. We prefer the G.729 codec,
which allows us to utilize VoIP in more cost effective ways. It allows for
compressing more calls in limited bandwidth, reducing the call to 8 kilobits per
second. For all of our retail customers and our more sophisticated wholesale
accounts, we use G.729 to save cost and enhance the quality of the call.
Some VoIP carriers use only G.711 compression under the theory that
when more bandwidth is used, the voice quality is normally better. We find,
however, that our G.729 VoIP traffic provides a higher quality voice
conversation than the G.711 processed by other VoIP carriers because when we
utilize only 8 kilobits per second of bandwidth, fewer packets are lost. Under
G.711, with the wider bitstream, the packets are more susceptible to dropping
off and not reaching their intended destination, resulting in sound jitter or
periods of silence during a telephone call. The high quality of our G.729
product, combined with the lower bandwidth cost, we experience because we buy
only one-eighth the bandwidth to bring customer traffic into and out of our
switch, further reduces our costs of providing VoIP service. Similarly, using
G.729 compression, we offer a bandwidth cost savings to our customers. A small
office that uses six of our VoIP lines is able to support the data and telephony
needs of the office with only one standard residential high-speed Internet
connection with a 384 kilobits per second upstream speed. This customer would
need to buy significantly more bandwidth if the VoIP lines were utilizing G.711
compression. With the quality and cost advantages of G.729, we anticipate G.729
will become increasingly utilized by VoIP carriers.
Our principal executive offices are located at 75 South Broadway, New
York, Suite 302, White Plains, New York 10601, and our telephone number at that
address is (914) 682-0214. We also maintain a regional office in Celebration,
Florida. We maintain an Internet website at www.elec.net. Information on our
website is not part of this prospectus.
Recent Developments
On February 27, 2006, we signed a non-binding letter of intent to
acquire Liberty Bell Telecom, LLC ("Liberty Bell"), a privately-held
telecommunications company that provides local and long distance telephone
service in the State of Colorado. Liberty Bell is licensed in Colorado as a
Competitive Local Exchange Carrier (CLEC). In 2005, Liberty Bell generated
approximately $4.7 million of revenue (unaudited) and produced over $150,000
(unaudited) in net profits in its latest fiscal quarter. We are currently in the
early stages of preparing and negotiating definitive documents for the
transaction. Thus, there can be no assurance that the transaction will be
consummated on the terms described herein or that the transaction will be
consummated at all. The consummation of the transaction will likely be
conditioned upon our ability to obtain financing for the transaction, among
other customary closing
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conditions.
We currently expect that Liberty Bell's equity owners will receive a
combination of cash and shares of our common stock in exchange for their equity
in Liberty Bell, the number of which shall be determined based upon the results
of our due diligence and Liberty Bell's audited financial statements. As yet,
the amount of cash we will pay and shares we will issue has not been determined.
Tom Martino, Liberty Bell's founder, is expected to sign an agreement with us to
provide marketing services for our VoIP product, in addition to the current
services he provides to Liberty Bell. Liberty Bell's President, Jay Weber, is
expected to assume an executive management position within our company.
About This Offering
This prospectus relates to the resale of up to 9,617,320 shares of
common stock, of which 8,951,057 shares are issuable upon the conversion of
promissory notes and the payment of the principal amount of, and interest on,
these notes to, or the exercise of outstanding warrants by, Laurus Master Fund,
Ltd., and 666,263 shares are issuable upon the exercise of outstanding warrants
of eLEC Communications Corp. by certain other selling shareholders identified in
this prospectus. All of the shares, when sold, will be sold by these selling
shareholders, including Laurus. The selling shareholders may sell their common
stock from time to time at prevailing market prices. We will not receive any
proceeds from the sale of the shares of common stock by the selling
shareholders.
Common Stock Offered.............................. 9,617,320 shares
Common Stock Outstanding at April 26, 2006(1)..... 16,839,282 shares
Use of Proceeds.................................. We will not receive any of
the proceeds from the sale
of the shares by the selling
shareholders, except upon
exercise of certain common
stock purchase warrants.
OTC Bulletin Board Ticker Symbol.................. ELEC
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(1) Does not include (i) 6,473,479 shares that are issuable upon the conversion
of outstanding convertible notes, (ii) 5,143,841 shares issuable upon the
exercise of outstanding warrants and non-qualified options, or (iii)
2,289,000 shares issuable upon the exercise of outstanding options granted
under our 1995 Equity Incentive Plan or our 2004 Equity Incentive Plan.
Selected Financial Information
The selected financial information presented below is derived from and
should be read in conjunction with our consolidated financial statements,
including notes thereto, appearing elsewhere in this prospectus. See "Financial
Statements."
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Summary Operating Information
Fiscal Quarter Ended Fiscal Year Ended
February 28, November 30,
------------ ------------
2006 2005 2005 2004 2003
---- ---- ---- ---- ----
Net revenues .................... $ 2,496,854 $ 3,863,479 $ 15,880,803 $ 9,557,600 $ 5,568,004
Income (loss) from operations ... $ (373,964) $ (402,973) $ (2,401,952) $ (642,150) $ (2,948,352)
Net income (loss) ............... $ (663,479) $ (380,589) $ (2,265,795) $ 170,253 $ 8,323,211
Earnings (loss) per common share $ (0.04) $ (0.02) $ (0.14) $ .01 $ .53
Weighted average number of common
shares Outstanding
Basic ........................ 16,839,282 16,681,726 16,770,789 16,254,282 15,771,219
Diluted ....................... 16,839,282 16,681,726 16,770,789 16,715,808 15,841,941
Summary Balance Sheet Information
November 30
-----------
February 28, 2006 2005 2004
----------------- ---- ----
Working capital deficit ....... $ (1,602,488) $ (974,123) $ (1,939,147)
Total assets .................. $ 3,078,628 $ 4,385,091 $ 1,903,802
Total liabilities ............. $ 6,004,743 $ 6,748,818 $ 3,600,241
Stockholders' equity deficiency $ (2,926,115) $ (2,363,727) $ (1,696,439)
4
RISK FACTORS
You should carefully consider the risks described below before buying
shares in this offering. The risks and uncertainties described below are not the
only risks we face. These risks are the ones we consider to be significant to
your decision whether to invest in our common stock at this time. We might be
wrong. There may be risks that you in particular view differently than we do,
and there are other risks and uncertainties that are not presently known to us
or that we currently deem immaterial, but that may in fact impair our business
operations. If any of the following risks actually occur, our business, results
of operations and financial condition could be seriously harmed, the trading
price of our common stock could decline and you may lose all or part of your
investment.
Risks Relating to Our Business
We have incurred losses since inception of our telephone business and we may be
unable to achieve profitability or generate positive cash flow.
We have not generated operating profits since fiscal 1996. While we
reported net income of $8,323,211 and $170,253 in fiscal 2003 and 2004,
respectively, we reported losses from our telecommunications operations.
Furthermore, in fiscal 2005 and the first quarter of fiscal 2006, we reported
net losses of approximately $2,266,000 and $664,000, respectively. In fiscal
2004, net income of $170,253 resulted primarily from the gain of approximately
$743,000 resulting from a settlement with creditors in the bankruptcy
proceedings of a subsidiary. In fiscal 2003, net income of $8,323,211 resulted
primarily from the gain on the disposition of a subsidiary and the disposition
of property of approximately $11,306,000. In fiscal 2003, fiscal 2004, fiscal
2005 and the first quarter of fiscal 2006, we generated operating losses of
approximately ($2,948,000), ($642,000), ($2,402,000) and ($374,000),
respectively, from operations. We expect to continue to incur operating losses
until we develop our telecommunications operations to a level at which it
generates sufficient revenues to cover operating expenses.
We have an unproven business model and can give no assurance that our business
model and strategy will be successful.
Our business strategy is unproven and we do not know whether our
business model and strategy will be successful. We intend to sell wholesale and
retail VoIP services to residential consumers and small businesses and
de-emphasize the wireline business that we have utilized for the majority of our
revenues since fiscal 2000. We have developed our own proprietary IP platform
and for the first time in our operating history, we are a facilities-based
carrier. We believe our network is robust and efficient, but it has not carried
the hundreds of millions of minutes that we anticipate will eventually use our
network. Our inability to scale our VoIP network and execute effectively as a
VoIP provider, if that occurs, would significantly diminish our ability to
generate sufficient VoIP revenue to achieve profitability.
We have a need for additional financing.
Due to our recent operating losses and our additional requirements for
working capital to establish and grow our business, over the past several months
we have sold debt and additional shares of capital stock to fund our working
capital needs. We expect that we will continue to sell our capital stock, incur
additional indebtedness or sell other assets we currently own 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 we find acceptable. If we cannot obtain additional funds when needed, we
may be forced to
5
curtail or cease our activities, which may result in the loss of all or a
substantial portion of your investment.
We may fail to continue as a going concern, in which event you may lose your
entire investment in our shares.
Our audited financial statements have been prepared on the assumption
that we will continue as a going concern. Our independent registered public
accounting firm has indicated in their report on our fiscal 2005 financial
statements that our recurring losses from operations, our negative working
capital, our stockholders' equity deficiency and our difficulties in generating
sufficient cash flow to meet our obligations and sustain our operations raise
substantial doubt about our ability to continue as a going concern. If we fail
to continue in business, you will lose your investment in the shares you acquire
in this offering.
We depend on incumbent carriers as a key component for our business.
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 incumbent carriers for the
transmission of customer telephone calls for our CLEC subsidiaries. The risk
factors inherent in this approach include, but are not limited to, the
following:
o the inability to negotiate and renew favorable wholesale
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 internal and external
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.
We depend on a third-party billing system to bill our customers.
The accurate and prompt billing of our customers is essential to our
operations and future profitability. We utilize a third-party system for
billing, tracking and customer service. While our former Chairman, who also owns
stock in our company, is the Chairman and Chief Executive Officer of our billing
company, we believe that all transactions with this company are at arms-length.
The system is designed to provide us with a high degree of flexibility to handle
custom rate plans that provide consumers discounts from the incumbent local
carriers' rate plans or bundled plans that include various features and long
distance services. Although we believe the system is very functional, it is
currently set up to support approximately 500,000 local lines in six states, and
its ability to handle substantially more customers is not fully tested. In
addition, the billing company we utilize competes with us as a CLEC and may
terminate its billing services at any time. Furthermore, in the most recent
audited financial statements of the billing company we utilize, the report of
the independent public accountants expressed substantial doubt about its ability
to continue as a going concern. This strategy exposes us to various risks that
include, but are not limited to, the following:
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o the inability to adapt the billing system to process the number
of customers we are targeting in our marketing plans;
o the failure of the system to provide all of the billing services
that we require;
o the possibility that we may want to provide services in a state
that our billing company has difficulty rating calls and
processing data for us; and
o the possibility that we may need to quickly engage a new billing
company to process our invoices to our customers, and devote a
large amount of internal resources at one time to work on this
transition.
Our business is dependent upon our ability to resell long distance services, for
which we currently rely on only one third-party carrier.
We offer long distance telephone services as part of our service
package. We currently have a wholesale agreement with only one long distance
carrier to provide transmission and termination services for all of our long
distance traffic. Recently, several long distance carriers have encountered
financial difficulties, including the carrier utilized by us. Financial
difficulties encountered by our current carrier or any other carrier with which
we are negotiating could cause disruption to our operations and loss of
customers and revenues.
We could be liable for breaches of security on our web site, fraudulent
activities of our users, or the failure of third-party vendors to deliver credit
card transaction processing services.
A fundamental requirement for operating a customer-friendly CLEC and an
internet-based, worldwide voice service is the secure transmission of
confidential information over public networks. Although we have developed
systems and processes that are designed to protect consumer information and
prevent fraudulent credit card transactions and other security breaches, failure
to mitigate such fraud or breaches may adversely affect our operating results.
The law relating to the liability of providers of online payment services is
currently unsettled. We rely on third party providers to process and guarantee
payments made by our customers up to certain limits, and we may be unable to
prevent our users from fraudulently receiving goods and services. Any costs we
incur as a result of fraudulent transactions could harm our business. In
addition, the functionality of our current billing system relies on certain
third-party vendors delivering services. If these vendors are unable or
unwilling to provide services, we will not be able to charge for our services in
a timely or scalable fashion.
We may face difficulties managing our anticipated rapid expansion.
We are attempting to grow our business rapidly in terms of the number
of services we offer, the number of customers we serve and the regions we serve.
In particular, we are expending substantial sums to expand our VoIP initiative.
There can be no assurance that our marketing initiatives will proceed as
expected or that they will be successful, particularly in light of the legal and
regulatory and competitive uncertainties described elsewhere in this report.
Furthermore, there is no assurance that we will successfully manage our efforts
to:
o expand, train, manage and retain our employee base;
o expand and improve our customer service and support systems;
7
o introduce and market new VoIP products and services and new
pricing plans;
o capitalize on new opportunities in the competitive marketplace;
or
o control our expenses.
The strains posed by these new demands are magnified by the emerging
nature of our operations. If we cannot manage our growth effectively, our
results of operations could be adversely affected.
The failure of our customers to pay their bills on a timely basis could
adversely affect our cash flow.
Our target customers consist of residences and small 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. We have experienced difficulty with residential wireline accounts in the
past and have incurred significant bad debt write-offs. Our failure to collect
accounts receivable owed to us by our residential wireline or wholesale VoIP
customers on a timely basis could have a material adverse effect on our
business, financial condition, results of operations and cash flow.
Acquisitions could divert management's time and attention, dilute the voting
power of existing shareholders and have a material adverse effect on our
business.
As part of our growth strategy, we may continue to acquire
complementary businesses and assets. Acquisitions that we may make in the future
could result in the diversion of time and personnel from our business. We also
may issue shares of common stock or other securities in connection with
acquisitions, which could result in the dilution of the voting power of existing
shareholders and could dilute earnings per share. Any acquisitions would be
accompanied by other risks commonly encountered in such transactions, including
the following:
o difficulties integrating the operations and personnel of acquired
companies;
o the additional financial resources required to fund the
operations of acquired companies;
o the potential disruption of our business;
o our ability to maximize our financial and strategic position by
the incorporation of acquired technology or businesses with our
product and service offerings;
o the difficulty of maintaining uniform standards, controls,
procedures and policies;
o the potential loss of key employees of acquired companies;
o the impairment of employee and customer relationships as a result
of changes in management; and
o significant expenditures to consummate acquisitions.
As a part of our acquisition strategy, we may engage in discussions
with various businesses respecting their potential acquisition. In connection
with these discussions, we and each potential acquired business may exchange
confidential operational and financial information, conduct due diligence
inquiries, and consider the structure, terms and conditions of the potential
acquisition. In certain cases, the prospective acquired business may agree not
to discuss a potential acquisition with any other party for a
8
specific period of time, may grant us certain rights in the event the
acquisition is not completed, and may agree to take other actions designed to
enhance the possibility of the acquisition. Potential acquisition discussions
may take place over a long period of time, may involve difficult business
integration and other issues, and may require solutions for numerous family
relationship, management succession and related matters. As a result of these
and other factors, potential acquisitions that from time to time appear likely
to occur may not result in binding legal agreements and may not be consummated.
Our acquisition agreements may contain purchase price adjustments, rights of
set-off and other remedies in the event that certain unforeseen liabilities or
issues arise in connection with an acquisition. These remedies, however, may not
be sufficient to compensate us in the event that any unforeseen liabilities or
other issues arise.
We need to retain key management personnel and hire additional qualified
personnel. We are dependent on the efforts of our executive officers and senior
management and on our ability to hire and retain qualified management personnel.
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. We have not entered into employment agreements
with any of our senior officers. The loss of any of Paul H. Riss, our Chief
Executive Officer, Michael Khalilian, our Chief Technology Officer, or Mark
Richards, our Chief Information Officer and the President of our Vox
Communications subsidiary, could adversely affect our business.
We may be unable to adapt to rapid technology trends and evolving industry
standards.
The communications industry is subject to rapid and significant changes
due to technology innovation, evolving industry standards, and frequent new
service and product introductions. New services and products based on new
technologies or new industry standards expose us to risks of technical or
product obsolescence. We will need to use technologies effectively, continue to
develop our technical expertise and enhance our existing products and services
in a timely manner to compete successfully in this industry. We may not be
successful in using new technologies effectively, developing new products or
enhancing existing products and services in a timely manner or that any new
technologies or enhancements used by us or offered to our customers will achieve
market acceptance.
The telecommunications industry is highly regulated and amendments to or repeals
of existing regulations or the adoption of new regulations could adversely
affect our business, financial condition or results of operations.
Federal, state and local regulation may affect our telecommunications
business. Since regulation of the telecommunications industry 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
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o the establishment of strict regulatory requirements.
The communications services industry is highly competitive and we may be unable
to compete effectively.
The communications industry, including Internet and data services, is
highly competitive, rapidly evolving and subject to constant technological
change and intense marketing by providers with similar products and services. We
expect that new competitors are likely to join existing competitors in the
communications industry, including the market for VoIP, Internet and data
services. Many of our current competitors are significantly larger and have
substantially greater market presence, as well as greater financial, technical,
operational, marketing and other resources and experience, than we do. In the
event that such a competitor expends significant sales and marketing resources
in one or several markets, we may not be able to compete successfully in such
markets. We believe that competition will continue to increase, placing downward
pressure on prices. Such pressure could adversely affect our gross margins if we
are not able to reduce our costs commensurate with such price reductions. In
addition, the pace of technological change makes it impossible for us to predict
whether we will face new competitors using different technologies to provide the
same or similar services offered or proposed to be offered by us. If our
competitors were to provide better and more cost effective services than ours,
our business initiatives could be materially and adversely affected.
Industry consolidation could make it more difficult to compete.
Companies offering Internet, data and communications services are, in
some circumstances, consolidating. We may not be able to compete successfully
with businesses that have combined, or will combine, to produce companies with
substantially greater financial, sales and marketing resources, larger client
bases, extended networks and infra-structures and more established relationships
with vendors, distributors and partners than we have. With these heightened
competitive pressures, there is a risk that our financial performance could be
adversely impacted and the value of our common stock could decline.
Risks Relating to Our VoIP Business
Part of our long-term strategy in building a profitable telephone
company includes the marketing of our technology for VoIP-based telephony
applications through our wholly-owned subsidiary, VoX. VoIP is a new technology
that involves many unique risks, including those set forth below.
The VoIP telephony market is subject to rapid technological change and we depend
on new product introductions in order to grow our VoIP business.
VoIP telephony is an emerging market that is characterized by rapid
changes in customer requirements, frequent introductions of new and enhanced
products, and continuing and rapid technological advancement. To compete
successfully in this emerging market, we must continue to design, develop and
sell new and enhanced VoIP telephony software products and services that provide
increasingly higher levels of performance and reliability at lower cost. These
new and enhanced products must take advantage of technological advancements and
changes, and respond to new customer requirements. Our success in designing,
developing and selling such products and services will depend on a variety of
factors, including:
o the identification of market demand for new products;
o the scalability of our VoIP telephony software products;
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o product and feature selection;
o timely implementation of product design and development;
o product performance;
o cost-effectiveness of products under development;
o effective distribution processes; and
o success of promotional efforts.
Additionally, we may also be required to collaborate with third parties
to develop our products and may not be able to do so on a timely and
cost-effective basis, if at all. We have in the past experienced delays in the
development of new products and the enhancement of existing products, and such
delays will likely occur in the future. If we are unable, due to resource
constraints or technological or other reasons, to develop and introduce new or
enhanced products in a timely manner, if such new or enhanced products do not
achieve sufficient market acceptance, or if such new product introductions
decrease demand for existing products, our operating results would decline and
our business would not grow.
We may not be successful if the Internet is not adopted by a significant number
of users as a means of communications.
If the market for IP-based communications and the related services that we will
make available does not grow at the rate we anticipate or at all, we will not be
able to realize our anticipated revenues with respect to our broadband phone
service. To be successful, IP-based communications require validation as an
effective means of communication and as a viable alternative to traditional
phone service. Demand and market acceptance for newly introduced services are
subject to a high level of uncertainty. The Internet may not prove to be a
viable alternative to traditional phone service for reasons including:
o inconsistent quality or speed of service;
o traffic congestion on the Internet;
o potentially inadequate development of the necessary infrastructure;
o lack of acceptable security technologies;
o lack of timely development and commercialization of performance
improvements; and
o unavailability of cost-effective, high-speed access to the Internet.
Future legislation or regulation of the Internet and/or VoIP services could
restrict our business, prevent us from offering service or increase our cost of
doing business.
At present there are few laws, regulations or rulings that specifically
address access to or commerce on the Internet, including VoIP services. We are
unable to predict the impact, if any, that future legislation, legal decisions
or regulations concerning the Internet may have on our business, financial
condition or results of operations. Regulation may be targeted toward, among
other things, assessing access or settlement charges, imposing taxes related to
Internet communications, imposing tariffs or regulations based on encryption
concerns or the characteristics and quality of products and services, imposing
additional regulations and requirements related to the handling of emergency 911
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services, any of which could restrict our business or increase our cost of doing
business. The increasing growth of the VoIP market and popularity of VoIP
products and services heighten the risk that governments or other legislative
bodies will seek to regulate VoIP and the Internet. In addition, large,
established telecommunication companies may devote substantial lobbying efforts
to influence the regulation of the broadband IP telephony market, which may be
contrary to our interests.
Many regulatory actions are underway or are being contemplated by
federal and state authorities, including the Federal Communications Commission
("FCC") and other state regulatory agencies. There is risk that a regulatory
agency may require us to conform to rules that are unsuitable for VoIP
communications technologies or rules that cannot be complied with due to the
nature and efficiencies of IP routing, or are unnecessary or unreasonable in
light of the manner in which we offer service to our customers. It is not
possible to separate the Internet, or any service offered over it, into
intrastate and interstate components. While suitable alternatives may be
developed in the future, the current IP network does not enable us to identify
the geographic nature of the traffic traversing the Internet.
Our emergency calling services are different from those offered by traditional
wireline telephone companies and may expose us to significant liability.
Our 911 calling service is more limited, in certain areas, than the
emergency calling services offered by traditional wireline telephone companies.
In each case, those differences may cause significant delays, or even failure,
in a caller's receipt of the emergency assistance he or she needs.
Traditional wireline telephone companies route emergency calls over a
dedicated infrastructure directly to an emergency services dispatcher at the
public safety answering point, or PSAP, in the caller's area. Generally, the
dispatcher automatically receives the caller's phone number and actual location
information. While our 911 service being deployed in the United States is
designed to route calls in a fashion similar to traditional wireline services,
our 911 capabilities may not reach the intended PSAP, although we do have
procedures in place to ensure that a dispatcher somewhere is reached. In
addition, the only location information that our E911 service can transmit to a
dispatcher at a PSAP is the information that our customers have registered with
us. A customer's registered location may be different from the customer's actual
location at the time of the call because customers can use their enabled VoIP
device to make calls almost anywhere a broadband connection is available. In
such cases, as described below, we offer customers alternative access to
emergency services.
We are also providing E911 service that is comparable to the emergency
calling services obtained by customers of traditional wireline telephone
companies in the same area. For those customers, emergency calls are routed,
subject to the limitations discussed below, directly to an emergency services
dispatcher at the PSAP in the area of the customer's registered location. The
dispatcher will have automatic access to the customer's telephone number and
registered location information. However, if a customer places an emergency call
using the customer's enabled VoIP device and the device is in a location
different from the one registered with us, the E911 system will still route the
call to a dispatcher in the registered location, not the customer's actual
location at the time of the call. Every time a customer moves his or her enabled
VoIP device to a new location, the customer's registered location information
must be updated and verified. Until that takes place, the customer will have to
verbally advise the emergency dispatcher of his or her actual location at the
time of the call and wait for the call to be transferred, if possible, to the
appropriate local emergency response center before emergency assistance can be
dispatched.
In some cases, even under our E911 service, emergency calls may be
routed to a local PSAP, designated statewide default answering point or
appropriate local emergency authority that is not capable of receiving our
transmission of the caller's registered location information and, in some cases,
the
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caller's phone number. Where the emergency call center is unable to process the
information, the caller is provided a service that is similar to the basic 911
services offered to some wireline telephone customers. In these instances, the
emergency caller may be required to verbally advise the operator of his or her
location at the time of the call and, in some cases, a call back number so that
the call can be handled or forwarded to an appropriate emergency dispatcher. We
are continuing our efforts to deploy our E911 service such that all relevant
information is displayed and will be routed to the appropriate PSAP in the first
instance.
Customers who are located in areas in which we are currently unable to
provide either E911 or the basic 911 described above, as well as WiFi telephone
and SoftPhone users, are supported by a national call center that is run by a
third-party provider and operates 24 hours a day, seven days a week. When
reaching the call center, a caller must provide his or her physical location and
call back number, after which an operator will coordinate connecting the caller
to the appropriate PSAP or emergency services provider.
Our softswitching platform and back office systems are technologically
advanced and the essential service delivery of providing emergency call handling
is of paramount importance to us. We have developed a web portal where
subscribers can maintain the flexibility of providing us with a currently
correct physical location should they take the VoIP device away from the
registered location. We cannot guarantee they will actually remember to enter
this information in the web portal when they move their VoIP device, and if they
do not make this update, the emergency call will be routed to the address that
was previously notified. This flexibility, along with the ability to call into
our customer support call center to update the address, is compliant with the
current requirements of the FCC regarding emergency calling.
If one of our customers experiences a broadband or power outage, or if
a network failure were to occur, the customer will not be able to reach an
emergency services provider.
Delays our customers encounter when making E911 or basic 911 calls and
any inability of the answering point to automatically recognize the caller's
location or telephone number can have devastating consequences. Customers may in
the future attempt to hold us responsible for any loss, damage, personal injury
or death suffered as a result. Some traditional telephone companies also may be
unable to provide the precise location or the caller's telephone number when
their customers place emergency calls. However, while we are not covered by
legislation exempting us from liability for failures of our emergency calling
services, traditional telephone companies are covered. This liability could be
significant. In addition, we have lost, and may in the future lose, existing and
prospective customers because of the limitations inherent in our emergency
calling services. Any of these factors could cause us to lose revenues, incur
greater expenses or cause our reputation or financial results to suffer.
The success of our planned expansion is dependent upon market developments and
usage patterns.
Our purchase of network equipment and placement of our VoIP software
will be based in part on our expectations concerning future revenue growth and
market developments. As we expand our network, we will be required to make
capital expenditures, in addition to making financial commitments for DS-3
circuits and colocation space, and to add additional employees. If our traffic
volume were to decrease, or fail to increase to the extent expected or necessary
to make efficient use of our network, our costs as a percentage of revenues
would increase significantly, which would have a materially adverse effect on
our financial condition and results of operations.
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Potential regulation of Internet service providers could adversely affect our
operations.
To date, the FCC has treated Internet service providers as information
service providers. Information service providers are currently exempt from
federal and state regulations governing common carriers, including the
obligation to pay access charges and contribute to the universal service fund.
The FCC is currently examining the status of Internet service providers and the
services they provide. If the FCC were to determine that Internet service
providers, or the services they provide, are subject to FCC regulation,
including the payment of access charges and contribution to the universal
service funds, it could have a material adverse effect on our business,
financial condition and operating results.
Our success depends on our ability to handle a large number of simultaneous
calls, which our network may not be able to accommodate.
We expect the volume of simultaneous calls to increase significantly as
our VoIP subscriber base grows. Our network hardware and software may not be
able to accommodate this additional volume. If we fail to maintain an
appropriate level of operating performance, or if our VoIP service is disrupted,
our reputation could be hurt and we could lose customers, which could have a
material adverse effect on our business, financial condition and results of
operations.
Our growth in our VoIP business is dependent upon our ability to build new
relationships with VoIP carriers and to bring on new customers.
Our ability to grow through quick and cost effective deployment of our
VoIP services is due, in part, to our ability to create new interconnection
agreements with VoIP carriers that can provide us with telephone numbers and
termination service to sign contracts with new customers, and, in many cases, to
enter into joint venture or strategic agreements with local partners, as well as
to satisfy newly enacted regulatory requirements to operate in emerging markets.
While we pursue several opportunities simultaneously, we might not be able to
create the necessary partnerships and interconnections, expand our customer
base, deploy networks and generate profitable traffic over these networks within
the time frame envisioned.
We are pursuing new business lines, that require specialized skill sets. Our
ability to effectuate our business plan is due, in part, to the roll out of new
services.
Our ability to deploy new products and services may be hampered by
technical and operational issues that could delay our ability to derive
profitable revenue from these service offerings. These issues include our
ability to competitively price such products and services. In addition, certain
VoIP service offerings are relatively new in our industry and their market
potential is relatively untested. Additionally, our ability to market these
products and service offerings may prove difficult. To date, our customers use
only approximately 500,000 VoIP minutes per month. As a result, we have derived
extremely limited revenue from our VoIP service offerings, and there can be no
assurance that we will increase our current focus and/or derive significant
revenue from such offerings.
We rely on third party equipment suppliers.
We are dependent on third party equipment suppliers for equipment, VoIP
phones and adapter devices, including UTStarcom Inc., Cisco Systems, Inc. and
Motorola, Inc. If these suppliers fail to continue product development or
research and development or fail to deliver quality products or support services
on a timely basis, or we are unable to develop alternative sources, if and as
required, our financial condition or results of operations could be materially
adversely impacted.
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We may not be able to maintain adequate customer care during periods of growth
or in connection with our addition of new and complex VoIP devices, which could
adversely affect our ability to grow and cause our financial results to be
negatively impacted.
Good customer care is important to acquiring and retaining customers. As
we continue to grow our VoIP business, we will need to expand our customer care
operations quickly enough to meet the needs of our increased customer base. We
may face additional challenges in training our customer care staff. If we are
unable to hire, train and retain sufficient personnel to provide adequate
customer care, we may experience slower growth, increased costs and higher churn
levels, which would cause our financial results to be negatively impacted.
If we are unable to improve our process for local number portability
provisioning, our growth may be negatively impacted.
We support local number portability for our customers, which allows our
customers to retain their existing telephone numbers when subscribing to our
services. Transferring numbers is a manual process that in the past could have
taken us 20 business days or longer, although we have taken steps to automate
this process to reduce the delay. A new VoX customer must maintain both VoX
service and the customer's existing telephone service during the transferring
process. By comparison, transferring wireless telephone numbers among wireless
service providers generally takes several hours, and transferring wireline
telephone numbers among traditional wireline service providers generally takes a
few days. The additional delay that we experience is due to our reliance on the
telephone company from which the customer is transferring and to the lack of
full automation in our process. Further, because VoX is not a regulated
telecommunications provider, it must rely on the telephone companies, over whom
we have no control, to transfer numbers. Local number portability is considered
an important feature by many potential customers, and if we fail to reduce
related delays, we may experience increased difficulty in acquiring new
customers.
Risks Relating to Our Common Stock
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 the amount and timing of expenditures relating to the rollout of
our POTS and VoIP service offerings;
o our ability to obtain, and the timing of, necessary regulatory
approvals;
o the 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 our ability to deploy our network on a timely basis;
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o the availability of financing to continue our expansion;
o technical difficulties or network downtime;
o the availability of incumbent carrier's wholesale service program
for the establishment of our own full-service platform and timing
of the implementation of our VoIP platform; and
o the introduction of new services or technologies by our
competitors and resulting pressures on the pricing of our
service.
We do not intend to pay dividends on our common stock in the foreseeable future,
which could cause the market price of our common stock and the value of your
investment to decline.
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.
Our agreements with our primary lender currently precludes the payment
of dividends.
The market for our common stock is thinly traded, which could result in
fluctuations in the value of our common stock.
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:
o variations in our operating results;
o sales of a large number of shares by our existing shareholders;
o announcements by us or others;
o developments affecting us or our competitors; and
o extreme price and volume fluctuations in the stock market.
16
Our common stock price is likely to be highly volatile, which could cause the
value of your investment to decline.
The market price of our common stock is likely to be highly volatile as
the stock market in general, and the market for small cap and micro cap
technology companies in particular, has been highly volatile. For example,
during the last 12 months our common stock has traded at prices ranging from
$0.32 to $0.60 per share. Investors may not be able to resell their shares of
our common stock following periods of volatility because of the market's adverse
reaction to volatility. We cannot assure you that our common stock will trade at
the same levels of our stocks in our industry or that our industry stocks in
general will sustain their current market prices. Factors that could cause such
volatility may include, among other things:
o actual or anticipated fluctuations in our quarterly operating
results;
o large purchases or sales or our common stock;
o announcements of technological innovations;
o changes in financial estimates by securities analysts;
o investor perception of our business prospects;
o conditions or trends in the telecommunications industry;
o changes in the market valuations of other industry-related
companies;
o the acceptance of market makers and institutional investors of
our business model and our common stock; and
o worldwide economic or financial conditions.
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. The rights of the holders of our
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.
17
Provisions of New York law may discourage a takeover attempt even if doing so
may be beneficial to our shareholders.
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.
We are exposed to potential risks from recent legislation requiring companies to
evaluate internal controls under Section 404 of the Sarbanes Oxley Act of 2002.
We are evaluating and documenting 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 this
legislation. 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. As a result, we expect to incur additional expenses and
diversion of management's time. We have reported material weaknesses and
significant deficiencies in our disclosure controls and procedures and our
internal control over financial reporting because of a deficiency in the number
of qualified personnel in our accounting department. While we anticipate being
able to rectify this weakness and to fully implement the requirements relating
to internal controls and all other aspects of Section 404 in a timely fashion,
we cannot be certain as to the timing of completion of our evaluation, testing
and remediation actions or the impact of the same on our operations. If we are
not able to implement the requirements of Section 404 in a timely manner or with
adequate compliance, we might be subject to sanctions or investigation by
regulatory authorities, such as the Securities and Exchange Commission. Any such
action could adversely affect our financial results and could cause our stock
price to decline.
Forward-Looking Statements
This Prospectus contains forward-looking statements within the meaning
of Section 27 A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Such forward-looking statements include statements
regarding, among others, (a) our expectations about product development
activities, (b) our growth strategies, (c) operating performance, (d)
anticipated trends in our industry and competition, (e) our future financing
plans, and (f) our anticipated needs for working capital. Forward-looking
statements, which involve assumptions and describe our future plans, strategies,
and expectations, are not guarantees of future performance, and generally are
identifiable by use of the words "may," "will," "should," "expect,"
"anticipate," "approximate," "estimate," "believe," "intend," "strategy",
"plan," or "project," or the negative of these words or other variations on
these words or comparable terminology. This information may involve known and
unknown risks, uncertainties, and other factors that may cause our actual
results, performance, or achievements to be materially different from the future
results, performance, or achievements expressed or implied by any
forward-looking statements. These statements may be found in this Prospectus.
Actual events or results may differ materially from those discussed in
forward-looking statements as a result of various factors, including, without
limitation, the risks outlined under "Risk Factors" and matters described in
this Prospectus generally. In light of these risks and uncertainties, the events
anticipated in the forward-looking statements may or may not occur. These
statements are based on current expectations and speak only as of the date of
such statements. We undertake no obligation to publicly update or revise any
forward-looking statement, whether as a result of future events, new information
or otherwise.
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The information contained in this Prospectus, as well as in our SEC
filings, identifies important factors that could adversely affect actual results
and performance. We urge prospective investors to consider such factors
carefully.
All forward-looking statements attributable to us are expressly
qualified in their entirety by the foregoing cautionary statements.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares of our
common stock by the selling shareholders.
We will receive proceeds of up to a maximum of $168,393 upon the
exercise, if any, of the fifteen-year warrants granted by us exercisable for an
aggregate of 1,683,928 shares of common stock. We will receive proceeds of up to
a maximum of $650,793 upon the exercise, if any, of the seven-year warrants
granted by us exercisable for an aggregate of 793,650 shares of common stock. We
will receive proceeds up to a maximum of $320,000 upon the exercise, if any, of
the four-year warrants granted by us exercisable for an aggregate of 516,263
shares of common stock. We will receive proceeds of up to a maximum of $94,500
upon the exercise, if any, of the three-year warrants granted by us exercisable
for an aggregate of 150,000 shares of common stock. We intend to use any such
proceeds for working capital and general corporate purposes.
Further, to the extent that any of our obligations under our credit
facilities with Laurus are converted into, or paid in the form of, shares of our
common stock, we will be relieved of such obligations to the extent of such
conversion or payment.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 50,000,000 shares of common
stock, par value $.10 per share, and 1,000,000 shares of preferred stock, par
value $.10 per share. As of April 26, 2006, 16,839,282 shares of common stock
were issued and outstanding and no shares of preferred stock were issued and
outstanding. In addition, at such date, 14,422,320 shares of common stock were
reserved for issuance upon the exercise of outstanding options and warrants and
the conversion of outstanding convertible indebtedness.
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
non-assessable. 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, our loan agreements with Laurus does
not allow us directly or indirectly to declare or pay any dividends so long as
certain amounts under our secured convertible term notes to Laurus remain
outstanding.
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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 shareholder actions 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.
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. Our Board of Directors has not
authorized the issuance of any shares of preferred stock.
Potential Dilution of Share Value; Preferences. Any 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 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.
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.
20
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of April 26, 2006, the names,
addresses and number of shares of our common stock beneficially owned by all
persons known to us to be beneficial owners of more than 5% of the outstanding
shares of our common stock, and the names and number of shares beneficially
owned by all of our directors and all of our executive officers and directors as
a group (except as indicated, each beneficial owner listed exercises sole voting
power and sole dispositive power over the shares beneficially owned). As of
April 26, 2006, we had a total of 16,839,282 shares of common stock outstanding:
Number of Shares Percent of Shares
Name and Address Beneficially Owned Beneficially Owned
---------------- ------------------ ------------------
Paul H. Riss
eLEC Communications Corp. 1,512,000(1) 8.8%
75 South Broadway, Suite 302
White Plains, New York 10601
Michael H. Khalilian
478 E. Altamonte Drive, Suite 108-480 575,000(2) 3.3%
Altamonte Springs, Florida 32701
Mark Richards 410,000(3) 2.4%
610 Sycamore Street, Suite 120
Celebration, Florida 34747
Greg M. Cooper 125,000(4) *
Cooper, Neiman & Co., CPAs, LLP
PO Box 190
Mongaup Valley, New York 12762
Gayle Greer 53,300(5) *
75 South Broadway, Suite 302
White Plains, New York 10601
All directors and executive officers
as a group (five individuals) 2,675,300 14.7%
------------------
* Less than 1%.
(1) Includes 420,000 shares of common stock subject to options that are
presently exercisable or exercisable within 60 days after April 26, 2006.
(2) Includes 450,000 shares of common stock subject to options that are
presently exercisable or exercisable within 60 days after April 26, 2006.
(3) Includes 400,000 shares of common stock subject to options that are
presently exercisable or exercisable within 60 days after April 26, 2006.
(4) Includes 85,000 shares of common stock subject to options that are
presently exercisable or exercisable within 60 days after April 26, 2006.
(5) Includes 50,000 shares of common stock subject to options that are
presently exercisable or exercisable within 60 days after April 26, 2006.
21
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market for Common Stock
Our common stock is traded on the OTC Bulletin Board under the symbol
"ELEC."
The following table contains information about the range of high and
low bid prices for our common stock for each full quarterly period in our last
two fiscal years and for the first fiscal quarter of 2006 (through April 26),
based upon reports of transactions on the OTC Bulletin Board.
High Low
---- ---
Fiscal 2004
-----------
1st Quarter..............................$0.25 $0.13
2nd Quarter............................... 0.26 0.14
3rd Quarter............................... 0.36 0.14
4th Quarter............................... 0.40 0.21
Fiscal 2005
-----------
1st Quarter..............................$0.74 $0.28
2nd Quarter..............................$0.69 $0.35
3rd Quarter...............................$0.58 $0.36
4th Quarter...............................$0.53 $0.35
Fiscal 2006
-----------
1st Quarter..............................$0.57 $0.37
2nd Quarter (through April 26)...........$0.50 $0.39
The source of these high and low prices was the OTC Bulletin Board.
These quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commissions and may not represent actual transactions. The high and low
prices listed have been rounded up to the next highest cent.
The market price of our common stock is subject to significant
fluctuations in response to variations in our quarterly operating results,
general trends in the market for the services we offer, and other factors, over
many of which we have little or no control. In addition, broad market
fluctuations, as well as general economic, business and political conditions,
may adversely affect the market for our common stock, regardless of our actual
or projected performance. On April 26, 2006, the closing bid price of our common
stock as reported by the OTC Bulletin Board was $0.42 per share.
Holders
As of April 26, 2006, there were approximately 195 holders of record of
our common stock and approximately 3,000 beneficial holders.
Dividend Policy
We have never paid dividends on our common stock and do not expected to
do so in the foreseeable future. Our loan agreements with Laurus Master Funds,
Ltd. do not allow us to directly or indirectly declare or pay any dividends so
long as certain amounts under our secured convertible term notes to Laurus
remain outstanding.
22
THE LAURUS TRANSACTIONS
On February 8, 2005, we consummated a private placement with Laurus
Master Fund, Ltd., a Cayman Islands corporation ("Laurus"), pursuant to which we
issued a secured convertible term note in the principal amount of $2,000,000
(the "February Note"), and we issued a common stock purchase warrant (the
"February Warrant"), entitling Laurus to purchase up to 793,650 shares of our
common stock. The February Note and the February Warrant were sold to Laurus, an
"accredited investor" (as such term is defined in the rules promulgated under
the Securities Act of 1933, for a purchase price of $2,000,000.
On November 30, 2005, we consummated a private placement with Laurus
pursuant to which we issued a secured convertible term note in the principal
amount of $2,000,000 (the "November Note"), and we issued a stock purchase
warrant (the "November Warrant") entitling Laurus to purchase up to 1,683,928
shares of our common stock. The November Note and the November Warrant were sold
to Laurus for a purchase price of $2,000,000.
The proceeds of the loans evidenced by the February Note and the
November Note were fully disbursed to us contemporaneously with our execution
and delivery of such notes on the respective closing dates. The February Note
and the November Note are sometimes collectively referred to herein as the
"Notes" and the February Warrant and the November Warrant are sometimes
collectively referred to herein as the "Warrants."
The following describes certain of the material terms of our financing
transactions with Laurus. The description below is not a complete description of
the material terms of the transactions and is qualified in its entirety by
reference to the agreements entered into in connection with the transactions,
copies of which are included as exhibits to this Registration Statement:
Note Maturity Date and Interest Rate. Absent earlier redemption by us
or earlier conversion by Laurus, as described below, the February Note matures
on February 8, 2008 and the November Note matures on November 30, 2008. Interest
accrues on the unpaid principal and interest on the February Note at a rate per
annum equal to the "prime rate" published in The Wall Street Journal from time
to time, plus three percent (3%) and on the November Note at a rate per annum
equal to the "prime rate" published in The Wall Street Journal from time to
time, plus two percent (2%).
Payment of Interest and Principal. Interest on the February Note is
payable monthly on the first day of each month during the term of the February
Note, which commenced on March 1, 2005. From May 1, 2005 through November 30,
2005, we made monthly principal payments of $60,606.06 per month on the February
Note. In connection with the sale of the November Note, the requirement that we
make monthly principal payments on the February Note during the period December
1, 2005 to April 1, 2006 were deferred and added equally to the remaining note
payments of the February Note. Commencing May 1, 2006, we will commence making
monthly principal payments of $75,036 per month on the February Note.
Interest on the November Note is payable monthly on the first day of
each month during the term of the November Note, which commenced on January 1,
2006. Commencing May 1, 2006, we are required to make monthly principal payments
of $33,333.33 per month on the November Note. The remaining principal amount of
the November Note in the amount of approximately $967,000 is due and payable on
November 30, 2008.
Note Conversion Rights. All or a portion of the outstanding principal
and interest due under the Notes shall be converted into shares of our common
stock upon satisfaction of certain conditions. The February Note is initially
convertible into shares of our common stock at a price of $0.63 per share. The
November Note is initially convertible into shares of our common stock at a
price of $0.61 per share. The
23
closing bid prices of our common stock as reported by the OTC Bulletin Board on
the dates of issuance of the February Note and November Note were $0.66 per
share and $0.44 per share, respectively. The conversion prices of the Notes are
subject to anti-dilution protection adjustments, on a weighted average basis,
upon our issuance of additional shares of our common stock at a price that is
less than the then-current conversion price.
Laurus may, at any time, convert the outstanding indebtedness of the
Notes into shares of our common stock at the then-applicable conversion prices.
Subject to the restrictions on conversion described below, Laurus shall
be required to convert the principal and interest due on any date into shares of
our common stock in the event (i) the average closing price of our common stock
for the five consecutive trading days preceding such due date is greater than
115% of the conversion price of the applicable Note, and (ii) the amount of such
conversion does not exceed 25% of the aggregate dollar trading volume of our
common stock for the 22-day trading period immediately preceding the due date of
such payment.
In the event all or any portion of any principal or interest due on the
Notes is paid in cash, we are required to pay Laurus an amount equal to 102% of
such payment amount.
Right to Redeem Notes. We have the option of prepaying the outstanding
principal amount of the Notes in whole or in part by paying an amount equal to
(i) if such payment is made during the first year following the date of issuance
of such Note, 120% of such principal amount; (ii) if such payment is made during
the second year following the date the of issuance of such Note, 125% of such
principal amount; and (iii) if such payment is made during the third year
following the date of issuance of such Note, 130% of such principal amount. We
must give Laurus at least ten business days prior written notice of our
intention to redeem any portion of the principal amount of either Note.
Security for Notes. Each Note is secured by a blanket lien on
substantially all of our assets pursuant to the terms of a security agreement
executed by us and our subsidiaries in favor of Laurus. In addition, we have
pledged our ownership interests in our subsidiaries pursuant to a stock pledge
agreement executed by us in favor of Laurus securing our obligations under the
Notes. If an event of default occurs under the security agreement, the stock
pledge agreement or the Notes, Laurus has the right to accelerate payments under
the Notes and, in addition to any other remedies available to it, to foreclose
upon the assets securing the Notes.
Warrant Terms. The February Warrant grants Laurus the right to purchase
for cash up to 793,650 shares of our common stock at an exercise price of (i)
$0.72 per share for the first 264,550 shares acquired; (ii) $0.79 per share for
the next 264,550 shares acquired and (iii) $0.95 per share for the remaining
shares acquired. The February Warrant expires on February 8, 2012. The closing
bid price of our common stock as reported by the OTC Bulletin Board on the date
of issuance of the February Warrant was $0.66 per share.
The November Warrant grants Laurus the right to purchase for cash up to
1,683,928 shares of our common stock at an exercise price of $0.10 per share.
The closing bid price of our common stock as reported by the OTC Bulletin Board
on the date of issuance of the November Warrant was $0.44 per share. The
November Warrant expires on November 30, 2020. Upon ten (10) business days prior
notice to Laurus, we have the right to redeem any unexercised portion of the
November Warrant for a price of $0.10 per warrant if (i) our obligations to
Laurus under the November Note have been irrevocably repaid in full; (ii) the
closing price of our common stock has closed above three hundred percent (300%)
of the then applicable exercise price for twenty (20) consecutive trading days
and (iii) we have filed a registration statement with the SEC covering the
shares of our common stock to be issued upon the full
24
exercise of the November Warrant, and such registration statement has been
declared and remains effective on the date that we give such notice.
Restrictions on Conversion of Notes and Exercise of Warrants. We pay
amounts due under the Notes in shares of our common stock only so long as there
is an effective registration statement under the Securities Act of 1933 covering
the resale of such shares or an exemption from such registration is available
under Rule 144 of the Securities Act of 1933. In addition, Laurus is not
entitled to receive shares of our common stock upon exercise of the Warrants,
upon payment of principal or interest on the Notes, or upon conversion of the
Notes if such receipt would cause Laurus to be deemed to beneficially own in
excess of 4.99% of the outstanding shares of our common stock on the date of
issuance of such shares. Such provision may be waived by Laurus upon 75 days
prior written notice to us.
Registration Rights. Pursuant to the terms of Registration Rights
Agreements between Laurus and us, we filed a registration statement on Form S-1,
of which this prospectus is a part, registering the resale of the shares of our
common stock issuable upon payment or conversion of the Notes and exercise of
the Warrants. Subject to certain exceptions, we are required to keep such
registration statement effective so long as the Notes or Warrants remain
outstanding.
SELLING SHAREHOLDERS
The following table sets forth information with respect to the maximum
number of shares of common stock beneficially owned by the selling shareholders
named below and as adjusted to give effect to the sale of the shares offered
hereby. The shares beneficially owned have been determined in accordance with
rules promulgated by the SEC, and the information is not necessarily indicative
of beneficial ownership for any other purpose. The information in the table
below is current as of April 26, 2006. All information contained in the table
below is based upon information provided to us by the selling shareholders and
we have not independently verified this information. The selling shareholders
are not making any representation that any shares covered by this prospectus
will be offered for sale. The selling shareholders may from time to time offer
and sell pursuant to this prospectus any or all of the common stock being
registered.
For purposes of this table, beneficial ownership is determined in
accordance with SEC rules, and includes voting power and investment power with
respect to shares and shares owned pursuant to warrants exercisable within 60
days. The "Number of Shares Beneficially Owned After Offering" column assumes
the sale of all shares offered.
As explained below under "Plan of Distribution," we have agreed with
the selling shareholders to bear certain expenses (other than broker discounts
and commissions, if any) in connection with the registration statement, which
includes this prospectus.
Number of Shares Number of Shares
Beneficially Owned Number of Shares Beneficially Owned
Selling Shareholder Prior to Offering(1) Offered After Offering(2)
------------------- -------------------- ---------------- -----------------
Laurus Master Fund, Ltd.(3) 840,280(4) 8,951,057(4) -0-
W. Todd Coffin 63,492 63,492(5) -0-
Ted Flomenhaft 121,492 63,492(5) 43,000
David Harris 15,571 15,571(5) -0-
Russell Newton 43,841 43,841(5) -0-
Bruce Ryan 43,841 43,841 (5) -0-
Jeffrey Silverman 82,699 12,699(5) 70,000
TT Capital, LLC 423,328 423,328(5) -0-
25
------------------
(1) Unless otherwise indicated, the selling shareholders have sole voting and
investment power with respect to its shares of common stock. The inclusion
of any shares in this table does not constitute an admission of beneficial
ownership for the selling shareholders. Includes shares of common stock
that the selling shareholder has the right to acquire beneficial ownership
of within 60 days.
(2) Assumes the sale of all shares of common stock offered hereby and no other
transactions in the common stock by the selling shareholders or their
affiliates. Shareholders are not required to sell their shares.
(3) Laurus Master Fund, Ltd. ("Laurus") is a Cayman Islands-based institutional
fund specializing in providing financing to small capitalization
publicly-traded companies. Control of all investment decisions are vested
with its investment manger, Laurus Capital Management LLC. The directors of
Laurus Capital Management LLC are David and Eugene Grin. By virtue of their
position as principals of Laurus Capital Management LLC, Messrs. Grin
exercise voting control over the shares of our common stock owned by
Laurus.
(4) Laurus holds promissory notes that are convertible into an aggregate of
6,473,478 shares of common stock and warrants to purchase an aggregate of
2,477,578 shares of common stock. The notes and warrants contain provisions
known as "exercise caps," which prohibit the holder of the notes and
warrants (and its affiliates) from converting such notes or exercising such
warrants to the extent that giving effect to such conversion or exercise,
such holder would beneficially own in excess of 4.99% of our outstanding
common stock. The holder can waive the 4.99% limit, but such waiver will
not become effective until the 76th day after such notice is delivered to
us. The figures set forth above as the ownership prior to the offering and
the ownership after the offering reflect the operation of such exercise
caps in that we have not included 8,110,777 shares of common stock issuable
pursuant to such convertible notes and warrants as Laurus has advised us
that it does not beneficially own such shares due to the fact that it
cannot exercise its right to receive these shares at this time. In the
absence of such caps, Laurus would have the right to receive all the shares
issuable upon conversion of the notes and exercise of the warrants and
would have a beneficial ownership percentage of 34.7%.
(5) Represents shares issuable upon the exercise of outstanding warrants that
expire on February 8, 2009 and are exercisable at a price of $0.63 per
share, subject to certain anti-dilution adjustments.
We utilized Source Capital Group, Inc. ("Source Capital") as a
financial advisor under the terms of an agreement that expired on July 31, 2005.
Source Capital instructed us to grant the 516,263 options to which it was
entitled as part of its advisory fee to the seven selling shareholders listed
above who received warrants expiring on February 8, 2009 and on November 30,
2009.
Except as provided above, no affiliate of any of the selling
shareholders has held any position or office with us or any of our affiliate and
none of the selling shareholders has had any other material relationship with us
or any of our affiliates within the past three years other than as a result of
its ownership of shares of equity security.
No affiliate of any of the selling shareholders has held any position
or office with us or any of our affiliates and none of the selling shareholders
has had any other material relationship with us or any of our affiliates within
the past three years other than as a result of its ownership of shares of equity
securities.
26
PLAN OF DISTRIBUTION
The selling shareholders may, from time to time, sell any or all of
their shares of common stock on any stock exchange, market or trading facility
on which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. The selling shareholders may use any one or more of
the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer 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 purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o short sales after this registration statement becomes effective;
o broker-dealers may agree with the selling shareholders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling shareholders may also sell shares under Rule 144 under the
Securities Act of 1933, if available, rather than under this prospectus.
The selling shareholders may also engage in short sales against the box
after this registration statement becomes effective, puts and calls and other
transactions in our securities or derivatives of our securities and may sell or
deliver shares in connection with these trades.
Broker-dealers engaged by the selling shareholders may arrange for
other broker-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the selling shareholders (or, if any broker-dealer
acts as agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling shareholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved. Any
profits on the resale of shares of common stock by a broker-dealer acting as
principal might be deemed to be underwriting discounts or commissions under the
Securities Act of 1933. Discounts, concessions, commissions and similar selling
expenses, if any, attributable to the sale of shares will be borne by a selling
stockholder. The selling shareholders may agree to indemnify any agent, dealer
or broker-dealer that participates in transactions involving sales of the shares
if liabilities are imposed on that person under the Securities Act of 1933.
The selling shareholders may from time to time pledge or grant a
security interest in some or all of the shares of common stock owned by them
and, if they default in the performance of their secured obligations, the
pledgees or secured parties may offer and sell the shares of common stock from
time to time under this prospectus after we have filed an amendment to this
prospectus under Rule 424(b)(3) or other applicable provision of the Securities
Act of 1933 amending the list of selling shareholders to include the pledgee,
transferee or other successors in interest as selling shareholders under this
prospectus.
27
The selling shareholders also may transfer the shares of common stock
in other circumstances, in which case the transferees, pledgees or other
successors in interest will be the selling beneficial owners for purposes of
this prospectus and may sell the shares of common stock from time to time under
this prospectus after we have filed an amendment to this prospectus under Rule
424(b)(3) or other applicable provision of the Securities Act of 1933 amending
the list of selling shareholders to include the pledgee, transferee or other
successors in interest as selling shareholders under this prospectus.
We are required to pay all fees and expenses incident to the
registration of the shares of common stock. We have agreed to indemnify the
selling shareholders against certain losses, claims, damages and liabilities,
including liabilities under the Securities Act of 1933.
Each of the selling shareholders acquired the securities offered hereby
in the ordinary course of business and has advised us that they have not entered
into any agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their shares of common stock, nor is there
an underwriter or coordinating broker acting in connection with a proposed sale
of shares of common stock by any selling stockholder. If we are notified by any
selling stockholder that any material arrangement has been entered into with a
broker-dealer for the sale of shares of common stock, if required, we will file
a supplement to this prospectus. If the selling shareholders use this prospectus
for any sale of the shares of common stock, they will be subject to the
prospectus delivery requirements of the Securities Act.
The anti-manipulation rules of Regulation M under the Securities
Exchange Act of 1934 may apply to sales of our common stock and activities of
the selling shareholders.
LEGAL MATTERS
The legality of the issuance of the shares offered in this prospectus
will be passed upon for us by Pryor Cashman Sherman & Flynn LLP, New York, New
York 10022. Pryor Cashman Sherman & Flynn LLP holds options to purchase 25,000
shares of our common stock at an exercise prices ranging from $0.10 to $0.97 per
share. In addition, a member of Pryor Cashman Sherman & Flynn LLP holds 208,000
shares of our common stock.
EXPERTS
The financial statements and the related financial statement schedule
incorporated in this prospectus by reference from our Annual Report on Form 10-K
for the year ended November 30, 2005, have been audited by Nussbaum Yates &
Wolpow, P.C., an independent registered public accounting firm, as stated in
their report, which is incorporated herein by reference, which report on the
financial statements and financial statement schedule expresses an unqualified
opinion and includes an explanatory paragraph referring to matters which raise
substantial doubt about our ability to continue as a going concern, and has been
so incorporated in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus constitutes the prospectus of our company, filed as
part of a registration statement on Form S-1, and it does not contain all
information in the registration statement, as certain portions have been omitted
in accordance with the rules and regulations of the Securities and Exchange
Commission, or the SEC.
We are subject to the informational requirements of the Securities
Exchange Act of 1934, which requires us to file reports, proxy statements and
other information with the SEC. Such reports, proxy statements and other
information may be inspected at the public reference room of the SEC at
Judiciary Plaza, 4350 Fifth street N.W., Washington D.C. 20549. Copies of such
material can be obtained from the facility at prescribed rates. Please call the
SEC toll free at 1-800-SEC-0330 for information about is
28
public reference room. Because we file documents electronically with the sec,
you may also obtain this information by visiting the SEC's Internet website at
http://www.sec.gov or our website at http://www.elec.net. Information contained
------------------ -------------------
in our website is not part of this prospectus.
Our statements in this prospectus about the contents of any contract or
other document are not necessarily complete. You should refer to the copy of our
contract or other document we have filed as an exhibit to the registration
statement for complete information.
You should rely only on the information incorporated by reference or
provided in this prospectus or any supplement. We have not authorized anyone
else to provide you with different information. This prospectus is an offer to
sell or buy only the securities described in this document, but only under
circumstances and in jurisdictions in which it is lawful to do so. The
information contained in this prospectus is current and accurate only as of the
date of this prospectus.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The SEC allows us to "incorporate by reference" in this prospectus the
information we file with it, which means that we can disclose important
information to you by referring you to the documents we have filed with the SEC.
The information incorporated by reference is considered to be a part of this
prospectus. We are incorporating by reference in this prospectus the following
documents previously filed by us:
1. Our Annual Report on Form 10-K for the fiscal year ended
November 30, 2005 filed on March 2, 2006; and
2. Our Quarterly Report on Form 10-Q for the fiscal quarter
ended February 28, 2006, filed on April 14, 2006; and
We will provide to you, upon written or oral request and without
charge, copies of the documents referred to above that we have incorporated in
this prospectus by reference. You can request copies of such documents if you
call or write us at the following address or telephone number: Secretary, eLEC
Communications Corp., 75 South Broadway, Suite 302, White Plains, New York
10601, telephone (914) 682-0214, or you may visit our website at www.elec.net.
Information with Respect to the Registrant
The information required to be disclosed in the registration statement
pertaining to our company is incorporated by reference from the documents listed
as incorporated by reference above. Such documents are being delivered with this
prospectus. See "Prospectus Summary," "Risk Factors," and "Incorporation of
Certain Information by Reference."
Material Changes
There have been no material changes since November 30, 2005 which have
not been described in our Annual Report on Form 10-K or this prospectus, or
which have not been described in a Form 10-Q or Form 8-K filed by our company
under the Securities Exchange Act of 1934.
29
COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
We maintain directors and officers insurance which, subject to certain
exclusions, insures our directors and officers against certain losses that 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 us against amounts which we have paid or may become
obligated to pay as indemnification to our 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 our company
pursuant to the foregoing, we have 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.
30
No dealer, salesperson, or other person has been authorized to give any
information or to make any representation not contained in this Prospectus, and,
if given or made, such information and representation should not be relied upon
as having been authorized by us or the selling stockholder. This Prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered by this Prospectus in any jurisdiction 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
an implication that there has been no change in the facts set forth in this
Prospectus or in our affairs since the date hereof.
9,617,320 Shares
eLEC COMMUNICATIONS CORP.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MAY __, 2006
--------------------------------------------------------------------------------
31
Part II--INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the expenses expected to be incurred by
us in connection with the issuance and distribution of the common stock
registered hereby, all of which expenses, except for the Securities and Exchange
Commission registration fee, are estimates:
Description Amount
-------
Securities and Exchange Commission registration fee..... $ 465
Accounting fees and expenses............................ 5,000*
Legal fees and expenses................................. 35,000*
Miscellaneous fees and expenses......................... 2,335*
-------
Total......................................... $43,000*
=======
-------------
* Estimated
Item 14. 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 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.
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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 15. Recent Sales of Unregistered Securities
In March 2006, we issued a warrant to purchase up to 100,000 shares of
our common stock, at an exercise price of $0.63 per share, to an unaffiliated
third party as partial consideration for services rendered to us. Such warrant
vests over one year in four equal quarterly installments and expires on March 9,
2011. Such warrant was issued in reliance on the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"), on the basis that its issuance did not involve a public
offering, no underwriting fees or commissions were paid by us in connection with
such issuance and the recipient of such warrant represented to us that it was an
"accredited investor," as defined in the Securities Act.
In November 2005, we issued a secured convertible term note (the
"Convertible Term Note") in the principal amount of $2,000,000 to Laurus Master
Fund, Ltd. ("Laurus"). The Convertible Term Note is convertible into shares of
our common stock at a fixed conversion price of $0.61 per share of common stock.
We also issued to Laurus a warrant (the "November Warrant") to purchase up to
1,683,928 shares of our common stock, at an exercise price of $0.10 per share.
The November Warrant expires on November 30, 2020. The Convertible Term Note and
the November Warrant were issued in reliance on the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"), on the basis that their issuance did not involve a public
offering, no underwriting fees or commissions were paid by us in connection with
such sale and Laurus represented to us that it was an "accredited investor," as
defined in the Securities Act.
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In February 2005, we issued a secured convertible term note (the
"February Convertible Term Note") in the principal amount of $2,000,000 to
Laurus. The February Convertible Term Note is convertible into shares of our
common stock at a fixed conversion price of $0.63 per share of common stock. We
also issued to Laurus a warrant (the "February Warrant") to purchase up to
793,650 shares of our common stock, at an exercise price of (i) $0.72 per share
for the first 264,550 shares acquired; (ii) $0.79 per share for the next 264,550
shares acquired and (iii) $0.95 per share for the remaining shares acquired. The
February Warrant expires on February 8, 2012. The February Convertible Term Note
and the February Warrant were issued in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended
(the "Securities Act"), on the basis that their issuance did not involve a
public offering, no underwriting fees or commissions were paid by us in
connection with such sale and Laurus represented to us that it was an
"accredited investor," as defined in the Securities Act.
In February 2005, we paid to Source Capital Group, Inc. ("Source
Capital"), in consideration of the introduction made by Source Capital of Laurus
to the Company, a finder's fee in the amount of $160,000 and issued to and at
the direction of Source Capital common stock purchase warrants (the "Source
Warrants") to purchase up to an aggregate of 253,968 shares of common stock at
an exercise price of $0.63 per share. The Source Warrants expire on February 8,
2009. The Source Warrants were issued in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act, on the basis that
their issuance did not involve a public offering and satisfied the conditions of
Rule 506 of the Securities Act, and Source Capital represented to us that it is
an "accredited investor," as defined in the Securities Act.
In December 2004, we sold 160,000 shares of our stock in conjunction
with the sale of a promissory note in the principal amount of $328,767.12 to an
unaffiliated third party for an aggregate purchase price of $300,000. Such
shares were issued in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act, on the basis that such issuances did not
involve a public offering, no underwriter fees or commissions were paid in
connection with such issuances and the unaffiliated third party represented to
us that he was an "accredited investor" as defined in Regulation D under the
Securities Act.
In August 2003 and October 2003, we issued an aggregate of 450,000 and
180,000 shares of our common stock, respectively, to three investors in
conjunction with certain financing agreements as interest expense. Such shares
were issued in reliance upon the exemption from registration provided by Section
4(2) of the Securities Act, on the basis that such issuances did not involve a
public offering, no underwriter fees or commissions were paid in connection with
such issuances and the recipients were "accredited investors" as defined in
Regulation D under the Securities Act of 1933, as amended.
Item 16. Exhibits
Exhibit Number Description
--------------------------------------------------------------------------------
3.1 Certificate of Incorporation, as amended, incorporated by reference to
our Registration Statement on Form S-1 filed with the Securities and
Exchange Commission on August 27, 1969 under Registration Number 2-34436.
3.2 Certificate of Amendment of the Certificate of Incorporation,
incorporated by reference to our definitive proxy statement filed with
the Securities and Exchange Commission in connection with our Annual
Meeting of Shareholders held in May 1984.
3.3 Certificate of Amendment to the Certificate of Incorporation,
incorporated by reference to Exhibit 3(b) to our Annual Report on Form
10-K for the year ended November 30, 1988.
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3.4 Certificate of Amendment to the Certificate of Incorporation,
incorporated by reference to Exhibit 3(e) to our Annual Report on Form
10-K for the year ended November 30, 1994, as amended.
3.5 Certificate of Amendment of the Certificate of Incorporation,
incorporated by reference to Exhibit 3 to our Quarterly Report on Form
10-Q for the quarter ended August 30, 1995.
3.6 Certificate of Amendment of the Certificate of Incorporation,
incorporated by reference to Exhibit 3(f) to our Annual Report on Form
10-K for the year ended November 30, 1998.
3.7 Certificate of Amendment of the Certificate of Incorporation,
incorporated by reference to Exhibit 3.2 to our Quarterly Report on Form
10-Q for the quarter ended August 31, 1998.
3.8 Certificate of Amendment of the Certificate of Incorporation,
incorporated by reference to Exhibit 3(1) to our Current Report on Form
8-K dated November 16, 1999.
3.9 By-laws, amended and restated as of December 1996, incorporated by
reference to Exhibit 3(e) to our Annual Report on Form 10-K for the year
ended November 30, 1996.
5.1 Opinion of Pryor Cashman Sherman & Flynn LLP
10.1 1995 Stock Option Plan, incorporated by reference to Exhibit 10(I) to our
Annual Report on Form 10-K for the year ended November 30, 1995, as
amended.
10.2 1996 Restricted Stock Award Plan, incorporated by reference to Exhibit A
to our Proxy Statement dated October 24, 1996.
10.3 Non-Employee Director Stock Option Plan, dated March 30, 2001,
incorporated by reference to Exhibit 10(c) to our Annual Report on Form
10-KSB for the year ended November 30, 2003.
10.4 Lease Agreement between South Broadway WP, LLC, Landlord, and New
Rochelle Telephone Corp., Tenant, dated August 2003, incorporated by
reference to Exhibit 10(d) to our Annual Report on Form 10-KSB for the
year ended November 30, 2003.
10.5 Office Lease between Lexin Celebration, LLC, as Landlord, and VoX
Communications Corp., as Tenant, dated January 25, 2005, incorporated by
reference to Exhibit 10(e) to our Annual Report on Form 10-KSB for the
year ended November 30, 2004.
10.6 Securities Purchase Agreement, dated as of February 8, 2005, between eLEC
Communications Corp. and Laurus Master Fund, Ltd., incorporated by
reference to Exhibit 10.1 to our Current Report on Form 8-K dated
February 8, 2005.
10.7 Secured Convertible Term Note, dated as of February 8, 2005, between eLEC
Communications Corp. and Laurus Master Fund, Ltd., incorporated by
reference to Exhibit 10.2 to our Current Report on Form 8-K dated
February 8, 2005.
10.8 Master Security Agreement, dated as of February 8, 2005, among us, New
Rochelle Telephone Corp., Telecarrier Services, Inc., VoX Communications
Corp., Line One, Inc., AVI Holding Corp. and TelcoSoftware.com Corp. in
favor of Laurus Master Fund, Ltd., incorporated by reference to Exhibit
10.3 to our Current Report on Form 8-K dated February 8, 2005.
10.9 Stock Pledge Agreement, dated as of February 8, 2005, executed by eLEC
Communications Corp. in favor of Laurus Master Fund, Ltd., incorporated
by reference to Exhibit 10.4 to our Current Report on Form 8-K dated
February 8, 2005.
10.10 Subsidiary Guaranty, dated as of February 8, 2005, executed by New
Rochelle Telephone Corp., Telecarrier Services, Inc., VoX Communications
Corp., Line One, Inc., AVI Holding Corp. and TelcoSoftware.com Corp.,
incorporated by reference to Exhibit 10.5 to our Current Report on Form
8-K dated February 8, 2005.
10.11 Registration Rights Agreement, dated as of February 8, 2005, between eLEC
Communications Corp. and Laurus Master Fund, Ltd., incorporated by
reference to Exhibit 10.6 to our Current Report on Form 8-K dated
February 8, 2005.
10.12 Common Stock Purchase Warrant, dated as of February 8, 2005, between eLEC
Communications
II-4
Corp. and Laurus Master Fund, Ltd., incorporated by reference to Exhibit
10.7 to our Current Report on Form 8-K dated February 8, 2005.
10.13 Form of Common Stock Purchase Warrant, dated as of February 8, 2005,
issued by eLEC Communications Corp. to or on the order of Source Capital
Group, Inc., incorporated by reference to Exhibit 10.8 to our Current
Report on Form 8-K dated February 8, 2005.
10.14 Securities Purchase Agreement, dated as of November 30, 2005, between
eLEC Communications Corp. and Laurus Master Fund, Ltd., incorporated by
reference to Exhibit 10.1 to our Current Report on Form 8-K dated
November 30, 2005.
10.15 Secured Convertible Term Note, dated as of November 30, 2005, between
eLEC Communications Corp. and Laurus Master Fund, Ltd., incorporated by
reference to Exhibit 10.2 to our Current Report on Form 8-K dated
November 30, 2005.
10.16 Reaffirmation and Ratification Agreement, dated as of November 30, 2005,
among us, New Rochelle Telephone Corp., Telecarrier Services, Inc., VoX
Communications Corp., Line One, Inc., AVI Holding Corp. and
TelcoSoftware.com Corp., incorporated by reference to Exhibit 10.3 to our
Current Report on Form 8-K dated November 30, 2005.
10.17 Registration Rights Agreement, dated as of November 30, 2005, between
eLEC Communications Corp. and Laurus Master Fund, Ltd., incorporated by
reference to Exhibit 10.4 to our Current Report on Form 8-K dated
November 30, 2005.
10.18 Common Stock Purchase Warrant, dated as of November 30, 2005, between
eLEC Communications Corp. and Laurus Master Fund, Ltd., incorporated by
reference to Exhibit 10.5 to our Current Report on Form 8-K dated
November 30, 2005.
10.19 Form of Common Stock Purchase Warrant, dated as of November 30, 2005,
issued by eLEC Communications Corp. to or on the order of Source Capital
Group, Inc., incorporated by reference to Exhibit 10.6 to our Current
Report on Form 8-K dated November 30, 2005.
10.20 Funds Escrow Agreement, dated as of February 8, 2005, between eLEC
Communications Corp., Laurus Mater Fund, Ltd. and Loeb & Loeb LLP.
10.21 Funds Escrow Agreement, dated as of November 30, 2005, between eLEC
Communications Corp., Laurus Mater Fund, Ltd. and Loeb & Loeb LLP.
21* Subsidiaries.
23.1 Consent of Nussbaum Yates & Wolpow, P.C.
23.2* Consent of Pryor Cashman Sherman & Flynn LLP (included in their opinion
filed as Exhibit 5.1)
24.1* Powers of Attorney of certain officers and directors of the Company
(included on the signature page of this Registration Statement).
-----------------------
* Previously filed with the Commission.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act") may be permitted to directors,
officers and controlling persons of the Company, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company 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, we will,
unless in the opinion of our 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.
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The undersigned Company hereby undertakes that:
(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this Registration
Statement to:
(i) Include any prospectus required by Section 10(a)(3)
of the Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, 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
end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration
Statement;
(iii) Include any additional or changed information on the
plan of distribution.
(2) For determining liability under the Securities Act, the
Company will treat each such post-effective amendment as a new
Registration Statement of the securities offered, and the
offering of such securities at that time to be the initial
bona fide offering.
(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.
(4) For determining any liability under the Securities Act, treat
each post-effective amendment that contains a form of
prospectus as a new Registration Statement for the securities
offered in the Registration Statement, and that offering of
the securities at that time as the initial bona fide offering
of those securities.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it met all
the requirements of filing on Form S-1 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in White Plains, New
York on May 12, 2006.
eLEC COMMUNICATIONS CORP.
By: /s/Paul H. Riss
-----------------------
Paul H. Riss
Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated.
Signature Title Date
/s/Paul H. Riss Chairman of the Board, Chief Executive May 12, 2006
--------------------------- Officer and Chief Financial Officer
Paul H. Riss (principal financial officer, principal
accounting officer and principal
executive officer)
* Director May 12, 2006
---------------------------
Michael H. Khalilian
* Director May 12, 2006
---------------------------
Greg M. Cooper
* Director May 12, 2006
---------------------------
Gayle Greer
* By: /s/Paul H. Riss
---------------------------
Paul H. Riss
Attorney-in-fact