As filed with the Securities and Exchange Commission on September __, 2002
We intend to release definitive copies of this proxy statement to security
holders on October 7, 2002
PRELIMINARY COPY
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
_______________
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|X| Preliminary Proxy Statement
|_| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
|_| Confidential, for the use of the Commission only (as permitted by
Rule 14a-6(e)(2))
_______________
eLEC COMMUNICATIONS CORP.
(Name of Registrant as Specified in Its Charter)
(Name of Person Filing Proxy Statement)
_______________
Payment of Filing Fee (Check the appropriate box):
|X| No fee required
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction c
omputed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how it
was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
|_| Fee paid previously with preliminary materials:
|_| Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-1l(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: $
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
eLEC COMMUNICATIONS CORP.
543 Main Street
New Rochelle, New York 10801
Dear shareholder:
You are hereby invited to attend the annual meeting of shareholders of
eLEC Communications Corp., a New York corporation, to be held on November 26,
2002 at 10:00 a.m., local time, at our executive offices located at 543 Main
Street, New Rochelle, New York 10801.
Our board of directors has extensively evaluated our financial position
and our ability to increase shareholder value as currently constituted. After
careful consideration, our board of directors determined that it was in your and
our best interest to eliminate the significant debt load of our wholly-owned
subsidiary, Essex Communications, Inc. ("Essex"), by selling substantially all
of the assets of Essex to a third party. On September 3, 2002, we entered into
an agreement with Essex Acquisition Corp. ("EAC"), a wholly-owned subsidiary of
BiznessOnline.com, Inc., to accomplish this goal. Under the terms of the
agreement, EAC agreed to assume certain liabilities of Essex, including all
obligations due and payable to Essex's largest vendor, Verizon Services Corp. By
eliminating the burden of these obligations, we believe we will be able to
continue to compete as a competitive local exchange carrier through our other
licensed telecommunications subsidiaries and channel our resources into the
growth of these subsidiaries. The transaction is subject to, among other things,
approval by our shareholders.
As more fully set forth in the accompanying proxy statement, at the
annual meeting you will be asked to consider and vote to approve our proposal to
sell substantially all of the assets of Essex. You will also be asked to elect
three directors to our board of directors for the ensuing year, as we typically
do at our annual meetings.
In the materials accompanying this letter, you will find a notice of
annual meeting of shareholders, a proxy statement relating to the actions to be
taken by the shareholders at the annual meeting and a proxy card. Please read
the notice and the proxy statement and consider the information included therein
carefully. All shareholders are invited to attend the annual meeting in person.
Whether or not you plan to attend the annual meeting, please complete, sign,
date and return your proxy in the enclosed envelope. If you attend the annual
meeting, you may vote in person if you wish, even though you have previously
returned your proxy. It is important that your shares be represented and voted
at the annual meeting.
Sincerely,
/s/ Joel Dupre
----------------
JOEL DUPRE
Chairman of the Board
eLEC COMMUNICATIONS CORP.
543 Main Street
New Rochelle, New York 10801
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON TUESDAY, NOVEMBER 26, 2002
October 7, 2002
To the shareholders of eLEC Communications Corp.:
Notice is hereby given that the annual meeting of shareholders of eLEC
Communications Corp., a New York corporation, will be held at our executive
offices located at 543 Main Street, New Rochelle, New York 10801 on Tuesday,
November 26, 2002 at 10:00 A.M., local time, for the following purposes:
1. To approve the sale of substantially all of the assets of Essex
Communications, Inc. ("Essex"), our wholly-owned subsidiary,
pursuant to the Asset Purchase Agreement dated as of September 3,
2002 (the "Agreement"), by and among our company and Essex, on
the one hand, and Essex Acquisition Corp., a wholly-owned
subsidiary of BusinessOnline.com, Inc., on the other hand, a copy
of which is attached as Appendix A to the accompanying proxy
statement;
2. To elect three directors to our board of directors for the
ensuing year; and
3. To consider and act upon such other business as may properly come
before the meeting.
The foregoing items of business are more fully described in the proxy
statement accompanying this notice. Our board of directors has fixed the close
of business on Wednesday, September 25, 2002 as the record date for the
determination of shareholders entitled to notice of and to vote at the annual
meeting and at any adjournment or postponement thereof.
Whether or not you plan to attend the annual meeting, you should
complete, sign, date and promptly return the enclosed proxy card, to ensure that
your shares will be represented at the meeting. If you attend the annual meeting
and wish to vote in person, you may withdraw your proxy and vote in person. You
should not send any certificates representing stock with your proxy card.
Sincerely,
/s/ Joel Dupre
------------------
JOEL DUPRE
Chairman of the Board
eLEC COMMUNICATIONS CORP.
543 Main Street
New Rochelle, New York 10801
PROXY STATEMENT
Date, Time and Place of the Annual Meeting
This proxy statement is furnished to shareholders of eLEC
Communications Corp., in connection with the solicitation, by order of our board
of directors, of proxies to be voted at the annual meeting of shareholders to be
held on Tuesday, November 26, 2002, at 10:00 A.M., local time, at our executive
offices located at 543 Main Street, New Rochelle, New York 10801, and at any
adjournment or adjournments thereof. The accompanying proxy is being solicited
on behalf of our board of directors. This proxy statement and the enclosed proxy
card were first mailed to our shareholders on or about Monday, October 7, 2002.
Purpose of the Annual Meeting
At the annual meeting, you will be asked to consider and vote upon the
following matters:
1. To approve the sale of substantially all of the assets of Essex
Communications, Inc. ("Essex"), our wholly-owned subsidiary,
pursuant to the Asset Purchase Agreement dated as of September 3,
2002 (the "Agreement"), by and among our company and Essex, on
the one hand, and Essex Acquisition Corp. ("EAC"), a wholly-owned
subsidiary of BiznessOnline.com, on the other hand, a copy of
which is attached as Appendix A to this proxy statement (the
"Sale Proposal");
2. To elect three directors to our board of directors for the
ensuing year; and
3. To consider and act upon such other business as may properly come
before the meeting.
Voting and Revocation of Proxies; Adjournment
All of our voting securities represented by valid proxies, unless the
shareholder otherwise specifies therein or unless revoked, will be voted FOR the
Sale Proposal set forth herein, FOR each of the director nominees set forth
herein and at the discretion of the proxy holders on any other matters that may
properly come before the annual meeting. Our board of directors does not know of
any matters to be considered at the annual meeting other than (i) the Sale
Proposal and (ii) the election of three board members.
If a shareholder has appropriately specified how a proxy is to be
voted, it will be voted accordingly. Any shareholder has the power to revoke
such shareholder's proxy at any time before it is voted. A shareholder may
revoke a proxy by delivering a written statement to our corporate secretary
stating that the proxy is revoked, by submitting a subsequent proxy signed by
the same person who signed the prior proxy, or by voting in person at the annual
meeting.
As of September 25, 2002, we had a total of 15,635,282 shares of common
stock outstanding, including 16,000 shares of common stock issuable upon the
conversion of our outstanding shares of Series A preferred stock. The
affirmative vote of two thirds of the total outstanding shares entitled to vote
at the annual meeting is required in order to approve the Sale Proposal, a
plurality of the votes cast at the annual meeting by the shareholders entitled
to vote in the election is required to elect the director nominees, and a
majority of the votes cast by the shareholders entitled to vote at the meeting
is required to take any other action. For purposes of determining whether a
proposal has received the required vote, abstentions will be included in the
vote totals, with the result being that an abstention will have the same effect
as a negative vote. In instances where brokers are prohibited from exercising
discretionary
authority for beneficial holders who have not returned a proxy (so-called
"broker non-votes"), those shares will not be included in the vote totals and,
therefore, will also have the same effect as a negative vote. Shares that
abstain or for which the authority to vote is withheld on certain matters will,
however, be treated as present for quorum purposes on all matters.
In the event that sufficient votes in favor of any of the matters to
come before the meeting are not received by the date of the annual meeting, the
persons named as proxies may propose one or more adjournments of the annual
meeting to permit further solicitation of proxies. Any such adjournment will
require the affirmative vote of the holders of a majority of the shares of
common stock present in person or by proxy at the annual meeting. The persons
named as proxies will vote in favor of any such proposed adjournment or
adjournments. We will bear the cost of the solicitation of proxies related to
the annual meeting. However, under the asset purchase agreement, EAC has agreed
to reimburse us for reasonable expenses not to exceed $40,000 in connection with
our efforts to obtain shareholder approval of the Sale Proposal. EAC also agreed
to pay us the additional sum of $12,500 for transaction-related legal fees upon
obtaining the shareholder approval for the Sale Proposal. Such payments by EAC
are to be made at the closing of the asset sale.
Solicitation
The solicitation of proxies pursuant to this proxy statement will be
primarily by mail. In addition, certain of our directors, officers or other
employees may solicit proxies by telephone, telegraph, mail or personal
interviews, and arrangements may be made with banks, brokerage firms and others
to forward solicitation material to the beneficial owners of shares held by them
of record. No additional compensation will be paid to our directors, officers or
other employees for such services.
Quorum and Voting Rights
Our board of directors has fixed Wednesday, September 25, 2002, as the
record date for the determination of shareholders entitled to notice of and to
vote at the annual meeting. Holders of record of shares of our common stock at
the close of business on the record date will be entitled to one vote for each
share held. The presence, in person or by proxy, of the holders of a majority of
the outstanding voting securities entitled to vote at the annual meeting is
necessary to constitute a quorum at the annual meeting.
SUMMARY TERM SHEET OF SALE PROPOSAL
You are being asked to vote on two items, the Sale Proposal and the
election of directors. The information related to the election of directors is
set forth in this proxy statement under Proxy Item 2. For your convenience, we
have set forth below a summary of certain information relating to the Sale
Proposal that is contained under Proxy Item 1 in this proxy statement. This
summary does not contain all of the information that is important to you. We
urge you to read this entire proxy statement (including all appendices) before
you decide whether to vote in favor of the Sale Proposal. A copy of the
agreement related to the Sale Proposal is attached as an appendix to this proxy
statement. We have included page references parenthetically to direct you to a
more complete description in this proxy statement of the topics presented in
this summary.
Background of the Sale (page 11) Since the spring of 2001, we have been
exploring strategic alternatives to
finance the growth of our business in
the face of tightening financial markets
and a general decline in the value of
telecommunications companies. Since that
time, we also reported that our ability
to continue as a going concern is
dependent upon our ability to raise
additional working capital, increase
revenue, improve our operating margins
or significantly reduce our indebtedness
and other payables. The substantial
reduction in the availability of equity
capital,
2
particularly for telecommunications
companies, over the past 18 months has
caused us to seek strategic
alternatives, including the sale of all
or a portion of our assets or the
potential liquidation of our business.
In light of our inability to raise
additional cash to continue to fund our
growth, on September 3, 2002 we agreed
to sell to EAC substantially all of the
assets of our principal subsidiary,
Essex, in consideration of the agreement
of EAC to assume in excess of $9,800,000
of our liabilities. This transaction
offered us an additional cash
reimbursement of $270,000, which will
allow us to continue operations of our
remaining telecommunications
subsidiaries. In the course of reaching
our decision to approve the sale of the
Essex assets pursuant to the asset
purchase agreement, our board of
directors consulted with management and
our outside legal counsel.
Reasons for the Sale (page 13) Our board of directors considered
numerous factors relating to the
benefits and risks associated with the
asset purchase agreement and the sale of
the assets and business of Essex and
unanimously determined that the
transactions contemplated by the asset
purchase agreement is expedient and in
the best interests of our company and
our stakeholders.
Parties to the Transaction We are a competitive local exchange
carrier that, through our wholly-owned
subsidiaries, offers small businesses
and residential customers an integrated
set of telecommunications products and
services, including local exchange,
local access, domestic and international
long distance telephone, and a full
suite of features including items such
as three-way calling, call waiting and
voice mail.
Essex Communication, Inc., a New York
corporation, is our principal operating
subsidiary. Essex is currently selling
local telephone and related services in
nine states and is licensed as a
competitive local exchange carrier in 41
states. For the years ended November 30,
2000 and 2001 and the six months ended
May 31, 2002, Essex had revenues of
approximately $9,536,000, $18,384,000
and $8,122,000, respectively, which
constituted 80%, 93% and 99%,
respectively, of our total revenues for
such periods. At November 30, 2000 and
2001 and at May 31, 2002, Essex had
total assets of approximately
$3,402,000, $3,674,000 and $2,581,000,
respectively, which constituted 23%, 50%
and 39%, respectively, of our total
assets at such dates.
Essex Acquisition Corp., a Delaware
corporation, is a wholly-owned
subsidiary of BiznessOnline.com, Inc.
BiznessOnline.com is an integrated
communications providers that offers
customers co-location, e-commerce
development, Web design and hosting
services, high-speed Internet access and
local/long distance telecom services.
Description of the Proposed Transaction Our company, Essex and EAC entered into
an asset purchase agreement and EAC and
Essex entered into a consulting and
funding agreement. Under these
documents, Essex agreed to sell, subject
to shareholder and other regulatory
approval and certain other conditions,
substantially all of its assets to EAC
in exchange for $5.00 and the assumption
by EAC of certain liabilities of Essex,
including all obligations due and
payable to Essex's largest creditor,
Verizon
3
Services Corp. In addition, EAC agreed
to fund, at its option, and manage the
operations of Essex until the closing,
subject to certain limitations. Upon the
closing of the transaction, EAC will pay
us $270,000 to reimburse us for amounts
previously paid by us to Essex's lender.
Asset Purchase Agreement (page 15) Generally. Under the terms of the asset
purchase agreement, we propose to sell
to EAC substantially all of the assets
of Essex for $5.00. EAC will also assume
certain liabilities of Essex.
Assets to be Sold. The assets that we
propose to sell to EAC include
substantially all of Essex's subsisting
contracts, customer accounts and account
balances, certain deposits, all
intellectual property rights and
transferable licenses, and certain
customer records and other tangible
property.
Liabilities to be Assumed. EAC will
assume certain liabilities of Essex,
including certain accounts payable
(including all obligations due and
payable to Essex's largest vendor,
Verizon Services Corp.), employee
payables, contractual obligations and
contingent liabilities. Such liabilities
were estimated at approximately
$9,816,500 when the asset purchase
agreement was signed, and may be more or
less than that amount on the date of
closing of the asset sale.
General Contract Terms. We, Essex and
EAC make customary representations and
warranties in the asset purchase
agreement, including, with respect to
our company and Essex, representations
as to our title to, and the absence of
litigation or infringement claims
against us relating to, the assets to be
sold to EAC. EAC's obligation to
complete the sale is conditioned on our
satisfaction of certain closing
conditions, including our certifying the
continuing accuracy of our
representations, our performance of all
required pre-closing obligations and our
obtaining all necessary consents and
approvals, including shareholder
approval. Our representations and
warranties will survive the closing of
the transactions contemplated under the
asset purchase agreement for a period of
one year.
Non-Solicitation of Customers. We and
Essex have agreed that, for a period of
three years following the closing, we
will not, directly or indirectly,
solicit any customer of Essex
transferred to EAC. If, in the 18-month
period following the closing, any such
customer of Essex (subject to certain
exceptions) terminates its relationship
with EAC and establishes a customer
relationship with our company or one of
our affiliates, then we have agreed to
pay EAC $200 for each customer line
transferred.
Non-Solicitation of Individuals. We and
Essex agreed that, for a period of one
year following the closing, we will not,
directly or indirectly, persuade any
director, officer, employee, agent or
consultant to discontinue its engagement
or employment with EAC or become
employed in any activity substantially
similar to or in any way competitive
with the activities of EAC. We and Essex
also agreed not to hire or retain any
such individual.
4
Indemnification. We, Essex and EAC have
agreed to indemnify each other against
all losses due to any breach or
inaccuracy of our respective
representations, warranties or covenants
under the asset purchase agreement.
Additionally, we and Essex have agreed
to indemnify EAC against all losses
incurred by EAC due to liabilities not
expressly assumed by EAC under the asset
purchase agreement, and EAC has agreed
to indemnify us against any losses we
incur due to liabilities assumed by EAC
under the asset purchase agreement.
Termination. The asset purchase
agreement may be terminated under
certain circumstances, including (i) by
mutual written consent of the parties,
(ii) by either party if the other party
is in breach and such breach is not
cured with 30 days, (iii) by either
party, if the asset sale is not
completed by December 31, 2002, or (iii)
by EAC if Essex terminates the
consulting and funding agreement. If the
transaction is terminated for any reason
other than by mutual consent or breach
by EAC, EAC may purchase from Essex all
customer lines in excess of the number
of lines existing on the date of the
asset purchase agreement for an
aggregate cost of $1.00. If we and Essex
fail to close the transaction for
reasons other than a material uncured
breach of the asset purchase agreement
by EAC, then Essex will be obligated to
pay to EAC as liquidated damages the sum
of $1,000,000 in cash and to sell to EAC
all customer lines in the State of New
York at a cost of $50 per line.
Reimbursement Obligation (page 19) In connection with our signing of the
asset purchase agreement, EAC agreed to
pay us at the closing of the
transactions contemplated by the asset
purchase agreement $270,000 to reimburse
us for amounts previously paid by us
under a guarantee agreement to Essex's
lender. Pending such reimbursement
payment, EAC agreed to lend us up to
$270,000, which amount may be drawn in
equal four equal installments on October
1, 2002, November 1, 2002, December 1,
2002 and January 1, 2003. Any amounts
borrowed by us from EAC will be repaid
from the amount EAC is to reimburse us
at the closing under the asset purchase
agreement.
Consulting and Funding Agreement Essex and EAC entered into a consulting
(page 19) and funding agreement dated as of
September 3, 2002 whereby the parties
agreed that from the date of the
agreement until the closing under the
asset purchase agreement, the operations
of Essex will be managed by EAC. As
compensation for the management
services, Essex agreed to pay EAC a
monthly management fee of $10,000, which
fee will accrue but only become payable
if the closing does not occur. During
the term of the agreement, EAC is
responsible for all aspects of the
business operations of Essex and may, at
its option, secure financing for Essex
in an amount up to $2,000,000 to fund
Essex's operations. If the sale of Essex
is completed, Essex will have no
obligation to repay any advances made by
EAC. However, if the transaction is not
completed, Essex will be obligated to
repay to EAC within 30 days after the
termination of the asset purchase
agreement and the consulting and funding
agreement all interim operating advances
made by EAC.
5
Dissenter's Rights (page 19) Under the laws of New York, our
shareholders who do not vote in favor of
the Sale Proposal may have the right to
seek to obtain payment in cash of the
fair value of their shares. In order to
exercise this right a shareholder must
comply with certain procedural
requirements. A copy of the relevant New
York laws is set forth as Appendix B.
Regulatory Approvals (page 21) Completion of the asset purchase will
not occur until after receipt of all
necessary regulatory approvals and
consents. The FCC and several state
public utility commissions have
jurisdiction to review and/or approve
the sale of assets, customer lines and
licenses. In some states, a license
cannot be sold, and EAC is applying for
a new license so that the sale of assets
can take place. As of the date of this
proxy statement no regulatory approvals
have been obtained.
Tax Consequences of the Proposed Tax Consequences for Us. We will
Transaction (page 21) recognize net taxable gains on the sale
of the assets of Essex equal to the
excess of the amount realized on the
sale over our aggregate adjusted basis
in the assets sold. Although the gains
will constitute capital gains, to the
extent that we hold the Essex assets as
capital assets, we expect that the gains
will be offset by operating losses
incurred during 2002 and/or by net
operating loss carry-forwards from
previous taxable years. The losses
and/or loss carry-forwards so absorbed
will not be available to offset income
and gains that we may realize in the
future.
Tax Consequences for Our Shareholders .
The sale of the Essex assets will not,
in and of itself, cause our shareholders
to recognize any income for federal
income tax purposes.
Recommendation of the Board (page 14) Our board of directors has unanimously
determined that the asset sale by Essex
is in your and our best interests and
recommends that you vote FOR approval of
the Sale Proposal.
6
QUESTIONS AND ANSWERS ABOUT THE PROPOSALS
The following questions and answers are for your convenience only, and
briefly address some commonly asked questions about the proposals that are being
submitted to our shareholders at the annual meeting. You should still carefully
read this proxy statement in its entirety, including the attached appendices.
WHO IS SOLICITING MY PROXY?
Our board of directors is soliciting proxies from each of our
shareholders.
WHEN AND WHERE IS THE ANNUAL MEETING?
The annual meeting will be held on Tuesday, November 26, 2002 at 10:00
a.m. local time, at our executive offices at 543 Main Street, New Rochelle, NY
10801.
WHO MAY VOTE?
Only shareholders of record of our common stock as of the close of
business on September 25, 2002 will be entitled to notice of, and to vote at,
the annual meeting and any adjournments thereof. Each shareholder is entitled to
one vote per share.
HOW DO SHAREHOLDERS VOTE?
Registered shareholders can vote their shares (1) by mailing their
signed proxy card or (2) in person at the annual meeting. If a shareholder does
not intend to attend the annual meeting, any written proxy or notice should be
returned to us, not later than the close of business on November __, 2002.
HOW DO PROXIES WORK?
Giving your proxy means that you authorize us to vote your shares at
the annual meeting in the manner you direct. If you sign, date and return the
enclosed proxy card but do not specify how to vote, the persons named as proxies
thereon will vote your shares FOR the Sale Proposal, FOR the election of the
three individuals nominated to our board of directors and at their discretion
with respect to any other proposals that may properly come before the annual
meeting. We do not know of any other matter that will be brought before the
annual meeting. The persons named as proxies are our directors.
HOW MAY A PROXY BE REVOKED?
You may revoke your proxy before it is voted by delivering a written
statement to our corporate secretary stating that the proxy is revoked, by
submitting a subsequent proxy signed by the same person who signed the prior
proxy, or by voting in person at the annual meeting.
IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
Your broker will vote your shares only if you provide instructions on
how to vote. You should follow the procedures provided by your broker regarding
the voting of your shares.
WHAT HAPPENS IF I CHOOSE NOT TO SUBMIT A PROXY OR TO VOTE?
If a shareholder does not submit a proxy or vote, it will have the same
effect as a vote against approval of each of the proposals set forth in this
proxy statement.
7
WHAT ARE THE SHAREHOLDERS BEING ASKED TO APPROVE?
At the annual meeting you will be voting on two proposals:
Proposal 1: To approve the sale of substantially all of the
assets of Essex Communications, Inc., our wholly-owned
subsidiary; and
Proposal 2. To elect three directors to our board of directors for
the ensuing year.
You will also be asked to vote on any other business as may properly
come before the meeting or any adjournment or postponement. Presently, we do not
anticipate that any other business will be brought before the meeting.
HOW MANY VOTES ARE REQUIRED TO APPROVE THE PROPOSALS?
As of September 25, 2002 we had a total of 15,635,282 shares of common
stock outstanding, including 16,000 shares of common stock issuable upon
conversion of our outstanding shares of Series A preferred stock. The
affirmative vote of two-thirds of the outstanding shares of our common stock is
required for the approval of the Sale Proposal and the affirmative vote of a
plurality of our outstanding shares of common stock is required for the approval
of the nominees for directors. For purposes of determining whether a proposal
has received the required vote, abstentions will be included in the vote totals,
with the result being that an abstention will have the same effect as a negative
vote. In instances where brokers are prohibited from exercising discretionary
authority for beneficial holders who have not returned a proxy (so-called
"broker non-votes"), those shares will not be included in the vote totals and,
therefore, will also have the same effect as a negative vote. Shares that
abstain or for which the authority to vote is withheld on certain matters will,
however, be treated as present for quorum purposes on all matters.
WHO PAYS FOR THIS PROXY SOLICITATION?
We will bear the cost of solicitation of proxies relating to the annual
meeting. However, under the asset purchase agreement, EAC has agreed to
reimburse us for reasonable expenses not to exceed $40,000 in connection with
our efforts to obtain shareholder approval of the Sale Proposal. EAC also agreed
to pay us the additional sum of $12,500 for transaction-related legal fees upon
obtaining the shareholder approval for the Sale Proposal. Such payments by EAC
are to be made at the closing of the asset sale.
WHY IS MY VOTE NECESSARY FOR THE ASSET SALE?
Your vote may be necessary to satisfy the New York Business Corporation
law. The sale of substantially all of the assets of Essex may be construed as a
sale of substantially all of our assets, which would require the affirmative
vote of the holders of two-thirds of our outstanding shares of common stock
under New York Business Corporation Law Section 909, subject to certain
exceptions. In addition, your vote is necessary because one of the conditions to
the closing of the asset sale is the receipt of shareholder approval, which
condition may be waived by EAC.
WHEN DO YOU EXPECT THE ASSET SALE TO BE COMPLETED?
The closing of the asset sale will occur as soon as all of the
conditions to closing are met, which includes receipt of, among other things,
applicable shareholder and regulatory approvals. Unless extended by the parties
to the asset purchase agreement, the sale must be completed by December 31,
2002.
WHAT IS THE BOARD'S RECOMMENDATION AS TO THE SALE PROPOSAL?
Our board has unanimously determined that the asset sale by Essex is in
your and our best interests and recommends that you vote FOR approval of the
Sale Proposal.
8
WHY HAS THE BOARD DECIDED TO SELL THE ASSETS OF ESSEX?
In light of our need of additional cash to continue operations and in
recognition of the unavailability of more favorable financing alternatives, our
board of directors has decided that the sale of the assets of Essex pursuant to
the asset purchase agreement is in the best interests of our company and our
shareholders. The proposed transaction will relieve us of more than $9,800,000
of liabilities and payables in exchange for the sale of the assets of Essex. The
board of directors considered various benefits to approving the transaction,
including that the sale of the assets of Essex would provide relief from
burdensome liabilities and permit us to focus on the businesses of our other
subsidiaries. Under the terms of the asset purchase agreement, we are also
permitted to continue to compete in the sale of voice and data services to
businesses and residential customers. Our board of directors also considered
various negative factors concerning the sale of the assets of Essex pursuant to
the asset purchase agreement and determined that overall the risks associated
with the transaction were outweighed by the potential benefits of the sale.
WHAT OTHER OPTIONS WERE CONSIDERED BEFORE DECIDING TO SELL THE ASSETS OF ESSEX?
Over the past 18 months we considered many possible financing and
strategic alternatives, including issuing additional equity securities,
obtaining a loan secured by our assets and selling all or a portion of our
company. We also explored the possibility of restructuring our company and our
liabilities under the protection of the available state and federal bankruptcy
laws. We were unable to identify any qualified third party willing to purchase
our equity or make us a loan on acceptable terms, nor were we able to negotiate
the timely sale of our assets or business with any party other than EAC.
WHAT WILL OCCUR IF THE SALE OF THE ASSETS OF ESSEX IS NOT APPROVED AND NOT
COMPLETED?
Our board of directors does not believe that the long-term continued
operation of Essex is feasible without additional capital to pay a significant
portion of our outstanding liabilities and to fund the continued growth of our
business. Therefore, if the sale of the assets of Essex to EAC is not approved,
we must either (1) pursue an infusion of capital or another transaction in which
we can sell all or a portion of Essex's business on acceptable terms, or (2) if
no such transaction is found in the immediate future, liquidate Essex under the
protection of federal or state bankruptcy laws. Given current market conditions
and our past experience, we believe it is unlikely that we would be able to
conclude an acceptable transaction in time to avoid liquidation of Essex.
The sale by Essex of its assets to EAC under the terms contemplated by
the asset purchase agreement also has certain benefits for the on-going
operations of our company. As outlined above, at the closing of the asset sale,
EAC has agreed to reimburse us $270,000 for amounts we have previously paid
under a guarantee of certain indebtedness of Essex. In addition, in the asset
purchase agreement, EAC has agreed to assume the obligations of Essex under a
real property lease and a software billing agreement we have entered into with
Essex. It is contemplated that monthly payments under the lease and the software
billing agreement will aggregate in excess of $50,000 through at least January
2003. Our board of directors believes the long-term continued operation of our
company may not be feasible without such additional payments. Therefore, if the
sale to EAC is not approved, unless we can obtain an infusion of capital or
another transaction in which we can sell Essex or all or a portion of its
business on acceptable terms, it is likely we also will have to liquidate our
remaining businesses under the protection of federal or state bankruptcy laws.
If the transaction is terminated for any reason other than by mutual
consent or breach by EAC, EAC may acquire all customer lines of Essex in excess
of the number of lines existing on the date of the asset purchase agreement for
an aggregate cost of $1.00. In addition, if we fail to close the transaction for
reasons other than a material uncured breach of the asset purchase agreement by
EAC, then Essex must pay to EAC as liquidated damages the sum of $1,000,000 in
cash and sell to EAC all customer lines in the State of New York at a cost of
$50 per line.
9
WHAT ARE THE FEDERAL TAX CONSEQUENCES OF THE SALE OF THE ASSETS OF ESSEX?
We will recognize net taxable gains on the sale of the Essex assets
equal to the excess of the amount realized on the sale over the aggregate
adjusted basis in the assets sold, which gains we expect will be offset by our
operating losses. The sale of the Essex assets will not, in and of itself, cause
our shareholders to recognize any income for federal income tax purposes.
AM I ENTITLED TO APPRAISAL OR DISSENTER'S RIGHTS?
Yes. Under the laws of New York, if you do not vote in favor of the
Sale Proposal you may have the right to seek to obtain payment in cash of the
fair value of your shares. In order to exercise your right you must comply with
certain procedural requirements. A copy of the relevant New York laws is set
forth as Appendix B to this proxy statement.
WHERE CAN I FIND MORE INFORMATION ABOUT YOU?
We are subject to the information requirements of the Securities
Exchange Act of 1934 and are required to file reports, proxy statements and
other information with the Securities and Exchange Commission. You may inspect
and copy our reports, proxy statements and other information at the Public
Reference Section of the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the Commission at 1-800-SEC-0330 for further
information about the public reference rooms. You may also obtain copies of the
reports, proxy statements and other information from the Public Reference
Section of the Commission, Washington, D.C. 20549, at prescribed rates. The
Commission maintains a world-wide web site on the Internet at http://www.sec.gov
that contains reports, proxies, information statements, registration statements
and other information filed with the Commission through the EDGAR system.
If you want to contact us directly, you may do so at the following
address:
eLEC Communications Corp.
543 Main Street
New Rochelle, New York 10801
Attention: Chief Executive Officer
10
SALE OF SUBSTANTIALLY ALL
OF THE ASSETS OF ESSEX
(Proxy Item 1)
Background
We commenced operations in the telecommunications industry in 1998 by
acquiring Essex, which was then a newly-formed competitive local exchange
carrier ("CLEC"). At that time, most other CLEC's were investing substantial
amounts of capital to buy circuit-switched equipment and roll-out fiber to build
their networks. We refer to this strategy as "facilities-first" strategy,
because the CLEC has invested in its equipment and placed the equipment in
service before the CLEC has developed a customer base. We determined, instead,
to develop a "customer-first," or a "deferred-build" strategy. We invested our
capital to build our own operations support systems ("OSS") to support our
customers and we leased facilities on an as-needed basis from incumbent local
exchange carriers ("ILECs") while we built our customer base. After we obtained
a substantial geographical concentration of customers, we could then make
decisions regarding the purchase and installation of our own network equipment.
We believed this strategy would allow us to be very flexible with our customer
base as we grew our business. As planned, we could move our customer base to
alternative access, if appropriate, and would not become a captive of our own
underutilized equipment, as can happen with a "facilities-first" CLEC.
On August 9, 2000, one of our affiliates, Access One Communications
Corp. ("Access One"), was sold to Talk America Holdings Inc. ("Talk") in a
stock-for-stock transaction. Following that sale, we owned approximately 1.9
million shares of Talk, which at August 31, 2000, was valued at approximately
$13,490,000. Our shares of Talk bore a restrictive legend and were not freely
tradable until November 1, 2000.
As we did not want the entire financing our company to be solely
dependent on the proceeds of our shares of common stock of Talk, in October
2000, Essex entered into a revolving enterprise value loan ("REVL") with Textron
Financial Corp. (formerly known as RFC Capital Corporation). The REVL was
secured by all of the assets and business of Essex, including its customer
lines, and by 1,000,000 of our shares of common stock of Talk. Under the REVL,
Essex was able to borrow, on a formula basis an amount up to three times its
monthly cash collections, up to a maximum of $5 million, or four times its
monthly cash collections if Talk common stock was trading at $2.50 per share or
higher. This facility was expandable to up to $10 million under certain
conditions, and it allowed Essex to continue to borrow to fund its growth
because of the multiple formula of cash collections.
Like most participants in the telecommunications sector, we did not
anticipate the rapid downturn in the value of Nasdaq stocks, nor did we
anticipate the resulting drop in the value of telecommunications stocks,
including the common stock of Talk. The decrease in stock values, including the
value of the common stock of Talk, which closed at low of $0.56 per share in
December 2000, forced us to consider other financing options and merger and
acquisition possibilities in early 2001.
In February 2001, through our own efforts and through the preliminary
efforts of Kaufman Bros., L.P., an investment banking firm we engaged, we began
to seek out and investigate possible financing or strategic alternatives.
Through the autumn of 2001, however, neither our investment banker nor we were
able to identify a qualified third party interested in entering into an
acceptable strategic or financing relationship with us. Throughout this process,
our management kept our board of directors apprised of the status of possible
strategic alternatives. Our directors instructed management to continue to seek
out and evaluate opportunities.
In November 2001, a significant venture capital firm approached us to
invest up to $30 million in our company. Based upon our due diligence and
preliminary meetings with this group, we signed a letter of intent that included
a no-shop clause and provided for an initial investment of $5,000,000 at a price
of $0.40 per share, the approximate market price of our common stock at that
time. This firm indicated it was seeking an interest in a UNE-P carrier with a
scalable billing platform that it would provide it the opportunity to acquire
several low-priced local exchange customer bases that were for sale. After
several weeks of negotiations, the venture capital firm concluded, however, that
prices of providers in the telecommunications industry would continue to
decline, and in January 2002, it withdrew its offer and released us from the
no-shop clause. Essex sought funding from its lender to
11
fund the purchase of the local exchange lines we had been pursuing. However,
without the venture firm's equity capital, Essex's lender refused to participate
in the purchase of any lines.
In January 2002, we began speaking with a CLEC that expressed interest
in purchasing Essex, including all of its liabilities, and leasing space from us
in our headquarters building. The transaction required the consent of our
lender, which initially indicated it was not willing to lend to the potential
purchaser. While trying to negotiate other financing arrangements with our
lender, the potential purchaser acquired approximately 200,000 lines from
another entity and lost interest in purchasing our Essex customer base.
With the loss of this potential purchaser, in February 2002 our lender
put us on notice that it would begin to sell shares of common stock of Talk
pledged by us as collateral in an effort to pay down Essex's loan. The lender
also requested secured guarantees from all of our other subsidiaries and a
written agreement that limited over-advances to Essex under the REVL and
eliminated the three times cash collections formula under which Essex was
borrowing.
We continued to pursue other buyers for the assets of Essex and
received preliminary indications of interest at a purchase price that amounted
to approximately $50 a line, or one times monthly revenues. Potential buyers
pointed to the recent bankruptcy sale of the customer base of a competing CLEC
that appeared to approximate $50 a line. We believed our lines were more
valuable as they were not part of a bankruptcy estate and included approximately
10,000 lines in New York, where gross margins on the UNE-P service offering were
higher than most states.
By April 1, 2002, Essex was in default of certain covenants in its loan
agreement, and its lender signed a forbearance agreement giving us until May 11,
2002 to find a buyer for Essex. We continued negotiating with two potential
purchasers that indicated a willingness to pay approximately $150 a line, but we
were unable to come to a written agreement with either one. Because we were
making negotiating progress, Essex's lender extended the forbearance until May
25, 2002. When this deadline could not be met, in June 2002, Essex's lender sold
our remaining shares of Talk.
During the first five months of 2002, our investment banker informed us
of at least four telecommunication companies that indicated preliminary interest
in a merger with, or the purchase of, our company. However, these companies were
not profitable, had substantial debt burdens and, in certain cases, had received
a going concern qualification in the auditor's report from their independent
accounting firm. After conducing preliminary due diligence of the interested
parties, our board of directors concluded that all of the proposed transactions
would be significantly dilutive to our shareholders and that none of these
opportunities could offer long-term value to our stakeholders.
In May 2002, we met with bankruptcy counsel and examined the
possibility of Essex filing for protection under Chapter 11 of the United States
Bankruptcy Code. However, the cash balances of Essex were not sufficient to fund
a reorganization proceeding, and beginning in July 2002, its lender would no
longer advance Essex any cash. The prospects of a bankruptcy filing by Essex
were diminished by our lack of cash to continue forward, our lack of
debtor-in-possession financing, and the large amounts payable to our primary
vendor, Verizon Services, Corp. We anticipated that, following a voluntary
bankruptcy filing by Essex, Verizon would demand large deposits to continue
services to Essex, and Essex had no viable means to secure the cash to make such
deposits.
In April 2002, we commenced negotiations with EAC to structure a
transaction in which we could retain our OSS and our other subsidiaries, and we
could continue as a public company operating both as a CLEC and an OSS provider.
On September 3, 2002, we, Essex and EAC executed the asset purchase agreement
and related documentation.
12
Reasons for the sale of the Assets of Essex
Our board of directors unanimously determined that the sale of
substantially all of the assets of Essex and the other transactions contemplated
by the asset purchase agreement is expedient and in our best interests and the
best interests of our shareholders, Essex and its stakeholders, and unanimously
recommends that our shareholders approve the Sale Proposal.
Our board of directors believes the transactions contemplated by the
asset purchase agreement will be beneficial to our company and our shareholders
and considered a number of positive factors in reaching this conclusion,
including the following:
o if we do not consummate the transaction contemplated by the asset
purchase agreement, we will likely be unable to continue to fund
our operations and will be required to return our customer base
to Verizon, our underlying carrier, as Essex is in default on its
payments to Verizon. Should this loss of the Essex customer base
occur, Essex would have no revenues going forward.
o the $270,000 cash reimbursement we will receive in connection
with the consummation of the transactions contemplated by the
asset purchase agreement will enable us (i) to attempt to build
and increase the value of our other competitive local exchange
carriers, Telecarrier Services Inc., and New Rochelle Telephone
Corp., as ongoing operations; or (ii) to have additional time to
sell the service bureau business of our subsidiary,
TelcoSoftware.com Corp., or our telemarketing subsidiary, Line
One, Inc.; or (iii) to attempt to build our service bureau
business and telemarketing business; or (iv) to find another
entity with which to merge or to purchase to create a more
substantial business entity.
o under the terms of the asset purchase agreement, we are permitted
to continue to compete in the sale of voice and data services to
business and residential consumers. We can therefore continue to
utilize for our shareholders the know-how that our employees have
developed in marketing and providing telephone services to small
businesses and residential consumers. While we are not permitted
under the asset purchase agreement to solicit the customers that
are sold to EAC, the remaining addressable market in the United
States is estimated to be in excess of 200 million local access
lines, giving us a very large potential customer base to which we
can potentially sell services.
o the gain we record on our books from the sale transaction and the
assumption of liabilities by EAC far exceeds the total value of
all of our outstanding shares, based on the recent trading prices
of our common stock.
o based on the history of our discussions with other parties, no
other transaction involving the sale of Essex or its assets is
likely to be more favorable to us and our shareholders.
o the asset purchase agreement enables us to retain our operations
support systems (OSS) that we developed over the last three years
to provision, rate, bill and provide customer service to local
and long distance telephone customers, thus leaving us with a
valuable asset that is needed to generate future business.
o the terms of the asset purchase agreement are reasonable and do
not contain any extraordinary conditions,in order to close the
transactions contemplated by the agreement.
Our board of directors also considered a number of potentially negative
factors in its deliberations
13
concerning the transactions contemplated by the asset purchase
agreement, including:
o the consummation of the transactions contemplated by the asset
purchase agreement is conditioned upon a number of factors,
including: approval by our shareholders, regulatory approvals
from various state and federal agencies, the accuracy of the
representations and warranties of the parties and compliance by
the parties with their obligations under the asset purchase
agreement, and the absence of a decrease in the total number of
local access lines sold of more than 25% from the time the
agreement was signed.
o the failure of the sale to be consummated for any reason would
likely render Essex unable to pay its obligations and could
result in our ceasing operations and/or filing for bankruptcy
protection. Further, under certain circumstances, Essex would owe
EAC $1,000,000 for failure to close and would be obligated to
sell its New York local access lines to EAC for a purchase price
of $50 per line.
o after the consummation of the transactions contemplated by the
asset purchase agreement, we need to rapidly rebuild our revenue
base so that we can support our remaining fixed overhead; as a
result of the sale, our total revenues will be substantially
lower than they are currently and; while we believe our service
bureau subsidiary, TelcoSoftware.com, is a valuable entity, even
with the billing agreement it has in place with Essex (which
agreement is to be assumed by EAC), it will not be generating a
profit on a stand-alone basis.
o the proceeds of the sale and the $270,000 reimbursement discussed
above may not be sufficient to enable us to reach the break even
level before we run out of working capital.
o we will no longer be a licensed carrier in 41 states and we will
have to reapply for licenses in any state in which we want to
sell telephone services.
o Essex will probably cease to exist as an operating entity as a
result of the sale.
o Essex will remain responsible for certain preclosing liabilities
that are not related to the on-going business that EAC is to
acquire.
Our board of directors believes that certain of these negative factors
are unlikely to occur or are unlikely to have a material impact on us, and that
overall, the risks associated with the consummation of the transactions
contemplated by the asset purchase agreement are outweighed by the potential
benefits of the sale.
The foregoing discussion of information and factors considered by our
board of directors is not intended to be all-inclusive. In view of the wide
variety of factors considered, our board of directors did not find it
practicable to quantify or otherwise assign relative weight to the specific
factors considered. However, after taking into account all of the factors set
forth above, our board of directors unanimously determined that the sale of the
assets of Essex and the other transactions contemplated by the asset purchase
agreement was expedient and in our best interests and the best interests of our
shareholders and that we should proceed with the sale of the assets of Essex and
the other transactions contemplated by the asset purchase agreement..
Recommendation of the Board
Our board of directors unanimously recommends that you vote FOR the
sale of substantially all of the assets of Essex to EAC pursuant to the asset
purchase agreement as described in this proxy statement.
14
Asset Purchase Agreement
Following is a description of the material provisions of the asset
purchase agreement. We do not purport to describe all of the terms of the asset
purchase agreement. The full text of the asset purchase agreement is attached to
this proxy statement as Appendix A and is incorporated into this proxy
statement. All shareholders are urged to read the asset purchase agreement in
its entirety because it is the legal document that governs the transaction and
the principal document pursuant to which we propose to sell the assets of Essex
to EAC.
Purchased Assets. We propose to sell to EAC substantially all of the
assets of Essex. Included in such sale are the following items relating to the
Essex business, subject to certain exclusions in the asset purchase agreement:
o all customer accounts and related account balances of current
customers and former customers
o all outstanding shares of Essex Telecommunications of Virginia,
Inc.
o certain customer lines
o certain bank account balances and pre-paid deposits
o all contracts, commitments and arrangements
o all maintenance, service and warranty agreements associated with
equipment and software
o all software programs, billing systems and management information
systems
o all account balances from interexchange carriers for carrier
access billing
o all books and records
o all equipment and other inventory
o the corporate names and logos of Essex
o all registries, applications, permits, licenses, authorizations
and government approvals
o all goodwill associated with the Essex business
Excluded Assets. The following assets of Essex will be excluded from
the sale and will remain the property of Essex:
o all shares of common stock of Cordia Corporation
o a limited number of customers
o three automobiles
o certain deposits with third parties
o customer account balances and lines that are or had been serviced
in the BellSouth territory or by our wholly-owned subsidiary, New
Rochelle Telephone Corp.
15
o certain retainer agreements with professionals
o certain furniture and equipment
o a receivable from Cordia Corporation and all receivables from our
affiliates
Assumed Liabilities. EAC agreed to assume certain liabilities of Essex,
including:
o certain accounts payable
o amounts owed to Verizon Services Corp.
o accruals
o accrued payroll and benefits
o certain capital lease obligations
o taxes
The liabilities to be assumed by EAC were estimated at approximately $9,816,500
when the asset purchase agreement was signed. EAC will also assume all
liabilities incurred by Essex in the ordinary course of business after that
date. As certain liabilities of Essex to be assumed by EAC will be paid or
satisfied by Essex in the ordinary course of business, and additional
liabilities will be incurred between September 3, 2002 and the closing date, the
actual amount of liabilities to be assumed by EAC at the closing of the asset
sale may be greater or less than $9,816,500.
Purchase Price. In addition to assumed liabilities set forth above, EAC
agreed to pay Essex a purchase price of $5.00.
Representations and Warranties. The asset purchase agreement contains
customary representations and warranties made by our company and Essex. These
representations and warranties include, among other things, matters relating to
our corporate standing and ability to enter into the asset purchase agreement,
as well as to our ownership of the acquired assets. The asset purchase agreement
also contains customary representations and warranties made by EAC. These
representations and warranties of each party must continue to be true at the
time of closing in order for the other party to be obligated to consummate the
transaction. The representations and warranties shall survive for a period of
one year after the closing date.
Covenants. The asset purchase agreement contains customary covenants
concerning actions that must take place prior to closing. These covenants
contain, among other things, an agreement by our company and Essex not to engage
in discussions with other parties regarding the acquisition of Essex or its
assets, an agreement to cooperate on tax matters and filings, and an agreement
by EAC to preserve the books and records of the Essex business. The parties also
agreed to customary non-disclosure covenants regarding the information and
materials obtained in connection with the transaction. Lastly, we agreed to
change the name of Essex to another name that does not include the words Essex
or a variant thereof and the following specific non-competition covenants:
- Non-Solicitation of Customers. We agreed that, for a period of three
years following the closing date, we will not solicit, within any state in
which Essex provides services as of the closing date, any customer of the
business of Essex as of the closing date without EAC's prior written
consent. We are expressly permitted to continue to sell voice and data
services throughout the United States via certain wholly-owned licensed
subsidiaries, such as New Rochelle Telephone Corp. and Telecarrier
Services, Inc.
16
- Non-Solicitation of Individuals. We agreed that, for a period of one
year following the closing date, we will not (1) attempt to persuade any
director, officer, employee agent, consultant of the business of EAC to
discontinue that individual's status or employment with EAC, or to become
employed in any business that competes with EAC, or (2) hire or retain any
such individual without the written approval of EAC. We may hire, however,
without notification to EAC, any individual whose employment or affiliation
with EAC or Essex had been terminated by September 3, 2002.
Closing. The closing of the asset sale, if approved by our
shareholders, will take place no later than ten days following the date on which
the closing conditions have been satisfied, excused or waived by the applicable
parties. Essex has agreed that, at the closing of the asset sale, it will
deliver to EAC customary closing documents and documents required to transfer
title to the purchased assets.
At the closing, the consulting and funding agreement described in this
proxy statement will terminate. Also, EAC will reimburse us in cash an amount
equal to $270,000 in respect of amounts previously paid by us as a guarantor of
certain indebtedness of Essex to RFC Capital Corp. (now known as Textron
Financial Corp.).
Conditions to Closing. Neither we nor Essex, on the one hand, nor EAC,
on the other hand, is required to close the asset sale if the other party's
representations and warranties are not true and correct in all material respects
on the date of the closing or if the other party has failed to perform in all
material respects all of its obligations under the asset purchase agreement. At
the closing, each party must deliver to the others a certificate indicating that
it is in compliance with these conditions.
Our obligations and the obligation of Essex to close the sale is also
subject to the following conditions:
o receipt of required shareholder approvals
o our lease agreement with Essex (which will be assumed by EAC) for
the office location currently occupied by Essex must be in full
force and effect
o our software billing agreement with Essex (which will be assumed
by EAC) must be in full force and effect
o receipt of a legal opinion from EAC's counsel
o no claim, action, suit or proceeding has been instituted or
threatened to restrain, modify or prevent the carrying out of the
transactions contemplated by the asset purchase agreement or to
seek damages or a discovery order in connection with those
transactions or which may an adverse effect on the assets or
business of Essex
EAC's obligation to close the sale is also subject to the following
conditions:
o receipt of approval of the transaction by our shareholders
o receipt of all necessary permits and regulatory approvals
o receipt of all consents, permits and approvals from third parties
to certain interconnect agreements of Essex
o EAC shall have entered into an agreement with Verizon Services
Corp. to resolve certain potential claims against Essex
17
o EAC shall have entered into an agreement for the existing and
continued financing of Essex's business
o the lease agreement at the office location currently occupied by
Essex must be in full force and effect
o our software billing agreement with Essex must be in full force
and effect
o no claim, action, suit or proceeding has been instituted or
threatened to restrain, modify or prevent the carrying out of the
transactions contemplated by the asset purchase agreement or to
seek damages or a discovery order in connection with those
transactions or which may have, in the reasonably justified
opinion of EAC, an adverse effect on the assets or business of
Essex
o receipt of a legal opinion from our counsel and counsel to Essex
o receipt by EAC of the books and records of Essex
o verification that the number of customer lines included in the
transferred assets is at least 95% of the number of customer
lines listed in the disclosure memorandum
o verification that the number of customer lines detailed in the
disclosure memorandum are not less than 75% of the number of
customer lines existing on the date of the asset purchase
agreement, not including certain lines associated with Telebeam
Communications, Inc.
o the amount of liabilities assumed by EAC, other than those to
Verizon Services Corp., do not exceed $2,250,000
Indemnification. In the asset purchase agreement, the parties agreed to
the customary indemnification obligations listed below. The parties also agreed
that no claim for indemnification could be made unless a single claim or group
of claims (whether or not related) exceeds $50,000. If such claims exceed
$50,000, the parties may seek indemnification for the initial $50,000.
We agreed to indemnify EAC from any losses incurred in connection with
the following:
o any breach of a representation or warranty
o the breach of any covenant or agreement
o any liability or obligation not specifically assumed by EAC.
EAC agreed to indemnify us from any losses incurred in connection with
the following:
o any breach of a representation or warranty
o the breach of any covenant or agreement
o any liability or obligation which is specifically assumed by EAC
18
Termination. The asset purchase agreement may be terminated at any
time prior to the closing date by:
o mutual consent of the parties
o by either party, on 30 days notice, if the other party is in
breach and such breach is not cured within 30 days
o by either party if the transaction does not close by December 31,
2002
o by EAC, if Essex terminates the consulting and funding agreement
If the transaction is terminated for any reason other than by mutual
consent or breach by EAC, EAC may acquire all customer lines of Essex in excess
of the number of lines existing on the date of the asset purchase agreement for
an aggregate cost of $1.00. Also, if we fail to close the transaction for
reasons other than a material uncured breach of the asset purchase agreement by
EAC, then Essex must pay to EAC as liquidated damages the sum of $1,000,000 in
cash and sell to EAC all customer lines in the State of New York at a cost of
$50 per line.
Reimbursement Obligation
In connection with our signing of the asset purchase agreement, we
entered into an agreement with EAC pursuant to which EAC agreed to pay us in
cash and amount equal to $270,000 to reimburse us for amounts previously paid by
us as a guarantor of certain indebtedness of Essex to Essex's lender, Textron
Financial Corp. (formerly known as RFC Capital Corp.). EAC also agreed to lend
us up to $270,000, which amount may be drawn in equal four equal parts on
October 1, 2002, November 1, 2002, December 1, 2002 and January 1, 2003. If the
closing of the asset sale occurs prior to any of those dates, EAC is required to
fund the balance of the loan immediately prior to closing. The loan will be
repaid in full on the closing date from the reimbursement amount to be paid to
us by EAC.
The Consulting and Funding Agreement
Essex and EAC entered into a consulting and funding agreement as of
September 3, 2002 whereby they agreed that from the date of the agreement until
the closing under the asset purchase agreement, the operations of Essex would be
managed by EAC. As compensation for the management services, Essex agreed to pay
EAC a monthly management fee of $10,000, which fee will accrue but not become
payable unless the closing of the asset sale does not occur. During the term of
the agreement, EAC is responsible for all aspects of the business operations of
Essex, and EAC may, at its option, secure financing and transfer to Essex up to
an aggregate amount of $2,000,000 to fund Essex's operations. If the sale of
Essex is completed, Essex will have no obligation to repay any advances made by
EAC. However, if the transaction is not completed, Essex will be obligated to
repay to EAC all interim operating advances made by EAC within 30 days after the
termination of the asset purchase agreement and the consulting and funding
agreement.
Dissenter's Rights
We are a New York corporation. Because the sale of the assets under the
asset purchase agreement may be construed under New York law as a "sale of
substantially all of the assets" of our company, our shareholders who do not
vote in favor of the Sale Proposal may have the right to seek to obtain payment
in cash of the fair value of their shares under Section 910 of the New York
Business Corporation Law ("BCL"). The BCL provides our shareholders with the
right to dissent from the transaction and to obtain payment of the fair value of
their shares if the transaction is consummated. "Fair value" means the value of
the shares immediately before the consummation of the sale, excluding any
appreciation or depreciation in anticipation of the sale unless exclusion is
inequitable. You must follow certain procedures required by Section 623 of the
BCL to dissent from the sale. A copy of Section 623 of the BCL, which governs
the procedures for the exercise of such dissenters' rights under New York law,
is attached as Appendix B. We provide a summary description of the dissenters'
rights of appraisal requirements below. Our description is only a summary and is
qualified in its entirety by reference to the text of Section 623 of the BCL in
Appendix B. We urge you to read these requirements and follow the procedures
precisely as failure to
19
follow all of the steps required by Section 623 will result in the loss of your
dissenters' rights. Any shareholder who votes against the sale may dissent and
elect to exercise appraisal rights under Section 623 of the BCL. A dissenting
shareholder must exercise appraisal rights with respect to all shares of our
common stock that are owned of record and beneficially by the shareholder. A
nominee or fiduciary who holds shares of record for a beneficial owner may not
dissent on behalf of the beneficial owner with respect to less than all shares
held on behalf of the beneficial owner. To dissent and to receive the fair value
in a cash payment, if the merger is effected, a dissenting shareholder must take
each of the following actions:
o file with us, prior to or at the annual meeting and before the
vote, a written objection to the sale (and not withdraw the
objection before the vote); and
o vote against the sale.
The written objection sent by the dissenting shareholder must comply
with the requirement of Section 623 of the BCL. The objection is not required
from any shareholder to whom we did not give notice of the annual meeting or
where the proposed action is authorized by written consent of shareholders
without a meeting. Within 10 days after the vote of shareholders approving the
Sale Proposal, we must give written notice of such authorization by registered
mail to each dissenting shareholder who filed written objection or from whom
written objection was not required and who did not vote in favor of the Sale
Proposal. Within 20 days after the giving of such notice, any shareholder from
whom written objection was not required and who elects to dissent from the
proposed asset sale must file with us a written notice of such election, stating
the dissenting shareholder's name and residence address, the number of shares of
common stock as to which the notice applies and a demand for payment of the fair
value of such shares. Upon consummation of the asset sale, each dissenting
shareholder who dissents in the manner set forth above will cease to have any
rights as a shareholder, except the right to be paid the fair value of such
dissenting shareholder's shares of our common stock and any other rights under
Section 623 of the BCL.
The written notice of election of dissent may be withdrawn by a
dissenting shareholder at any time prior to accepting in writing an offer by us
for shares of our common stock held by the dissenting shareholder, but in no
case later than 60 days after the later of the consummation of the asset sale
and the date we make our written offer. After that time, withdrawal will require
our written consent. If a written notice of election is withdrawn, the
dissenting shareholder will lose his or her dissenter's rights and shall not
have the right to receive payment for his or her shares and he shall be
reinstated to all his or her rights as a shareholder as of the consummation of
the asset sale.
At the time of filing the written notice of election to dissent or
within a month thereafter, a dissenting shareholder must submit all of the
certificates representing his or her shares to us or our transfer agent. We (or
our transfer agent) will then note thereon that a written notice of election to
dissent has been filed in respect of such shares and will then return them to
the dissenting shareholder. Any dissenting shareholder who fails to submit
certificates representing shares of our common stock for such notation will, if
we, at our option, so notify such dissenting shareholder in writing within 45
days after the date that the written notice of election to dissent was filed,
lose his or her dissenter's rights (unless a court, for good cause shown, shall
otherwise direct). Within the later of 15 days after the consummation of the
sale or 15 days after the expiration of the period within which shareholders may
file their notices of election to dissent (but in no event later than 90 days
after the annual meeting), we will be required to make a written offer by
registered mail to each dissenting shareholder who has filed his or her notice
of election to pay for their shares at a specified price which we consider to be
their "fair value." Such offer shall be accompanied by a statement setting forth
the aggregate number of shares with respect to which notices of election to
dissent have been received and the aggregate number of holders of such shares.
The dissenting shareholder will have 30 days to accept this written offer.
We may request a court to determine the rights of dissenting
shareholders and to fix the fair value of our shares. If we do not institute
such a proceeding, any dissenting shareholder may do so. We can not predict the
fair value of any shares that may be determined by a court. Merely voting
against the Sale Proposal will not satisfy the requirements for a written demand
for the payment of fair value of a shareholder's shares or the other actions
specified in Section 623 of the BCL to perfect such appraisal rights, and the
written demand for the payment of
20
the fair value of a dissenting shareholder's shares must be in addition to and
separate from any proxy or vote against the asset sale. ANY SHAREHOLDER WHO DOES
NOT DELIVER TO US BEFORE THE VOTE IS TAKEN WRITTEN NOTICE OF HIS OR HER INTENT
TO DEMAND FAIR VALUE PAYMENT FOR HIS OR HER SHARES OF OUR COMMON STOCK, WHO
VOTES IN FAVOR OF THE SALE PROPOSAL, WHO DOES NOT DEMAND PAYMENT OR WHO DOES NOT
DEPOSIT HIS OR HER COMMON STOCK CERTIFICATES BY THE DATE SET FORTH IN THE
DISSENTERS' NOTICE IS NOT ENTITLED TO FAIR VALUE PAYMENT FOR HIS OR HER SHARES
OF OUR COMMON STOCK UNDER SECTION 623 OF THE BCL.
Regulatory Approvals.
In order to complete the sale of the assets of Essex, Essex and EAC
must receive authorization from, or the transaction will be subject to review
by, various U.S. federal and state governmental agencies. As of the date of this
proxy statement, we have prepared filings to send to the U.S. Federal
Communications Commission and nine states in which Essex is currently doing
business. We are filing a petition seeking approval for the transfer of assets
and the transfer of telecommunications licenses in the states of Colorado,
Connecticut, New Jersey, New York, Rhode Island and West Virginia. EAC is
preparing applications for a certificate of public convenience and necessity in
the states of Massachusetts, Pennsylvania and Virginia. Each of these states
will not allow a license to be sold or transferred from one entity to another
unaffiliated entity. It is possible that one or more other state governmental
agencies will not provide the requested approvals or consents in a timely manner
or at all or may seek, as a condition to any such approvals or consents, various
regulatory concessions. Receipt of all requisite regulatory approvals in all of
the above nine states, with the exception of Colorado and Rhode Island, is
required in order to complete the asset sale. There can be no assurance that all
required regulatory approvals and consents will be obtained within the time
frame contemplated by the asset purchase agreement, on terms that are
satisfactory to the parties, or at all.
Material United States Federal Income Tax Consequences
The following discussion summarizes certain U.S. federal income tax
consequences of the sale of the Essex assets. The discussion is based on the
Internal Revenue Code, Treasury Regulations, existing administrative
interpretations and court decisions, all of which may change, possibly with
retroactive effect. This discussion is not a complete analysis or description of
every potential U.S. federal income tax consequence, and does not address any
consequences under state, local or foreign tax laws or non-income tax laws.
Tax consequences for Us. We will recognize net taxable gains on the
sale of the Essex assets equal to the excess of the amount realized on the sale
over our aggregate adjusted basis in the assets sold. Although the gains will
constitute capital gains, to the extent that we hold the Essex assets as capital
assets, we expect that the gains will be offset by operating losses incurred
during 2002, and/or by net operating loss carry-forwards from previous taxable
years. The losses and/or loss carry-forwards so absorbed will not be available
to offset income and gains that we may realize in the future.
Tax consequences for Our Shareholders. The sale of the Essex assets
will not, in and of itself, cause our shareholders to recognize any income for
federal income tax purposes.
21
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
A VOTE IN FAVOR OF PROXY ITEM 1
ELECTION OF DIRECTORS
(Proxy Item 2)
Our amended and restated by-laws provide that the number of our
directors shall be at least three, except that when all the shares are owned
beneficially and of record by fewer than three shareholders, the number of
directors may be less than three but not less than the number of shareholders.
Subject to the foregoing limitation, such number may be fixed from time to time
by action of our board of directors or of the shareholders, or, if the number of
directors is not so fixed, the number shall be five. In April 1998, our board
fixed the number of directors at six. With the resignation of one member of the
board in June 2002, there are currently three vacancies on our board. We
continue to search for qualified individuals to fill the existing vacancies on
our board of directors. In accordance with our by-laws, the remaining vacancies
will be filled by the affirmative vote of a majority of the remaining directors
who shall serve until their respective successors are duly elected at next
year's annual meeting. The term of office of the directors is one year, expiring
on the date of the next annual meeting, or when their respective successors
shall have been elected and shall qualify, or upon their prior death,
resignation or removal.
Except where the authority to do so has been withheld, it is intended
that the persons named in the enclosed proxy will vote for the election of the
nominees to our board of directors listed below to serve until the date of the
next annual meeting and until their successors are duly elected and qualified.
Although our directors have no reason to believe that the nominees will be
unable or decline to serve, in the event that such a contingency should arise,
the accompanying proxy will be voted for a substitute (or substitutes)
designated by our board of directors
Vote Required
A plurality of the votes cast at the annual meeting by the shareholders
entitled to vote in the election is required to elect the director nominees.
Our board of directors recommend a vote FOR election of each of the
nominees listed below. The names of the nominees and information concerning the
director nominees and their associations as of September 25, 2002, as furnished
by the nominees, follows:
Principal Occupation for Past Five Years and
Name Age Current Public Directorships or Trusteeships
- ---- --- --------------------------------------------
Joel Dupre 49 Director since 1990; Chairman of our
board of directors since March 1995;
President of OneDotSource LLC from March
2000 to present; President of the Sirco
Division of Interbrand L.L.C., a
manufacturer and distributor of apparel
accessories and luggage, from August
1999 to March 2000; our Chief Executive
Officer from March 1995 to August 1999.
Eric M. Hellige 47 Director since 1995 and our Secretary;
Partner for more than five years of
Pryor Cashman Sherman & Flynn LLP, our
outside counsel.
Paul H. Riss 47 Director since 1995; our Chief Executive
Officer since August 1999 and our Chief
Financial Officer and Treasurer since
November 1996.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires our directors and executive officers, and persons who
own more than ten percent of a registered class of our equity securities, to
file with the Securities and Exchange Commission initial reports of ownership
and reports of changes in ownership of our common stock and other equity
securities. Officers, directors and 10% shareholders are required by Commission
regulation to furnish us with copies of all Section 16(a) forms they file.
22
Based solely on our review of the copies of such reports we received,
we believe that for the fiscal year 2001, all Section 16(a) filing requirements
applicable to our officers, directors and 10% shareholders were complied with.
Board Meetings and Committees; Management Matters
Our board of directors held five meetings during the fiscal year ended
November 30, 2001. Each director attended at least 75% of the board of directors
and committee meetings of which he was a member during such time as he served as
a director. From time to time, the members of our board of directors act by
unanimous written consent pursuant to the laws of the State of New York. No fees
are paid to directors for attendance at meetings of the board of directors.
Our board of directors has a stock option committee, which met one time
during the fiscal year ended November 30, 2001 and currently consists of Eric M.
Hellige and Joel Dupre. The stock option committee has authority to grant
options to our executive officers under the 1995 Stock Option Plan. In October
1997, our board of directors established an audit committee, which met one time
during the fiscal year ended November 30, 2001. The board of directors does not
have standing nominating or compensation committees or, except in the case of
the grant of stock options by the stock option committee, any committee
performing similar functions.
We have an audit committee currently composed of Eric M. Hellige and
Joel Dupre. The third member of the audit committee during fiscal 2001 resigned
from our board of directors in June 2002. We continue to search for a qualified
individual to fill the third position of the audit committee. The audit
committee members are independent directors as defined by the rules of the
National Association of Securities Dealers. The audit committee is governed by a
written charter approved by our board of directors.
Report of the Audit Committee
The audit committee reviews our financial reporting process on behalf
of our board of directors. Management has the primary responsibility for the
financial statements and the reporting process, including the system of internal
controls. The independent auditors are responsible for performing an independent
audit of the consolidated financial statements to ensure that those statements
were prepared in accordance with generally accepted accounting principles and
report thereon to our board of directors. The audit committee reviews and
monitors these processes.
Within this framework, the audit committee has reviewed and discussed
the audited financial statements with management and the independent auditors.
Management has affirmed to the audit committee that our consolidated financial
statements were prepared in accordance with generally accepted accounting
principles. The audit committee has discussed with the independent auditors
those matters required to be discussed by Statement of Auditing Standards No. 61
(Codification of Statements on Auditing Standards, AU ss. 380).
In addition, the audit committee has received the written disclosures
and the letter from the independent auditors required by Independence Standards
Board Standard No. 1 (Independent Standards Board Standard No. 1, Independence
Discussions with Audit Committees), and has also discussed with the independent
auditors, the auditor's independence from management and our company. In
connection with the new standards for independence of our independent auditors
promulgated by the Securities and Exchange Commission, the audit committee has
undertaken to consider whether the provision of any non-audit services (such as
internal audit assistance and tax-related services) by our independent auditors
is compatible with maintaining the independence of the independent auditors when
the independent auditors are also engaged to provide non-audit services.
The audit committee also discussed with our independent auditors the
overall scope and plans for their audit, their evaluation of our internal
controls and the overall quality of our financial reporting.
23
In reliance on the reviews and discussions referred to above, the audit
committee has recommended to the board of directors that the audited
consolidated financial statements be included in our Annual Report on Form 10-K
for the year ended November 30, 2001.
Audit Committee
Joel Dupre, Member
Eric M. Hellige, Member
EXECUTIVE COMPENSATION
Summary of Cash and Certain Other Compensation
The following table sets forth, for the fiscal years indicated, all
compensation awarded to, earned by or paid to Mr. Paul H. Riss, our Chief
Executive Officer, and to Mr. Joel Dupre, our Chairman of the Board and former
Chief Executive Officer (collectively referred to as the "Named Executives").
None of our other executive officers received more than $100,000 in compensation
during fiscal 2001.
Compensation Table
Long-Term
Annual Compensation Compensation Awards
------------------- -------------------
Name and Fiscal Other Annual All Other
Principal Position Year Salary($) Bonus($) Compensation ($) Options(#) Compensation
- ------------------ ---- --------- -------- ---------------- ---------- ------------
Paul H. Riss(1) 2001 $150,000 None None None None
Chief Executive Officer, 2000 150,000 $10,225 None 400,000 None
Chief Financial Officer 1999 121,492 None None 150,000 None
and Treasurer
Joel Dupre 2001 --- None 20,000 None
Chairman of the Board 2000 --- None None None None
and former Chief 1999 $133,000 None 150,000 None
Executive Officer None
None
_______________
(1) Mr. Riss has been Chief Financial Officer and Treasurer since November 1996
and was appointed Chief Executive Officer in August 1999.
Stock Option Grants
The following table sets forth individual grants of stock options and
stock appreciation rights ("SARs") made during fiscal 2001 to each of the Named
Executives.
24
Option/SAR Grants In Last Fiscal Year
Potential Realizable Value
at Assumed Annual Rates of
Number of Percent of Total Stock Price Appreciation
Securities Options/SARs For Option
Underlying Granted to Exercise or Term(3)
Options/SARs Employees in Base Price Expiration --------------------------
Name Granted(1) Fiscal Year(2) ($/Share) Date 5% ($) 10% ($)
---- ---------- -------------- --------- ---- --------------
Joel Dupre................. 10,000 5.2% 0.97 12/04/05 2,677 5,936
Joel Dupre................. 10,000 5.2% 0.97 12/04/05 2,677 5,936
_______________
(1) No SARs were granted in fiscal 2001.
(2) In fiscal 2001, we granted to employees options to purchase an
aggregate of 194,000 shares.
(3) The amounts shown in these two columns represent the potential
realizable values using the options granted and the exercise price.
The assumed rates of stock price appreciation are set by the
Commission's executive compensation disclosure rules and are not
intended to forecast the future appreciation of our common stock.
Stock Option Exercises
The following table contains information relating to the exercise of
stock options by the Named Executives in fiscal 2001, as well as the number and
value of their unexercised options as of November 30, 2001.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
Number of Securities Underlying Value of Unexercised
Shares Unexercised Options In-the-Money Options at Fiscal
Acquired on Value at Fiscal Year-End(#)(1) Year-End ($)(2)
------------------------------ -----------------------------
Name Exercise (#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ ----------- ----------- ------------- ----------- -------------
Paul H. Riss............. -- -- 340,000 350,000 -- --
Joel Dupre............... -- -- 240,000 10,000 -- --
________________
(1) The sum of the numbers under the Exercisable and Unexercisable column
of this heading represents each Named Executive's total outstanding
options to purchase shares of common stock.
(2) The dollar amounts shown under the Exercisable and Unexercisable
columns of the heading represent the number of exercisable and
unexercisable options, respectively, that were "In-the-Money" on
November 30, 2001, multiplied by the difference between the closing
price of the common stock on November 30, 2001, which was $0.58 per
share, and the exercise price of the options. For purposes of these
calculations, In-the-Money options are those with an exercise price
below $0.58 per share.
25
Board of Directors Compensation
We do not currently compensate directors for service on our Board of
directors. We maintain a Non-Employee Director Stock Option Plan. Under the
plan, each non-employee director is granted a nonstatutory option to purchase
10,000 shares of common stock on the date on which he or she is elected,
re-elected or appointed to our board of directors. Options granted pursuant to
the plan will vest in full on the one-year anniversary of the grant date,
provided the non-employee director is still one of our directors at that time.
The exercise price granted under the plan is 100% of the fair market value per
share of the common stock on the date of the grant.
Report on Executive Compensation
Our board of directors determines the compensation of the Chief
Executive Officer and sets policies for and reviews with the Chief Executive
Officer the compensation awarded to the other principal executives. The
compensation policies utilized by our board of directors are intended to enable
us to attract, retain and motivate executive officers to meet our goals using
appropriate combinations of base salary and incentive compensation in the form
of stock options. Generally, compensation decisions are based on contractual
commitments, if any, as well as corporate performance, the level of individual
responsibility of the particular executive and individual performance. During
the fiscal year ended November 30, 2001, Paul H. Riss was our sole executive
officer.
Salaries. Base salaries for our executive officers are determined
initially by evaluating the responsibilities of the position held and the
experience of the individual, and by reference to the competitive marketplace
for management talent, including a comparison of base salaries for comparable
positions at comparable companies within our industry. We believe our salaries
are below average as compared to our competitors. Annual salary adjustments are
determined by evaluating the competitive marketplace, our performance, the
performance of the executive, particularly with respect to the ability to manage
our growth, the length of the executive's service to us and any increased
responsibilities assumed by the executive.
Stock Incentives. Stock incentives may be granted under our 1995 Stock
Option Plan, as amended, by our board of directors or the stock option
committee, in their sole discretion, to our officers and employees to reward
outstanding performance during the prior fiscal year and as an incentive to
continued outstanding performance in future years. In evaluating the performance
of officers and employees other than the Chief Executive Officer, the stock
option committee consults with the Chief Executive Officer and others in
management, as applicable. In an effort to attract and retain highly qualified
officers and employees, stock incentives may also be granted by the stock option
committee, at its sole discretion, to newly-hired officers and employees as an
inducement to accept employment with us.
Compensation of Chief Executive Officer. Paul H. Riss, our Chief
Executive Officer, assumed the duties of Chief Executive Officer, in addition to
his duties as Chief Financial Officer and Treasurer, in September 1999 following
our sale in August 1999 of substantially all of the assets of our former luggage
division. Mr. Riss' compensation for fiscal 2001 was $150,000 per annum. In an
effort to incent Mr. Riss to grow our telecommunications business and to further
align the compensation of Mr. Riss with the interests of shareholders, in
September 1999 and in October 2000, our board of directors granted incentive
stock options to Mr. Riss that will vest only upon our achievement of certain
revenue goals.
Board of Directors Interlocks and Insider Participation in Compensation
Decisions
The following members of our board of directors were officers of our
company or one of our subsidiaries during the fiscal year ended November 30,
2001: Eric M. Hellige and Paul H. Riss. Such members participated in
deliberations of our board of directors concerning executive officer
compensation during the fiscal year ended November 30, 2001.
26
Certain Relationships and Related Transactions
Mr. Riss was a member of the board of directors of RiderPoint, Inc.,
which was our affiliate during fiscal year 2000. We sold our interest in
RiderPoint, Inc. on February 2, 2001 and Mr. Riss resigned from the board of
directors of RiderPoint, Inc. at the time of that sale.
Eric M. Hellige, one of our directors, is a member of Pryor Cashman
Sherman & Flynn LLP, our outside counsel ("Pryor Cashman"). Fees paid by us to
Pryor Cashman for legal services rendered during the fiscal year ended November
30, 2001 did not exceed 5% of such firm's or our revenues.
Joel Dupre, our Chairman of the Board of Directors, is the President of
OneDotSource LLC. We sold approximately $126,000 of goods and services to
OneDotSource LLC during fiscal 2001.
We believe that all purchases from or transactions with affiliated
parties were on terms and at prices substantially similar to those available
from unaffiliated third parties.
COMMON STOCK OWNED BY DIRECTORS,
OFFICERS AND OTHER BENEFICIAL OWNERS
The table below sets forth, as of September 25, 2002, the names,
addresses and number of shares of our common stock beneficially owned by all
persons known to our management 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 September 25, 2002 we had a total of 15,619,282
shares of common stock outstanding:
Shares
Beneficially Percent of Outstanding
Name and Address Owned Common Stock
- ---------------- ----- ------------
Joel Dupre....................................... 974,668(1) 6.0%
c/o eLEC Communications Corp.
509 Westport Avenue
Norwalk, Connecticut 06851
Geils Ventures LLC............................... 890,350 5.5
54 Danbery Road, Suite 38
Ridgefield, Connecticut 06877
Paul H. Riss..................................... 514,500(2) 3.2
Eric M. Hellige.................................. 78,000(3) *
All directors and executive officers as a
as a group (three individuals)................. 1,567,168 9.7
__________________
* Less than 1%.
(1) Includes 170,000 shares of common stock subject to options that are
presently exercisable.
27
(2) Includes 270,000 shares of common stock subject to options that are
presently exercisable.
(3) Includes 35,000 shares of common stock subject to options and warrants
that are presently exercisable. Does not include 60,000 shares of
common stock subject to options that are presently exercisable held by
Pryor Cashman Sherman & Flynn LLP, of which Mr. Hellige is a member,
as to which shares Mr. Hellige disclaims beneficial ownership.
INDEPENDENT PUBLIC ACCOUNTANTS
Nussbaum Yates & Wolpow, P.C. ("Nussbaum"), served as our independent
public accountants for the fiscal year ended November 30, 2001. A representative
of Nussbaum is expected to attend the annual meeting, and such representative
will have the opportunity to make a statement if he so desires and will be
available to respond to appropriate questions from shareholders.
Audit Fees. Nussbaum billed us $99,780 for the independent audit of our
annual financial statements for fiscal 2001 and for the review of the financial
statements contained in our Quarterly Reports on Form 10-Q.
Other Fees. Nussbaum billed us $21,143 for all other fees for
professional services rendered for the most recent fiscal year, which included
the preparation of our consolidated tax return and sundry other matters.
SHAREHOLDER PROPOSALS
Proposals of shareholders intended for presentation at our 2003 annual
meeting of shareholders and intended to be included in our proxy statement and
form of proxy relating to that meeting must be received at our executive offices
by May 30, 2002.
OTHER BUSINESS
Other than as described above, our board of directors knows of no
matters to be presented at the annual meeting, but it is intended that the
persons named in the proxy will vote your shares according to their best
judgment if any matters not included in this proxy statement do properly come
before the meeting or any adjournment thereof.
ANNUAL REPORT
Our Annual Report on Form 10-K for the year ended November 30, 2001,
including financial statements, is being mailed with this proxy statement. If,
for any reason, you do not receive your copy of the Report, please contact Mr.
Paul H. Riss, Chief Executive Officer, eLEC Communications Corp., 543 Main
Street, New Rochelle, New York 10801, and another will be sent to you.
By Order of the Board of Directors,
/s/ Joel Dupre
-----------------------
JOEL DUPRE,
Chairman of the Board
Dated: October 7, 2002
New Rochelle, New York
28
Appendix A
ASSET PURCHASE AGREEMENT
This ASSET PURCHASE AGREEMENT, dated as of September 3, 2002, is made
by and among ESSEX ACQUISITION CORP., a Delaware corporation ("Buyer"), ESSEX
COMMUNICATIONS, INC., a New York corporation ("Essex"), and eLEC COMMUNICATIONS
CORP., a New York corporation ("ELEC") (Essex and ELEC are sometimes hereinafter
referred to as "Sellers").
R E C I T A L S
---------------
WHEREAS, Buyer wishes to purchase from Essex, and Essex wishes to sell
to the Buyer, certain of the assets of Essex used in the competitive local
exchange carrier ("CLEC") business of Essex (the "Business"), a wholly owned
subsidiary of ELEC.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties and agreements contained herein, the parties agree
as follows:
ARTICLE 1
DEFINITIONS USED IN THIS AGREEMENT
As used in this Agreement, the following terms have the following
meanings:
"Acquired Assets" has the meaning set forth in Section 2.2.
"Acquired Inventory" has the meaning set forth in subsection 2.2(e).
"Applicable Laws" has the meaning set forth in Section 3.3(b).
"Assumed Liabilities" has the meaning set forth in Section 2.9.
"Bill of Sale" means the assignment and bill of sale in the form of
Exhibit A attached hereto delivered by Essex to Buyer at the Closing
transferring the Acquired Assets to Buyer.
"Business" has the meaning set forth in the Recitals.
"Closing" means the consummation of the transactions contemplated by
this Agreement. The time and place of the Closing are set forth in Section 2.1.
"Closing Date" has the meaning set forth in Section 2.1.
"Consulting and Funding Agreement" has the meaning set forth in
Section 2.4.
"Contracts" has the meaning set forth in subsection 2.2(b).
"Disclosure Memorandum" means the disclosure memorandum delivered by
Sellers to Buyer at or prior to the execution of this Agreement.
"Equipment" shall mean all equipment detailed on Section 2.2(a) of the
Disclosure Memorandum.
"Excluded Assets" has the meaning set forth in Section 2.3.
"Effective Date" means the date of execution of this Agreement, which
is September 3, 2002.
"Financial Statements" has the meaning set forth in subsection 3.4(a).
"Goodwill" has the meaning set forth in subsection 2.2(g).
"Instrument of Assumption" means the instrument of assumption of
liability in the form of Exhibit B attached hereto delivered by Buyer to the
Seller at the Closing assuming the Assumed Liabilities.
"Internal Revenue Code" means the Internal Revenue Code of 1986, as
amended.
"Legal Action" means any legal, regulatory, administrative or
arbitrative action, suit, claim, investigation or proceeding.
"Preclosing Operating Expenses" has the meaning set forth in Section
2.6.
"Purchase Price" has the meaning set forth in Section 2.4.
"Service Agreements" has the meaning set forth in subsection 2.2(c).
"Software" has the meaning set forth in subsection 2.2(f).
"Software Licenses" has the meaning set forth in subsection 2.2(f).
"Tax" or "Taxes" means all federal, state or local income, gross
receipts, sales, use, employment, franchise, profits, property, excise or other
taxes, fees, stamp taxes and duties, assessments or charges of any kind
whatsoever (whether payable directly or by withholding), together with any
interest and any penalties, additions to tax or additional amounts imposed by
any taxing authority with respect thereto.
"Transferred Employees" has the meaning set forth in Section 6.1.
2
ARTICLE 2
THE CLOSING
2.1 Time and Place of Closing. The closing (the "Closing") shall take
place at the offices of Dreier Baritz & Colman, 750 East Palmetto Park Road,
Suite 750, Boca Raton, Florida 33432, or at such other location as shall be
agreed to in writing by the parties, on that date which is not more than ten
days following that date that the Closing conditions provided in Section 7 have
been satisfied, excused or waived (or such other date as the parties shall
mutually agree), at which time the conditions to the parties' respective
obligations to close hereunder shall have been fully satisfied or waived. For
all purposes hereof, the closing shall be deemed to have occurred at 12:01 AM on
the day of the Closing (hereinafter called the "Closing Date").
2.2 Purchase and Sale of the Acquired Assets. Subject to the terms and
conditions hereof, at the Closing, Essex agrees to sell to Buyer and Buyer
agrees to purchase from Essex, pursuant to the Bill of Sale, and for the
consideration set forth in Section 2.4, the following tangible and intangible
assets and personal property owned by Essex and used in connection with the
conduct of the Business, wherever located (collectively, the "Acquired Assets"):
(a) all right, title and interest of Essex in and to such assets as
detailed on Section 2.2(a) of the Disclosure Memorandum, which shall include,
but not be limited to, a detailed listing of all active and inactive customers
(noted as such), customer addresses, and customer lines relating thereto;
(b) all right, title and interest of Essex in, to and under all
contracts, agreements, commitments, arrangements and understandings, both oral
and written, express and implied, associated with the Acquired Assets, in which
Essex has been granted, among other things, the exclusive (or non-exclusive, as
the case may be) right to operate, service, manage and otherwise maintain the
Business (collectively, the "Contracts"), listed on Section 2.2(b) of the
Disclosure Memorandum, or entered into on or after the Effective Date;
(c) all right, title and interest of Essex in, to and under all
maintenance, service and warranty agreements associated with any Equipment or
Software (all such Equipment and Software being listed on Section 2.2(a) of the
Disclosure Memorandum), including but not limited to (i) all remaining and
transferable warranties associated with any management information systems,
software and programs installed in or utilized in connection with the Equipment
and the Business as it relates thereto; (ii) all maintenance, service and
warranty agreements listed on Section 2.2(c) of the Disclosure Memorandum, or
entered into on or after the Effective Date (all of the foregoing maintenance,
service and warranty agreements being hereinafter collectively referred to as
the "Service Agreements") and (iii) the services agreement relating to the
billing software system and services provided by TelcoSoftware.com, Inc., a
wholly owned subsidiary of ELEC;
(d) all books and records, including electronic or computerized records
and any documentation derived therefrom which relates to the Business and the
Equipment, including without limitation, service records, quality control
information, sales and marketing information, customer lists and information,
personnel records for those employees of Essex who are becoming Transferred
Employees, usage and traffic reports, call data summaries, and any books and
records
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relating to or containing information concerning any coin, commission, surcharge
or other revenue generated by the Acquired Assets, commissions payable to site
or property owners or lessees in connection therewith, and any other relevant
financial data, provided, however, that Sellers shall be permitted to keep the
originals of all financial, profit and loss analyses and tax related items and
produce copies of same to Buyer;
(e) all supplies, spare parts, miscellaneous equipment and other items
of inventory, utilized or operated in connection with the Business (wherever the
same may be located) which relate to the Business and are on hand on the Closing
Date, including but not limited to those listed on Section 2.2(e) of the
Disclosure Memorandum (collectively, the "Acquired Inventory");
(f) all rights of Essex in and to the software, programs, billing
systems and management information systems installed in or utilized in
connection with the Acquired Assets and the Business as it relates thereto
(collectively, the "Software"), together with all licenses and rights of use
granted to Essex with respect thereto (collectively, the "Software Licenses");
(g) the corporate names and logos (if any) of Essex, together with all
goodwill associated with or otherwise accruing to Essex with respect to such
names, logos, the Contracts and the Business as it relates thereto (the
"Goodwill");
(h) subject to receipt of necessary consents and to the extent legally
transferrable, all registries, applications, permits, franchises, licenses,
authorizations and approvals submitted or filed by Essex to or with any
governmental or regulatory authority, or issued or granted by any such authority
to Essex, in connection with operation of the Equipment and the Business as it
relates thereto, including the CLEC certifications and other licenses listed on
Section 2.2(h) of the Disclosure Memorandum (collectively, "Authorizations");
(i) all right, title and interest of Essex in and to all other tangible
and intangible assets or personal property of Essex used in connection with the
conduct of the Business and not otherwise enumerated in Section 2.2 hereof
(excepting those which are specifically identified as Excluded Assets in Section
2.3 hereof);
provided, however, Essex shall not be required to sell to Buyer, and the term
"Acquired Assets" shall not include, any assets of Essex on the date hereof
(whether or not listed on Section 2.2 of the Disclosure Memorandum) that, in the
ordinary course of business of Essex and without any breach by Essex of the
terms hereof, are no longer assets of Essex on the Closing Date.
2.3 Excluded Assets. It is expressly understood and agreed that the
assets listed on Section 2.3 of the Disclosure Memorandum (collectively, the
"Excluded Assets") are specifically excepted from the Acquired Assets being
transferred to Buyer pursuant to the terms and conditions hereof.
2.4 Purchase Price and Payment. In consideration of the transfer to
Buyer of the Acquired Assets at the Closing and the execution of that certain
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Consulting and Funding Agreement between Buyer and Essex dated contemporaneously
herewith, a copy of which is attached hereto as Exhibit C (the "Consulting and
Funding Agreement"), and subject to the terms and conditions hereof, Essex shall
sell the Acquired Assets for an aggregate consideration of $5.00, payable to
Essex at the Closing, together with the assumption of such liabilities as
hereinafter described (hereinafter referred to as the "Purchase Price").
2.5 Federal, State, City, Sales and Transfer Tax Liabilities.
(a) Provided this Agreement closes in accordance with its terms, Buyer
shall assume sole responsibility and liability for the timely payment of all
federal, state and local sales, use, transfer and other Taxes, if any, that are
listed in Section 3.12 of the Disclosure Memorandum, or arise from the ordinary
course operation of the Business or any acquisitions consummated by Essex on and
after July 31, 2002 and on or prior to the Closing Date (or otherwise accrued as
of the Closing Date) or the sale or transfer of the Acquired Assets, the
liability for which may be imposed upon ELEC, Essex or their respective officers
or directors in the absence of Sellers' payment and satisfaction in full. In
connection herewith, Buyer's obligation hereunder may be satisfied utilizing any
funding facility in place in favor of Essex prior to the Closing Date in
accordance with the Consulting and Funding Agreement.
(b) Without limiting the generality of the foregoing, Essex agrees to
provide Buyer with a written statement showing the amount of any unpaid tax,
interest or penalties as of the Closing Date. Buyer will pay all such taxes as
it collects the taxes from the accounts receivable balances that are being
acquired hereunder from Essex.
(c) In the event that Buyer and/or ELEC and/or Essex receives a notice
from any such taxing authorities which sets forth a claim for tax, interest or
penalty due and owing from Essex (a "Tax Notice") relating to any pre-closing
business operations or transactions that are listed on Section 3.12 of the
Disclosure Memorandum or arose from the ordinary course operation of the
Business on or after July 31, 2002 and on or prior to the Closing Date, Buyer
shall pay all such monies to such state within ten (10) days of Buyer's and/or
Sellers and/or Essex receipt of such Tax Notice. In the event that Buyer fails
to timely and fully pay such monies, then ELEC may elect to pay such monies on
Buyer's behalf, in which case ELEC shall, upon notice thereof to Buyer, provided
there is a Closing with respect to this Agreement, be promptly reimbursed by
Buyer in an amount equivalent to the amount of such tax monies paid by ELEC.
2.6 Intentionally deleted.
2.7 Intentionally deleted.
2.8 Allocation of Purchase Price. Notwithstanding anything to the
contrary contained herein, the values assigned to the various assets which
constitute the Acquired Assets and to the Covenant Not to Compete/Not to Solicit
contained in subsection 5.10(a) hereof shall be as follows:
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Asset: Value:
------ ------
(a) Contracts $ 0.00
(b) Equipment $ 50,000.00
(c) Covenant Not to Compete/Not to Solicit $ 0.00
(d) Goodwill $5,060,041.00
(e) Accounts Receivable $1,663,992.00
(f) All other Acquired Assets $ 136,398.00
Buyer and Essex agree that such values were separately established as a result
of good faith bargaining and that in reporting the transactions contemplated by
this Agreement to the Internal Revenue Service as is required by Section 1060 of
the Internal Revenue Code, they will use such prices and cooperate with each
other in meeting the requirements of the Internal Revenue Code and the
regulations promulgated thereunder. It is agreed and understood that the parties
will, if necessary, adjust the foregoing values based on changes which occur
between the Effective Date and the Closing Date.
2.9 Assumption of Certain Liabilities. Provided this Agreement closes
in accordance with its terms, Buyer shall agree to pay, perform and discharge
when due all liabilities of Essex listed on Section 2.9 of the Disclosure
Memorandum. In addition, provided this Agreement closes in accordance with its
terms, Buyer shall agree to pay, perform and discharge (i) those liabilities,
charges and operating expenses associated with the Acquired Assets and the
Business as it relates thereto which are incurred in the ordinary course of
business on and after the Effective Date; and (ii) the liabilities and
obligations of Essex arising on and after and to be performed on and after the
Effective Date under such Contracts, Service Agreements and Software Licenses as
are included in the Acquired Assets and in fact assigned to Buyer (or, in the
case of consents to assign which have not been properly obtained therefor, where
and for so long as the benefits under such Contracts, Service Agreements and
Software Licenses are in fact made available to Buyer), other than those
liabilities and obligations resulting from a breach by Sellers of the Contracts,
Service Agreements or Software Licenses before the Effective Date (Section 2.9
of the Disclosure Memorandum and items (i) and (ii) above being hereinafter
collectively referred to as the "Assumed Liabilities"). Sellers expressly
acknowledge and agree that, except as expressly set forth herein, Buyer does not
and shall not assume any liabilities and obligations of either Seller (i) in
respect of any Contract, Service Agreement or Software License if the same is
neither transferred nor assigned to, or the benefits under which are not
otherwise made available to, Buyer on and after the Closing Date; and (ii) other
than those expressly defined as Assumed Liabilities in this Section 2.9.
2.10 Non-Assignment of Certain Contracts, Rights, Etc. Notwithstanding
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anything in this Agreement to the contrary, this Agreement shall not constitute
or be construed as an assignment by Essex to Buyer of any contract, agreement,
license or commitment (or of any claim, duty or right arising therefrom), if an
attempted assignment of the same without the consent of the other party thereto
would constitute a breach thereof or otherwise be ineffective to complete the
assignment. In the case of contracts and rights, if any, which cannot be
effectively transferred to Buyer without the consent of third parties, and which
consents have not been obtained and delivered to Buyer on the Closing Date,
Sellers shall use their respective best efforts to obtain all such consents and
deliver them to Buyer promptly thereafter. Any costs or expenses incurred in
obtaining such consents are being and shall be borne solely by Essex. If any
consent for assignment of an agreement is not in fact obtained, then to the
extent reasonably possible, Essex shall keep the agreement in effect and shall
give Buyer the benefit of such agreement to the same extent as if Essex had not
been excluded from assigning such agreement to Buyer.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE SELLERS
Sellers, jointly and severally, make the following representations and
warranties to Buyer, each of which shall be deemed material, and Buyer, in
executing, delivering and consummating this Agreement, have relied upon the
correctness and completeness of each of such representations and warranties:
3.1 Organization. Essex is a corporation duly organized, validly
existing and in good standing under the laws of the State of New York and has
the requisite power and authority to own all of its properties and assets and
carry on the Business as now being conducted. Sellers have heretofore provided
Buyer with a true, complete and correct copy of Essex's Certificate of
Incorporation and Bylaws.
3.2 Authority Relative to this Agreement. Sellers have the power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery by Sellers of this
Agreement and the consummation of the transactions contemplated hereby has been
duly and validly authorized by all necessary action on the part of Sellers
(including boards of director and shareholder action (as of the Closing Date),
if applicable). This Agreement has been duly and validly executed and delivered
by Sellers and constitutes each Seller's valid, binding and enforceable
obligation.
3.3 No Violations.
(a) Except as listed on Section 3.3(a) of the Disclosure Memorandum,
neither the execution, delivery and performance of this Agreement, the
consummation by Sellers of the transactions contemplated hereby, nor compliance
by Sellers with any of the provisions hereof shall (i) conflict with or result
in any breach of any provision of the Certificate of Incorporation or Bylaws of
Essex; (ii) result in a default (or give rise to any right of termination,
cancellation or acceleration) under any of the terms, conditions or provisions
of any note, bond, mortgage, indenture, license,
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agreement, lease or other instrument or obligation to which either Seller or any
of the Acquired Assets may be bound, except for such defaults (or rights of
termination, cancellation or acceleration) as to which requisite waivers or
consents have been obtained or the obtaining of which has been expressly waived
in writing by Buyer; or (iii) violate any order, writ, injunction, decree,
statute, rule, regulation or ordinance applicable to either Seller or any of the
Acquired Assets.
(b) All licenses, permits, governmental and regulatory authorizations
and approvals held by Essex in respect of the Acquired Assets or the Business
are valid and there are no violations thereof. Essex possesses all licenses,
permits, authorizations and approvals necessary for the conduct of the Business,
and all such licenses, permits, authorizations and approvals are in full force
and effect. Essex has complied in all material respects with all rules,
regulations, orders, laws and ordinances applicable to the Acquired Assets
and/or the Business (collectively, "Applicable Laws"), and Essex has not
received written notice alleging any noncompliance therewith.
3.4 Financial Information. (a) Attached hereto as Exhibit D are true,
complete and correct copies of the unaudited balance sheet and income statement
of Essex for the quarter and six months ended May 31, 2002, and the month ended
June 30, 2002 (collectively, the "Financial Statements"). The Financial
Statements were prepared on an accrual basis, in conformity with generally
accepted accounting principals, and contain all adjustments necessary to present
fairly the assets, liabilities and financial position of Essex with respect to
the Business as of such dates and in accordance with Essex's internal financial
systems and procedures for the Business consistently applied.
(b) All other financial information provided by Sellers before or at
the Closing, including but not limited to copies of tax returns, any and all
information regarding revenues, expenses and charges, is true, complete and
correct in all material respects.
3.5 Litigation. Except as listed on Section 3.5 of the Disclosure
Memorandum, there are no Legal Actions pending or, to the best of either
Seller's knowledge, threatened against either Seller, whether at law or in
equity and whether civil or criminal in nature, before or by any federal, state,
municipal or other court, arbitrator, governmental department, commission,
agency or instrumentality, domestic or foreign, nor are there any judgments,
decrees or orders of any such court, arbitrator, governmental department,
commission, agency or instrumentality outstanding against either Seller (i)
which relate to the Acquired Assets or the Business; or (ii) which seek
specifically to prohibit, restrict or delay consummation of the transactions
contemplated hereby or fulfillment of any of the conditions of this Agreement.
3.6 Defaults. Except as listed on Section 3.6 of the Disclosure
Memorandum, (i) there is not, with respect to any Contract or Service Agreement,
any existing default, or event of default, or event which with or without due
notice or lapse of time or both would constitute a default or event of default,
on the part of either Seller or, to the best of either Seller's knowledge, any
other party thereto, except for such defaults as to which requisite waivers or
consents have been obtained or the obtaining of which has been expressly waived
in writing by Buyer; (ii) neither Seller has any knowledge that any Contract,
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Service Agreement, Software License or Authorization will be terminated or not
renewed; and (iii) all relations between Essex and its customers, vendors,
suppliers, licensors and the relevant governmental or regulatory authorities
are, to the best of Sellers' knowledge, in good standing.
3.7 Equipment, etc. All Equipment and Software being purchased and
transferred to Buyer hereunder is in good working order, reasonable wear and
tear excepted, and is usable in the ordinary course of business.
3.8 Title to Acquired Assets. Except as provided in Section 3.8 of the
Disclosure Memorandum, Essex has, and from and after the Closing, Buyer shall
have, good, marketable and indefeasible title to all of the Acquired Assets,
free and clear of any and all liabilities, mortgages, conditional sales
agreements, security interests, leases, liens, pledges, encumbrances, deeds of
trust, equities, charges, claims, imperfections of title or other burdens
affecting Essex' title to the Acquired Assets.
3.9 Capitalization. All issued and outstanding shares of capital stock
of Essex are duly authorized, validly issued, fully paid and non-assessable and
held of record and beneficially by ELEC. Except as provided in Section 3.9 of
the Disclosure Memorandum, there are no options, warrants, rights of conversion
or other rights, agreements, arrangements or commitments relating to the capital
stock of Essex obligating it to issue or sell any shares of capital stock of, or
other equity interests in, Essex, which outstanding shares shall be released on
or before the Closing Date.
3.10 Absence of Changes. Except as provided in Section 3.10 of the
Disclosure Memorandum, since May 31, 2002, Essex has operated the Business in
the usual and ordinary course, and there has not been (a) any material adverse
change in the operations, properties or condition (financial or otherwise) of
the Business; (b) any damage, destruction or loss (whether or not covered by
insurance) materially and adversely affecting the Business or the Acquired
Assets, or that could reasonably be expected to materially and adversely affect
the Business or the Acquired Assets; or (c) any material loss of, or
deterioration of relations with, customers or suppliers of Essex, the Business
or the Acquired Assets.
3.11 Expenses of the Business. Except as provided in Section 3.11 of
the Disclosure Memorandum, Essex is not delinquent in the payment of any bills,
taxes, fees, charges, expenses, debts, commissions, or other amounts due
relating to the Acquired Assets.
3.12 Taxes. Except as provided in Section 3.12 of the Disclosure
Memorandum, Essex has filed or caused to be filed, all federal, state and local
tax returns which are required to be filed by it in connection with the
Business, and has paid or caused to be paid, or has made adequate provisions on
its books (i.e., reserves) for amounts sufficient for the payment of, all taxes
as shown on such returns or on any assessment received by it, and has made all
estimated tax payments required to be made by it in order to avoid the
imposition of penalties, interest and other additions to tax. No tax liens have
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been filed against Essex, and Essex has not been notified of or otherwise have
knowledge of, any claim being asserted with respect to any such taxes. There is
no action, suit, proceeding, investigation or audit pending or threatened
against Essex in respect of any tax or assessment, nor is any claim for
additional tax or assessment being asserted by any taxing authority whatsoever.
All taxes which Essex is required by law to withhold or collect have been duly
withheld or collected and, to the extent required, paid over to the proper
governmental authorities on a timely basis. All ad valorem taxes which are due
and owing have been paid. No prior tax return of Essex has been audited and
except as listed on Section 3.12 of the Disclosure Memorandum, none of the
officers, directors or employees of ELEC or Essex have been notified or
otherwise advised that such an audit may occur.
3.13 Employee Matters. Except as provided in Section 3.13 of the
Disclosure Memorandum, Essex has complied in all material respects with all
federal, state and local laws, rules and regulations relating to the employment
of labor, including but not limited to those related to wages, hours and payment
of withholding and unemployment taxes. Essex has withheld all amounts required
by law or agreement to be withheld from wages or salaries of its employees and
is not liable for any arrearage of wages or any taxes or penalties for failure
to comply with any of the foregoing. Except as expressly provided in the
Consulting and Funding Agreement or this Agreement, Buyer will not be obligated
to employ any employee of ELEC or Essex or to make any payment or provide any
benefits to any employee of ELEC or Essex on account of services rendered prior
to the Closing Date. Neither Seller is a party to any collective bargaining
agreement or pension or profit sharing or other employee benefit plan which
would require Buyer, as purchaser of the Acquired Assets, to assume or become
obligated to pay any of the obligations or liabilities of Sellers under any such
collective bargaining agreement or pension or profit sharing or other employee
benefit plan.
3.14 Full Disclosure. Sellers have disclosed to Buyer all facts
material to the Acquired Assets and the Business (financial or otherwise). To
the best of both Seller's knowledge or belief, no representation or warranty to
Buyer contained in this Agreement, and no statement contained in the Disclosure
Memorandum, or any certificate, list or other writing furnished to Buyer
pursuant to the provisions hereof, contains any untrue statement of a material
fact or omits to state a material fact necessary in order to make the statements
herein or therein not misleading.
3.15 No Brokers. Neither ELEC nor Essex has engaged, consented to or
authorized any broker, finder, investment banker or other third party to act on
its behalf, either directly or indirectly, as a broker or finder in connection
with this Agreement and the transactions contemplated hereby.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer makes the following representations and warranties to Sellers,
each of which shall be deemed material, and Sellers, in executing, delivering
and consummating this Agreement, have relied upon the correctness and
completeness of each of such representations and warranties:
4.1 Organization. Buyer is a corporation duly organized, validly
existing and in good standing under the laws of its respective state of
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incorporation and has the requisite corporate power and authority to own all of
its properties and assets and carry on its business as now being conducted.
4.2 Authority Relative to this Agreement. Buyer has the corporate power
and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery by Buyer of this
Agreement and the consummation of the transactions contemplated hereby have been
duly and validly authorized by all necessary corporate action on the part of
Buyer. This Agreement has been duly and validly executed and delivered by Buyer
and constitutes Buyer's valid, binding and enforceable obligation.
4.3 No Violations. Neither the execution, delivery and performance of
this Agreement, the consummation by Buyer of the transactions contemplated
hereby nor compliance by Buyer with any of the provisions hereof shall (i)
conflict with or result in any breach of any provision of the Certificate of
Incorporation or Bylaws of Buyer; (ii) result in a default (or give rise to any
right of termination, cancellation or acceleration) under any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, license,
agreement, lease or other instrument or obligation to which Buyer is a party or
by which Buyer may be bound, except for such defaults (or rights of termination,
cancellation or acceleration) as to which requisite waivers or consents have
been obtained or the obtaining of which has been expressly waived in writing by
Sellers; (iii) violate any order, writ, injunction, decree, statute, rule,
regulation or ordinance applicable to Buyer.
ARTICLE 5
OTHER AGREEMENTS OF THE PARTIES
5.1 Conduct of Business. On and after the Effective Date and prior to
the Closing, Essex shall be managed in accordance with the Consulting and
Funding Agreement.
5.2 Forbearances by Sellers. The parties acknowledge and agree that,
after the Effective Date, and prior to the Closing Date, the Business shall be
conducted pursuant to the Consulting and Funding Agreement. Notwithstanding the
foregoing, and with the express understanding that Essex shall not be liable or
responsible for the acts or omissions of Buyer or its representatives acting
under or in accordance with the Consulting and Funding Agreement, except as
otherwise provided in this Agreement or the Consulting and Funding Agreement,
Essex will not, after the Effective Date and prior to the Closing, without the
prior written consent of Buyer:
(a) sell, dispose of, transfer or encumber any of the Acquired Assets
except in the ordinary course of business;
(b) mortgage, pledge or otherwise encumber any of the Acquired Assets;
(c) amend, modify or cancel any Contract, Service Agreement, Software
License or Authorization except in the ordinary course of business;
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(d) make any commitments for capital expenditures related to the
Business and the Acquired Assets except in the ordinary course of business;
(e) enter into any contract relative to the Business which will require
an expenditure of more than $1.00;
(f) cause or permit Essex to make or pay any dividend or distribution
of cash or property to any person, or to increase in any manner any compensation
payable to any of its directors, officers or employees;
(g) alter in any way the manner in which Essex has regularly and
customarily maintained its books of account and records; or
(h) enter into any agreements to do any of the things described in
clauses (a) through (g) above.
5.3 Negotiations with Others. From and after the Effective Date to the
Closing, Sellers will not, directly or indirectly, without the written consent
of Buyer, encourage, participate in or initiate discussions or engage in
negotiations with any corporation, partnership, person or entity, other than
Buyer, concerning any possible proposal regarding the acquisition other than in
the ordinary course of business of part or all of the Acquired Assets.
5.4 Intentionally deleted.
5.5 Cooperation Regarding Tax Matters and Document Filings.
(a) Sellers, on the one hand, and Buyer, on the other hand, shall
provide each other with such cooperation and information as either of them
reasonably may request of the other in filing any report with the Securities and
Exchange Commission (the "Commission") or Tax commission, any Tax return,
amended return or claim for refund, determining a liability for Taxes or a right
to a refund of Taxes, or in conducting any audit or other proceeding. Such
cooperation and information shall be provided to the requesting party at no or a
de minimus cost (unless the same would be unreasonable), and shall include but
not be limited to the provision of copies of all relevant Tax returns, documents
and records, or portions thereof, relating to the Acquired Assets and the
Business. Sellers and Buyer shall make their respective employees available on a
mutually and reasonably convenient basis to provide explanation of any documents
or information provided hereunder, and shall retain all returns, schedules and
work papers and all material records or other documents relating to Tax matters
pertaining to the Acquired Assets and the Business for the taxable year of
Sellers and Buyer ending after the Closing Date and for all previous years,
until the expiration of the statute of limitations of the taxable years to which
such returns and other documents relate (and, to the extent notified by the
other party in writing, any extensions thereof). Any information obtained under
this Section 5.5 shall be kept confidential, except as may be otherwise
necessary in connection with the filing of returns or claims for refund or in
conducting an audit or other proceeding.
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(b) If in order properly to prepare documents to be filed with
governmental authorities or its financial statements, it is necessary that any
party hereto be furnished with additional information relating to the Acquired
Assets and the Business and such information is in the possession of another
party hereto, the party possessing such information agrees to use its best
efforts to furnish such information to the party requesting it, at such
requesting party's sole cost and expense.
5.6 Books and Records. Buyer agrees that it shall preserve and keep all
books and records of Sellers identified as Acquired Assets in Section 2.2(d)
hereof, in Buyer's possession for a period of at least three (3) years from the
Closing Date. During such three (3) year period, Buyer shall cooperate
reasonably with Sellers and allow duly authorized representatives of Sellers to
have access to such books and records, upon reasonable prior written notice to
Buyer, and during Buyer's normal business hours, in order to examine, inspect
and copy such books and records, provided, however, that Sellers shall be
permitted to keep the originals of all financial, profit and loss analyses and
tax related items and produce copies of same to Buyer.
5.7 Bulk Sales Law. Buyer hereby waives compliance by Sellers with the
provisions of all applicable state bulk sales laws, and Essex agrees to protect,
defend, save harmless and indemnify Buyer pursuant to the procedures set forth
in Article 8 hereof from and against any and all claims of creditors or taxing
authorities that are asserted against Buyer by reason of such noncompliance to
the extent that such claims or the underlying liabilities are not Assumed
Liabilities.
5.8 Confidentiality. Sellers, on the one hand, and Buyer, on the other
hand, shall hold, and shall cause its respective officers, directors,
shareholders, employees, representatives, consultants and advisors and their
respective affiliates to hold, in strictest confidence, unless compelled to
disclose by judicial or administrative process or by other requirements of law
(in which case, where reasonably possible, notice of such required disclosure
shall be given to the affected party prior to such disclosure, except that no
notice need be given with regard to disclosures made pursuant to filings with
and reports to the Commission), the entire contents hereof, as well as any and
all documents executed in connection herewith and all documents and information
obtained by it with respect to the other in connection with the transactions
contemplated hereby, except to the extent that such information can be shown to
have been or to have become (i) generally available to the public other than as
a result of wrongful disclosure by the officers, directors, shareholders,
employees, representatives, consultants or advisors of the party receiving such
documents and information; (ii) made available to the public on a
non-confidential basis from a source other than the officers, directors,
shareholders, employees, representatives, consultants or advisors of the party
receiving such documents and information; or (iii) known to the party receiving
such information prior to the date of the disclosure of such information.
However, nothing contained in this Section 5.8 shall preclude the disclosure of
such information on the condition that it remain confidential to auditors,
attorneys, lenders, investors or potential investors, financial advisors and
other consultants and advisors in connection with the performance of their
duties in preparation for consummation of the transactions contemplated hereby.
In addition, any party hereto may disclose the contents hereof with the prior
written consent of the other parties hereto, which consent shall not be
unreasonably
13
denied or withheld. It is understood and agreed that the respective obligations
of the parties contained in this Section 5.8 shall survive indefinitely.
5.9 Further Assurances. Subject to the terms and conditions herein
provided, each party hereto agrees to cooperate with the other parties hereto,
on the Effective Date or promptly thereafter, to obtain all consents and
approvals of third parties, whether private or governmental, which may be
reasonably necessary to implement the provisions of this Agreement. Each party
hereto further agrees to cooperate fully with the other parties hereto, and at
the reasonable request of any party hereto (the "Requesting Party") on and after
the Closing Date, each such party shall, without further consideration, execute
and deliver, or cause to be executed and delivered, such additional deeds,
assignments, bills of sale, consents and other similar instruments, in form and
substance satisfactory to the Requesting Party as such Requesting Party may
reasonably deem necessary or desirable. No party, however, shall be required to
initiate any litigation, make any substantial payment or incur any material
economic burden in connection with the obtaining of any such consent or
approval.
5.10 Miscellaneous Other Agreements. In consideration of the mutual
covenants set forth herein, the parties agree as follows:
(a) Covenant Not to Compete/Covenant Not to Solicit. (i) Except as
provided in Section 5.10(a) of the Disclosure Memorandum, each of ELEC and Essex
agree that, for a period of three (3) years following the Closing Date, they
shall not, directly or indirectly, within any state in which the services
provided by Essex were provided as of the Closing Date (the "Territory"),
whether individually, or as a principal, partner, shareholder, director,
officer, employee, agent of or consultant for any firm, corporation, partnership
or other entity, (x) solicit or cause or authorize to be solicited, for or on
behalf of itself or any third party, any customer of the Business from the
Closing Date without Buyer's prior written consent. Without limiting any other
remedies, if in the eighteen (18) month period following the Effective Date, any
customer of the Business, other than those listed on Section 2.3 of the
Disclosure Memorandum, terminates its or their relationship with Essex and/or
Buyer and transfers or otherwise establishes a customer relationship with ELEC,
its subsidiaries, affiliates or assigns, a $200 fee shall be due and owing to
Buyer on written demand for each underlying line transferred or established
therewith.
(i) Each of Seller and Essex further agree, that for a period of one
(1) year following the Closing Date, they shall not, directly or indirectly,
whether individually or as a principal, partner, shareholder, director, officer,
employee, agent of or consultant for any firm, corporation, partnership or other
entity, (x) seek to persuade any director, officer, employee, agent or
consultant (including but not limited to a Transferred Employee), whether
formerly affiliated with Essex or now affiliated with Buyer or any
successor-in-interest to or assignee of the business or assets of Buyer, to
discontinue that individual's status or employment with Buyer or any such
successor or assignee, or to become employed in any activity substantially
similar to or in any way competitive with the activities of Buyer or any such
successor or assignee; or (y) hire or retain any such individual, in each case
without the prior written approval of Buyer or any such successor or assignee.
Notwithstanding anything in this Subsection 5.10(a)(i), Seller or Essex may
14
hire, without notification to Buyer, any individual whose employment or
affiliation with Buyer or Essex has been terminated from and after the Effective
Date.
(ii) In the event of a breach by ELEC or Essex or any such person or
entity of any provision contained in subsection 5.10(a), the parties hereto
agree that Buyer or any successor-in-interest to or assignee of the business or
assets of Buyer, as the case may be, shall be without an adequate remedy at law,
and in addition to any other rights, remedies or damages available to it at law
or in equity, Buyer or such successor or assignee shall be entitled to such
temporary and permanent injunctive relief as shall be necessary or appropriate
to prevent or restrain any such breach or threatened breach, without the
necessity of proving damages, without prejudice to any other remedies which
Buyer or such successor or assignee may have at law or in equity, and without
obligation to post any security in connection therewith.
(iii) It is expressly understood and agreed that any and all provisions
contained in subsection 5.10(a) may be assigned by Buyer without either Seller's
consent, in which case such assignee shall be entitled to the benefits thereof
to the same degree and extent as Buyer.
(b) Change of Name. Promptly following the Closing Date, Essex shall
file with the Secretary of State of the State of New York an amendment to its
Articles of Incorporation changing its name to such name as shall not include
the words "Essex" or any variant thereof. After the Closing Date, Sellers nor
any entity controlled, directly or indirectly, by Sellers will use, or permit
the use of, the name of Essex, or any name deceptively similar thereto.
(c) Expenses of the Parties. Except as otherwise provided herein, each
party hereto shall be responsible for its own expenses in connection with all
matters relating to this Agreement and the transactions contemplated hereby,
provided, however, upon delivery of detailed receipts or invoices, Buyer shall
pay on the Closing Date the reasonable expenses, including, but not limited to,
attorneys' fees of ELEC's counsel, Pryor Cashman Sherman & Flynn, LLP, and ELEC
accountants, an amount not to exceed $40,000 in connection with Sellers efforts
to obtain shareholder approval of the transactions contemplated hereby, and the
additional sum of $12,500 for transaction related legal fees shall be payable
immediately following the successful obtainment of shareholder approval of the
transaction contemplated hereby.
5.11 Maintenance of Essex Post-Closing. It is expressly understood and
agreed that, if the Closing occurs, Essex will not file a voluntary petition in
bankruptcy for a period of at least ninety (90) days after the Closing Date.
5.12 Further Cooperation. Each of the Sellers and Buyer shall
cooperate, and use commercially reasonable efforts to take, or cause to be
taken, all actions, and to do, or cause to be done, all things necessary, proper
or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement.
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ARTICLE 6
EMPLOYEES AND EMPLOYEE MATTERS
6.1 Transferred Employees. Sellers have previously delivered to Buyer a
list of all employees engaged in the Business, more particularly detailed on
Section 6.1 of the Disclosure Memorandum, as of the most recent date for which
such information is available, and will afford Buyer's representatives an
opportunity, prior to the Closing, to offer employment with Buyer after the
Closing to any and all of such persons, whether salaried or hourly employees,
who Buyer in its sole discretion desires to employ. Those employees selected by
Buyer for employment and who elect to become employees of Buyer after the
Closing are hereinafter referred to as "Transferred Employees" and shall be
considered employees of Buyer effective as of the Closing Date.
6.2 Worker's Compensation. Buyer shall assume responsibility for any
worker's compensation claim made by any Transferred Employee arising from events
occurring on and after the Closing Date, and Essex shall retain responsibility
for any worker's compensation claim made by any employee of Essex or any
Transferred Employee that arises from events occurring before the Closing Date.
6.3 Vacation and Sick Pay. Buyer shall assume responsibility for those
employees listed on Section 6.1 of the Disclosure Memorandum accruing prior to
the Closing Date. Provided this Agreement closes in accordance with its terms,
Buyer shall assume responsibility for all unpaid salaries, vacation and sick pay
of the Transferred Employees under and pursuant to the Essex employment plans
and policies.
6.4 Employee Benefit Plans. Buyer will provide health, insurance,
disability or other employee welfare/benefit plans or arrangements for the
Transferred Employees.
6.5 Administration. Sellers, on the one hand, and Buyer, on the other
hand, shall make their appropriate employees available to the other at such
reasonable times (and upon such reasonable terms) as may be necessary for the
proper administration by the other of any and all matters relating to employee
benefits and worker's compensation claims affecting their employees.
ARTICLE 7
CONDITIONS OF CLOSING
7.1 Conditions Precedent to the Obligation of the Buyer to Close. The
obligation of the Buyer to enter into and complete the Closing is subject, at
its option, to the fulfillment on or prior to the Closing Date of the following
conditions, any one or more of which may be waived by it in its sole and
absolute discretion:
(a) Representations and Covenants. The representations and warranties
of Sellers contained in this Agreement shall be and remain true in all material
respects as and when made, and, except for actions or events arising on or after
the Effective Date, on and as of the Closing Date as if then made. Sellers shall
have performed and complied in all material respects with all covenants and
agreements required by this Agreement to be performed or complied with by each
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of them on or prior to the Closing Date. Sellers shall have delivered to Buyer a
certificate, dated the Closing Date and signed by Sellers to the foregoing
effect and stating that all conditions to the Buyer's obligations hereunder have
been satisfied.
(b) Governmental Permits and Approvals. All necessary permits and
approvals from the governmental and regulatory bodies in those jurisdictions
listed on Section 7.1(b) of the Disclosure Memorandum which are required to
enable Buyer to provide telecommunication services in such jurisdictions, shall
have been obtained and delivered to Buyer.
(c) Third Party Consents. All consents, permits and approvals from
parties to the interconnect agreements of Essex listed on Section 7.1(c) of the
Disclosure Memorandum, as well as from such other parties which are required to
enable Buyer to provide telecommunication services in the jurisdictions
identified in Section 7.1(b) of the Disclosure Memorandum, shall have been
obtained and delivered to Buyer.
(d) Shareholder Approval. Buyer shall have received the favorable
approval of the sale contemplated hereby from the shareholders of ELEC and
Essex. Sellers shall use their prompt best efforts to secure such affirmative
shareholder votes from the date of execution hereof, of ELEC's officers,
directors, 5% shareholders and affiliates.
(e) Agreement with Verizon. Buyer shall have entered into an agreement
acceptable in Buyers sole discretion, providing for the resolution of all
outstanding claims asserted by Verizon Services Corp. against Sellers.
(f) Financing Agreement. Buyer shall have entered into an agreement
acceptable in Buyer's sole discretion, providing for the existing and continued
financing of the Business.
(g) Lease Agreement. The lease agreement at the office location
currently occupied by Essex, substantially in the form attached hereto as
Exhibit E, shall be in full force and effect.
(h) Software Billing Agreement. The Software Billing Agreement,
substantially in the form attached hereto as Exhibit F, shall be in full force
and effect.
(i) Litigation. No claim, action, suit or proceeding shall have been
instituted before any court or governmental or regulatory body, or instituted or
threatened by any party, governmental agency or body, to restrain, modify or
prevent the carrying out of the transactions contemplated hereby or to seek
damages or a discovery order in connection with such transactions, or which has
or may have, in the reasonably justified opinion of the Buyer, an adverse effect
on the Acquired Assets or the Business.
(j) Books and Records. Seller shall cause Essex to deliver to Buyer all
of the books and records maintained by Essex in connection with the operation of
the Business and the Acquired Assets.
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(k) Other Documents. The Seller shall have delivered at or prior to
Closing all such certified resolutions, certificates, certificate of good
standing, instruments, corporate documents or other papers as the Buyer, or its
counsel, may reasonably request or reasonably desire to carry out the intent and
purpose of this Agreement.
(l) Customer Lines. In connection with the customer lines acquired
pursuant to the transaction contemplated by this Agreement, Buyer will have a
sixty (60) day period following the Effective Date to verify that the actual
number of customer lines as of the Effective Date, is not less than 95% of the
number of customer lines detailed by Sellers in Section 2.2(a) of the Disclosure
Memorandum. In the event the actual number of customer lines is less than 95% of
such number of customer lines, Buyer may, in its sole discretion, refuse to
proceed to a Closing without the consequence of penalty or claim by Sellers. In
the event the transaction contemplated by this Agreement is terminated for any
reason other than by mutual consent or Buyer's breach, as provided in Section
9.1(b) or 9.1(e), Buyer may acquire all lines in excess of that number of
customer lines existing as of the Effective Date for an aggregate cost of $1.00.
(m) No Material Adverse Changes. The number of customer lines detailed
by Sellers on Section 2.2 (a) of the Disclosure Memorandum shall not be less
than 75% of such number of customer lines on and as of the Closing Date, not
including the loss of any customer lines associated with Telebeam
Communications, Inc. Further, on and as of the Closing Date, the amount of the
Assumed Liabilities, excluding all liabilities payable to Verizon Services
Corp., shall not exceed $2,250,000, excluding any amounts borrowed prior to the
Closing Date for payments to Verizon Services Corp.
7.2 Conditions Precedent to the Obligation of Sellers to Close. The
obligation of the Sellers to enter into and complete the Closing is subject, at
their option, to the fulfillment on or prior to the Closing Date of the
following conditions, any one or more of which may be waived by it in its sole
and absolute discretion:
(a) Representations and Covenants. The representations and warranties
of Buyer contained in this Agreement shall be and remain true in all material
respects as and when made, and, except for actions or events arising on or after
the Effective Date, on and as of the Closing Date as if then made. Buyer shall
have performed and complied in all material respects with all covenants and
agreements required by this Agreement to be performed or complied with by it on
or prior to the Closing Date. Buyer shall have delivered to Sellers a
certificate, dated the Closing Date and signed by Buyer to the foregoing effect
and stating that all conditions to the Buyer's obligations hereunder have been
satisfied.
(b) Board of Directors and Shareholder Approval. ELEC shall have
received the favorable approval of the purchase contemplated hereby from the
shareholders of ELEC.
(c) Lease Agreement. The lease agreement at the office location
18
currently occupied by Essex, substantially in the form attached hereto as
Exhibit E, shall be in full force and effect.
(d) Software Billing Agreement. The Software Billing Agreement,
substantially in the form attached hereto as Exhibit F, shall be in full force
and effect.
(e) Opinion of Counsel. Sellers shall have been provided the favorable
opinion of Buyer's counsel, dated the Closing Date, addressed to Sellers, in
form and substance reasonably satisfactory to Sellers and its counsel, which
opinion shall be limited solely to the favorable opinion with respect to the
authority of Buyer to consummate the transaction contemplated hereby.
(f) Litigation. No claim, action, suit or proceeding shall have been
instituted before any court or governmental or regulatory body, or instituted or
threatened by any party, governmental agency or body, to restrain, modify or
prevent the carrying out of the transactions contemplated hereby or to seek
damages or a discovery order in connection with such transactions, or which has
or may have, in the reasonably justified opinion of Sellers, an adverse effect
on the Acquired Assets or the Business.
(g) Other Documents. Buyer shall have delivered at or prior to Closing
all such certified resolutions, certificates, certificates of good standing,
instruments, corporate documents or other papers as Sellers, or its counsel, may
reasonably request or reasonably desire to carry out the intent and purpose of
this Agreement.
ARTICLE 8
INDEMNIFICATION
8.1 Survival of Representations and Warranties. The respective
representations and warranties of the parties contained in this Agreement shall
survive the Closing until the first year anniversary thereof (the "Survival
Date"), at which time they shall lapse; provided, however, that the
representation and warranty of Sellers contained in Section 3.8 hereof shall
survive indefinitely and any representation or warranty in respect of which
indemnity may be sought under Section 8.2 hereof shall survive the Survival
Date, if notice, given in good faith, of the specific inaccuracy in or breach
thereof giving rise to a claim for indemnification shall have been given to the
party from which indemnification is sought prior to the Survival Date. No
investigation by any of the parties, heretofore or hereafter made, shall affect
the survival of any representation or warranty contained herein.
8.2 Cross Indemnity.
(a) Subject to the terms and conditions of this Agreement and the
limitations contained in this Article 8, Sellers shall, jointly and severally,
indemnify and hold harmless Buyer and any affiliate thereof from and against (i)
any breach of a representation or warranty made by either Seller in this
Agreement
19
or in any instrument, agreement or other document executed in connection
herewith; (ii) the breach of any covenant or agreement of either Seller
contained in this Agreement or in any instrument, agreement or other document
executed in connection herewith (provided, however, that ELEC shall not be
liable under this Section 8.2 for any breach by Essex); (iii) any liability or
obligation of any Seller not specifically assumed by Buyer pursuant to this
Agreement; and (iv) any reasonable costs (including but not limited to
reasonable attorneys' and accountants' fees) incurred by Buyer or any affiliate
thereof in connection therewith.
(b) Subject to the terms and conditions of this Agreement and the
limitations contained in this Article 8, Buyer shall indemnify and hold harmless
the Sellers from and against (i) any breach of a representation or warranty made
by Buyer in this Agreement or in any instrument, agreement or other document
executed in connection herewith; (ii) the breach of any covenant or agreement of
Buyer contained in this Agreement or in any instrument, agreement or other
document executed in connection herewith; (iii) any liability or obligation of
either Seller which is being specifically assumed by Buyer pursuant to this
Agreement; and (iv) any reasonable costs (including but not limited to
reasonable attorneys' and accountants' fees) incurred by either Seller or
affiliate thereof in connection therewith.
8.3 Third Party Claims.
(a) Except as otherwise provided herein, the procedures set forth in
the following paragraphs of this Section 8.3 shall apply to indemnification of
claims resulting from the assertion of liability by persons or entities not
parties to this Agreement.
(b) The party seeking indemnification (the "Indemnified Party") shall,
as promptly as reasonably practicable, give written notice to the party from
which indemnification is sought (the "Indemnifying Party") of any assertion of
liability by a third party which might give rise to a claim by the Indemnified
Party against the Indemnifying Party based on the indemnity agreements contained
in this Agreement or in any document executed and delivered in connection
herewith, stating the nature and basis of the assertion and the amount thereof
to the extent known. Failure on the part of the Indemnified Party to give prompt
notice to the Indemnifying Party shall not limit or otherwise affect such
Indemnified Party's right to indemnification hereunder so long as the
Indemnifying Party is not materially adversely affected.
(c) In the event that any Legal Action is brought against an
Indemnified Party with respect to which the Indemnifying Party may have
liability under an indemnity agreement contained in this Agreement or in any
document executed and delivered in connection herewith, the Indemnifying Party
shall have the right, at its sole cost and expense, to defend the Indemnified
Party against such Legal Action (and any appeal and review thereof), with
counsel reasonably acceptable to the Indemnified Party (and if Indemnified Party
is Buyer, with counsel chosen by Buyer, and reasonably acceptable to
Indemnifying Party). In any such Legal Action, the Indemnified Party shall have
the right to be represented by advisory counsel and accountants, at its own
expense, and the Indemnifying Party shall keep the Indemnified Party fully
informed as to such proceeding at all stages thereof, whether or not the
Indemnified Party is represented by its own counsel.
20
(d) Until the Indemnifying Party shall have assumed the defense of such
Legal Action, or if the Indemnified and Indemnifying Parties are both named
parties in such Legal Action and the Indemnified Party shall have reasonably
concluded that there may be defenses available to it that are different from or
in addition to the defenses available to the Indemnifying Party (in which case
the Indemnifying Party shall not have the right to assume the defense of such
Legal Action but shall remain responsible for its obligation as an indemnitor),
all legal and other reasonable expenses incurred by the Indemnified Party as a
result of such Legal Action, shall be borne solely by the Indemnifying Party. In
such event the Indemnifying Party shall make available to the Indemnified Party
and its attorneys and accountants, for review and copying, all of its books and
records relating to such Legal Action and the parties agree to render to each
other such assistance as may reasonably be requested in order to facilitate the
proper and adequate defense of any such Legal Action.
(e) The Indemnifying Party shall not make any settlement of any claim
without the written consent of the Indemnified Party, which consent shall not be
unreasonably withheld. Without limiting the generality of the foregoing, it
shall not be deemed unreasonable to withhold consent to a settlement involving
injunction or other equitable relief against the Indemnified Party or its
assets, employees or business. The Indemnified Party shall be entitled to
receive a general release for its benefit in any settlement, without obligation
to pay any money or other consideration therefor.
(f) Notwithstanding anything to the contrary contained in this Article
8, no claim for indemnification hereunder shall be made unless any single claim
or group of claims (whether or not related) exceeds Fifty Thousand Dollars
($50,000.00), and in the case of claims in excess of Fifty Thousand Dollars
($50,000.00), the initial Fifty Thousand Dollars ($50,000.00) shall be subject
to indemnification.
ARTICLE 9
TERMINATION
9.1 Termination of Agreement. The parties may terminate this Agreement
prior to the Closing as follows:
(a) Buyer, on the one hand, and the Sellers, on the other hand, may
terminate this Agreement by mutual written consent;
(b) Either Buyer, on the one hand, or the Sellers, on the other hand,
may terminate this Agreement on thirty (30) days written notice if the other
party is in breach of this Agreement and such breach is not cured within such
thirty (30) day period;
(c) Either Buyer, on the one hand, or the Sellers, on the other hand,
may terminate this Agreement upon written notice if the Closing shall not have
occurred on or prior to December 31, 2002, unless extended by mutual agreement
of the parties; or
21
(d) Buyer may immediately terminate this Agreement upon written notice
if Sellers terminate the Consulting and Funding Agreement.
(e) Sellers may terminate this Agreement upon written notice to Buyer
if Buyer breaches in any material respect its obligation under Section 3(b) of
the Consulting and Funding Agreement, or if Buyer does not notify Sellers in
writing on or prior to that date which is thirty days after the Effective Date
that Closing Conditions 7.1(e) and 7.1(f) have been satisfied to its
satisfaction, provided, however, Buyer shall have two additional weeks beyond
the date of such notification with respect to Closing Conditions 7.1(e) and
7.1(f) to secure satisfaction with respect thereto.
9.2 Effect of Termination. If either Buyer, on the one hand, or the
Sellers, on the other hand, terminate this Agreement pursuant to Section 9.1,
(a) each of Buyer and the Sellers will redeliver to the party furnishing the
same or destroy all documents, work papers and other material of any other party
relating to the transactions contemplated hereby, whether so obtained before or
after the execution hereof; (b) neither the Sellers nor Buyer shall make or
issue, or cause to be made or issued, any announcement or written statement
concerning termination of this Agreement or the transactions contemplated hereby
for dissemination to the general public without the prior written consent of the
other parties except as required by law or legal process; and (c) this Agreement
shall become wholly void and of no force or effect, without any liability or
further obligation on the part of the Sellers or Buyer or any director, officer,
or principal thereof, except for liabilities of one party hereto to another
arising from a breach of this Agreement prior to termination in accordance with
Section 9.1 (including without limitation the breach of a representation or
covenant that results in the failure of the Closing to occur) and except that
the provisions set forth in this Section 9.2 shall survive such termination.
9.3 Liquidated Damages. (a) In the event that Sellers shall fail to
consummate the transactions contemplated hereby due to a termination of this
Agreement for reasons other than a material uncured breach hereof by Buyer, then
the parties hereto agree that, within ten (10) business days after such
termination, Essex shall (i) pay to Buyer as reasonable liquidated damages
therefor, the sum of One Million Dollars ($1,000,000) in cash, by certified
company check, bank check, or wire transfer of immediately available funds to a
depository designated by such other party; and (ii) sell to Buyer all Customer
Lines in the State of New York at a cost of $50 per line.
(b) The parties hereto agree that the foregoing liquidated damages are
reasonable in light of the anticipated or actual harm caused by the aforesaid
failure to consummate (including but not limited to, valuable time and monies
lost by Buyer, as a result of due diligence activities (including operational,
legal and accounting investigations, and UCC lien and judgment searches)
performed, funds advanced, escrowed or otherwise reserved, expenditures made, or
charges incurred in good faith and in reliance upon the consummation of the
transactions contemplated hereby), the difficulties of proof of loss, and the
inconvenience or nonfeasibility of otherwise obtaining an adequate remedy.
22
ARTICLE 10
GENERAL PROVISIONS
10.1 Notices. All notices and other communications required or
permitted hereunder shall be in writing (including facsimile or similar written
transmission) and shall be given:
(a) If to Buyer:
Essex Acquisition Corp.
6590 West Rogers Circle, Ste #6
Boca Raton, Florida 33487
Attn: Kenneth Baritz
Fax: 561/431-3900
with a copy to:
--------------
Dreier Baritz & Colman
150 East Palmetto Park Road, Suite 750
Boca Raton, Florida 33432
Attn: Neil S. Baritz, Esq.
Fax: (561)750-0910
(c) If to either Seller:
eLEC Communications Corp.
543 Main Street
New Rochelle, NY 10801
Attn: Paul Riss
Fax: 914/632-8411
with a copy to:
---------------
Pryor Cashman Sherman & Flynn LLP
410 Park Avenue
New York, New York 10022
Attn: Eric M. Hellige, Esq.
Fax: 212/326-0806
or to such other person or address or telecopier number as the party to whom
notice is to be given may have furnished the other parties in writing by like
notice. If mailed, any such communication shall be deemed to have been given on
the third business day following the day on which the communication is posted by
registered or certified mail (return receipt requested). If sent by overnight
mail or fax, any such communication shall be deemed to have been given at the
end of business on the next business day, or the day of confirmation (provided
that such day is a business day), respectively. If given by any other means, any
such communication shall be deemed to have been given when delivered to the
address specified in this Section.
23
10.2 Interpretation. The headings contained in this Agreement are for
reference purposes only and shall not affect the meaning or interpretation of
this Agreement.
10.3 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
10.4 Amendment. This Agreement and the exhibits and schedules attached
hereto may be amended, modified or supplemented only by written agreement of the
parties hereto.
10.5 Extension; Waiver. At any time after the Closing, any party to
this Agreement which is entitled to the benefits hereof may (a) extend the time
for the performance of any of the obligations of another party hereto, (b) waive
any misrepresentation (including an omission) or breach of a representation or
warranty of another party hereto, whether contained herein or in any exhibit,
schedule or document delivered pursuant hereto, or (c) waive compliance of
another party hereto with respect to any of the terms, conditions or provisions
contained herein. Any such extension or waiver shall be valid only if set forth
in a written instrument signed by the party or parties giving the extension or
waiver.
10.6. Publicity. None of the parties hereto shall make any disclosure
to the public concerning this Agreement or the transactions contemplated hereby
other than with the express written consent of the other parties hereto, except
as may be required by law, or by rule, regulation or announcement of a
governmental or quasi-governmental agency. To the extent reasonably practicable,
any press release proposed to be issued by any party hereto shall be submitted
to the other parties hereto for approval, which approval shall not be
unreasonably withheld or delayed.
10.7 Severability. If any provision, or part thereof, of this Agreement
shall be held to be invalid or unenforceable, such invalidity or
unenforceability shall attach only to such provision and not in any way affect
or render invalid or unenforceable any other provisions of this Agreement, and
this Agreement shall be carried out as if such invalid or unenforceable
provision, or part thereof, had been reformed so that it would be valid, legal
and enforceable to the fullest extent permitted by Applicable Law.
10.8 Miscellaneous. This Agreement (a) constitutes the entire agreement
and supersedes all other prior or contemporaneous agreements and understandings,
both written and oral, between or among the parties with respect to the subject
matter hereof; (b) except as otherwise provided herein, is not intended to and
shall not confer upon any other person or business entity, other than the
parties hereto and their successors and assigns, any rights or remedies with
respect to the subject matter hereof; (c) may be assigned by any party hereto
upon written notice to the other parties hereto (it being understood and agreed
that in such case the assignor shall remain liable for satisfaction of its
obligations hereunder, notwithstanding such assignment); and (d) shall be
governed in all respects by the laws of the State of New York without regard to
its laws or regulations relating to conflict of laws.
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[signature page to follow]
25
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be
executed in their individual capacity or by their respective officers thereunto
duly authorized on the date first above written.
ESSEX ACQUISITION CORP. ELEC COMMUNICATIONS CORP.
By: /s/ Kenneth Baritz By: /s/ Paul Riss
----------------------- ------------------------
Name: Kenneth Baritz Name: Paul Riss
----------------------- ------------------------
Title: Chief Executive Officer Title: Chief Executive Officer
----------------------- ------------------------
ESSEX COMMUNICATIONS INC.
By: /s/ Paul Riss
-----------------------
Name: Paul Riss
-----------------------
Title: Chief Executive Officer
-----------------------
26
LIST OF EXHIBITS
Exhibits
Exhibit A - Form of Bill of Sale
Exhibit B - Form of Undertaking and Instrument of Assumption of Liabilities
Exhibit C - Consulting and Funding Agreement
Exhibit D - Financial Statements
Exhibit E - Lease Agreement
Exhibit F - Software Billing Agreement
27
EXHIBIT A
FORM OF BILL OF SALE
This BILL OF SALE is made and delivered on _____________, 2002, by ELEC
COMMUNICATIONS CORP., a New York corporation ("ELEC"), ESSEX COMMUNICATIONS
CORP., a New York corporation, ("ESSEX"), (ELEC and ESSEX are hereinafter also
referred to collectively as a "Seller" or "Sellers"), to and for the benefit of
ESSEX ACQUISITION CORP., a Delaware corporation ("Buyer"). This Bill of Sale is
made and delivered pursuant to and in furtherance of an Asset Purchase Agreement
dated as of September 3, 2002 (the "Asset Purchase Agreement") by and among
Buyer, ELEC and ESSEX. Capitalized terms used herein without definition have the
respective meanings given to them in the Asset Purchase Agreement.
1. For good and valuable consideration in hand paid to the Sellers,
receipt of which is hereby acknowledged, Sellers do by this Bill of Sale grant,
bargain, transfer, sell, assign, set over, convey ownership of and deliver to
Buyer, its successors and assigns forever, all of their right, title and
interest, legal and equitable, in and to the Acquired Assets, wheresoever
situate, free and clear of all liens, charges and encumbrances and otherwise in
accordance with and subject to the terms of the Asset Purchase Agreement and
this Bill of Sale.
2. Sellers hereby covenant that they are the sole and lawful owners of
the Acquired Assets conveyed and assigned pursuant hereto. Sellers further
covenant and agree, jointly and severally, that they shall, without further
consideration, at any time and from time to time after the date hereof, upon the
reasonable request and at the reasonable expense of Buyer or their successors or
assigns, do, execute, acknowledge, deliver or file, or shall cause to be done,
executed, acknowledged, delivered or filed, all such further acts, deeds,
transfers, conveyances, assignments, notices, releases, acquittances or
assurances as Buyer or its successors or assigns may reasonably request in order
to more effectively consummate the transfer to Buyer of all such right, title
and interest of each Seller in and to the Acquired Assets hereby conveyed.
3. Nothing contained in this Bill of Sale, express or implied, is
intended or shall be construed to confer upon, or give to, any person, firm or
corporation other than Buyer and its successors and assigns, any remedy or claim
under or by reason of this Bill of Sale or any terms, covenants or conditions
hereof, and all the terms, covenants and conditions, promises and agreements
contained herein shall be for the sole and exclusive benefit of the Buyer, its
successors and assigns. Notwithstanding the foregoing, any lender providing
financing in connection with Buyer's purchase of the Acquired Assets and
consummation of the transactions contemplated by the Purchase Agreement shall be
entitled to rely upon this Bill of Sale.
IN WITNESS WHEREOF, each Seller has caused this Bill of Sale to be duly
executed and delivered in its individual capacity or by its officer thereunto
duly authorized on the date first above written.
ELEC COMMUNICATIONS CORP., a New York corporation
By: _______________________
Name: _______________________
Title: _______________________
EXHIBIT B
FORM OF
UNDERTAKING AND INSTRUMENT
OF ASSUMPTION OF LIABILITIES
This UNDERTAKING AND INSTRUMENT OF ASSUMPTION OF LIABILITIES is made
and delivered on ________, 2002, by ESSEX ACQUISITION CORP, a Delaware
corporation ("Buyer"), in favor of ESSEX COMMUNICATIONS CORP, a New York
corporation ("ESSEX") and ELEC COMMUNICATIONS CORP. ("ELEC"), a New York
corporation, in accordance with and subject to the terms and provisions of an
Asset Purchase Agreement dated as of September 3, 2002 (the "Asset Purchase
Agreement") by and among Buyer and Sellers. ELEC and ESSEX are hereinafter
sometimes referred individually as a "Seller" and collectively as the "Sellers".
Capitalized terms used herein without definition have the respective meanings
given to them in the Asset Purchase Agreement.
In consideration of the sale by Sellers to Buyer of the Acquired
Assets, Buyer, pursuant to and in accordance with Section 2.9 of the Asset
Purchase Agreement, hereby assumes and agrees to pay, perform and discharge the
Assumed Liabilities. The assumption of the Assumed Liabilities by Buyer
hereunder shall not be construed to defeat, impair or limit in any way any
rights or remedies of Buyer or its successors or assigns to contest or dispute
the validity or amount thereof against third parties. Notwithstanding the
foregoing, Buyer acknowledges its obligation to indemnify and hold harmless
Sellers from and against any liability or obligation constituting an Assumed
Liability as set forth in Section 7.2 of the Asset Purchase Agreement.
Buyer hereby agrees that it shall, without further consideration, at
any time and from time to time after the date hereof, upon the request of either
Seller, promptly do, execute, acknowledge, deliver or file, or shall cause to be
done, executed, acknowledged, delivered or filed, all such further acts,
releases, instruments or assurances as such Seller may reasonably request in
order to more effectively assume the Assumed Liabilities or otherwise to confirm
or carry out the provisions and intent of this Undertaking and Instrument of
Assumption of Liabilities.
This Undertaking and Instrument of Assumption of Liabilities is
executed by, and shall be binding upon, Buyer, its successors and assigns, for
the uses and purposes above set forth and referred to, on the date hereof.
This Undertaking and Instrument of Assumption of Liabilities is only
for the benefit of Sellers, their successors and assigns, and shall not be
relied upon, or inure to the benefit of, any other party.
IN WITNESS WHEREOF, Buyer has caused this Undertaking and Instrument of
Assumption of Liabilities to be duly executed and delivered by its officer
thereunto duly authorized on the date first above written.
ESSEX ACQUISITION CORP.,
a Delaware corporation
By: ___________________________
Name: ___________________________
Title: ___________________________
EXHIBIT C
CONSULTING AND FUNDING AGREEMENT
EXHIBIT D
FINANCIAL STATEMENTS
EXHIBIT E
LEASE AGREEMENT
EXHIBIT F
SOFTWARE BILLING AGREEMENT
35
Appendix B
New York laws regarding Dissenter's Rights
Section 623. Procedure to enforce shareholder`s right to receive payment for
shares.
(a) A shareholder intending to enforce his right under a section of this chapter
to receive payment for his shares if the proposed corporate action referred to
therein is taken shall file with the corporation, before the meeting of
shareholders at which the action is submitted to a vote, or at such meeting but
before the vote, written objection to the action. The objection shall include a
notice of his election to dissent, his name and residence address, the number
and classes of shares as to which he dissents and a demand for payment of the
fair value of his shares if the action is taken. Such objection is not required
from any shareholder to whom the corporation did not give notice of such meeting
in accordance with this chapter or where the proposed action is authorized by
written consent of shareholders without a meeting.
(b) Within ten days after the shareholders` authorization date, which term as
used in this section means the date on which the shareholders` vote authorizing
such action was taken, or the date on which such consent without a meeting was
obtained from the requisite shareholders, the corporation shall give written
notice of such authorization or consent by registered mail to each shareholder
who filed written objection or from whom written objection was not required,
excepting any shareholder who voted for or consented in writing to the proposed
action and who thereby is deemed to have elected not to enforce his right to
receive payment for his shares.
(c) Within twenty days after the giving of notice to him, any shareholder from
whom written objection was not required and who elects to dissent shall file
with the corporation a written notice of such election, stating his name and
residence address, the number and classes of shares as to which he dissents and
a demand for payment of the fair value of his shares. Any shareholder who elects
to dissent from a merger under section 905 (Merger of subsidiary corporation) or
paragraph (c) of section 907 (Merger or consolidation of domestic and foreign
corporations) or from a share exchange under paragraph (g) of section 913 (Share
exchanges) shall file a written notice of such election to dissent within twenty
days after the giving to him of a copy of the plan of merger or exchange or an
outline of the material features thereof under section 905 or 913.
(d) A shareholder may not dissent as to less than all of the shares, as to which
he has a right to dissent, held by him of record, that he owns beneficially. A
nominee or fiduciary may not dissent on behalf of any beneficial owner as to
less than all of the shares of such owner, as to which such nominee or fiduciary
has a right to dissent, held of record by such nominee or fiduciary.
(e) Upon consummation of the corporate action, the shareholder shall cease to
have any of the rights of a shareholder except the right to be paid the fair
value of his shares and any other rights under this section. A notice of
election may be withdrawn by the shareholder at any time prior to his acceptance
in writing of an offer made by the corporation, as provided in paragraph (g),
but in no case later than sixty days from the date of consummation of the
corporate action except that if the corporation fails to make a timely offer, as
provided in paragraph (g), the time for withdrawing a notice of election shall
be extended until sixty days from the date an offer is made. Upon expiration of
such time, withdrawal of a notice of election shall require the written consent
of the corporation. In order to be effective, withdrawal of a notice of election
must be
accompanied by the return to the corporation of any advance payment made to the
shareholder as provided in paragraph (g). If a notice of election is withdrawn,
or the corporate action is rescinded, or a court shall determine that the
shareholder is not entitled to receive payment for his shares, or the
shareholder shall otherwise lose his dissenters` rights, he shall not have the
right to receive payment for his shares and he shall be reinstated to all his
rights as a shareholder as of the consummation of the corporate action,
including any intervening preemptive rights and the right to payment of any
intervening dividend or other distribution or, if any such rights have expired
or any such dividend or distribution other than in cash has been completed, in
lieu thereof, at the election of the corporation, the fair value thereof in cash
as determined by the board as of the time of such expiration or completion, but
without prejudice otherwise to any corporate proceedings that may have been
taken in the interim.
(f) At the time of filing the notice of election to dissent or within one month
thereafter the shareholder of shares represented by certificates shall submit
the certificates representing his shares to the corporation, or to its transfer
agent, which shall forthwith note conspicuously thereon that a notice of
election has been filed and shall return the certificates to the shareholder or
other person who submitted them on his behalf. Any shareholder of shares
represented by certificates who fails to submit his certificates for such
notation as herein specified shall, at the option of the corporation exercised
by written notice to him within forty-five days from the date of filing of such
notice of election to dissent, lose his dissenter`s rights unless a court, for
good cause shown, shall otherwise direct. Upon transfer of a certificate bearing
such notation, each new certificate issued therefor shall bear a similar
notation together with the name of the original dissenting holder of the shares
and a transferee shall acquire no rights in the corporation except those which
the original dissenting shareholder had at the time of transfer.
(g) Within fifteen days after the expiration of the period within which
shareholders may file their notices of election to dissent, or within fifteen
days after the proposed corporate action is consummated, whichever is later (but
in no case later than ninety days from the shareholders` authorization date),
the corporation or, in the case of a merger or consolidation, the surviving or
new corporation, shall make a written offer by registered mail to each
shareholder who has filed such notice of election to pay for his shares at a
specified price which the corporation considers to be their fair value. Such
offer shall be accompanied by a statement setting forth the aggregate number of
shares with respect to which notices of election to dissent have been received
and the aggregate number of holders of such shares. If the corporate action has
been consummated, such offer shall also be accompanied by:
(1) advance payment to each such shareholder who has submitted the
certificates representing his shares to the corporation, as provided
in paragraph (f), of an amount equal to eighty percent of the amount
of such offer, or
(2) as to each shareholder who has not yet submitted his certificates a
statement that advance payment to him of an amount equal to eighty
percent of the amount of such offer will be made by the corporation
promptly upon submission of his certificates.
If the corporate action has not been consummated at the time of the making of
the offer, such advance payment or statement as to advance payment shall be sent
to each shareholder entitled thereto forthwith upon consummation of the
corporate action. Every advance payment or statement as to advance payment shall
include advice to the shareholder to the effect that acceptance of such payment
does not constitute a waiver of any dissenters` rights. If the corporate action
has not been consummated upon the expiration of the ninety day period after the
shareholders` authorization date, the offer may be conditioned upon the
consummation of such action. Such offer shall be made at the same price per
share to all dissenting shareholders of the same class, or if divided into
series, of the same series and shall be accompanied by a balance sheet of the
corporation whose shares the dissenting shareholder holds as of the latest
available date, which shall not be earlier than twelve months before the making
of such offer, and a profit and loss statement or statements for not less than a
twelve month period ended on the date of such balance sheet or, if the
corporation was not in existence throughout such twelve month period, for the
portion thereof during which it was in existence. Notwithstanding the foregoing,
the corporation shall not be required to furnish a balance sheet or profit and
loss statement or statements to any shareholder to whom such balance sheet or
profit and loss statement or statements were previously furnished, nor if in
connection with obtaining the shareholders` authorization for or consent to the
proposed corporate action the shareholders were furnished with a proxy or
information statement, which included financial statements, pursuant to
Regulation 14A or Regulation 14C of the United States Securities and Exchange
Commission. If within thirty days after the making of such offer, the
corporation making the offer and any shareholder agree upon the price to be paid
for his shares, payment therefor shall be made within sixty days after the
making of such offer or the consummation of the proposed corporate action,
whichever is later, upon the surrender of the certificates for any such shares
represented by certificates.
(h) The following procedure shall apply if the corporation fails to make such
offer within such period of fifteen days, or if it makes the offer and any
dissenting shareholder or shareholders fail to agree with it within the period
of thirty days thereafter upon the price to be paid for their shares:
(1) The corporation shall, within twenty days after the expiration of
whichever is applicable of the two periods last mentioned, institute a
special proceeding in the supreme court in the judicial district in which
the office of the corporation is located to determine the rights of
dissenting shareholders and to fix the fair value of their shares. If, in
the case of merger or consolidation, the surviving or new corporation is a
foreign corporation without an office in this state, such proceeding shall
be brought in the county where the office of the domestic corporation,
whose shares are to be valued, was located.
(2) If the corporation fails to institute such proceeding within such
period of twenty days, any dissenting shareholder may institute such
proceeding for the same purpose not later than thirty days after the
expiration of such twenty day period. If such proceeding is not instituted
within such thirty day period, all dissenter`s rights shall be lost unless
the supreme court, for good cause shown, shall otherwise direct.
37
(3) All dissenting shareholders, excepting those who, as provided in
paragraph (g), have agreed with the corporation upon the price to be paid
for their shares, shall be made parties to such proceeding, which shall
have the effect of an action quasi in rem against their shares. The
corporation shall serve a copy of the petition in such proceeding upon each
dissenting shareholder who is a resident of this state in the manner
provided by law for the service of a summons, and upon each nonresident
dissenting shareholder either by registered mail and publication, or in
such other manner as is permitted by law. The jurisdiction of the court
shall be plenary and exclusive.
(4) The court shall determine whether each dissenting shareholder, as
to whom the corporation requests the court to make such determination, is
entitled to receive payment for his shares. If the corporation does not
request any such determination or if the court finds that any dissenting
shareholder is so entitled, it shall proceed to fix the value of the
shares, which, for the purposes of this section, shall be the fair value as
of the close of business on the day prior to the shareholders`
authorization date. In fixing the fair value of the shares, the court shall
consider the nature of the transaction giving rise to the shareholder`s
right to receive payment for shares and its effects on the corporation and
its shareholders, the concepts and methods then customary in the relevant
securities and financial markets for determining fair value of shares of a
corporation engaging in a similar transaction under comparable
circumstances and all other relevant factors. The court shall determine the
fair value of the shares without a jury and without referral to an
appraiser or referee. Upon application by the corporation or by any
shareholder who is a party to the proceeding, the court may, in its
discretion, permit pretrial disclosure, including, but not limited to,
disclosure of any expert`s reports relating to the fair value of the shares
whether or not intended for use at the trial in the proceeding and
notwithstanding subdivision (d) of section 3101 of the civil practice law
and rules.
(5) The final order in the proceeding shall be entered against the
corporation in favor of each dissenting shareholder who is a party to the
proceeding and is entitled thereto for the value of his shares so
determined.
(6) The final order shall include an allowance for interest at such
rate as the court finds to be equitableI, from the date the corporate
action was consummated to the date of payment. In determining the rate of
interest, the court shall consider all relevant factors, including the rate
of interest which the corporation would have had to pay to borrow money
during the pendency of the proceeding. If the court finds that the refusal
of any shareholder to accept the corporate offer of payment for his shares
was arbitrary, vexatious or otherwise not in good faith, no interest shall
be allowed to him.
(7) Each party to such proceeding shall bear its own costs and
expenses, including the fees and expenses of its counsel and of any experts
employed by it. Notwithstanding the foregoing, the court may, in its
discretion, apportion and assess all or any part of the costs, expenses and
fees incurred by the corporation against any or all of the dissenting
shareholders who are parties to the proceeding, including any who have
withdrawn their notices of election as provided in paragraph (e), if the
court finds that their refusal to
accept the corporate offer was arbitrary, vexatious or otherwise not in
good faith. The court may, in its discretion, apportion and assess all or
any part of the costs, expenses and fees incurred by any or all of the
dissenting shareholders who are parties to the proceeding against the
corporation if the court finds any of the following:
(A) that the fair value of the shares as determined materially
exceeds the amount which the corporation offered to pay;
(B) that no offer or required advance payment was made by the
corporation;
(C) that the corporation failed to institute the special
proceeding within the period specified therefor; or
(D) that the action of the corporation in complying with its
obligations as provided in this section was arbitrary, vexatious
or otherwise not in good faith.
In making any determination as provided in clause (A), the court may
consider the dollar amount or the percentage, or both, by which the fair
value of the shares as determined exceeds the corporate offer.
(8) Within sixty days after final determination of the proceeding, the
corporation shall pay to each dissenting shareholder the amount found to be
due him, upon surrender of the certificates for any such shares represented
by certificates.
(i) Shares acquired by the corporation upon the payment of the agreed value
therefor or of the amount due under the final order, as provided in this
section, shall become treasury shares or be cancelled as provided in section 515
(Reacquired shares), except that, in the case of a merger or consolidation, they
may be held and disposed of as the plan of merger or consolidation may otherwise
provide.
(j) No payment shall be made to a dissenting shareholder under this section at a
time when the corporation is insolvent or when such payment would make it
insolvent. In such event, the dissenting shareholder shall, at his option:
(1) Withdraw his notice of election, which shall in such event be deemed
withdrawn with the written consent of the corporation; or
(2) Retain his status as a claimant against the corporation and, if it is
liquidated, be subordinated to the rights of creditors of the corporation,
but have rights superior to the non-dissenting shareholders, and if it is
not liquidated, retain his right to be paid for his shares, which right the
corporation shall be obliged to satisfy when the restrictions of this
paragraph do not apply.
(3) The dissenting shareholder shall exercise such option under
subparagraph (1) or (2) by written notice filed with the corporation within
thirty days after the corporation has
39
given him written notice that payment for his shares cannot be made because
of the restrictions of this paragraph. If the dissenting shareholder fails
to exercise such option as provided, the corporation shall exercise the
option by written notice given to him within twenty days after the
expiration of such period of thirty days.
(k) The enforcement by a shareholder of his right to receive payment for his
shares in the manner provided herein shall exclude the enforcement by such
shareholder of any other right to which he might otherwise be entitled by virtue
of share ownership, except as provided in paragraph (e), and except that this
section shall not exclude the right of such shareholder to bring or maintain an
appropriate action to obtain relief on the ground that such corporate action
will be or is unlawful or fraudulent as to him.
(l) Except as otherwise expressly provided in this section, any notice to be
given by a corporation to a shareholder under this section shall be given in the
manner provided in section 605 (Notice of meetings of shareholders).
(m) This section shall not apply to foreign corporations except as provided in
subparagraph (e) (2) of section 907 (Merger or consolidation of domestic and
foreign corporations).
40
Section 910. Right of shareholder to receive payment for shares upon merger or
consolidation, or sale, lease, exchange or other disposition of assets, or share
exchange.
(a) A shareholder of a domestic corporation shall, subject to and by complying
with section 623 (Procedure to enforce shareholder`s right to receive payment
for shares), have the right to receive payment of the fair value of his shares
and the other rights and benefits provided by such section, in the following
cases:
(1) Any shareholder entitled to vote who does not assent to the taking of
an action specified in clauses (A), (B) and (C).
(A) Any plan of merger or consolidation to which the corporation is a
party; except that the right to receive payment of the fair value of
his shares shall not be available:
(i) To a shareholder of the parent corporation in a merger
authorized by section 905 (Merger of parent and subsidiary
corporations), or para- graph (c) of section 907 (Merger or
consolidation of domestic and foreign corporations); or
(ii) To a shareholder of the surviving corporation in a merger
author- ized by this article, other than a merger specified in
subclause (i), unless such merger effects one or more of the
changes specified in subparagraph (b) (6) of section 806
(Provisions as to certain proceedings) in the rights of the
shares held by such shareholder; or
(iii) Notwithstanding subclause (ii) of this clause, to a
shareholder for the shares of any class or series of stock, which
shares or deposi- tory receipts in respect thereof, at the record
date fixed to determine the shareholders entitled to receive
notice of the meeting of sharehold- ers to vote upon the plan of
merger or consolidation, were listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of
Securities Dealers, Inc.
(B) Any sale, lease, exchange or other disposition of all or substan-
tially all of the assets of a corporation which requires shareholder
approval under section 909 (Sale, lease, exchange or other disposition
of assets) other than a transaction wholly for cash where the
sharehold- ers` approval thereof is conditioned upon the dissolution
of the corpo- ration and the distribution of substantially all of its
net assets to the shareholders in accordance with their respective
interests within one year after the date of such transaction.
(C) Any share exchange authorized by section 913 in which the corpo-
ration is participating as a subject corporation; except that the
right to receive payment of
the fair value of his shares shall not be avail- able to a shareholder
whose shares have not been acquired in the exchange or to a
shareholder for the shares of any class or series of stock, which
shares or depository receipt in respect thereof, at the record date
fixed to determine the shareholders entitled to receive notice of the
meeting of shareholders to vote upon the plan of exchange, were listed
on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc.
(2) Any shareholder of the subsidiary corporation in a merger author- ized by
section 905 or paragraph (c) of section 907, or in a share exchange authorized
by paragraph (g) of section 913, who files with the corporation a written notice
of election to dissent as provided in para- graph (c) of section 623.
(3) Any shareholder, not entitled to vote with respect to a plan of merger or
consolidation to which the corporation is a party, whose shares will be
cancelled or exchanged in the merger or consolidation for cash or other
consideration other than shares of the surviving or consolidated corporation or
another corporation.