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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1996 COMMISSION FILE NUMBER 0-025842
EQUALNET HOLDING CORP.
A TEXAS IRS EMPLOYER
CORPORATION NO. 76-0457803
1250 WOOD BRANCH PARK DRIVE
HOUSTON, TEXAS 77079
Telephone Number 281/529-4600
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.01 Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Aggregate market value of the voting stock (common stock) held by non-affiliates
of registrant as of October 8, 1996 $13,504,500
Number of shares of registrant's common stock outstanding
as of October 8, 1996 6,002,000
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of registrant's proxy statement relating to registrant's 1996 annual
meeting of shareholders have been incorporated by reference into Part III
hereof.
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ITEM PAGE
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PART I
1. BUSINESS......................................................... 1
2. PROPERTIES....................................................... 7
3. LEGAL PROCEEDINGS................................................ 7
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 7
PART II
5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS........................................................ 8
6. SELECTED FINANCIAL DATA.......................................... 9
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................................... 10
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................... 19
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE........................................... 19
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............... 19
11. EXECUTIVE COMPENSATION........................................... 19
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT... 19
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 19
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K....................................................... 20
ALL DEFINED TERMS UNDER RULE 4-10(A) OF REGULATION S-X SHALL HAVE THEIR
STATUTORILY-PRESCRIBED MEANINGS WHEN USED IN THIS REPORT.
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PART I
ITEM 1. BUSINESS
GENERAL
EqualNet Holding Corp. ("EqualNet" or the "Company") is a long-distance
telephone company that provides services to approximately 115,000 customers
nationwide. The Company currently contracts with AT&T Corp. ("AT&T") and Sprint
Communications Company, L.P. ("Sprint") to provide transmission of its
customers' traffic. Sales related to services provided pursuant to the AT&T and
Sprint contracts accounted for approximately 85% and 15%, respectively, of the
Company's revenues for the year ended June 30, 1996.
EqualNet markets its services primarily to small business customers with
monthly long-distance bills of less than $l,000, and for the year ended June 30,
1996, the monthly long-distance bill of the Company's average customer was
approximately $50. EqualNet is one of the several hundred companies that
comprise the third tier of the long-distance market. See "-- Industry Overview
and Competition". The Company uses independent marketing agents and an internal
sales force in selling its services. The Company primarily uses independent
marketing agents to sell the Company's services through telemarketing and direct
sales efforts. Revenues derived from EqualNet's customers introduced to the
Company by independent marketing agents constituted approximately 87% of the
Company's total revenue for the year ended June 30, 1996. Revenues attributable
to EqualNet's customers introduced through the efforts of one independent
marketing agent accounted for 28%, 40% and 28% of the Company's total revenues
for the fiscal years ended June 30, 1994, 1995 and 1996, respectively. The
independent marketing agents receive residual commissions based on billings less
a portion, typically 50%, of bad debt expense attributable to delinquent
accounts.
Since the Company's inception in July 1990, EqualNet's revenues have
grown to $78.4 million for the fiscal year ended June 30, 1996. Pre-tax income
for the fiscal years ended June 30, 1994 and 1995 was $1.8 million and $2.9
million, respectively, and pre-tax loss for fiscal 1996 was $11.1 million. Pro
forma net income for the fiscal years ended June 30, 1994 and 1995 was $ 1.1
million and $1.8 million, respectively, while fiscal 1996 resulted in a net loss
of $8.4 million. EqualNet has increased its sales volume primarily through its
network of independent marketing agents actively selling the Company's products
and through the acquisition of customer accounts of other resellers. The
Company's network of independent marketing agents has historically included more
than 100 agents; however, the majority of the Company's sales has been generated
by a smaller number of large agents. The Company currently receives
substantially all of its new orders from 15 agents. The Company believes that
partnering with a smaller number of large, established marketing agents will
result in a more long-term relationship with its agents and the orders generated
by those agents will lead to a higher quality, more stable customer base.
INDUSTRY OVERVIEW AND COMPETITION
Since the break-up of AT&T in 1984, annual revenues for the domestic
long-distance market have increased significantly. According to industry data,
AT&T, together with MCI Telecommunications Corporation ("MCI") and Sprint,
constitute what generally is regarded as the first tier in the long-distance
market. Large regional long-distance companies, some with national capabilities,
such as LDDS WorldCom, Inc. ("WorldCom"), Frontier Corporation ("Frontier"),
Cable & Wireless Communications, Inc. and LCI International, constitute the
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second tier of the industry and, cumulatively, are believed to account for
approximately 5% of the market. The remainder of the market share is held by
several hundred smaller companies, known as third-tier carriers.
Many first- and second-tier companies, most notably AT&T, Sprint,
WorldCom (through its WilTel subsidiary) and Frontier (through its Allnet
subsidiary), actively have been providing long-distance products for resale for
a number of years. Since 1994, MCI has also adopted an aggressive stance in
providing product for resale.
Long-distance companies can be categorized by several definitions. One
distinction is between facilities-based companies and non-facilities-based
companies, or resellers. Facilities-based companies own transmission facilities,
such as fiber optic cable or digital microwave equipment. Profitability for
facilities-based carriers is dependent not only upon their ability to generate
revenues but also upon their ability to manage complex networking and
transmission costs. Substantially all of the first- and second-tier long-
distance companies are facilities-based carriers and generally offer service
nationwide. Most facilities-based carriers in the third tier of the market
generally offer their service only in a limited geographic area. Some
facilities-based carriers contract with other facilities-based carriers to
provide transmission where they have geographic gaps in their facilities.
Similarly, non-facilities-based companies, such as the Company, contract with
facilities-based carriers to provide transmission of their customers' long-
distance traffic. Pricing in such contracts is typically either on a fixed rate
lease basis or a call volume basis. Profitability for non-facilities based
carriers is based primarily on the carrier's ability to generate and retain
sufficient revenue volume to negotiate attractive pricing with one or more
facilities-based carriers.
A second distinction among long-distance companies is that of switched
versus switchless carriers. Switched carriers have one or more switches,
computers that direct telecommunications traffic in accordance with programmed
instructions. All of the facilities-based carriers are switched carriers, as are
many non-facilities-based companies. Switchless carriers depend on one or more
facilities-based carriers to provide both transmission capacity and switch
facilities. EqualNet currently is a switchless reseller.
Competition in the long-distance industry is based upon pricing,
customer service, network quality and value-added services. The success of a
non-facilities-based carrier such as the Company depends almost entirely upon
the amount of traffic that it can commit to the underlying carrier -- the larger
the commitment, the lower the cost of service. Subject to contract restrictions
and customer brand loyalty, resellers like EqualNet may competitively bid their
traffic among other national long-distance carriers to gain improvement in the
cost of service. The non-facilities-based carrier devotes its resources entirely
to marketing, operations and customer service, deferring the costs of network
maintenance and management to the underlying carrier.
The relationship between resellers and the major underlying carriers is
predicated primarily upon the pricing strategies of the first-tier companies,
which has resulted historically in higher rates to the small business customer.
Small business customers typically are not able to make the volume commitments
necessary to negotiate reduced rates under individualized contracts. The higher
rates result from the higher cost of credit, collection, billing and customer
service per revenue dollar associated with small billing level long-distance
customers. By committing to large volumes of traffic, the reseller is
guaranteeing traffic to the underlying carrier. The underlying carrier is also
relieved of the administrative burden of qualifying and servicing large numbers
of relatively small accounts. The successful reseller efficiently markets the
long-distance product, processes orders, verifies credit and provides customer
service to large numbers of small accounts.
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SERVICES AND OPERATIONS
NETBASE CUSTOMER MANAGEMENT SYSTEM
The NetBase System ("NetBase") is the Company's proprietary customer
management and information system. Operations, customer service and marketing
efforts are managed by the system, and satellite modules of NetBase are licensed
by EqualNet's independent marketing agents. This system facilitates smooth
processing of orders and information exchange between the Company and its
independent marketing agents. The NetBase system was developed internally with
outside programming support.
In 1995 the Company began development of a new customer management
information system, the NetBase Plus operating system ("NetBase Plus"). In the
second quarter of fiscal 1996, the Company implemented NetBase Plus. After
implementation, NetBase Plus was determined to have inherent design flaws which
resulted in inefficient operation, and the entire system was subsequently
abandoned. The Company reverted from NetBase Plus to an improved form of
NetBase, the Company's original customer management information system, in April
1996. As a result, the Company wrote off approximately $2.2 million in
capitalized software development costs associated with the NetBase Plus system.
The responsibilities of the operations department include billing and
"provisioning" or processing orders with the underlying carriers . The
operations department receives orders electronically from independent marketing
agents and from the sales department of the Company and then processes the
orders for entry into the Company's database. Provisioning of customer orders
also is performed electronically, with rejected or invalid orders evaluated as
to cause, and those rejected are corrected and resubmitted. Operations personnel
interface with the underlying carriers and billing companies for processing and
procedural matters.
CUSTOMER SERVICE
The Company's customer service philosophy is to develop long-term
customer relationships through proactive communication with its customer base by
customer service representatives. Orders received from independent agents first
are verified by the Company's wholly-owned subsidiary TeleSource, Inc.
("TeleSource"). Periodically, a customer service representative contacts the
customer for input relative to service, to monitor outstanding account balances,
to identify significant variances in usage or to confirm the need for additional
services or products, as well as to respond to customer account data tracked by
NetBase. The Company believes that these contacts by its customer service
representatives will minimize customer attrition and establish EqualNet as the
customer's carrier of choice.
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PRODUCTS AND SUPPLIERS
AT&T
EqualNet's primary provider of underlying long-distance services is AT&T
for both outbound and inbound services. Under its contract with AT&T, the
Company has committed to resell a certain amount in AT&T long-distance each
year. If EqualNet does not meet this commitment level in a given year, it has
agreed to pay AT&T penalties that are dependent upon the degree to which the
Company is short of those commitments. At June 30, 1996, the Company was $3.8
million below the cumulative minimum semi-annual revenue commitment ("MSARC").
Historically, the Company has been able to negotiate a settlement with the
carrier which has resulted in no penalty being incurred by the Company. The
Company is currently in negotiation with AT&T for a new contract and believes
that upon execution of the new contract, any shortfalls under the existing
contract will be extended and included in the new contract. No assurances can be
made that the Company will be able to reach a favorable settlement with the
carrier should negotiations cease and the Company continue to fail to meet its
commitment.
If the existing contract with AT&T is terminated, either by the Company
or by AT&T for non-payment, prior to the expiration of the full term without
execution of a new contract, the Company will be liable for the total amount of
the unsatisfied MSARC for the period in which the discontinuance occurs and for
100% of the MSARCs for each semi-annual period remaining in the contract tariff
term. In addition, the Company will also be required to refund a prorated
portion, based upon the number of months remaining in the contract tariff term
at the time of termination, of $535,500 in credits issued the Company by AT&T.
See note 6 of the notes to consolidated financial statements. The contract
expires in June 1999. The Company's current AT&T contract allows the Company to
sell both Distributed Network Service ("DNS"), AT&T's only long-distance product
designed specifically for resale, and Software Defined Network Service ("SDN"),
an AT&T product designed for larger business customers. The combined DNS and SDN
commitment levels increase over the term of the contract. EqualNet has chosen
AT&T Bill Manager(TM), a strategic business unit of AT&T, to bill its DNS and
SDN services.
SPRINT
In June 1994, the Company entered into a two-year agreement with Sprint
for long-distance service. This long-distance product was negotiated at a rate
less than that of the Company's AT&T contract commitment rate, and is used as
EqualNet's private brand economy-priced product. This long-distance product is
available to EqualNet's marketing network as an alternative to the AT&T SDN
products. The Company believes that this long-distance product is complementary
to rather than competitive with the DNS and SDN products that it currently
markets. In addition, this product provides a customer with one invoice for both
inbound 800 calls and outbound calls, a feature that is not currently available
with the Company's DNS and SDN products. Although the Sprint contract expired in
June 1996, the Company has continued to use Sprint for long-distance service
under a three-month contract extension. The Company has negotiated an additional
three-month extension to allow continued usage through December 1996. The
extensions have no minimum revenue commitment. No assurances can be made that
the Company will be able to continue negotiating extensions, the failure of
which could result in an increase in the cost Sprint charges the Company to
provide services. In the event that the Ccompany is unable to negotiate an
extension of the existing contract or negotiate a new agreement with Sprint, the
Company has the ability to transfer these customers to its existing AT&T
contract or to another carrier and, accordingly, does not expect any termination
of the Sprint contract to have a material adverse effect on the results of
operations.
CUSTOMERS AND MARKETING
CUSTOMERS
The Company markets its long-distance services primarily to small
business customers with monthly long-distance bills of less than $l,000.
Currently, the monthly long-distance telephone bills for
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EqualNet's customers range from under $5 to $10,000, and for the year ended June
30, 1996, the monthly long-distance phone bill for an average EqualNet customer
was approximately $50. The Company does not have contracts with its customers,
but receives authorization from new customers in connection with their order for
service.
MARKETING
The Company historically has relied on its network of independent
marketing agents to market its long-distance products. Independent marketing
agents are companies that market the Company's long-distance products directly
to business customers as authorized agents or sales agents of EqualNet and
historically have received a continuing commission based on the monthly usage of
the customer accounts that they have brought to the Company. During fiscal 1996,
the Company began purchasing orders from agents directly, with no future
commitment to the agents accruing on these orders. In purchasing these orders,
the Company assumed 100% of the risk that the revenues associated with these
orders would not be collected, in contrast with majority of commissioned sales
in which the Company shares this risk with the marketing agent. The Company
effectively discontinued purchasing orders during the fourth quarter of fiscal
1996 and has returned to orders which receive a continuing commission and share
in the revenue-collection risk. Certain independent marketing agents have
committed to larger traffic volumes and use NetBase to submit orders and receive
account status updates electronically. The Company provides its independent
marketing agents with promotional materials and products and offers training
programs by Company employees. The Company solicits independent marketing agents
primarily through telecommunications trade periodicals and trade shows.
The Company has used in excess of 100 marketing agents to generate the
existing customer base. The Company currently is utilizing approximately 15
agents which generate a substantial majority of the orders currently being
received. The Company believes that by reducing the number of active agents and
increasing the orders received from each agent, greater control of the quality
of the customer acquired can be achieved.
In June 1994, the Company established a direct sales force in its
Houston office. The Company currently employs six direct sales representatives
who meet personally with prospective customers. The Company advertises on a
limited basis directly to end users of long-distance services in local markets.
The Company also distributes video and printed marketing materials to
prospective users on a selected basis. EqualNet is also evaluating the
development of internal telemarketing operations in addition to considering
opportunities with established independent telemarketing firms.
TRADEMARKS AND PROPRIETARY RIGHTS
The Company has registered the trademark EQUAL NET(R) with the United
States Patent and Trademark Office and has amended that registration for the
trademark EQUALNET(R). The Company has also registered the trademarks NETBASE
PLUS(R), EQUALNOTES(R), and TELECONOMY(R), and has applications pending to
register the trademarks for EDGE, EQUALNET ANSWER, EQUALTIMES and various
designs of its registered and pending trademarks, as well as its housemark and
logo.
REGULATION
As a non-facilities-based provider of long-distance telecommunications
services, the Company is subject to many of the same regulatory requirements as
facilities-based interexchange carriers. EqualNet is regulated at the federal
level by the Federal Communications Commission ("FCC") and is required to file
tariffs containing descriptions of its products, rates, terms and conditions of
service. In addition, EqualNet is required to maintain a certificate, issued by
the FCC, in connection with its international services. The Company updates its
tariffs to reflect any modifications to its existing rates or terms and
conditions of service, as well as to reflect any new products or services
developed for resale by the Company.
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The intrastate long-distance telecommunications operations of EqualNet
are also subject to various state laws and regulations, including prior
certification, notification or registration requirements. EqualNet generally
must obtain and maintain certificates of public convenience and necessity from
regulatory authorities in most states in which it offers service. In most of
these jurisdictions, the Company must also file and obtain prior regulatory
approval of tariffs for intrastate service. EqualNet can provide intrastate
originating service to customers in the contiguous 48 states and in the District
of Columbia. The Company must update and amend the tariffs and, in some cases,
the certificates of public convenience, when rates are adjusted or new products
are added to the long-distance services offered by the Company.
Occasionally, the Company is required by various regulatory and consumer
protection authorities to respond to customer complaints and allegations against
the Company concerning end-user subscription procedures, rate structures,
billing and other matters that fall under the purview of such authorities. State
attorneys general, under various consumer protection statutes, have the
authority to petition courts of appropriate jurisdiction for injunctive relief
or an assessment of monetary sanctions for violations of their consumer
protection statutes. Public service or utility commissions have the authority to
assess monetary penalties or other sanctions up to and including revocation of a
carrier's certificate of public convenience and necessity.
During the past fiscal year the Company has responded to civil
investigative demands or formal inquiries in the states of California, Iowa,
Kansas, New Jersey, Oregon, and Texas. Other jurisdictions have elected to file
suit against the Company without filing of any civil investigative demand.
The Company has responded to each of these inquiries. To date, no follow-up
inquiry has been made with respect to Iowa, New Jersey or Texas matters. The
Company has reached settlement agreements for the entry of agreed orders or
assurances of voluntary compliance in California, Oregon and with the Kansas
Corporation Commission. The Company does not believe the outcome of any current
proceedings or investigations will have a material adverse effect on the
Company's results of operations or financial condition. See Item 3, "Legal
Proceedings".
In February 1996, President Clinton signed Public Law 104-104, commonly
referred to as the Telecommunications Act of 1996 (the "Act"). The statutory
changes effected by the Act generally are intended to increase competition and
provide consumers with more choices as to telecommunications providers and
services.
The Act is designed to stimulate the development of competition in local
exchange markets by permitting the Regional Bell Operating Companies (the
"RBOCs") to enter the long-distance arena only after they comply with certain
statutory requirements designed to eliminate their monopolies over local
exchange services. The RBOCs are permitted to offer long-distance services
immediately in geographical areas other than the areas in which they currently
provide local exchange services. The Act required the FCC to promulgate
regulations to implement the requirements of the Act. Entry by long-distance
companies into the markets for local service is governed by the public utility
regulatory authorities of each state in which such service is to be provided.
While state public utility commissions are responsible for regulating such
entry, the Act prohibits state regulations that could bar such entry.
This legislation is the first comprehensive amendment to the
Communications Act of 1934, and it is impossible to predict fully the effects it
will have upon the Company or the highly competitive environment in which the
Company operates. The entry of large, well funded and aggressive competitors
into the long-distance industry may result in a loss of long-distance market
share for the Company. On the other hand, the Act creates new opportunities for
the Company to enter local markets not
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previously available to the Company. It is not certain at this time as to when,
to what extent and under what circumstances the Company will be able to
effectively market local services as permitted under the Act.
During the past fiscal year, AT&T, the Company's largest competitor and
one of the Company's major suppliers, was reclassified as a non-dominant
carrier, allowing it to file tariff revisions or new tariffs which become
effective after one day's notice rather than the previously required 14 day's
notice. Consequently, adverse changes to AT&T's tariffs for services that the
Company resells now can take effect before the Company would have a meaningful
opportunity to object to such changes, giving AT&T a significant competitive
advantage and increased flexibility to price directly marketed services more
competitively with the services it resells through reseller companies like
EqualNet.
ITEM 2. PROPERTIES
The Company leases approximately 62,500 square feet of general and
administrative office space in Houston, Texas, under leases with unaffiliated
third parties that expire in 2004. The Company's monthly rental obligation for
its facilities is approximately $58,000. The Company believes that its leased
facilities are adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is involved in what it believes to be
routine litigation or other legal proceedings that may be considered as part of
the ordinary course of its business. Currently the Company is involved in
litigation filed in August, 1995 under Cause No. 95-CH-01472 in the Circuit
Court of the Seventh Judicial Circuit of Sangamon County, Illinois brought by
the Illinois Attorney General under that state's Consumer Fraud and Deceptive
Business Practices Act seeking injunctive relief, attorneys fees and civil
penalties in the amount of $50,000 for each violation of that Act. The Company
is also involved in litigation filed in February, 1996 under Cause No.
IJ96-1153, in the Chancery Court of Pulansky County, Arkansas, 1st Division
brought by the Arkansas Attorney General under that state's Deceptive Trade
Practices Act seeking injunctive relief, attorneys fees, restitution to
consumers and civil penalties in the amount of $10,000 for each violation of the
Act. The Company is also involved in litigation filed in February, 1996 in the
Fourth Judicial District of the State of Idaho in and for the County of Ada
under Cause No. CV-DC-9600809D brought by the Idaho Attorney General under that
state's Consumer Protection Act, Telephone Solicitation Act and Rules of
Telephone Solicitations seeking injunctive relief, restitution to consumers,
attorneys fees and civil penalties in the amount of $5,000 for each violation of
either the Consumer Protection or Telephone Solicitation Acts. The Company has
also received and responded to a civil investigative demand from the Kansas
Attorney General. Each of these matters allege that the Company has received an
excessive number of customer complaints that long-distance service was switched
to EqualNet without the customer's knowledge or informed consent, with remedies
being sought under the deceptive trade practices-consumer protection statutes of
these states. While the Company acknowledges that some customers may not fully
understand the technical distinction between being a customer of one of the
Company's underlying carriers and being a customer of EqualNet with all network
processes being handled by those same underlying carriers, the Company
vigorously denies that it has engaged in any program or pattern of wrongfully
switching customers' long-distance service in violation of state or
federal laws. Although it is not possible at this time to predict with any
degree of certainty the ultimate exposure of the Company in these matters, the
Company does not believe that the outcome of any of these proceedings will have
a material adverse effect on the Company's results of operations or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on The Nasdaq National Market under
the symbol "ENET". The table below sets forth the high and low sales prices of
the Common Stock for the third and fourth quarters of fiscal 1995 and for fiscal
year 1996, as reported by The Nasdaq Stock Market. The quotations reflect
inter-dealer prices, without retail mark-down or commission and may not
represent actual transactions. Prior to the Company's initial public offering of
the Common Stock in March 1995, there was no market for the Common Stock.
FISCAL YEAR ENDED JUNE 30, 1996
PRICE RANGE
-------------------------------
HIGH LOW
1996 ------- -------
First Quarter $18 3/4 $14 3/4
Second Quarter $21 $ 6 3/4
Third Quarter $10 1/2 $ 5 3/4
Fourth Quarter $ 7 1/4 $ 3
1995
Third Quarter (from March 9) $11 7/8 $11
Fourth Quarter $17 3/4 $11 5/8
On October 8, 1996, the last sales price per share of the Company's
Common Stock, as reported by The Nasdaq Stock Market, was $2.25.
On October 8, 1996, the Company's 6,002,000 shares of Common Stock
outstanding were held by approximately 60 shareholders of record.
Holders of Common Stock are entitled to receive such dividends as may be
declared by the Board of Directors of the Company. The Company does not
anticipate that cash dividends will be paid in the foreseeable future. The
Company intends to retain any future earnings to finance the expansion and
continuing development of its business. The declaration and payment in the
future of any cash dividends will be at the election of the Company's Board of
Directors and will depend upon the earnings, capital requirements and financial
position of the Company, existing or future loan covenants, general economic
conditions and other pertinent factors. The loan agreement with the Company's
principal commercial lender (the "Loan Agreement") restricted the Company's
ability to declare and pay dividends on shares of capital stock while the
Company was exempt from federal income tax as an S corporation by permitting the
issuance of dividends in an amount up to 40% of net income for the previous
fiscal quarter. Dividends of $865,474 were distributed on this basis for the
year ended June 30, 1994, and a dividend of $335,481 was distributed during the
period ended March 7, 1995. In addition, on March 7, 1995, the Company declared
a dividend to its then existing shareholders of $2.1 million, which was equal to
the estimated aggregate amount of the Company's retained earnings at that time.
The loan agreement with its principal lender currently does not permit the
Company to declare and pay dividends.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated financial
data of the Company for each of the five years ended June 30, 1996, which
information has been derived from the Company's audited consolidated financial
statements. This information should be read in connection with and is qualified
in its entirety by the more detailed information and consolidated financial
statements, including the notes, thereto, under Item 8 of this Annual Report on
Form 10-K.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
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1992 1993 1994 1995 1996
----------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales ..................... $ 7,217,200 $ 18,950,168 $ 35,397,331 $ 67,911,405 $ 78,354,858
Cost of sales ............. 6,609,892 16,441,001 28,801,516 54,655,313 61,807,113
Selling, general and
administrative expenses .. 450,743 1,811,825 5,297,710 8,936,102 13,719,573
Depreciation and
amortization ............. 4,978 66,648 271,679 1,355,832 5,933,890
Write down of assets ...... -- -- -- -- 6,882,661
----------- ------------ ----------- ------------ ------------
Operating income (loss) ... 151,587 630,694 1,026,426 2,964,158 (9,988,379)
Other income (expense) .... (20,327) (35,361) 742,916 (92,856) (1,088,887)
----------- ------------ ----------- ------------ ------------
Income (loss) before
federal income taxes
and extraordinary
item ..................... 131,260 595,333 1,769,342 2,871,302 (11,077,266)
Provision (benefit) for
federal income taxes ..... 53,883 -- -- 507,057 (2,659,853)
Extraordinary item:
Utilization of
net operating loss
carryforward ............. (27,106) -- -- -- --
----------- ------------ ----------- ------------ ------------
Net income (loss) ......... $ 104,483 $ 595,333 $ 1,769,342 $ 2,364,245 $ (8,417,413)
=========== ============ =========== ============ ============
Net loss per share ........ $ (1.40)
============
Pro forma net income(1) ... $ 63,735 $ 363,153 $ 1,079,299 $ 1,751,494
=========== ============ =========== ============ ============
Pro forma net income per
share .................... $ 0.02 $ 0.09 $ 0.27 $ 0.38
=========== ============ =========== ============ ============
Weighted average number of
shares(2) ................ 4,000,000 4,000,000 4,000,000 4,618,043 6,017,332
=========== ============ =========== ============ ============
Cash dividends per share(3) $ -- $ -- $ 0.22 $ 0.61 $ --
=========== ============ =========== ============ ============
Balance Sheet Data:
Cash and equivalents ...... $ 129,915 $ 261,816 $ 194,571 $ 3,526,543 $ 381,849
Working capital ........... 96,212 (158,007) 230,448 7,772,366 (3,161,437)
Total assets .............. 3,495,749 6,012,925 9,044,595 39,315,569 34,595,832
Total long-term debt and
capital leases, net of
current portion .......... 166,030 84,378 512,914 1,142,640 45,000
Total shareholders' equity 34,821 466,830 1,350,698 20,705,724 12,383,998
</TABLE>
- - ------------
(1) From July 1, 1992 to March 7, 1995, the Company had reported for federal
income tax purposes as an S corporation. Accordingly, all taxable
earnings of the Company during that time have been taxed directly to the
shareholders of the Company at their individual tax rates. A pro forma
adjustment to reflect federal and state income taxes as if the Company
were a C corporation is presented for the respective periods at an
estimated effective rate of 39%.
(2) Shares used to compute pro forma net income per share are based upon the
actual weighted average shares outstanding giving retroactive effect to
the Company's reorganization which occurred March 8, 1995.
(3) Shares used to compute cash dividends per share are based upon 2,000,000
shares outstanding in 1991 and 4,000,000 shares outstanding for the
remaining periods as a result of the Reorganization. On March 7, 1995,
the Company declared a final dividend of $0.53 per share to the
shareholders of record on such date. The dividend was paid on March 24,
1995, to the shareholders of record on March 7, 1995.
-9-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, UNDER ITEM 8 OF THIS ANNUAL
REPORT ON FORM 10-K.
OVERVIEW
Since its formation in July 1990, the Company's long-distance volume has
grown to more than 15.2 million monthly minutes at June 30, 1996. Substantially
all of the Company's revenues have been derived from the sale of long-distance
services to small business customers. The source of these accounts is primarily
the Company's nationwide network of independent marketing agents and the
acquisition of customer accounts of other resellers. Many of these agents
actively market the Company's long-distance products via telemarketing.
The Company's primary expense, its costs of sales, is variable and
consists of the underlying "wholesale" cost of long-distance services from its
underlying providers, commissions to independent agents, and billing costs.
However, in the opinion of the Company, to the extent that revenues continue to
grow, continued incremental economies may be achieved in the Company's expenses,
particularly the costs of long-distance service and billing.
The Company has grown by adding independent marketing agents and by
acquiring the customer accounts of several other resellers. The Company acquires
customer accounts from certain of its independent marketing agents on an
individual price per order basis, allowing the Company to use the agents as a
vehicle to outsource telemarketing activities. Costs associated with
individually acquired orders totaled approximately $1.7 million and $8.1 million
in fiscal 1995 and 1996, respectively. The Company expects that future revenue
growth will come primarily from the continued development of independent
marketing agents and additional acquisitions of customer accounts.
The Company's selling, general and administrative costs are primarily
the costs of back office operations and customer service. The Company also has
devoted significant resources to the development of the information technology
necessary to support customer service and the network of independent marketing
agents. NetBase is a proprietary software system designed to provide efficient
order provisioning and access to customer account information. The Company's
operations and customer service efforts depend on NetBase, which serves as the
interface between the Company and its independent marketing agents. The Company
plans to continue to develop and enhance this system.
In 1995 the Company began development of a new customer management
information system, the NetBase Plus(R) operating system ("NetBase Plus"). In
the second quarter of fiscal 1996, the Company implemented NetBase Plus, which
the Company determined to have inherent design flaws that resulted in
inefficient operation. The entire system was subsequently abandoned, and the
Company reverted from NetBase Plus to NetBase in April 1996. As a result, the
Company wrote off approximately $2.2 million in capitalized software development
costs associated with the NetBase Plus system in the third quarter of fiscal
1996. The Company expects the reversion to the original NetBase to reduce cash
outlays that were required to service, maintain and modify the NetBase Plus
system, as well as decrease depreciation expense in the future by approximately
$50,000 per month.
The Company reported for federal income tax purposes as an S corporation
under the Internal Revenue Code of 1986, as amended, until its reorganization in
connection with its initial public offering in March 1995, and was similarly
treated for state income tax purposes under comparable state laws.
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<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the fiscal periods indicated the
percentages of total sales represented by certain items reflected in the
Company's consolidated statements of income and expenses:
Percentage of Total Revenues
Fiscal Year Ended June 30,
-----------------------------------------
1992 1993 1994 1995 1996
----- ----- ----- ----- -----
Total sales ....................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales ..................... 91.6 86.8 81.4 80.5 78.9
----- ----- ----- ----- -----
Gross margin ...................... 8.4 13.2 18.6 19.5 21.1
Selling, general and administrative
expenses ......................... 6.2 9.5 14.9 13.2 17.5
Depreciation and amortization ..... 0.1 0.4 0.8 2.0 7.6
Write down of long term assets .... -- -- -- -- 8.8
----- ----- ----- ----- -----
Operating income(loss)............. 2.1 3.3 2.9 4.4 (12.8)
Other income (expense):
Interest income ................ -- 0.2 0.1 0.7 0.1
Interest expense ............... (0.3) (0.4) (0.4) (0.8) (0.9)
Miscellaneous .................. -- -- 2.4 (0.1) (0.6)
----- ----- ----- ----- -----
Income (loss) before federal
income taxes and extraordinary
item ............................. 1.8 3.1 5.0 4.2 (14.2)
Provision (benefit) for federal
income taxes ..................... 0.7 -- -- 0.7 (3.4)
----- ----- ----- ----- -----
Income (loss) before
extraordinary item ............... 1.1 3.1 5.0 3.5 10.8
Extraordinary item ................ 0.3 -- -- -- --
----- ----- ----- ----- -----
Net income(loss) .................. 1.4% 3.1% 5.0% 3.5% (10.8)%
===== ===== ===== ===== =====
YEAR ENDED JUNE 30, 1996, COMPARED TO YEAR ENDED JUNE 30, 1995
TOTAL SALES. Long-distance sales increased 15.4%, from $67.9 million in
fiscal 1995 to $78.4 million for the year ended June 30, 1996. The increase
resulted from the significant growth of customer minutes in the third and fourth
quarters of fiscal 1995 that continued into fiscal 1996. Quarterly revenues
peaked in the first quarter of fiscal 1996 at $23.9 million and declined each
quarter thereafter, with fourth quarter revenues totalling $16.2 million in
fiscal 1996. The decline in revenues during fiscal 1996 was more gradual than
the growth in fiscal 1995, resulting in an overall increase when comparing the
two fiscal years. The decline in revenues on a quarterly basis in fiscal 1996
was the result of an increased rate of attrition on existing customers and a
decline in order activity in the last half of fiscal 1996.
TOTAL COST OF SALES. The Company's cost of sales, which is variable,
increased from $54.7 million in fiscal 1995 to $61.8 million for the year ended
June 30, 1996, an increase of 13.1%. This increase was a result of an increase
in the Company's sales. The Company's cost of long-distance (which is a
component of cost of sales) remained relatively stable as a percentage of sales,
decreasing slightly from 63.7% to 63.6% for the years ended June 30, 1995 and
1996, respectively. Commission expense as a percentage of sales decreased from
11.9% to 6.5%. This decrease in commissions was the result of a change in the
Company's sales strategy from that of advancing commissions to independent
marketing agents for individual customer accounts, to one of purchasing customer
accounts and bases of customer accounts. The purchased bases and accounts have
no associated commission expense. In addition, the Company made a payment in the
second quarter of fiscal 1996 to a principal agent to reduce the agent's
commission rate. Of the Company's total sales during fiscal
-11-
<PAGE>
1995 and 1996, 40% and 28%, respectively, were derived from customers
introduced to the Company from this agent. Billing expense as a percentage of
sales increased from 3.6% to 4.0%, a result of the average monthly customer bill
decreasing from $55 per month to $50 per month and the increase in the number of
delinquent accounts. Bad debt expense increased from 1.3% of sales in fiscal
year 1995 to 4.9% of sales in fiscal 1996. A primary factor to the increase in
bad debt expense incurred by the Company was the result of the shift to more
purchased orders for which the Company had full exposure to uncollectible
accounts as compared to commissioned orders for which the agents shared in a
substantial portion of the risk on uncollectible accounts. In addition, the
Company's collection efforts were hindered by the failure of NetBase Plus to
produce the necessary information to allow for the most timely and effective
method of collection.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 53.5% from $8.9 million for the year ended
June 30, 1995, to $13.7 million for the same period in fiscal 1996. Selling,
general and administrative expenses increased as a percentage of sales from
13.1% to 17.5% for the years ended June 30, 1995 and 1996, respectively. The
increase in this expense was a result of the substantial growth of the Company
over the last half of fiscal 1995 and through December 1995. Total staff
increased from an average of 144 temporary and permanent employees during the
year ended June 30, 1995 (220 at June 30, 1995), to an average of 204 temporary
and permanent employees during the year ended June 30, 1996. Staffing peaked in
December 1995 at 283 employees (including temporary employees) and declined to
183 temporary and permanent employees in June 1996. Salary related expense
increased $2.8 million as a result of the increase in personnel. Lease expense
increased from $700,000 in fiscal 1995 to $1.7 million in fiscal 1996. The
Company entered into two significant sale leaseback transactions totalling $1.5
million during fiscal 1996. Additionally, the Company leased a new telephone
system and computer equipment to support the Company's information system
network. The Company incurred approximately $500,000 in additional legal,
accounting and professional fees in fiscal 1996 as compared to fiscal 1995 as a
result of the added cost of being a public company for all of fiscal 1996, the
significant level of attempted acquisition activity in the first half of fiscal
1996, the joint venture with Metrolink, Inc. ("Metrolink"), and the
renegotiation of the Company's loan agreement with its principal lender in
November 1995 and amendments to that agreement in March and June 1996.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
337.7% from $1.4 million for the year ended June 30, 1995, to $5.9 million for
the same period for the year ended June 30, 1996. Amortization expense has
increased substantially because of the purchase of a customer base in June 1995
for $8.2 million and the investment of $8.5 million in fiscal 1996 in individual
orders purchased from independent marketing agents. Depreciation expense has
risen over the same periods as a result of the significant investment in
computers needed to support the Company's growth and as a result of the
investment in NetBase Plus.
The Company wrote down assets during the year ended June 30, 1996, of
approximately $6.9 million. Included in the write down were a $4.6 million
non-cash charge to reduce the carrying value of acquired customer bases to the
present value of the expected future cash flows associated with the underlying
customer accounts and a $2.2 million write off of capitalized software
development costs associated with the NetBase Plus system. The write down of
deferred acquisition costs was necessitated by continued greater than expected
turnover of acquired customer bases which resulted from difficulties in billing
and servicing the underlying customer accounts.
During fiscal 1996, the Company reverted from the NetBase Plus operating
system which was implemented in November 1995, to the Company's original NetBase
operating system. The Company determined that the NetBase Plus system had
inherent design flaws which resulted in inefficient operation and abandoned the
entire system in April 1996. The Company
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<PAGE>
expects the reversion to the original NetBase to reduce cash outlays that were
required to service, maintain and modify the NetBase Plus system, as well as
decrease depreciation expense in the future by approximately $50,000 per month.
OPERATING INCOME (LOSS). Operating income decreased 437% from $3.0
million for the year ended June 30, 1995, to an operating loss of $10.0 million
for fiscal 1996.
OTHER INCOME (EXPENSE). Other expense increased from $92,856 for fiscal
1995 to $1.1 million for the year ended June 30, 1996. This increase was
primarily attributable to a decrease in interest income of $443,000 from fiscal
1995 to fiscal 1996 and an increase in miscellaneous expense of $400,000. The
decrease in interest income was the result of the use during fiscal 1996 of the
excess cash generated through the Company's initial public offering in March
1995. Miscellaneous expense in fiscal 1996 includes a $250,000 accrual for
possible penalties, settlement costs and legal expenses associated with the
resolution of pending complaints against the Company by various state regulatory
agencies with regard to customer complaints. See Item 3, "Legal Proceedings".
Interest expense increased as a result of an increase in the size and
utilization of borrowings under the Company's line of credit during the year
ended June 30, 1996.
YEAR ENDED JUNE 30, 1995, COMPARED TO YEAR ENDED JUNE 30, 1994
TOTAL SALES. long-distance sales increased 91.9%, from $35.4 million in
fiscal 1994 to $67.9 million for the fiscal ended June 30, 1995.
Approximately 50% of this increase arose from sales to new customers. The
increase related primarily to continued expansion of the Company's network of
independent marketing agents as well as increases in the number of orders
submitted by the Company's existing independent marketing agents. A price
increase of 3.9% in June 1994 also was responsible for a proportionate share of
the increase in sales in the period, with existing customer usage remaining
relatively stable.
TOTAL COST OF SALES. The Company's cost of sales, which is variable,
increased from $28.8 million in fiscal 1994 to $54.7 million for the year ended
June 30, 1995, an increase of 89.8%. This increase was a result of an increase
in the Company's sales. The Company's cost of long-distance (which is a
component of cost of sales) decreased as a percentage of sales from 71.2% to
63.7% for the years ended June 30, 1994 and 1995, respectively. This decrease
was partially offset by an increase in the cost of commissions to the Company's
independent marketing agents from 11.5% to 11.9% of sales for these same
periods. Bad debts and billing costs increased from $334,000 to $1,033,160 and
from $1.2 to $2.5 million, respectively, but remained relatively constant as a
percentage of sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 84.8% from $5.6 million for the year ended
June 30, 1994, to $10.3 million for the same period in fiscal 1995. The increase
was a result of the substantial growth of the Company. Total staff increased
from 109 to 180 in the twelve months ended June 30, 1996 with a corresponding
increase in salary related costs of $1.9 million. The growth in personnel
necessitated expansion of office facilities and lease related expenses increased
$455,000 from fiscal 1994. Significant costs were also incurred to service the
increase in customers experienced in fiscal 1995. Selling, General and
Administrative expenses as a percentage of sales remained relatively constant
between fiscal 1994 and 1995 at 15.7% and 15.1%, respectively.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
499% from $271,679 in fiscal 1994 to $1.4 million in fiscal 1995 as a result of
the increase in customer acquisition costs and property, plant and equipment.
OPERATING INCOME. Operating income increased 188.8% from $1.0 million
for the year ended June 30, 1994, to $3.0 million for the same fiscal period in
1995.
-13-
<PAGE>
OTHER INCOME (EXPENSE). Other income (expense) declined from $742,916 in
income for fiscal 1994 to $92,856 in expense for the year ended June 30, 1995.
This decline was primarily attributable to other income earned from an incentive
payment related to an inbound traffic commitment during fiscal 1994, which was
not present during fiscal 1995. Interest expense increased as a result of an
increase in the size and utilization of the Company's line of credit for the
year ended June 30, 1995. This increase was more than offset in fiscal 1995 by
the increase in interest income resulting from the increase in cash due to
increased profitability and the initial public offering completed in March 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated pre-tax net income of $1.8 million and $2.9
million for the years ended June 30, 1994 and 1995, respectively, and recorded
an $11.1 million pre-tax loss for the year ended June 30, 1996. The Company
funded its operations during the year ended June 30, 1996, with the remaining
proceeds of its initial public offering which closed in March 1995, through
advances under its revolving credit facility and through operating cash flows.
By December 31, 1995, the remaining funds from the initial public offering had
been expended, and, due to operating losses sustained in the second half of
fiscal 1996 and a declining revenue base, the Company reached its maximum
borrowing capacity under its revolving credit facility. The Company's borrowing
capacity under this credit facility continues to decline as a result of
operating losses, a decline in the revenue base and the exclusion of certain
receivables from the criteria of eligible receivables. An additional source of
liquidity during this time period has been an extension of payment terms from
the Company's major suppliers, although there can be no assurance that any such
extensions will be granted in the future. At current levels of operations and
with a declining borrowing base, the Company must seek additional capital and
continued concessions from its vendors and must continue to reduce expenses to
bring them in line with current levels of revenues.
CASH FLOW FROM OPERATIONS. The Company used net cash of $741,113 in
operating activities in fiscal 1995 while operating activities provided net cash
of $309,443 in fiscal 1996. Cash from net income adjusted for non-cash expenses
increased from $4.8 million in fiscal 1995 to $6.0 million in 1996. The net use
of cash resulting from the change in operating assets and liabilities, primarily
the $3.1 million increase in commissions advanced to agents and a $5.0 million
change in accounts payable and accrued expenses offset by the decrease in
accounts receivable of $2.8 million, was $5.7 million in fiscal 1996. Accounts
receivable and payables, particularly the payable to providers of long-distance,
decreased as revenues declined in the third and fourth quarters of fiscal 1996.
Cash flow was also negatively affected by the Company's change in policy related
to the timing of payment of commissions. Beginning in fiscal 1996, the Company
began paying commissions based upon revenue billed while prior to that time
commissions were paid on revenues collected. In addition, the Company paid
approximately $1.0 million in federal and state sales taxes owed for prior
periods as a result of the Company's inadvertent failure to remit the sales tax
due to various taxing authorities on the incremental component of revenue in
excess of the cost of the underlying service (for which taxes were properly
paid).
CASH FLOW FROM INVESTING ACTIVITIES. Net cash used in investing
activities increased from $13.3 million in fiscal 1995 to $14.4 million in
fiscal 1996. During fiscal 1996 the Company purchased $8.5 million of customer
accounts. The Company expended $3.4 million for computer equipment and related
software development. The increase in personnel and back office development
through December 1995 required a substantial investment in office computer
equipment. Funds were also utilized to implement the NetBase Plus customer
management information system which required investment in hardware and
proprietary software, while additional funds were expended to revert back to,
modify and improve the original NetBase system. The Company invested $800,000 in
property and equipment related to expanded
-14-
<PAGE>
facilities. The Company also invested $234,000 in a proprietary in-house billing
system. The Company anticipates implementing the system for selected segments of
the Company's business in the second quarter of fiscal 1997 and internally
billing the majority of its customers by the end of fiscal 1997. The
Company also made a one-time payment of $710,000 to one of its largest
agents to reduce the agent's commission rate on existing traffic.
FINANCING ACTIVITIES. Financing activities provided $10.9 million to the
Company in fiscal 1996. The Company increased borrowings under the revolving
credit facility during fiscal 1996, resulting in net proceeds of $9.6 million An
additional $1.4 million was provided by the sale of computer equipment and
furniture owned by the Company, which the Company subsequently leased from the
purchaser.
WORKING CAPITAL AND LONG CASH CYCLE. Customer billings for long-distance
services are generated from detailed call records which are generally available
from the carrier on or about the tenth day of the month following the month of
customer usage. Customer invoices usually are generated within ten days
thereafter and are due by the 34th day following the month of customer usage.
However, the Company historically collects a large portion of receivables after
the scheduled due date, resulting in an average cash cycle of approximately 60
days. Since the Company's primary underlying carrier is paid within 35 days
following the month of usage, delays in receipt of customer payments have
resulted in significant working capital needs.
SALES TAXES. In early 1994, the Company determined that its treatment
and disbursement of sales taxes was not being properly administered and engaged
an outside tax compliance firm to assist in the resolution of the matter with
the various states and other regulatory and taxing authorities At June 30, 1996,
the Company has accrued $740,000 for resolution of this matter. The improper
treatment of sales taxes arose from the Company's failure to remit the sales tax
due to various taxing authorities on the incremental component of revenue in
excess of the cost of the underlying service (for which taxes were properly
paid). The Company believes that the amount accrued is adequate for the
satisfaction of this tax liability, including any interest and penalties
payable.
HISTORICAL CAPITAL RESOURCES. To date, the external funds necessary to
fund the Company's capital requirements arising from capital expenditures,
acquisitions and working capital have been provided primarily from bank credit
financing and the proceeds from the Company's initial public offering. Maximum
borrowings under the Company's line of credit has increased from $100,000 in
1992 to $15.0 million in 1996. The Company's current credit facility provides
for a borrowing base that is dependent upon the amount and aging of accounts
receivable. As of June 30, 1996, the borrowing base under the existing facility
was estimated to be $11.0 million. Under this facility, the interest on the
outstanding balance accrues at a rate equal to prime plus 3% (11.25% at June 30,
1996). Interest was payable at prime plus 1% from June 1, 1996, through
September 30, 1996, with the remaining deferred interest for that period due and
payable on October 1, 1996. Under this facility, the interest accrues and is
payable monthly at a rate equal to prime plus 3% beginning October 1, 1996
(11.25% at October 1, 1996). The existing credit facility expires December 1,
1997, and is secured by the Company's accounts receivable. As of June 30, 1996,
approximately $302,000 of borrowings were available under the credit facility.
The Company's agreement with AT&T establishes minimum semi-annual
revenue commitments ("MSARCs") which must be met to receive the contractual
price set forth in the agreement and to avoid shortfall penalties. MSARCs are
segregated into components differentiated by the type of traffic. At June 30,
1996, the Company was $3.8 million below the cumulative MSARC. If the existing
contract with AT&T is terminated, either by the Company or by AT&T for
non-payment, prior to the expiration of the full term without execution of a new
contract, the Company will be liable for the total amount of the unsatisfied
MSARC for the period in which the discontinuance occurs and for 100% of the
MSARCs for each semi-annual period remaining in the contract tariff term. In
addition, the Company will also be required to refund a prorated portion, based
upon the number of months remaining in the contract tariff term at the time of
termination, of $535,500 in credits issued the Company by AT&T. See note 5 of
the notes to consolidated financial statements. The contract expires in June
1999. The MSARCs increase over the term of the contract. Historically, the
Company has been able to negotiate a settlement of such shortfalls with the
carrier which has resulted in no penalty being incurred by the Company. Although
the Company currently is negotiating with AT&T for a new contract, there can be
no assurance that the Company will be able to reach a favorable settlement with
the carrier with respect to its current or any future shortfalls. Should the
Company be unable to reach such a favorable settlement it would be required to
fund the resulting penalties through its operating cash flow, funds available
under its existing credit facility and working capital. if required at this
time, such funds would not be available to meet the commitments when due and the
carrier could terminate the Company's underlying service.
-15-
<PAGE>
During fiscal 1996, the Company invested $3.4 million in computer
equipment and related programming. In addition, to support the staffing increase
through December 1995, the Company expended $1.3 million on furniture and
fixtures and leasehold improvements. The Company has budgeted $100,000 to
complete the in-house billing system and, should funds be available, intends to
modify and improve NetBase during fiscal 1997.
The Company has gross deferred tax assets of $4.2 million for which a
valuation allowance of $1.5 million has been established. The deferred tax
assets arise from deductible temporary differences of $4.0 million and a net
operating loss carryforward of $200,000. In assessing the need for and amount of
a valuation allowance, the Company considered its ability to generate taxable
income in recent periods (approximately $5 million in the 18 months ended June
30, 1995), the facts and circumstances which led to the significant operating
loss incurred in the year ended June 30, 1996, and projections of future taxable
income. In order to realize the net deferred tax asset, the Company must
generate taxable income of $5.7 million in future periods prior to the
expiration of the net operating loss carryforward in the year 2011. The pre-tax
loss of $11.1 million in fiscal 1996 included $11.2 million in special charges
which the Company believes will not reoccur in future periods. Based upon
projections of future operations, the Company believes that realization of the
net deferred tax asset of $2.2 million is more likely than not.
The Company believes that a combination of improved margins resulting
from lower negotiated rates from its carriers or the migration of its traffic to
lower cost platforms, reverting to a marketing agent incentive program that
emphasizes the amount of monthly billings rather than the volume of orders
submitted, as well as reductions in personnel and other operating costs should
enable it to return to profitability. There can be no assurance, however, that
the Company will generate any earnings or any specific level of continuing
earnings. The Company generally can be expected to generate taxable income in
excess of book income as a result of deductible temporary differences related to
the allowance for doubtful accounts and amortization of deferred acquisition
costs.
The Company is currently negotiating with its lenders to increase
availability under its revolving credit facility, amend certain financial
covenants and waive certain events of default. The significant special charges
incurred in fiscal 1996 resulted in decreased earnings, equity and tangible net
worth so that in March 1996 the Company was in default on certain loan covenants
of its credit agreement. The credit agreement was amended in June 1996, and the
covenants were amended so that the defaults as of and proir to April 30, 1996
were waived. The Company was in compliance with the covenants at June 30, 1996.
Certain of the amended covenants have increasing ratios over time. The
Company does not anticipate being in compliance with the covenants subsequent to
September 30, 1996, and will need to obtain from its lender waiver or credit
agreement amendments in order for the debt not to be in default.
These conditions raise substantial doubt about the Company's ability to
continue as a going concern. The Company is currently negotiating with its
lenders to increase availability under its revolving credit facility and to
amend certain financial covenants. At the present time the lender has not made
any demands for payment of the loan, and the Company believes that it is not its
intention to do so. While there can be no assurance that the Company will be
successful in securing such amendments to its existing credit facility,
management believes that the lender is receptive to reaching an accommodation
under certain conditions and that the Company will be able to successfully
conclude the negotiations and thus avoid any material adverse effect on the
Company's operations or financial condition. In addition, the Company is
negotiating with its carriers for special terms and consideration. In the event
the Company is unsuccessful in achieving any one or a combination of these
objectives sufficient to meet the Company's liquidity needs, it will seek an
alliance with a strategic partner, or in the event no such strategic alliance is
accomplished, the Company may be required to seek protection under United States
bankruptcy laws.
SEASONALITY
The Company's long-distance revenue is subject to seasonal variations.
Because most of the Company's revenue is generated by non-residential customers,
the Company traditionally experiences decreases in long-distance usage and
revenue in those periods with holidays. In past years the Company's
long-distance traffic, which is primarily non-residential, has declined slightly
during the quarter ending December 31 due to the November and December holiday
periods.
INFLATION
Inflation has not had a significant impact on the Company's operations
to date.
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<PAGE>
CAUTIONARY STATEMENTS
The Company's expectations with respect to operating results and other
matters described in this Annual Report on Form 10-K, and otherwise embodied in
oral and written forward looking statements are subject to the following risks
and uncertainties that must be considered when evaluating the likelihood of the
Company's realization of such expectations:
ATTRITION RATES - In the event that the Company's attrition rates
continue at the current level either as a result of increased provisioning times
by its underlying carrier, the purchase of poorly performing traffic, or the
inability to properly manage the existing customer base due to unforeseen
difficulties with the NetBase system, additional charges may be incurred that
would affect earnings.
DEPENDENCE ON INDEPENDENT MARKETING AGENTS - The Company has a small
internal sales force and obtains a significant majority of its new customers
from the Company's network of independent marketing agents ("Agents"). The
Company's near-term ability to expand its business depends upon whether it can
continue to maintain favorable relationships with existing Agents and recruit
and establish new relationships with additional Agents. Should the return to the
original NetBase system not continue to improve the exchange of information
between the Company and its Agents, no assurances can be made as to the
willingness of the existing Agents to continue to provide new orders to the
Company or as to the Company's ability to attract and establish relationships
with new Agents.
INABILITY TO COLLECT ACCOUNTS RECEIVABLE - Although the Company's bad
debt rate has improved somewhat in recent months, if it were not to continue to
improve or revert to the fiscal 1996 rate, either as a result of the purchase of
poorly performing traffic or the inability of the Company to properly manage
existing customer receivables, additional charges may be incurred that would
affect earnings. In addition, the inability to collect past due receivables
could have a material adverse impact upon the Company's liquidity and cash flow.
DEPENDENCE ON AT&T AND OTHER FACILITIES-BASED CARRIERS - The Company
does not own transmission facilities and currently depends primarily upon AT&T
and, to a lesser extent, upon Sprint to provide it with the telecommunications
services that it resells to its customers and the detailed information upon
which it bases its customer billings. The Company's near-term ability to expand
its business depends upon whether it can continue to maintain favorable
relationships with AT&T and Sprint. Although the Company believes that its
relations with AT&T and Sprint are good and should remain so with continued
contract compliance, the termination of the Company's current contracts with
either AT&T or Sprint or the loss of the telecommunications services that the
Company receives from AT&T or Sprint could have a material adverse effect on the
Company's results of operations and financial condition.
-17-
<PAGE>
This dependence on the Company's primary carrier further manifested
itself during the quarter ended March 31, 1996, as continued delays in
provisioning (activating new customers) by the carrier continued to result in a
backlog of customers who would otherwise have been activated on the Company's
long-distance and billing services. Although the carrier has agreed to take
certain steps to decrease the provisioning time which has resulted in an
elimination of the provisioning backlog, there can be no assurance that similar
delays will not occur in the future.
CARRIER COMMITMENTS - The Company has significant commitments with its
two primary carriers to resell long-distance services. The Company's contracts
with its carriers contain penalty clauses which could materially and adversely
impact the Company should the Company incur a shortfall in meeting its
commitments. The Company currently is in a shortfall situation with both of its
primary carriers. Although the Company has from time to time failed to meet its
commitment levels under a particular contract and in each case been able to
negotiate a settlement with the carrier which resulted in no penalty being
incurred by the Company, there can be no assurance that the Company will be able
to reach similar favorable settlements with its carriers currently or in the
event that the Company should continue to fail to meet its commitments.
In recent years, AT&T, MCI and Sprint have consistently followed one
another in pricing their long-distance products. If MCI and Sprint were to lower
their rates for long-distance service and AT&T did not adopt a similar price
reduction, adverse customer reaction could affect the Company's ability to meet
its commitments under the AT&T contract which could have a material adverse
affect on the Company's financial position and results of operations.
DEVELOPMENTAL AND TRANSITIONAL PROBLEMS WITH NETBASE - NetBase Plus(R),
the Company's second generation customer management system, was not able to meet
the operating requirements of the Company. As a result, in the third quarter of
fiscal 1996 the Company began reverting to an enhanced version of the original
NetBase operating system. Although the Company successfully completed the
reversion in the fourth quarter of fiscal 1996 and has made continued
improvements to the operating system, to the extent that the Company experiences
significant growth, the existing NetBase operating system may reach technical
limitations and hinder reporting visibility to management as well as cause a
decline in customer service, thereby negatively impacting attrition levels and,
therefore, results of operations.
RELATIONSHIPS WITH STATE REGULATORY AGENCIES - The Company's intrastate
long-distance telecommunications operations are subject to various state laws
and regulations, including prior certification, notification or registration
requirements. The Company must generally obtain and maintain certificates of
public convenience and necessity from regulatory authorities in most states in
which it offers service. The Company presently is responding to consumer
protection inquiries from seven states. Management believes these inquiries will
be resolved satisfactorily, although settlement offers may be made or accepted
in instances in which it is determined to be cost effective. During the quarter
ended March 31, 1996, the Company recorded an accrual for such estimated
settlements. No assurances can be made however, that additional states will not
begin inquiries or that the current accrual will be sufficient to provide for
existing or future settlements. Failure to resolve inquiries satisfactorily or
reach a settlement with the regulatory agencies could, in the extreme, result in
the inability of the Company to provide long-distance service in the
jurisdiction requiring regulatory certification. Any failure to maintain proper
certification in jurisdictions in which the Company provides a significant
amount of intrastate long-distance service could have a material adverse effect
on the Company's business.
-18-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial information
required to be filed under this Item are presented on pages 21 through 39 of
this Annual Report on Form 10-K, and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item will be set forth in the
Registrant's Proxy Statement relating to the annual meeting of the Registrant's
stockholders scheduled to be held November 26, 1996, under the captions
"Election of Directors" and "Executive Officers and Compensation", and such
information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be set forth in the
Registrant's Proxy Statement relating to the annual meeting of the Registrant's
stockholders scheduled to be held November 26, 1996, under the caption
"Executive Officers and Compensation", and such information is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be set forth in the
Registrant's Proxy Statement relating to the annual meeting of the Registrant's
stockholders scheduled to be held November 26, 1996, under the caption "Security
Ownership of Certain Beneficial Owners and Management", and such information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be set forth in the
Registrant's Proxy Statement relating to the annual meeting of the Registrant's
stockholders scheduled to be held November 26, 1996, under the caption
"Executive Officers and Compensation", and such information is incorporated
herein by reference.
-19-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) DOCUMENTS INCLUDED IN THIS REPORT:
1. FINANCIAL STATEMENTS PAGE
Report of Independent Auditors...........................................22
Consolidated Balance Sheets as of June 30, 1995 and 1996.................23
Consolidated Statements of Operations for the years ended
June 30, 1994, 1995 and 1996..........................................25
Consolidated Statements of Shareholders' Equity for the years
ended June 30, 1994, 1995 and 1996....................................26
Consolidated Statements of Cash Flows for the years ended
June 30, 1994, 1995 and 1996..........................................27
Notes to Financial Statements............................................28
2. FINANCIAL STATEMENT SCHEDULES
None required.
-20-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
Report of Independent Auditors.......................................... 22
Consolidated Balance Sheets as of June 30, 1995 and 1996................ 23
Consolidated Statements of Operations for the years ended
June 30, 1994, 1995 and 1996.......................................... 25
Consolidated Statements of Shareholders' Equity
for the years ended June 30, 1994, 1995 and 1996...................... 26
Consolidated Statements of Cash Flows for the years ended
June 30, 1994, 1995 and 1996.......................................... 27
Notes to Financial Statements........................................... 28
-21-
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
EqualNet Holding Corp.
We have audited the accompanying consolidated balance sheets of EqualNet
Holding Corp. and subsidiaries as of June 30, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended June 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
responsible assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of EqualNet Holding
Corp. and subsidiaries at June 30, 1996 and 1995, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended June 30, 1996, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming EqualNet
Holding Corp. and subsidiaries will continue as a going concern. As more fully
described in Note 2, the Company has incurred a significant operating loss in
the current year and has a working capital deficiency. The Company anticipates
not being able to comply with certain covenants of a credit agreement with a
bank and will need to obtain from its lender waivers or credit agreement
amendments in order for the debt not to be considered in default subsequent to
September 30, 1996. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
ERNST & YOUNG LLP
Houston, Texas
September 28, 1996
-22-
<PAGE>
EQUALNET HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
June 30, June 30,
1995 1996
------------ -----------
ASSETS
Current assets
Cash and equivalents ........................... $ 3,526,543 $ 381,849
Accounts receivable, net of allowance for
doubtful accounts of $1,219,154 at June 30, 1995
and $3,284,886 at June 30, 1996 ................ 20,866,661 14,372,858
Receivable from officers ....................... 37,071 28,367
Due from agents, net of allowances of $0 at
June 30, 1995 and $1,000,000 at June 30, 1996 .. -- 1,640,808
Prepaid expenses and other ..................... 62,250 582,052
Recoverable federal income taxes ............... -- 1,302,595
Deferred tax assets ............................ 395,516 696,868
------------ ------------
Total current assets ............................. 24,888,041 19,005,397
Property and equipment
Computer equipment ............................. 3,084,648 3,172,950
Office furniture and fixtures .................. 1,001,450 1,204,880
Leasehold improvements ......................... 715,685 1,174,510
------------ ------------
4,801,783 5,552,340
Accumulated depreciation and amortization ...... (886,205) (1,864,068)
------------ ------------
3,915,578 3,688,272
Customer acquisition costs, net of
accumulated amortization of $814,080 at
June 30, 1995 and $5,379,338 at June 30, 1996 .. 10,231,560 9,019,774
Deferred tax assets .............................. -- 1,531,209
Other assets ..................................... 280,390 1,351,180
------------ ------------
Total assets ..................................... $ 39,315,569 $ 34,595,832
============ ============
-23-
<PAGE>
EQUALNET HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
June 30, June 30,
1995 1996
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable ........................ $ 2,899,460 $ 2,057,092
Accrued expenses ........................ 698,818 1,080,627
Accrued sales taxes ..................... 3,075,073 912,123
Brokerage commissions payable ........... 71,613 177,891
Payable to providers of long-distance
services ................................ 9,689,249 7,194,856
Income taxes payable .................... 528,462 --
Current maturities of capital
lease obligations ....................... 153,000 90,000
Revolving line of credit ................ -- 10,654,245
------------ ------------
Total current liabilities ................. 17,115,675 22,166,834
Revolving line of credit .................. 1,052,640 --
Long term obligations under
capital leases .......................... 90,000 45,000
Deferred income taxes ..................... 351,530 --
Shareholder's equity
Preferred stock (non-voting), $.01 par
value
Authorized shares - 1,000,000 at
June 30, 1995 and 1996
Issued and outstanding shares - 0 at
June 30, 1995 and 1996 ................. -- --
Common stock, $.01 par value
Authorized shares - 20,000,000 at
June 30, 1995 and 1996
Issued and outstanding shares - 5,960,111
at June 30, 1995, and 6,002,000
at June 30, 1996 ....................... 60,237 60,237
Treasury stock at cost: 0 shares at
June 30, 1995 and 21,750 shares at
June 30, 1996 .......................... -- (104,881)
Additional paid in capital .............. 20,065,199 19,942,428
Deferred compensation ................... (659,175) (335,836)
Retained earnings ....................... 1,239,463 (7,177,950)
------------ ------------
Total shareholders' equity ................ 20,705,724 12,383,998
------------ ------------
Total liabilities and shareholders' equity $ 39,315,569 $ 34,595,832
============ ============
-24-
<PAGE>
<TABLE>
<CAPTION>
EQUALNET HOLDING CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30,
--------------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Sales ............................. $ 35,397,331 $ 67,911,405 $ 78,354,858
Cost of Sales ..................... 28,801,516 54,655,313 61,807,113
------------ ------------ ------------
6,595,815 13,256,092 16,547,745
Selling, general and administrative
expenses ...................... 5,297,710 8,936,102 13,719,573
Depreciation and amortization ..... 271,679 1,355,832 5,933,890
Write down of assets .............. -- -- 6,882,661
------------ ------------ ------------
Operating income (loss) ........... 1,026,426 2,964,158 (9,988,379)
Other income (expense)
Interest income ................. 49,592 498,280 55,546
Interest expense ................ (140,743) (526,733) (679,745)
Miscellaneous ................... 834,067 (64,403) (464,688)
------------ ------------ ------------
742,916 (92,856) (1,088,887)
Income (loss) before
federal income taxes ............ 1,769,342 2,871,302 (11,077,266)
Provision (benefit) for
federal income taxes ............ -- 507,057 (2,659,853)
------------ ------------ ------------
Net income (loss) ................. $ 1,769,342 $ 2,364,245 $ (8,417,413)
============ ============ ============
Net loss per share ................ $ (1.40)
============
Unaudited pro forma information
Pro forma adjustment for taxes . (690,043) (612,751)
Pro forma net income ........... $ 1,079,299 $ 1,751,494
============ ============
Pro forma net income per share . $ 0.27 $ 0.38
============ ============
Weighted average number of shares . 4,000,000 4,618,043 6,017,332
============ ============ ============
</TABLE>
-25-
<PAGE>
EQUALNET HOLDING CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
EqualNet EqualNet EqualNet
Corporation Holding Corp. Holding Corp. Additional Deferred
Common Common Treasury Paid-In Compen- Retained
Stock Stock Stock Capital sation Earnings Total
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1993 2,000 -- -- 34,907 -- 409,923 446,830
Shareholder Distributions (865,474) (865,474)
Net Income 1,769,342 1,769,342
-----------------------------------------------------------------------------------------
Balance, June 30, 1994 2,000 -- -- 34,907 -- 1,313,791 1,350,698
Shareholder distributions (2,435,480) (2,435,480)
Net Income ($0.61 per share) 2,364,245 2,364,245
Exchange of stock (2,000 shares
of EqualNet Corporation common
stock for 4,000,000 shares of
EqualNet Holding Corp.
common stock) (2,000) 40,000 (34,907) (3,093) --
Issuance of stock (1,810,000
shares) 18,100 17,831,690 17,849,790
Issuance of stock (150,111
shares) 1,501 1,534,145 1,535,646
Grant rights to 63,638 shares
of stock to key employees 636 699,364 (700,000) --
Amortization of deferred
compensation 40,825 40,825
-----------------------------------------------------------------------------------------
Balance, June 30, 1995 -- 60,237 -- 20,065,199 (659,175) 1,239,463 20,705,724
Forfeiture of 18,182 shares of
common stock granted to key
employees (77,229) (122,771) 200,000 --
Surrender of 3,658 shares of
common stock granted to
key employees for tax
withholdings payable (27,652) (27,652)
Net Loss ($1.40 per share) (8,417,413) (8,417,413)
Amortization of deferred
compensation 123,339 123,339
-----------------------------------------------------------------------------------------
Balance, June 30, 1996 -- 60,237 (104,881) 19,942,428 (335,836) (7,177,950) 12,383,998
=========================================================================================
</TABLE>
-26-
<PAGE>
<TABLE>
<CAPTION>
EQUALNET HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30,
1994 1995 1996
---------- ---------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,769,342 $ 2,364,245 $(8,417,413)
Adjustments to reconcile net income to
cash provided by (used in) operating activities
Depreciation and amortization 271,679 1,355,832 5,933,890
Provision for bad debt 333,556 1,033,160 3,820,701
Provision for agent advances -- -- 1,000,000
Equity in loss on investment -- -- 135,257
Provision for deferred income taxes -- (43,986) (3,486,686)
Loss on sale of assets -- -- 1,508
Compensation expense recognized
for common stock issue -- 40,825 123,339
Write down of long term assets -- -- 6,882,661
Change in operating assets and liabilities:
Accounts receivable (2,440,939) (15,067,615) 2,839,996
Prepaid commissions -- -- (3,104,424)
Prepaid expenses and other (47,583) (14,667) (372,241)
Other assets (5,035) (268,160) --
Accounts payable and accrued liabilities 1,686,328 9,859,253 (5,047,145)
----------- ------------ -----------
Net cash provided by (used in) operating activities 1,567,348 (741,113) 309,443
INVESTING ACTIVITIES
Acquisition of accounts receivable, net -- -- (771,894)
Purchase of property and equipment (782,364) (3,291,321) (4,404,531)
Proceeds from certificates of deposit -- 300,000 --
Proceeds from notes receivable 123,451 209,245 --
Proceeds from sale of equipment -- -- 1,010
Commission rate buydown -- -- (710,347)
Purchase of customer accounts (551,680) (10,493,960) (8,468,472)
----------- ------------ -----------
Net cash used in investing activities (1,210,593) (13,276,036) (14,354,234)
FINANCING ACTIVITIES
Repayments on long term debt (64,621) (84,379) --
Proceeds from revolving line of credit 28,071,770 57,875,733 88,316,775
Repayments on revolving line of credit (27,565,675) (57,329,188) (78,715,170)
Proceeds from sale leaseback transaction -- -- 1,434,144
Repayments on capital lease obligations -- (63,000) (108,000)
Proceeds from issuance of stock -- 19,385,436 --
Acquisition of treasury stock -- -- (27,652)
Shareholder distributions (865,474) (2,435,481) --
----------- ------------ -----------
Net cash provided by (used in) financing activities (424,000) 17,349,121 10,900,097
----------- ------------ -----------
Net increase (decrease) in cash (67,245) 3,331,972 (3,144,694)
Cash, beginning of period 261,816 194,571 3,526,543
----------- ------------ -----------
Cash, end of period $ 194,571 $3,526,543 $381,849
=========== ============ ===========
</TABLE>
-27-
<PAGE>
EQUALNET HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
EqualNet Communications, Inc. was incorporated in Texas on July 18, 1990. On
November 28, 1994, the Company changed its name from EqualNet Communications,
Inc. to EqualNet Corporation. Prior to its initial public offering of common
stock in March 1995, the Company formed EqualNet Holding Corp., a Texas
corporation (the Company), as a newly formed holding company and completed a
reorganization, pursuant to which EqualNet Corporation became a wholly-owned
subsidiary of the Company. (See also Note 11.)
The Company is a national long-distance telephone company contracting
primarily with AT&T Corp. ("AT&T") and Sprint Communications Company, L.P.
("Sprint") (collectively the "Carriers") to provide switching and long-haul
transmissions of its traffic. The Carriers bill the Company at contractual rates
for the combined usage of the Company's nationwide base of customers utilizing
their network. The Company bills its customers individually at rates established
by the Company. In addition, a subsidiary of AT&T supplies the Company with key
billing services under a separate agreement. In exchange for these billing
services, the Company pays AT&T and its subsidiary a service fee based on the
volume of long-distance calls processed in a given period. The Company also
utilizes the services of independent processing companies to provide it with
billing services for Sprint and certain AT&T traffic.
A significant amount of the Company's business is acquired through
independent marketing agents. Substantially all of the agreements with these
independent marketing agents provide for the Company to charge a percentage, as
specified by the agreement, of overdue receivables (typically defined as
accounts delinquent in the payment of charges for more than 120 days after the
invoice date) on accounts placed by the independent marketing agents against
commissions otherwise payable to these independent marketing agents. In the
event the Company later collects on any account which was previously declared a
bad debt, the Company credits back to the independent marketing agent the amount
of commission previously deducted. Bad debt expenses charged against the agent
commissions due were $229,375, $1,729,419, and $2,536,883 in 1994, 1995, and
1996, respectively. Customers placed by one independent marketing agent
accounted for approximately 28%, 40%, and 28% of sales in 1994, 1995 and 1996,
respectively. At June 30, 1996, the Company had outstanding advances to its
agents totaling $2,617,614 and had recorded an allowance of $1,000,000 against
those advances for potentially uncollectible amounts.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of EqualNet
Holding Corp. and all majority-owned subsidiaries. All siginificant intercompany
transactions have been eliminated. The Company's investments in associated
companies of 20% or more (but not in excess of 50%) are accounted for using
the equity method.
PROPERTY AND EQUIPMENT
Computer equipment, office furniture and fixtures, and leasehold
improvements are carried at cost, less accumulated depreciation and
amortization. Depreciation and amortization are provided for by the
straight-line method over the estimated useful lives of the depreciable assets
which range from four to ten years. Leasehold improvements are amortized over
the shorter of their useful lives or the term of the lease.
CUSTOMER ACQUISITION COSTS
Customer acquisition costs represent the direct costs of an acquired billing
base of customer accounts and orders bought on an individual basis from certain
agents or telemarketers. These costs are amortized by applying the Company's
attrition rate associated with the acquired customers each month against the
unamortized balance of
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<PAGE>
the previous month (declining balance method) over a five-year period, switching
to the straight-line method when the straight-line method results in greater
amortization. The Company's attrition rate used to amortize deferred acquisition
costs was 2.5% and 3.0% for fiscal 1994 and 1995. During fiscal 1996, the
attrition rate used to amortize customer acquisition costs was 3% through March
31, 1996 and 5% thereafter. The attrition rates used by the Company in
amortizing customer acquisition costs is an estimate of the attrition rate of
the acquired customer bases, and actual attrition may differ from the estimates
used. The Company evaluates the attrition rate of the acquired customer base
each quarter and then adjusts the attrition rate as necessary. The Company
periodically evaluates the unamortized balance of customer acquisition costs to
determine whether there has been any impairment by comparing the undiscounted
future cash flows of the acquired customer base to the net book value of the
associated customer base. If it appears that an impairment has been incurred,
management will write the unamortized balance down to its fair value.
During the year ended June 30, 1996, the Company wrote off $4.6 million of
customer acquisition costs to adjust customer acquisition costs to fair value as
a result of higher than expected attrition associated with those accounts.
PREPAID COMMISSIONS
During the year ended June 30, 1996, the Company modified the agreement with
one of its principal agents to reduce the commission rate the Company pays to
the agent on existing customers in exchange for $1.2 million from the Company.
The Company paid $710,000 in cash, with the remainder from the transaction being
utilized to offset advances due from the agent to the Company. The prepaid
commissions are amortized by applying the Company's attrition rate associated
with the underlying customers each month against the unamortized balance of the
previous month (declining balance method) over a five-year period, switching to
the straight-line method when the straight-line method results in greater
amortization.
CASH AND CASH EQUIVALENTS
Highly liquid investments with a maturity of three months or less are
considered cash equivalents.
REVENUE RECOGNITION
Revenue is recognized in the month in which the Company's customers complete
the telephone call.
INCOME TAXES
The Company accounts for deferred income taxes using the liability method.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk are accounts receivable. The Company continuously evaluates the
credit worthiness of its customers' financial conditions and generally does not
require collateral. The Company's allowance for doubtful accounts is based on
current market conditions and management's expectations. Write-offs of accounts
receivable, net of recoveries, were $255,088, $79,431 and $2.46 million for the
years 1994, 1995, and 1996, respectively. Included in the allowance for doubtful
accounts is $605,000 of amounts which were taken as a reduction of certain
excise and sales taxes payable for the portion of the allowance which relates to
those taxes and which will be recoverable through future deductions on excise
and sales tax returns when the related amounts are written-off.
-29-
<PAGE>
EARNINGS PER SHARE
Earnings per share is computed by dividing net income for the period by the
weighted-average number of shares of common stock and dilutive common stock
equivalents outstanding for the period.
PRO FORMA EARNINGS PER SHARE
Pro forma earnings per share is based on pro forma earnings after giving
effect to a pro forma tax adjustment (See Note 3) applicable to shares of common
stock and the average number of shares of common stock equivalents (stock
options) outstanding. The number of shares for 1994 have been retroactively
adjusted to reflect the Company's reorganization (See Note 11).
TREASURY STOCK
Treasury stock is accounted for using the cost method. During 1996 two
employees terminated their employment with the Company which resulted in the
forfeiture of 18,182 shares of common stock which had been awarded to them
contingent upon future service (See Note 12). As a result, $77,229 in deferred
compensation is recorded as the cost of these treasury shares. The cost of the
treasury shares was determined by the closing price per share of common stock on
the date of forfeiture which ranged from $3.84 to $5.88 per share. The remaining
portion of the deferred compensation associated with the forfeited shares
($122,771) was taken against additional paid in capital. In addition, upon the
vesting of stock awards certain employees elected to surrender a number of
shares received to satisfy federal income tax withholding liabilities to be paid
by the Company on the employees' behalf. The Company received 3,568 of the
shares to satisfy the liability based on the market value of the exchanged
shares on the date of the exchange, resulting in a total increase in treasury
stock of $27,652.
ACCOUNTING FOR EMPLOYEE STOCK BASED COMPENSATION
The Company accounts for employee stock based compensation in accordance
with APB Opinion 25. In October 1995, SFAS No. 123, "Accounting for Stock Based
Compensation", was issued which established a fair-value based method of
accounting for stock based compensation plans. In accordance with the provisions
of the new accounting standard, the Company has elected to continue following
the provisions of APB Opinion 25 and will include in future filings the pro
forma disclosures required by SFAS No. 123.
ACCOUNTING FOR LONG-LIVED ASSETS
In March 1995, the FASB issued Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company will adopt Statement 121
in the first quarter of fiscal 1997 and, based on current circumstances, does
not believe the effect of adoption will be material.
2. LIQUIDITY AND WORKING CAPITAL DEFICIT
For the year ended June 30, 1996 the Company reported a pre-tax loss of
$11.1 million. Declining revenues beginning in the second quarter of fiscal 1996
were attributable to a number of internal and external factors. With the rapid
growth of the Company, provisioning time -- the time it takes the Company's
primary underlying long-distance carrier to activate new customers -- rose
sharply. In addition, NetBase, the Company's original customer management
system, was not equipped to handle the rapid growth, leading to delays in
providing the Company's customers with accurate bills on a timely basis. This
problem was compounded when the Company converted to the NetBase Plus operating
system ("NetBase Plus"), a new customer management information system. After
implementation, NetBase Plus was determined to have inherent design flaws which
resulted in further billing and provisioning problems, and the entire system was
subsequently abandoned. These conditions caused customer attrition rates to
increase, and similarly, monthly revenues began to decline in the second
quarter. The problems with the customer management systems also lead to
difficulties in assimilating and managing a substantial acquired customer base.
The inability of the Company to successfully transfer the acquired base
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into NetBase resulted in difficulties in billing and servicing the customer
accounts and a greater than expected migration of the base to other
long-distance providers. The higher than expected attrition on the acquired
customer base and other purchased customers resulted in the impairment of the
carrying value of the customer bases and the Company recorded a $4.6 million
charge to earnings to reduce the unamortized balance to its fair value during
fiscal 1996. During fiscal year 1996, the Company also wrote off approximately
$2.2 million in capitalized software development costs associated with the
abandonment of the NetBase Plus system. The difficulties in billing and
provisioning accounts along with the shift by the Company to more purchased
orders for which the Company had full exposure to uncollectible accounts as
compared to commissioned orders for which the agents shared in a substantial
portion of the risk on uncollectible accounts resulted in a substantial increase
in bad debt expense. The Company's collection efforts were also hindered by the
failure of NetBase Plus to produce some of the necessary information to allow
for the most effective method of collection. The Company therefore recorded an
additional charge to uncollectible receivables of $2.6 million in the third
quarter of fiscal year 1996. Selling, general and administrative costs also
increased substantially in 1996 as compared to 1995. The historical rapid growth
and management's expectations resulted in a structure designed for continued
growth with an increase in staffing, equipment and office space. The
unanticipated decline in revenues obscured by the lack of accurate and timely
management information due to the problems with NetBase Plus, resulted in an
inefficient cost structure. In addition, substantial professional fees were
incurred as the Company aggressively pursued acquisition targets, incurred
increased cost associated with being a public company and renegotiating its loan
agreement and three amendments with its principal lender.
During the fourth quarter of fiscal 1996, the Company reverted back to an
enhanced version of the Company's customer management information system. The
enhanced customer management information system, NetBase Classic, has allowed
the Company to remedy many of the limitations of the original NetBase and has
allowed the Company to improve its customer service capabilities, timeliness of
billings, and delinquent account collection efforts. As a result, the Company's
customer base and revenues appear to have stabilized during the first quarter
of fiscal 1997.
The Company funded its operations during the year ended June 30, 1996, with
the remaining proceeds of its initial public offering which closed in March
1995, through advances under its revolving credit facility and through operating
cash flows. By December 31, 1995, the remaining funds from the initial public
offering had been expended, and, due to the operating losses sustained in the
second half of fiscal 1996 and the declining revenue base, the Company reached
its maximum borrowing capacity under its revolving credit facility. The
Company's borrowing capacity under this credit facility continues to decline as
a result of the decline in the revenue base and the exclusion of certain
receivables from the criteria of eligible receivables. An additional source of
liquidity during this time period has been an extension of payment terms from
the Company's major suppliers, although there can be no assurance that any such
extensions will be granted in the future. At current levels of operations and
with a declining borrowing base due to additional exclusions of certain
receivables from the criteria of eligible receivables, the Company may be
required to seek additional capital and continued concessions from its vendors
and must continue to reduce expenses to bring them in line with current levels
of revenues.
The significant special charges incurred in fiscal 1996 resulted in
decreased earnings, equity and tangible net worth so that in March 1996 the
Company was in default on certain loan covenants of its credit agreement. The
credit agreement was amended in June 1996, and the covenants were amended so
that defaults as of and prior to April 30, 1996 were waived. The Company was in
compliance with the covenants at June 30, 1996. Certain of the amended covenants
have increasing ratios over time. The Company does not anticipate being in
compliance with the covenants subsequent to September 30, 1996, and will need to
obtain from its lender waivers or credit agreement amendments in order for the
debt not to be in default.
These conditions raise substantial doubt about the Company's ability to
continue as a going concern. The Company is currently negotiating with its
lenders to increase availability under its revolving credit facility and to
amend certain financial covenants. At the present time the lender has not made
any demands for payment of the loan, and the Company believes that it is not its
intention to do so. While there can be no assurance that the Company will be
successful in securing such amendments to its existing credit facility,
management believes that the lender is receptive to reaching an acommodation
under certain conditions and that the Company will be able to successfully
conclude the negotiations and thus avoid any material adverse effect on the
Company's operations or financial condition. In addition, the Company is
negotiating with its carriers for special terms and consideration. In the event
the Company is unsuccessful in achieving any one or a combination of these
objectives sufficient to meet the Company's liquidity needs, it will seek an
alliance with a strategic partner, or in the event no such strategic alliance is
accomplished, the Company may be required to seek protection under United States
bankruptcy laws.
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The Company had a working capital deficit of $3,161,437 at June 30, 1996.
This reflects the consequences of $10,654,245 of borrowings under the line of
credit being reclassified as a current liability as a result of the anticipated
covenant violations subsequent to September 30, 1996. While the Company does not
believe it is probable that it will be required to repay the outstanding
borrowings in the next twelve months, generally accepted accounting principles
require that such obligations projected to be in default be classified as a
current liability at June 30, 1996.
3. PRO FORMA INFORMATION (UNAUDITED)
As described in Note 5, the Company in 1992 elected to be treated as an S
corporation for federal income tax purposes. Prior to its initial public
offering, as discussed in Note 11, the Company terminated its status as an S
corporation. The pro forma tax provision has been calculated as if the Company's
taxable results were taxable as a C corporation under the Internal Revenue Code
for the year ended June 30, 1994 and the period ended March 7, 1995, calculated
in conformity with Financial Accounting Standards Board Statement No. 109,
"Accounting for Income Taxes" (FAS 109) at an effective tax rate of 39%. Under
the provisions of FAS 109, deferred tax assets or liabilities are recorded for
the estimated future tax effects attributable to temporary differences between
the bases of assets and liabilities recorded for financial and tax reporting
purposes. Assuming the change in its tax status occurred July 1, 1992, the
Company would have recorded additional income tax expense of $690,043 and
$612,751 in 1994 and 1995, respectively.
4. DEBT
At June 30, 1996, the Company had a $12,500,000 revolving line of credit
with a bank which will expire December 1, 1997. Interest on the outstanding
balance is prime plus 3% (11.25% at June 30, 1996). Interest is payable at prime
plus 1% from June 1, 1996, through September 30, 1996, with the remaining
deferred interest for that period due and payable on October 1, 1996. Interest
at prime plus 3% is payable monthly beginning October 1, 1996. The maximum
borrowings under the revolving line of credit are subject to borrowing base
limitations as defined in the agreement. There was $301,572 available to be
borrowed against the line of credit at June 30, 1996. The line of credit is
secured by the accounts receivable of the Company. The revolving line of credit
requires the Company to meet certain restrictive covenants including tangible
net worth and debt to equity requirements. The Company was in compliance with
the covenants at June 30, 1996. Additionally, the agreement limits the Company's
ability to make dividend payments.
The Company does not project being in compliance with certain convenants of
the debt agreement through the end of fiscal 1997 and will need to obtain from
its lenders waivers or credit agreement amendments in order for the debt not to
be considered in default. Because the Company has not received waivers or
amendments for the projected covenant violations, the line of credit has been
classified as a current liability.
At June 30, 1995, the Company had a $7,000,000 revolving line of credit with
a bank which would have expired November 1, 1996. Interest was payable monthly
at prime (9% at June 30, 1995). The maximum borrowings under the revolving line
of credit were subject to borrowing base limitations as defined in the
agreement. There was $5,947,360 available to be borrowed against the line of
credit at June 30, 1995. The line of credit was secured by the accounts
receivable of the Company. The revolving line of credit required the Company to
meet certain restrictive covenants including tangible net worth and debt to
equity requirements. The Company was in compliance with the covenants at June
30, 1995. Additionally, the agreement limited the Company's ability to make
dividend payments.
Interest paid by the Company during the years ended June 30, 1994, 1995 and
1996, totalled $80,170, $526,723 and $573,721, respectively.
5. FEDERAL INCOME TAXES
From inception to June 30, 1992, the Company was organized as a C
corporation for federal income tax purposes. Effective July 1, 1992, the Company
elected S corporation status and operated as such through March 7, 1995.
Accordingly, all federal income tax liabilities related to income generated by
the Company during that time were borne by the individual shareholders, and no
provision for federal income taxes was recorded by the Company.
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As a result of the S corporation election, the deferred federal income tax
account as of June 30, 1992, was reclassified to additional paid-in capital
during fiscal 1993. Prior to its initial public offering, as discussed in Note
10, the Company terminated its S corporation status. A separate presentation in
the accompanying consolidated statements of income shows a provision for income
taxes and net income for the year ended June 30, 1994 and the period ending
March 7, 1995 as if all of the Company's operations had been subject to income
taxes for the entire period, and assuming an effective tax rate of 39%.
The following disclosures relate to balances and activity for the period
March 7, 1995 to June 30, 1995, and for the fiscal year ending June 30, 1996.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
June 30, June 30,
1995 1996
----------- -----------
Deferred tax liabilities:
Cash to accrual differences ............ $ (591,785) $ (392,500)
Other, net ............................. (103,071) (45,172)
----------- -----------
Total deferred tax liabilities ............... (694,856) (437,672)
Deferred tax assets:
Amortization of deferred
acquisition costs ..................... 146,064 2,425,065
Bad debt allowance ..................... 475,470 1,274,536
Accrued liabilities .................... 57,025 172,134
Net operating loss carryforward ........ 236,803
Other .................................. 60,283 104,910
----------- -----------
Total deferred tax assets .................... 738,842 4,213,448
Valuation allowance .......................... (1,547,699)
----------- -----------
Net deferred tax assets ...................... $ 43,986 $ 2,228,077
=========== ===========
A valuation allowance is provided to reduce the deferred tax assets to a
level which, more likely than not, will be realized. The net deferred tax assets
reflects management's estimate of the amount which will be realized from future
profitability. There can be no assurance however, that the Company will generate
taxable earnings or any specific level of continuing earnings in the future.
The Company has a net operating loss carryforward of $610,000 which is
available to offset future taxable income through the year 2011.
The differences between income taxes computed at the federal statutory
income tax rate and the provision for income taxes for the years ended June 30,
1995 and 1996 are as follows:
1995 1996
----------- -----------
Income taxes computed at the federal
statutory rate ............................... $ 976,243 $(3,766,270)
State income tax ............................... 143,565 (443,841)
Taxes on income earned during the year while
the Company was an S-Corporation ............. (612,751)
Valuation allowance ............................ 1,547,699
Other .......................................... 2,559
----------- -----------
Provision (benefit) for federal
income taxes ................................. $ 507,057 $(2,659,853)
=========== ===========
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The provision (benefit) for income taxes for the period from March 8, 1995
through June 30, 1995 and for the year ended June 30, 1996 consisted of the
following:
Current:
Federal .................................... $ 480,409 $ (476,612)
State ...................................... 70,648 850
----------- -----------
551,057 (475,762)
Deferred:
Federal .................................... (38,347) (1,914,217)
State ...................................... (5,653) (269,874)
----------- -----------
(44,000) (2,184,091)
----------- -----------
Provision (benefit) for federal income taxes ... $ 507,057 $(2,659,853)
=========== ===========
Taxes paid during the fiscal years ended June 30, 1995 and 1996 totalled
$22,595 and $1,355,296. No taxes were paid by the Company during fiscal 1994 due
to its S Corporation status.
6. COMMITMENTS AND CONTINGENCIES
COMMITMENTS WITH PROVIDERS
At June 30, 1996 the Company had an agreement with AT&T which expires in
June 1999. At expiration or any time prior, the Company can renew all material
aspects of the present agreement with AT&T. In the event that this is not
possible, the Company may be able to negotiate equally beneficial terms with
other major telecommunications companies. Should neither of these alternatives
be possible, there could be materially adverse implications for the Company's
financial position and operations. Management's experience has been to
renegotiate the multi-year agreement every six months, and management believes
the Company will be able to continue to renegotiate the agreement.
On June 22, 1994 the Company entered into a contract commitment with Sprint
Communications Company, L.P. for a period of two years from the date of first
usage. The agreement formally expired on June 30, 1996; however, the Company has
extended the contract for two consecutive three-month terms with no additional
minimum usage requirements.
The agreements cover the pricing of the services and establish minimum
semi-annual revenue commitments ("MSARCs") which must be met to receive the
contractual price and to avoid shortfall penalties. The commitment with AT&T is
segregated into components differentiated by the type of traffic. At June 30,
1996, the Company was $3.8 million below the cumulative MSARC. Historically, the
Company has been able to negotiate a settlement with the carrier which has
resuted in no penalty being incurred by the Company and no amount has been
accrued in the financial statements. No assurances can be made that the Company
will be able to reach similar favorable settlements with the carrier should it
continue to fail to meet its commitment.
Total future minimum usage commitments to AT&T at June 30, 1996 are as
follows:
YEAR ENDING JUNE 30,
1997 .......................... $37,683,333
1998 .......................... 43,750,000
1999 .......................... 40,541,667
--------------
$121,975,000
============
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If the contract with AT&T is terminated prior to the expiration of the full
term, either by the Company or by AT&T for non-payment, the Company will be
liable for the total amount of the unsatisfied MSARC for the period in which the
discontinuance occurs and for 100% of the MSARCs for each semi-annual period
remaining in the contract tariff term. In addition, the Company will also be
required to refund a prorated portion, based upon the number of months remaining
in the contract tariff term at the time of termination, of $535,500 in credits
issued the Company by AT&T.
During 1994, the Company had an 800-Service agreement with AT&T which would
have expired in July 1996. The agreement committed the Company for a minimum of
$400,000 in monthly usage, regardless of the actual amount of 800-Service
generated by the Company. In May 1994, the agreement was transferred to a third
party. As a part of the transfer, the Company is no longer the "customer of
record" and the commitment has become part of a larger commitment to AT&T from
the third party. During 1994, the Company received an advance payment of
approximately $848,000 from AT&T in connection with this commitment. The Company
was permitted to retain this payment after the transfer and has recorded the
revenue as miscellaneous revenue in 1994.
REGULATORY APPROVAL
The Company's intrastate long-distance telecommunications operations are
subject to various state laws and regulations, including prior certification,
notification or registration requirements. The Company must generally obtain and
maintain certificates of public convenience and necessity from regulatory
authorities in most states in which it offers service. The Company is presently
responding to consumer protection inquiries from eight states. The inquiries do
not state specific damage amounts and the potential liability, if any, is not
determinable. Management believes these inquiries will be resolved
satisfactorily, although settlement offers may be made or accepted in instances
in which it is determined to be cost effective. Although it is not possible at
this time to predict with any degree of certainty the ultimate exposure of the
Company with respect to these matters, the Company recorded an accrual of
$250,000 for estimated settlements. The Company does not believe the outcome of
these proceedings will have a material adverse effect on either the Company's
results of operations or financial condition. No assurances can be made however,
that the inquiries can be settled for amounts within the current amount accrued
or that additional states will not begin inquiries or that the current accrual
will be sufficient to provide for existing or future settlements. Failure to
resolve inquiries satisfactorily or reach a settlement with the regulatory
agencies could, in the extreme, result in the inability of the Company to
provide long-distance service in the jurisdiction requiring regulatory
certification. Any failure to maintain proper certification could have a
material adverse effect on the Company's business.
CAPITAL LEASES
During 1995, the Company entered into long-term lease agreements for the
purchase of equipment and furniture. The leases were capitalized and the related
obligations were recorded in the accompanying financial statements based on the
present value of future minimum lease payments. The gross balance of assets
included in property and equipment at June 30, 1995 and 1996 is $306,000.
Accumulated depreciation associated with these assets at June 30, 1995 and 1996
was $64,000 and $172,000, respectively. Depreciation on these assets is included
in depreciation and amortization expense. Future minimum lease payments related
to capital lease obligations are as follows:
YEAR ENDED JUNE 30,
1997 .................................................... $ 117,492
1998 .................................................... 48,589
---------
Total minimum lease payments ............................ 166,081
Less amounts representing interest (9.4% to 17.0% rate).. (31,081)
---------
Present value of future minimum lease payments .......... 135,000
Less current maturities of capital lease obligations .... (90,000)
---------
Long-term obligations under capital leases .............. $ 45,000
=========
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OPERATING LEASES
The Company leases certain equipment and office space under operating leases
that expire over the next nine years. Rental expense under operating leases was
$236,083, $695,166 and $1,715,636 in 1994, 1995 and 1996, respectively. Future
minimum lease payments under noncancelable operating leases are as follows:
YEAR ENDED JUNE 30,
1997 ...................................... $2,000,748
1998 ...................................... 1,960,554
1999 ...................................... 1,265,566
2000 ...................................... 692,932
2001 ...................................... 662,550
Thereafter .................................. 2,381,554
----------
$8,963,904
==========
The Company has entered into several agreements for the sale and leaseback
of certain computer equipment and office furniture. The Company has purchase and
lease renewal options at projected future fair market values under the
agreements. The leases are classified as operating leases in accordance with the
FASB Statement No. 13 -- "Accounting for Leases". The leases have thirty-six
month terms and the future minimum lease payments are included in the table
above. Lease payments on these transactions average $477,000 annually.
7. WRITE DOWN OF ASSETS
The Company wrote down assets during the year ended June 30, 1996, totalling
$6.9 million. Included in the write down was a $4.6 million non-cash charge to
reduce the carrying value of acquired customer bases (customer acquisition
costs) to the present value of the expected future cash flows associated with
the underlying customer accounts and a $2.2 million non-cash charge to eliminate
capitalized software development costs associated with the NetBase Plus system
(defined below). The write down of deferred acquisition costs was necessitated
by continued greater than expected turnover of acquired customer bases which
resulted from difficulties in billing and servicing the Company's customer
accounts.
In 1995 the Company began development of a new customer management
information system, the NetBase Plus operating system (NetBase Plus). In the
second quarter of fiscal 1996, the Company implemented NetBase Plus. After
implementation, NetBase Plus was determined to have inherent design flaws which
resulted in inefficient operation and the entire system was subsequently
abandoned. The Company reverted from NetBase Plus to an improved form of
NetBase, the Company's original customer management information system, in April
1996. As a result, the Company wrote off approximately $2.2 million in
capitalized software development costs associated with the NetBase Plus system.
8. EMPLOYMENT AGREEMENT
The Company has an employment agreement with its president. The agreement
includes certain conditions of employment including a covenant not to compete
should he terminate employment with the Company.
9. SAVINGS PLAN
The Company sponsors a 401(k) Plan (the "Plan") which became effective
January 1, 1993. The Plan is open to all employees over the age of 21. To become
eligible, an employee must have been employed on the effective date or must
complete six consecutive months of employment. The Plan gives the Company the
option to determine the amount they will contribute each year. The Company
currently matches 50% of the first 6% contributed by the participants.
Contributions were made to the Plan in the amount of $32,090, $46,217 and
$81,597 for the years ended June 30, 1994, 1995 and 1996, respectively.
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10. RELATED PARTY TRANSACTIONS
During the year ended June 30, 1996, the Company entered into a joint
venture with MetroLink, Inc., an Illinois Corporation (MetroLink), the purpose
of which is to market and sell wholesale long-distance services to the Company
and other long-distance resellers. The joint venture, Unified Network Services,
LLC (UNS), is owned 49% by EqualNet Wholesale Services, Inc., a Deleware
Corporation and wholly owned subsidiary of the Company, 25% by MetroLink, 25% by
MediaNet, Inc., an Illinois Corporation and wholly owned subsidiary of
MetroLink, and 1% by EqualNet Corporation. The Company made an initial
investment of $50,000 in UNS and has advanced an additional $163,197 to the
joint venture for working capital. During 1996, the Company recorded its equity
in the net loss of UNS of $135,257, reducing the investment to zero and reducing
the amount recorded as due the Company to $77,940 at June 30, 1996.
The Company utilizes the marketing services of a marketing company managed
and directed by the brother-in-law of one of the principal shareholders of the
Company. The Company paid commissions to the marketing company of $48,900,
$152,687, and $75,388 in 1994, 1995, and 1996, respectively. The Company also
made advances against future commissions to the marketing company of $64,700 in
1994. Advances due the Company from the marketing company were $64,735 and
$43,015 at June 30, 1995, and 1996, respectively.
11. INITIAL PUBLIC OFFERING
The Company completed an initial public offering of 1,960,000 shares of its
common stock (the Offering) in March 1995. The Company used a portion of the net
proceeds from the Offering to repay amounts outstanding under the Company's
principal credit facility, pay various accounts payable and accrued expenses,
fund a dividend payable to its existing shareholders, fund acquisitions of
customer accounts and of other resellers, and for working capital and general
corporate purposes.
In April 1995, the underwriters exercised an over-allotment option and
purchased 150,111 shares of Common Stock from the Company at the original issue
price of $11 per share less the underwriting discount of $0.77 per share. Net
proceeds to the Company totaled $1,535,646.
Prior to the Offering, the Company terminated its S-Corporation status and
formed EqualNet Holding Corp. as a newly organized holding company. Each
shareholder of EqualNet Corporation contributed each share of common stock in
EqualNet Corporation to the Company in exchange for 2,000 shares of common stock
in the Company. Subsequent to the reorganization, EqualNet Corporation became a
wholly-owned subsidiary of the Company. The authorized capital stock of the
Company consists of 20 million shares of Common Stock and 1 million shares of
Preferred Stock.
12. EMPLOYEE STOCK PURCHASE PLAN
During 1995, the Company adopted the EqualNet Holding Corp. Employee Stock
Purchase Plan (the Stock Purchase Plan) in which substantially all employees are
eligible to participate. The Stock Purchase Plan provides eligible employees of
the Company and its subsidiaries an opportunity to purchase shares of Common
Stock through after-tax payroll deductions. The Company will match contributions
in an amount equal to 15% of each participant's contribution. The Stock Purchase
Plan is administered by an independent administrator which purchases shares of
Common Stock on the open market with the amounts contributed by the participants
and the matching contributions made by the Company. The Stock Purchase Plan was
implemented during fiscal 1996 and the Company contributed $4,653 on behalf of
employees toward the purchase of Company stock during the year ended June 30,
1996.
13. STOCK OPTION AND RESTRICTED STOCK PLAN
During 1995, the Company adopted the EqualNet Holding Corp. Stock Option and
Restricted Stock Plan (the 1995 Plan). The 1995 Plan is designed to provide
certain full-time key employees, including officers and directors
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of the Company, with additional incentives to promote the success of the
Company's business and to enhance the ability to attract and retain the services
of qualified persons. The 1995 Plan is administered by a committee of no less
than two persons (the Committee) appointed by the Board of Directors. Committee
members cannot be employees of the Company and must not have been eligible to
participate under the 1995 Plan for a period of at least one year prior to being
appointed to the committee. Under the 1995 Plan, the Committee may grant
restricted stock awards or options to purchase up to an aggregate of 300,000
shares of Common Stock. In July 1995, the Board of Directors approved an
amendment to the 1995 Plan, subject to stockholder approval, to increase the
number of shares available under the 1995 Plan to 800,000. The exercise price of
an option granted pursuant to the 1995 Plan is determined by the Committee on
the date the option is granted. In the case of a grant to an employee who owns
ten percent or more of the outstanding shares of Common Stock (a 10%
Shareholder), the exercise price of each option under the 1995 Plan may not be
less than 110% of the fair market value of the Common Stock on the date of the
grant. No option may be granted under the 1995 Plan for a period of more than
ten years. In the case of a 10% Shareholder, no option may be granted for a
period of more than five years. Options under the 1995 Plan are considered
non-incentive stock options when the aggregate fair market value of the stock
with respect to which the options are exercisable for the first time by the
option holder in any calendar year, under the 1995 Plan or any other incentive
stock option plan of the Company, exceeds $100,000. Under the 1995 Plan, the
Committee may issue shares of restricted stock to employees for no payment by
the employee or for a payment below the fair market value on the date of grant.
The restricted stock is subject to certain restrictions described in the 1995
Plan, with no restrictions continuing for more than five years from the date of
the award. The 1995 Plan may be amended by the Board of Directors without any
requirement of shareholder approval, except as required by Rule 16b-3 under the
Securities Exchange Act of 1934 and the incentive option rules of the Internal
Revenue Code of 1986. The Company granted restricted stock awards for 63,638
shares of Common Stock having an aggregate fair market value, based on the per
share price of the Common Stock at the measurement date, March 14, 1995, of
$700,000 to certain key employees, none of whom is a director or executive
officer of the Company. These employees will not be required to make any payment
for these restricted stock awards, which vest over five years in 20% increments.
Restrictions on transfer and forfeiture provisions upon termination of
employment will apply to the restricted stock covered by the awards for a period
of five years, after which time the restrictions will lapse and the stock will
be owned by the employees free of further restrictions under the 1995 Plan. Two
employees terminated employment during the year resulting in the forfeiture of
restricted stock awards totalling 18,182 shares of Common Stock. These shares
were held in treasury at June 30, 1996.
On July 11, 1996, the Company granted options to purchase 248,000 shares of
common stock under the 1995 Plan to key employees with an exercise price of
$3 7/8 ($1.00 above the market price on the date of issuance).
14. NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
The shareholders approved on November 28, 1995, the adoption of the
Non-Employee Director Stock Option Plan (the "Director Option Plan"). The
Director Option Plan is designed to attract and retain the services of
experienced and knowledgeable non-employee directors of the Company and to
provide an incentive for such directors to increase their proprietary interest
in the Company and in the Company's long-term success and progress. The Director
Option Plan is administered by the Board of Directors and an aggregate of
250,000 shares of Common Stock have been authorized and reserved for issuance to
non-employee directors. The aggregate number of shares of Common Stock for which
options may be granted under the Director Option Plan may be adjusted based on
certain anti-dilution provisions contained in the Director Option Plan. On the
date of election, any new non-employee director will be granted an option to
purchase 5,000 shares of Common Stock at the fair market value of such stock on
the date that the option is granted. Each stock option granted to a non-employee
director will have a ten-year term, one-third of which will become vested and
exercisable on the first, second and third anniversary of the date of grant,
assuming continued service on the Board of Directors. On the date following each
annual meeting of shareholders, each current non-employee director will be
granted an option to purchase 1,000 shares of Common Stock at the fair market
value of such stock on the date of grant with such annual grants becoming
exercisable on the six month anniversary of the date of grant. All options
granted under the Director Option Plan are non-qualified stock options and may
not be repriced. No awards may be granted under the Director Option Plan after
May 8, 2005, or such earlier date as determined by the Board of Directors. The
Director Option Plan may be amended by the Board of Directors without any
requirement of shareholder approval, except as required by Rule 16b-3 under the
Securities Exchange Act of 1934 and the incentive stock option provisions of the
Internal Revenue Code of 1986,
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<PAGE>
and except that no amendment may be made more than once every six months that
would change the amount, price or timing of grants under the Director Option
Plan.
There are currently two non-employee directors eligible to participate in
the Director Option Plan. Options to purchase 10,000 shares of common stock were
awarded on May 10, 1995, with an exercise price of $14 13/16 per share. Options
to purchase 2,000 shares were awarded on November 29, 1995, with an exercise
price of $18 1/2 per share and 5,000 options to purchase shares of common stock
were awarded November 30, 1995, with an exercise price of $18 3/4 per share. At
June 30, 1996 there were options to purchase 6,998 shares of common stock
outstanding and exercisable.
15. INTERIM FINANCIAL DATA (UNAUDITED)
Selected quarterly financial results for the years 1996 and 1995 are
summarized below (in thousands):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
1996
Revenues ..................... $23,920 $ 19,047 $ 19,212 $ 16,176
Gross margin ................. 5,708 5,448 787 4,604
Net income (loss) ............ 881 (2,002) (6,430) (866)
Net income (loss) per share (1) $ 0.15 $ (0.33) $ (1.07) $ (0.14)
1995
Revenues ..................... $11,134 $ 13,564 $ 21,621 $ 21,591
Gross margin ................. 1,918 2,576 3,748 5,015
Net income ................... 206 430 808 921
Pro forma net income (2) ..... 126 262 606 921
Pro forma net income per share $ 0.03 $ 0.06 $ 0.14 $ 0.15
The quarter ending December 31, 1995, includes a $3.7 million write down of
deferred acquisition costs (See Note 7). The quarter ending March 31, 1996,
includes a $3.6 million charge to the provision for uncollectible accounts, a
$1.0 million write down of deferred acquisition costs, a $2.2 million write off
of capitalized software development costs associated with the NetBase Plus
system (See Note 7) and $700,000 of other charges which included accruals for
estimated settlements related to disputed carrier charges, long-distance
commitment shortfalls and consumer complaints filed with state agencies.
(1) Earnings per share are computed independently for each of the
quarters presented. Therefore, the sum of the quarterly earnings per
share in 1996 does not equal the total computed for the year due to stock
transactions which occurred during the year.
(2) The sum of the quarterly pro forma net income for 1995 does not agree
to the pro forma net income presented on the consolidated statement of
income for 1995. The pro forma net income presented on the consolidated
statement of income for 1995 includes a pro forma tax adjustment which
reflects a 39% tax rate for the entire year for comparison purposes. The
net income for the fourth quarter of 1995 includes a fully taxed period
and includes a deferred tax benefit of approximately $164,000 which was
recorded as a result of the change in the tax status of the Company. (See
Note 4).
16. ACQUISITION OF ACCOUNTS RECEIVABLE
In July 1995, the Company acquired $771,894 of accounts receivable, net of
an allowance for doubtful accounts of $100,378, associated with a customer base
acquired in June 1995.
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<PAGE>
(B) REPORTS ON FORM 8-K:
During the quarter ended June 30, 1996, the Company filed one Current Report
on Form 8-K, dated May 10, 1996, to report certain financial information
under Items 5 and 7 and included an unaudited statement of operations for
each of the three months and nine months ended March 31, 1996 and 1995. This
report was amended by Amendment No. 1 to Current Report on Form 8-K on Form
8-K/A dated May 10, 1996.
(C) EXHIBITS:
Exhibits designated by the symbol * are filed with this Annual Report on
Form 10-K. All exhibits not so designated are incorporated by reference to a
prior filing as indicated.
Exhibits designated by the symbol ** are management contracts or
compensatory plans or arrangements that are required to be filed with this
report pursuant to this Item 14.
The Company undertakes to furnish to any shareholder so requesting a copy of
any of the following exhibits upon payment to the Company of the reasonable
costs incurred by the Company in furnishing any such exhibit.
EXHIBIT NO. DESCRIPTION
- - ----------- -----------
3.1 Articles of Incorporation of the Registrant (incorporated by reference
to Exhibit 3.1 to Amendment No. 1 to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-88742) filed on February 13,
1995).
3.2 Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to
the Registrant's Registration Statement on Form S-1 (Registration No.
33-88742) filed on January 24, 1995).
4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit
4.1 to Amendment No. 2 to the Registrant's Registration Statement on
Form S-1 (Registration No. 33-88742) filed March 2, 1995).
10.1 Amended and Restated Agreement dated November 11, 1994, between
EqualNet and AT&T Corp. (incorporated by reference to Exhibit 10.1 to
the Registrant's Registration Statement on Form S-1 (Registration No.
33-88742) filed January 24, 1995).
10.2 AT&T Billing Service Agreement between EqualNet and AT&T
Communications, Inc., as amended by letter agreement dated October 28,
1994, between EqualNet and AT&T Corp. (incorporated by reference to
Exhibit 10.2 to the Registrant's Registration Statement on Form S-1
(Registration No. 33-88742) filed on January 24, 1995).
10.4** Form of Employment Agreement, by and between EqualNet and the persons
listed on the schedule attached thereto (incorporated by reference to
Exhibit 10.3 to Amendment No. 1 to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-88742) filed on February 13,
1995).
10.5 Lease Agreement dated November 21, 1991, by and between EqualNet and
DAP Plaza, Ltd., as amended by Addendum dated January 30, 1992, and
Addendum dated June 17, 1992 (incorporated by reference to Exhibit 10.4
to Registrant's Registration Statement on Form S-1 (Registration No.
33-88742) filed January 24, 1995).
10.6 Lease Agreement dated February 18, 1993 by and between EqualNet and DAP
Plaza, Ltd. (incorporated by reference to Exhibit 10.5 to Registrant's
Registration Statement on Form S-1 (Registration No. 33-88742)filed
January 24, 1995).
10.7 Lease Agreement dated June 28, 1994, between EqualNet and Caroline
Partners, Ltd., as amended by First Amendment dated August 15, 1994,
and Second Amendment dated September 8, 1994 (incorporated by reference
to Exhibit 10.6 to Registrant's Registration Statement on Form S-1
(Registration No. 33-88742) filed on January 24, 1995).
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<PAGE>
10.8* EqualNet Holding Corp. Stock Option and Restricted Stock Plan.
10.9 EqualNet Corporation 401(k) Plan effective January 1, 1993, as amended
by the First Amendment to the Equal Net Communications, Inc. 401(k)
Plan, dated effective as of July 1, 1993, and First Amendment to the
Adoption Agreement dated effective as of June 2, 1994 (incorporated by
reference to Exhibit 10.8 to Registrant's Registration Statement on
Form S-1 (Registration No. 33-88742) filed January 24, 1995).
10.10 Interstate and International Carrier Transport Switch Services
Agreement dated effective August 1, 1994, by and between EqualNet and
Sprint Communications Company, L.P. ("Sprint"), as amended by the
Amendment dated effective August 1, 1994, between EqualNet and Sprint
(incorporated by reference to Exhibit 10.11 to Registrant's
Registration Statement on Form S-1 (Registration No. 33-88742) filed
January 24, 1995).
10.11 Operator Services Agreement dated effective September 1, 1994, between
EqualNet and Sprint (incorporated by reference to Exhibit 10.12 to
Registrant's Registration Statement on Form S-1 (Registration No.
33-88742) filed January 24, 1995).
10.12 Personal Guaranty dated July 14, 1994, between Sprint and Zane D.
Russell, Marc R. Smith and Byron A. Russell (incorporated by reference
to Exhibit 10.13 to Registrant's Registration Statement on Form S-1
(Registration No. 33-88742) filed January 24, 1995).
10.13 Network WATS Enrollment Form, dated June 30, 1994, between EqualNet and
US Sprint Communications Company Limited Partnership (incorporated by
reference to Exhibit 10.14 to Registrant's Registration Statement on
Form S-1 (Registration No. 33-88742) filed January 24, 1995.)
10.14* EqualNet Holding Corp. Employee Stock Purchase Plan.
10.15** Promissory Note by Zane D. Russell in favor of EqualNet (incorporated
by reference to Exhibit 10.16 to Registrant's Registration Statement on
Form S-1 filed on January 24, 1995).
10.16** Promissory Note by Marc R. Smith in favor of EqualNet (incorporated by
reference to Exhibit 10.17 to Registrant's Registration Statement on
Form S-1 filed January 24, 1995).
10.17** Promissory Note by Byron A. Russell in favor of EqualNet (incorporated
by reference to Exhibit 10.18 to Registrant's Registration Statement on
Form S-1 filed January 24, 1995).
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<PAGE>
10.19 Loan Agreement dated March 10, 1995, between EqualNet Corporation and
EqualNet Holding Corp. (incorporated by reference to Exhibit 10.2 to
the Registrant's Quarterly Report on Form 10-Q for the period ended
March 31, 1995 (Commission File No. 0-025842)).
10.20 Security Agreement dated March 10, 1995 by EqualNet Corporation in
favor of EqualNet Holding Corp. (incorporated by reference to Exhibit
10.3 to the Registrant's Quarterly Report on Form 10-Q for the period
ended March 31, 1995 (Commission File No. 0-025842)).
10.21 Memorandum of Purchase and Sale dated as of June 6, 1995, by and
between EqualNet Corporation and Network Plus, Inc. (incorporated by
reference to Exhibit 10.1 to the Registrant's Current Report on Form
8-K dated June 6, 1995 (Commission File No. 0-025842)).
10.22 Contract Tariff dated November 2, 1995, by and between EqualNet
Corporation and AT&T Communications (incorporated by reference to
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended December 31, 1995 (Commission File No.
0-025842)).
10.23 Carrier Agreement between MCI Telecomunications Corporation and
EqualNet Communications, Inc., dated January 16, 1996 (incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1996. (Commission File
No. 0-025842)).
10.24 Corporate Guarantee given to AT&T Corp. by EqualNet Corporation and
MetroLink, Inc on behalf of Universal Network Services LLC
(incorporated by reference to Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended March 31,
1996 (Commission File No. 0-025842)).
10.25* Credit Agreement, dated as of November 30, 1995, by and between
EqualNet Holding Corp. and Comerica Bank-Texas, as amended by Amendment
to Secured Loan Agreement dated February 21, 1996, Second Amendment to
Credit Agreement dated March 20, 1996, and Third Amendment to Credit
Agreement dated as of June 20, 1996.
10.26* EqualNet Holding Corp. 1995 Non-Employee Director Stock Option Plan.
21.1* List of Subsidiaries of EqualNet.
23.1* Consent of Ernst & Young LLP.
27.1* Financial Data Schedule
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
EQUALNET HOLDING CORP.
(Registrant)
By: /s/ MICHAEL L. HLINAK
Michael L. Hlinak,
Senior Vice President and
Chief Financial Officer
Dated: October 11, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature Title Date
- - --------- ----- ----
/s/ ZANE D. RUSSELL Chairman of the Board, Chief October 11, 1996
Zane D. Russell Executive Officer and Director
(principal executive officer)
/s/ MICHAEL L. HLINAK Senior Vice President, Chief October 11, 1996
Michael L. Hlinak Operating Officer, Chief Financial
Officer and Director
(principal financial officer)
/s/ CURTIS L. MACKEY Corporate Controller October 11, 1996
Curtis L. Mackey (principal accounting officer)
/s/ WALTER V. KLEMP Director October 11, 1996
Walter V. Klemp
/s/ TERRY S.PARKER Director October 11, 1996
Terry S.Parker
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EXHIBIT 10.8
EQUALNET HOLDING CORP.
EMPLOYEE STOCK OPTION AND RESTRICTED STOCK PLAN
ADOPTED FEBRUARY 25, 1995
SECTION 1. PURPOSE
The purpose of the EqualNet Holding Corp. Employee Stock Option and
Restricted Stock Plan is to promote the interests of EqualNet Holding Corp. (the
"Company") and its shareholders by providing it with a mechanism to enable the
Company and its subsidiaries to attract, retain and motivate their key employees
with compensatory arrangements and benefits that make use of the Company's stock
so as to provide for or increase the proprietary interests of such employees in
the Company.
SECTION 2. DEFINITIONS
(A) "AGREEMENT" shall mean a written agreement setting forth the
terms of an Award.
(B) "AWARD" shall mean an Option (which may be designated as an
Incentive Stock Option or a Non-Incentive Stock Option) or a Restricted Stock
Award granted under this Plan.
(C) "BOARD" shall mean the Board of Directors of the Company.
(D) "CODE" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
(E) "COMMITTEE" shall mean the committee appointed by the Board to
administer this Plan.
(F) "COMMON STOCK" shall mean the Company's Common Stock, $.01 par
value (or such other par value as may be designated by act of the Company's
shareholders).
(G) "COMPANY" shall mean EqualNet Holding Corp.
(H) "DISABILITY" shall mean a medically determinable mental or
physical impairment which, in the opinion of a physician selected by the
Committee, shall prevent the Employee from engaging in any substantial gainful
activity and which can be expected to result in death or which has lasted or can
be expected to last for a continuous period of not less than 12 months and
which: (a) was not contracted, suffered or incurred while the Employee was
engaged in, or did not result from having engaged in, a felonious criminal
enterprise and (b) did not result from alcoholism or addiction to narcotics.
(I) "DISINTERESTED" shall mean disinterested within the meaning of
applicable regulatory requirements, including those promulgated under Section 16
of the Exchange Act.
(J) "EMPLOYEE" shall mean an officer or employee of the Company or a
Subsidiary.
(K) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934,
as amended.
<PAGE>
(L) "FAIR MARKET VALUE" of a share of Common Stock as of a
particular date (the "Determination Date") shall mean:
(i) If the Common Stock is listed or admitted to trading on
any securities exchange or recognized inter-dealer quotation system,
the arithmetic average of the high and low price on the principal
securities exchange or recognized inter-dealer quotation system on
which the Common Stock is traded or quoted on the trading day
immediately preceding the Determination Date.
(ii) If the Common Stock is not then listed or admitted to
trading on any securities exchange or recognized inter-dealer
quotation system, the last reported sale price on the trading day
immediately preceding the Determination Date, or if no sale takes
place on such day, the arithmetic average of the closing bid and
asked prices on such day.
(iii) If the Common Stock is not then listed or admitted to
trading on any securities exchange or recognized inter-dealer
quotation system and no such reported sale price or bid and asked
prices are available, the arithmetic average of the reported high
bid and low asked prices on the trading day immediately preceding
the Determination Date.
(iv) If it is not possible to determine the Fair Market Value
pursuant to any of the procedures set forth in clauses (i), (ii) or
(iii) above, then as determined in good faith by the Company's Board
of Directors upon a review of relevant factors.
(M) "INCENTIVE STOCK OPTION" shall mean an Option that is intended
by the Committee to meet the requirements of Section 422 of the Code or any
successor provision.
(N) "NON-INCENTIVE STOCK OPTION" shall mean an Option granted
pursuant to this Plan which does not qualify as an Incentive Stock Option.
(O) "OPTION" shall mean the right to purchase Common Stock at a
price to be specified and upon terms to be designated by the Committee pursuant
to this Plan. An Option shall be designated by the Committee as an Incentive
Stock Option or a Non-Incentive Stock Option.
(P) "OPTION PRICE" shall mean the price at which shares may be
purchased pursuant to an Option.
(Q) "PLAN" shall mean this EqualNet Holding Corp. Employee Stock
Option and Restricted Stock Plan.
(R) "RESTRICTED PERIOD" shall mean the period designated by the
Committee during which Restricted Stock may not be sold, assigned, transferred,
pledged, or otherwise encumbered.
(S) "RESTRICTED STOCK" shall mean those shares of Common Stock
issued pursuant to a Restricted Stock Award which are subject to the
restrictions, terms, and conditions set forth in the related Agreement.
(T) "RESTRICTED STOCK AWARD" shall mean an award of Restricted Stock
pursuant to Section 8 hereof.
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<PAGE>
(U) "RETAINED DISTRIBUTIONS" shall mean any securities or other
property (other than regular cash dividends) distributed by the Company in
respect of Restricted Stock during any Restricted Period.
(V) "RETIRE" or "RETIREMENT" shall mean retirement in accordance
with the terms of a retirement plan that is qualified under Section 401(a) of
the Code and maintained by the Company or a Subsidiary in which the employee is
a participant.
(W) "SUBSIDIARY" shall mean any present or future subsidiary
corporations, as defined in Section 424 of the Code, of the Company.
SECTION 3. STOCK SUBJECT TO THE PLAN
The total amount of the Common Stock with respect to which Awards
may be granted shall not exceed in the aggregate 300,000 shares. The class and
aggregate number of shares which may be subject to the Options granted under
this Plan shall be subject to adjustment under Section 7. The class and
aggregate number of shares which may be subject to the Restricted Stock Awards
granted under the Plan shall also be subject to adjustment under Section 8.
Shares of Common Stock with respect to which Awards may be granted may be
treasury shares or authorized but unissued shares of Common Stock. If any Award
under the Plan shall expire or terminate for any reason without having been
exercised in full, or if any Award shall be forfeited, the shares subject to the
unexercised or forfeited portion of such Award shall again be available for the
purposes of the Plan.
SECTION 4. ADMINISTRATION
The Plan shall be administered by a Committee the members of which
shall be Disinterested persons. The Committee shall consist of not less than two
members of the Board, who are not Employees. The Board shall have the power from
time to time to add or remove members of the Committee, and to fill vacancies
arising for any reason. The Committee shall designate a chairman from among its
members, who shall preside at all of its meetings, and shall designate a
secretary, without regard to whether that person is a member of the Committee,
who shall keep the minutes of the proceedings and all records, documents, and
data pertaining to its administration of the Plan. Meetings shall be held at any
time and place as it shall choose. A majority of the members of the Committee
shall constitute a quorum for the transaction of business. The vote of a
majority of those members present at any meeting shall decide any question
brought before that meeting. In addition, the Committee may take any action
otherwise proper under the Plan by the affirmative vote, taken without a
meeting, of a majority of its members. No member of the Committee shall be
liable for any act or omission of any other member of the Committee or for any
act or omission on his own part, including but not limited to the exercise of
any power or discretion given to him under the Plan, except those resulting from
his own gross negligence or willful misconduct. All questions of interpretation
and application of the Plan, or as to Awards granted under it shall be subject
to the determination of a majority of the Committee. The Committee in exercising
any power or authority granted under this Plan or in making any determination
under this Plan shall perform or refrain from performing those acts using its
sole discretion and judgment. Any decision made by the Committee or any
refraining to act or any act taken by the Committee in good faith shall be final
and binding on all parties. The Committee's decision shall never be subject to
de novo review. When appropriate the Plan shall be administered in order to
qualify certain of the Options granted under it as Incentive Stock Options.
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<PAGE>
SECTION 5. ELIGIBILITY
The individuals who shall be eligible to participate in the Plan
shall be those full-time key Employees, including directors if they are
Employees, as the Committee shall determine during the term of this Plan. No
individual shall be eligible to receive an Award under the Plan while that
individual is a member of the Committee.
No Employee who owns stock possessing more than 10% of the total
combined voting power of all classes of stock of the corporation employing the
Employee or of its parent or subsidiary corporation shall be eligible to receive
an Option which is an Incentive Stock Option unless at the time that the Option
is granted the Option Price is at least 110% of the Fair Market Value of the
Common Stock at the time the Option is granted and the Option by its own terms
is not exercisable after the expiration of five years from the date the Option
is granted.
An Employee will be considered as owning the stock owned, directly
or indirectly, by or for his brothers and sisters (whether by the whole or half
blood), spouse, ancestors, and lineal descendants. Stock owned, directly or
indirectly, by or for a corporation, partnership, estate or trust will be
considered as being owned proportionately by or for its shareholders, partners
or beneficiaries. For all purposes of this Plan, a parent corporation is any
corporation (other than the Company) in an unbroken chain of corporations ending
with the Company if, on the date of grant of the Option in question, each of the
corporations other than the Company owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in that chain; and a subsidiary corporation is any corporation
(other than the Company) in an unbroken chain of corporations beginning with the
Company if, on the date of grant of the Option in question, each of the
corporations, other than the last corporation in the chain, owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in that chain.
SECTION 6. MAXIMUM NUMBER OF SHARES SUBJECT TO AN AWARD
The maximum number of shares of Common Stock subject to Options that
may be awarded under the Plan to any Employee during any consecutive three year
period is 200,000. The maximum number of shares of Common Stock that may be
awarded under the Plan to any Employee pursuant to Restricted Stock Awards
during any consecutive three year period is 100,000.
SECTION 7. STOCK OPTIONS
A. AUTHORITY TO GRANT OPTIONS. The Committee may grant Incentive
Stock Options or Non-Incentive Stock Options at any time during the term of this
Plan to any eligible Employee that it chooses.
Each Option granted shall be approved by the Committee. Subject only
to any applicable limitations set forth in this Plan, the number of shares of
Common Stock to be covered by an Option shall be as determined by the Committee.
B. OPTION PRICE. The price at which shares may be purchased pursuant
to an Option, whether it is an Incentive Stock Option or a Non-Incentive Stock
Option, shall be not less than the Fair Market Value of the shares of Common
Stock on the date the Option is granted. The Committee in its discretion may
provide that the price at which shares may be purchased shall be more than the
minimum price required.
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<PAGE>
C. DURATION OF OPTIONS. No Option which is an Incentive Stock Option
shall be exercisable after the expiration of ten years from the date such Option
is granted. The Committee in its discretion may provide that such Option shall
be exercisable throughout the ten year period or during any lesser period of
time commencing on or after the date of grant of such Option and ending upon or
before the expiration of the ten year period. If an Employee owns stock
possessing more than 10% of the total combined voting power of all classes of
stock of the corporation employing the Employee or of its parent or subsidiary
corporation, no Option which is an Incentive Stock Option shall be exercisable
after the expiration of five years from the date such Option is granted. No
Option which is a Non-Incentive Stock Option shall be exercisable after the
expiration of ten years from the date such Option is granted. The Committee in
its discretion may provide that such Option shall be exercisable throughout the
ten year period or during any lesser period of time commencing on or after the
date of grant of such Option and ending upon or before the expiration of the ten
year period.
D. MAXIMUM VALUE OF STOCK SUBJECT TO OPTIONS WHICH ARE INCENTIVE
STOCK OPTIONS. To the extent that the aggregate Fair Market Value (determined as
of the date the Option is granted) of the stock with respect to which Incentive
Stock Options are exercisable for the first time by the Optionee in any calendar
year (under this Plan and any other incentive stock option plans of the Company
and any parent and subsidiary corporation within the meaning of Section 424 of
the Code) exceeds $100,000, the Options shall be treated as NonIncentive Stock
Options. In making this determination, Options shall be taken into account in
the order in which they were granted.
E. AMOUNT EXERCISABLE. The usual form of agreement granting an
Option (whether Incentive or Non-incentive) shall, subject to any limitation on
exercise contained in the Agreement which is not inconsistent with this Plan,
contain the following terms of exercise:
(a) No Option granted under this Plan may be exercised until an
optionee has completed one year of continuous employment with the Company
or any Subsidiary following the date of grant;
(b) Beginning on the day after the first anniversary of the date of
grant, an Option may be exercised up to 25% of the shares subject to the
Option;
(c) After the expiration of each succeeding anniversary date of the
date of grant, the Option may be exercised up to an additional 25% of the
shares subject to the Option, so that after the expiration of the fourth
anniversary of the date of grant, the Option shall be exercisable in full;
and
(d) To the extent not exercised, installments shall be cumulative
and may be exercised in whole or in part until the Option expires on the
tenth anniversary of the date of the grant.
However, the Committee, in its discretion, may change the terms of exercise so
that any Option may be exercised so long as it is valid and outstanding from
time to time in part or as a whole in such manner and subject to such conditions
as it may set. In addition, the Committee, in its discretion, may accelerate the
time in which any outstanding Option may be exercised. But in no event shall any
Option be exercisable after the tenth anniversary of the date of the grant.
F. EXERCISE OF OPTIONS. An optionee may exercise such optionee's
Option by delivering to the Company a written notice stating (i) that such
optionee wishes to exercise
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<PAGE>
such Option on the date such notice is so delivered, (ii) the number of shares
of Common Stock with respect to which the Option is to be exercised and (iii)
the address to which the certificate representing such shares of Common Stock
should be mailed. In order to be effective, such written notice shall be
accompanied by (i) payment of the Option Price of such shares of Common Stock
and (ii) payment of an amount of money necessary to satisfy any withholding tax
liability that may result from the exercise of such Option. Each such payment
shall be made by cashier's check drawn on a national banking association and
payable to the order of the Company in United States dollars.
If, at the time of receipt by the Company of such written notice,
(i) the Company has unrestricted surplus in an amount not less than the Option
Price of such shares of stock, (ii) all accrued cumulative preferential
dividends and other current preferential dividends on all outstanding shares of
preferred stock, if any, of the Company have been fully paid, (iii) the
acquisition by the Company of its own shares of stock for the purpose of
enabling such optionee to exercise such Option is otherwise permitted by
applicable law and without any vote or consent of any shareholder of the
Company, and (iv) there shall have been adopted, and there shall be in full
force and effect, a resolution of the Board authorizing the acquisition by the
Company of its own shares of stock for such purpose, then such optionee may
deliver to the Company, in payment of the Option Price of the shares of Common
Stock with respect to which such Option is exercised, (x) certificates
registered in the name of such optionee that represent a number of shares of
stock legally and beneficially owned by such optionee (free of all liens, claims
and encumbrances of every kind) and having a Fair Market Value on the date of
receipt by the Company of such written notice that is not greater than the
Option Price of the shares of Common Stock with respect to which such Option is
to be exercised, such certificates to be accompanied by stock powers duly
endorsed in blank by the record holder of the shares of stock represented by
such certificates, with the signature of such record holder guaranteed by a
national banking association, and (y) if the Option Price of the shares of
Common Stock with respect to which such Option is to be exercised exceeds such
Fair Market Value, a cashier's check drawn on a national banking association and
payable to the order of the Company in an amount, in United States dollars,
equal to the amount of such excess. Notwithstanding the provisions of the
immediately preceding sentence, the Committee, in its sole discretion, may
refuse to accept shares of stock in payment of the Option Price of the shares of
Common Stock with respect to which such Option is to be exercised and, in that
event, any certificates representing shares of stock that were received by the
Company with such written notice shall be returned to such optionee, together
with notice by the Company to such optionee of the refusal of the Committee to
accept such shares of stock. If, at the expiration of seven business days after
the delivery to such optionee of such written notice from the Company, such
optionee shall not have delivered to the Company a cashier's check drawn on a
national banking association and payable to the order of the Company in an
amount, in United States dollars, equal to the Option Price of the shares of
Common Stock with respect to which such Option is to be exercised, such written
notice from the optionee to the Company shall be ineffective to exercise such
Option.
As promptly as practicable after the receipt by the Company of (i)
such written notice from the optionee, (ii) payment, in the form required by the
foregoing provisions of this Section of the Option Price of the shares of Common
Stock with respect to which such Option is to be exercised, and (iii) payment,
in the form required by the foregoing provisions of this Section, of an amount
of money necessary to satisfy any withholding tax liability that may result from
the exercise of such Option, a certificate representing the number of shares of
stock with respect to which such Option has been so exercised, such certificate
to be registered in the name of such optionee, provided that such delivery shall
be considered to have been made when such certificate shall have been mailed,
postage prepaid, to such optionee at the address specified for such purpose in
such written notice from the optionee to the Company.
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G. TRANSFERABILITY OF OPTIONS. Options shall not be transferable by
the optionee except by will or under the laws of descent and distribution, and
shall be exercisable, during his lifetime, only by him. Any attempted sale,
assignment, transfer, pledge or encumbrance of an Option in violation of this
Agreement shall be void and the Company shall not be bound thereby.
H. TERMINATION OF EMPLOYMENT OR DEATH OF OPTIONEE. All Options shall
terminate on the earlier of the date of the expiration of the Option or one day
less than three months after the date of severance, upon severance of the
employment relationship between the Company and the optionee, whether with or
without cause, for any reason other than the death, Disability or, in the case
of Non-Incentive Stock Options only, Retirement of the optionee, during which
period the optionee shall be entitled to exercise the Option in respect of the
number of shares that the optionee would have been entitled to purchase had the
optionee exercised the Option on the date of such severance of employment.
Whether authorized leave of absence or absence on military or government service
shall constitute severance of the employment relationship between the Company
and the optionee shall be determined by the Committee at the time thereof. In
the event of severance because of the Disability of the holder of any Incentive
Stock Option while in the employ of the Company and before the date of
expiration of such Incentive Stock Option, such Incentive Stock Option shall
terminate on the earlier of such date of expiration or one year following the
date of such severance because of Disability, during which period the optionee
shall be entitled to exercise the Incentive Stock Option in respect to the
number of shares that the optionee would have been entitled to purchase had the
optionee exercised the Incentive Stock Option on the date of such severance
because of Disability. In the event of the death of the holder of any Incentive
Stock Option while in the employ of the Company and before the date of
expiration of such Incentive Stock Option, such Incentive Stock Option shall
terminate on the earlier of such date of expiration or one year following the
date of death. After the death of the optionee, his executors, administrators or
any person or person to whom his Incentive Stock Option may be transferred by
will or by the laws of descent and distribution, shall have the right, at any
time prior to the termination of an Incentive Stock Option to exercise the
Incentive Stock Option, in respect to the number of shares that the optionee
would have been entitled to exercise if he had exercised the Incentive Stock
Option on the date of his death while in employment. For purposes of Incentive
Stock Options issued under this Plan, an employment relationship between the
Company and the optionee shall be deemed to exist during any period in which the
optionee is employed by the Company, a corporation issuing or assuming an option
in a transaction to which Section 424(a) of the Code applies, or a parent or
subsidiary corporation of such corporation issuing or assuming an option. For
this purpose, the phrase "corporation issuing or assuming an option" shall be
substituted for the word "Company" in the definitions of parent and subsidiary
corporations in Section 2 and the parent-subsidiary relationship shall be
determined at the time of the corporate action described in Section 424(a) of
the Code.
I. NO RIGHTS AS SHAREHOLDER. No optionee shall have rights as a
shareholder with respect to shares covered by his Option until the date a stock
certificate is issued for the shares. Except as provided in the following
provisions of this Section 7, no adjustment for dividends, or other matters
shall be made if the record date is prior to the date the certificate is issued.
J. CHANGES IN THE COMPANY'S CAPITAL STRUCTURE. The existence of
outstanding Options shall not affect in any way the right or power of the
Company or its shareholders to make or authorize any or all adjustments,
recapitalizations, reorganizations or other changes in the Company's capital
structure or its business, or any merger or consolidation of the Company, or any
issue of bonds, debentures, preferred or prior preference stock ahead of or
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<PAGE>
affecting the Common Stock or the rights thereof, or the dissolution or
liquidation of the Company, or any sale or transfer of all or any part of its
assets or business, or any other corporate act or proceeding, whether of a
similar character or otherwise.
If the Company shall effect a subdivision or consolidation of shares
or other capital adjustment of, or the payment of a dividend in capital stock or
other equity securities of the Company on, its Common Stock, or other increase
or reduction of the number of shares of the Common Stock outstanding without
receiving consideration therefor in money, services, or property, or the
reclassification of its Common Stock, in whole or in part, into other equity
securities of the Company, then (i) the number, class and per share price of
shares of stock subject to outstanding Options hereunder shall be appropriately
adjusted (or in the case of the issuance of other equity securities as a
dividend on, or in a reclassification of, the Common Stock, the Options shall
extend to such other securities) in such a manner as to entitle an optionee to
receive, upon exercise of an Option, for the same aggregate cash compensation,
the same total number and class or classes of shares (or in the case of a
dividend of, or reclassification into, other equity securities, such other
securities) he would have held after such adjustment if he had exercised his
Option in full immediately prior to the event requiring the adjustment, or, if
applicable, the record date for determining shareholders to be affected by such
adjustment; and (ii) the number and class of shares then reserved for issuance
under the Plan (or in the case of a dividend of, or reclassification into, other
equity securities, such other securities) shall be adjusted by substituting for
the total number and class of shares of stock then received, the number and
class or classes of shares of stock (or in the case of a dividend on, or
reclassification into, other equity securities, such other securities) that
would have been received by the owner of an equal number of outstanding shares
of Common Stock as the result of the event requiring the adjustment. Comparable
rights shall accrue to each optionee in the event of successive subdivisions,
consolidations, capital adjustment, dividends or reclassifications of the
character described above.
If the Company shall distribute to all holders of its shares of
Common Stock (including any such distribution made to non-dissenting
shareholders in connection with a consolidation or merger in which the Company
is the surviving corporation and in which holders of shares of Common Stock
continue to hold shares of Common Stock after such merger or consolidation)
evidences of indebtedness or cash or other assets (other than cash dividends
payable out of consolidated retained earnings not in excess of, in any one year
period, the greater of (i) $1.00 per share of Common Stock and (ii) two times
the aggregate amount of dividends per share paid during the preceding calendar
year and dividends or distributions payable in shares of Common Stock or other
equity securities of the Company described in the immediately preceding
paragraph), then in each case the Option Price shall be adjusted by reducing the
Option Price in effect immediately prior to the record date for the
determination of shareholders entitled to receive such distribution by an amount
equal to the Fair Market Value, as determined in good faith by the Board (whose
determination shall be described in a statement filed in the Company's corporate
records and be available for inspection by any holder of an Option) of the
portion of the evidence of indebtedness or cash or other assets so to be
distributed applicable to one share of Common Stock; provided that in no event
shall the Option Price be less than the par value of a share of Common Stock.
Such adjustment shall be made whenever any such distribution is made, and shall
become effective on the date of the distribution retroactive to the record date
for the determination of the shareholders entitled to receive such distribution.
Comparable adjustments shall be made in the event of successive transactions of
the character described above.
After the merger of one or more corporations into the Company, after
any consolidation of the Company and one or more corporations, or after any
other corporate transaction described in Section 424(a) of the Code in which the
Company shall be the
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surviving corporation, each optionee, at no additional cost, shall be entitled
to receive, upon any exercise of his Option, in lieu of the number of shares as
to which the Option shall then be so exercised, the number and class of shares
of stock or other equity securities to which the optionee would have been
entitled pursuant to the terms of the agreement of merger or consolidation if at
the time of such merger or consolidation such optionee had been a holder of a
number of shares of Common Stock equal to the number of shares as to which the
Option shall then be so exercised and, if as a result of such merger,
consolidation or other transaction, the holders of Common Stock are not entitled
to receive any shares of Common Stock pursuant to the terms thereof, each
optionee, at no additional cost shall be entitled to receive, upon exercise of
his Option, such other assets and property, including cash to which he would
have been entitled if at the time of such merger, consolidation or other
transaction he had been the holder of the number of shares of Common Stock equal
to the number of shares as to which the Option shall then be so exercised.
Comparable rights shall accrue to each optionee in the event of successive
mergers or consolidations of the character described above.
After a merger of the Company into one or more corporations, after a
consolidation of the Company and one or more corporations, or after any other
corporate transaction described in Section 424(a) of the Code in which the
Company is not the surviving corporation, each optionee shall, at no additional
cost, be entitled at the option of the surviving corporation (i) to have his
then existing Option assumed or have a new option substituted for the existing
Option by the surviving corporation to the transaction which is then employing
him, or a parent or subsidiary of such corporation, on a basis where the excess
of the aggregate Fair Market Value of the shares subject to the Option
immediately after the substitution or assumption over the aggregate Option Price
of such option is equal to the excess of the aggregate Fair Market Value of all
shares subject to the option immediately before such substitution or assumption
over the aggregate Option Price of such shares, provided that the shares subject
to the new option must be traded on the New York or American Stock Exchange or
quoted on the National Association of Securities Dealers Automated Quotation
System, or (ii) to receive, upon any exercise of his Option, in lieu of the
number of shares as to which the Option shall then be so exercised, the
securities, property and other assets, including cash, to which the optionee
would have been entitled pursuant to the terms of the agreement of merger or
consolidation or the agreement giving rise to the other corporate transaction if
at the time of such merger, consolidation or other transaction such optionee had
been the holder of the number of shares of Common Stock equal to the number of
shares as to which the Option shall then be so exercised.
If a corporate transaction described in Section 424(a) of the Code
which involves the Company is to take place and there is to be no surviving
corporation while an Option remains in whole or in part unexercised, it shall be
canceled by the Board as of the effective date of any such corporate transaction
but before that date each optionee shall be provided with a notice of such
cancellation and each optionee shall have the right to exercise such Option in
full (without regard to any vesting limitations set forth in or imposed pursuant
to preceding provisions of this Plan or the option agreement with respect to
such Option) to the extent it is then still unexercised during a 30-day period
preceding the effective date of such corporate transaction.
Except as hereinbefore expressly provided, the issue by the Company
of shares of stock of any class, or securities convertible into shares of stock
of any class, for cash or property, or for labor or services either upon direct
sale or upon the exercise of rights or warrants to subscribe therefor, or upon
conversion of shares or obligations of the Company convertible into such shares
or other securities, shall not affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock then
subject to outstanding Options.
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<PAGE>
K. SUBSTITUTION OPTIONS. Options may be granted under this Plan from
time to time in substitution for stock options held by employees of other
corporations who are about to become employees of the Company, or whose employer
is about to become a parent or subsidiary corporation, conditioned in the case
of an Incentive Stock Option upon the employee becoming an employee as the
result of a merger or consolidation of the Company with another corporation, or
the acquisition by the Company of substantially all the assets of another
corporation, or the acquisition by the Company of at least 50% of the issued and
outstanding stock of another corporation as the result of which it becomes a
subsidiary of the Company. The terms and conditions of the substitute Options
granted may vary from the terms and conditions of this Plan to the extent the
Board at the time of grant may deem appropriate to conform, in whole or in part,
to the provisions of the stock options in substitution for which they are
granted. With respect to Options that are incentive stock options, however, no
variation shall be made which will affect the status of any substitute option as
an "Incentive Stock Option" under Section 422 of the Code.
SECTION 8. RESTRICTED STOCK AWARDS
A. AWARDS. The Committee may make an Award of Restricted Stock to
selected eligible Employees. The amount of each Restricted Stock Award and the
respective terms and conditions of each Award (which terms and conditions need
not be the same in each case) shall be determined by the Committee in its sole
discretion. However, the terms and conditions of an Award shall not be
inconsistent with the terms of the Plan.
B. TRANSFERABILITY AND RIGHTS WITH RESPECT TO RESTRICTED STOCK.
Except as provided herein, Restricted Stock may not be sold, assigned,
transferred, pledged, or otherwise encumbered during a Restricted Period. Any
attempted sale, assignment, transfer, pledge or encumbrance of Restricted Stock
in violation of this Plan shall be void and the Company shall not be bound
thereby.
During the Restricted Period, certificates representing the
Restricted Stock and any Retained Distributions shall be registered in the
recipient's name and bear a restrictive legend to the effect that ownership of
such Restricted Stock (and any such Retained Distributions), and the enjoyment
of all rights appurtenant thereto are subject to the restrictions, terms, and
conditions provided in this Plan and the applicable Agreement. Such certificates
shall be deposited by the recipient with the Company, together with stock powers
or other instruments of assignment, each endorsed in blank, which will permit
transfer to the Company of all or any portion of the Restricted Stock and any
securities constituting Retained Distributions which shall be forfeited in
accordance with this Plan and the applicable Agreement. Restricted Stock shall
constitute issued and outstanding shares of Common Stock for all corporate
purposes.
Subject to the terms of this Plan and the Agreement with respect to
the Award, the recipient shall have the right to vote the Restricted Stock
awarded to such recipient and to receive and retain all regular cash dividends,
and to exercise all other rights, powers and privileges of a holder of Common
Stock, with respect to such Restricted Stock, with the exception that (i) the
recipient shall not be entitled to delivery of the stock certificate or
certificates representing such Restricted Stock until the restrictions
applicable thereto shall have expired, (ii) the Company shall retain custody of
all Retained Distributions made or declared with respect to the Restricted Stock
(and such Retained Distributions shall be subject to the same restrictions,
terms and conditions as are applicable to the Restricted Stock) until such time,
if ever, as the Restricted Stock with respect to which such Retained
Distributions shall have been made, paid, or declared shall have become vested,
and such Retained Distributions shall not bear interest or be segregated in
separate accounts and (iii) the
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recipient may not sell, assign, transfer, pledge, exchange, encumber, or dispose
of the Restricted Stock or any Retained Distributions during the Restricted
Period. Nothing in this Section shall prevent transfers by will or by the
applicable laws of descent and distribution.
C. VESTING OF RESTRICTED STOCK. Restricted Stock Awards shall be
subject to such vesting restrictions, if any, as the Committee shall determine
in its sole discretion; provided that any Restricted Stock Award that is granted
to an Employee who is then subject to the reporting and short-swing profit
provisions of Section 16 of the Exchange Act and the rules thereunder shall vest
no earlier than six months following the date on which the Restricted Stock is
deemed awarded for purposes of such provisions.
D. CONSEQUENCE OF VESTING. Subject to Section 9, when shares of
Restricted Stock become vested, the Restricted Period shall be terminated as to
those shares, and the Company shall deliver to the Restricted Stock Award
recipient (or his estate, if applicable) a certificate representing those shares
of Common Stock and all Retained Distributions made or declared with respect to
those shares, reduced as necessary to satisfy the Company's tax withholding
obligation.
E. FORFEITURE OF RESTRICTED STOCK. If the employment of the
recipient of the Restricted Stock Award with the Company and its subsidiaries is
terminated for any reason before the recipient dies, Retires or becomes
Disabled, all Restricted Stock shares not then vested will be forfeited.
F. WITHHOLDING TAX. The Company shall meet its tax withholding
obligations under the Code and applicable state or local law arising upon the
vesting of Restricted Stock by delivering to the Restricted Stock recipient (or
his estate, if applicable) a reduced number of shares of Common Stock in the
manner specified herein. At the time of vesting of shares of Restricted Stock,
the Company shall (i) calculate the amount of withholding tax due on the
assumption that all such vested shares of Restricted Stock are made available
for delivery, (ii) reduce the number of such shares made available for delivery
so that the Fair Market Value of the shares withheld on the vesting date
approximates the amount of tax the Company is obliged to withhold and (iii) in
lieu of the withheld shares, remit cash to the United States Treasury and other
applicable governmental authorities, on behalf of the participant, in the amount
of the withholding tax due.
The Company shall withhold only whole shares of Common Stock to
satisfy its withholding obligation. Where the Fair Market Value of the withheld
shares does not equal Company's withholding tax obligation, the Company shall
withhold shares with a Fair Market Value slightly in excess of the amount of its
withholding obligation and shall remit the excess cash to the Restricted Stock
Award recipient (or his estate, if applicable) with the shares of Common Stock
made available for delivery.
The withheld shares of Restricted Stock not made available for
delivery by the Company shall be retained as treasury stock or will be cancelled
and, in either case, the recipient's right, title and interest in such
Restricted Stock shall terminate.
G. CHANGES IN COMPANY'S CAPITAL STRUCTURE. In the event that the
outstanding shares of Common Stock of the Company are changed into or exchanged
for a different number or kind of shares or other securities of the Company, or
of another corporation, by reason of reorganization, merger, consolidation,
recapitalization, reclassification, stock split, stock dividend, or combination
of shares, appropriate adjustments shall be made by the Committee in the
aggregate number and kind of shares which may be issued or granted as Awards. If
any adjustment shall result in a fractional share, the fraction shall be
disregarded.
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<PAGE>
SECTION 9. REQUIREMENTS OF LAW
The Company shall not be required to sell, issue or deliver any
shares of Common Stock under any Award if such sale, issuance or delivery shall
constitute a violation by the Award recipient or the Company of any provisions
of any law or regulation of any governmental authority. Each Award granted under
this Plan shall be subject to the requirements that, if at any time the Board or
the Committee shall determine that the listing, registration or qualification of
the shares upon any securities exchange or inter-dealer quotation system or
under any state or federal law of the United States or of any other country or
governmental subdivision, or the consent or approval of any governmental
regulatory body, or investment or other representations, are necessary or
desirable in connection with the issue, or purchase or delivery of shares
subject to an Award, that Award shall not be exercised in whole or in part and
no shares shall be delivered pursuant to an Award unless the listing,
registration, qualification, consent, approval or representations shall have
been effected or obtained free of any conditions not acceptable to the
Committee. Any determination in this connection by the Committee shall be final.
In the event the shares issuable or deliverable on exercise or vesting of an
Award are not registered under the Securities Act of 1933, the Company may
imprint on the certificate for those shares the following legend or any other
legend which counsel for the Company considers necessary or advisable to comply
with the Securities Act of 1933:
"The shares of stock represented by this certificate have not been
registered under the Securities Act of 1933 or under the securities
laws of any state and may not be sold or transferred except upon
registration or upon receipt by the Corporation of an opinion of
counsel satisfactory to the Corporation, in form and substance
satisfactory to the Corporation, that registration is not required
for a sale or transfer."
The Company may, but shall in no event be obligated to, register any securities
covered by this Plan under the Securities Act of 1933 (as now in effect or as
later amended) and, in the event any shares are registered, the Company may
remove any legend on certificates representing those shares. The Company shall
not be obligated to take any other affirmative action in order to cause the
exercise of an Award or the issuance or delivery of shares under the Award to
comply with any law or regulation or any governmental authority.
SECTION 10. EMPLOYMENT OBLIGATION
The granting of any Award shall not impose upon the Company any
obligation to employ or continue to employ any Award recipient. The right of the
Company to terminate the employment of any officer or other Employee shall not
be diminished or affected by reason of the fact that an Award has been granted
to him.
SECTION 11. FORFEITURE FOR CAUSE
Notwithstanding any other provision of this Plan, if the Committee
finds by a majority vote, that the Award recipient, before or after termination
of his employment with the Company (i) committed a fraud, embezzlement, theft,
felony or act of dishonesty in the course of his employment by the Company which
conduct damaged the Company or (ii) disclosed trade secrets of the Company, then
any outstanding Options which have not been exercised by the individual and any
Awards which have not yet vested will be forfeited. The decision of the
Committee as to the cause of an Award recipient's discharge, the damage done to
the Company and the extent of the individual's competitive activity will be
final. No
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<PAGE>
decision of the Committee, however, will affect the finality of the discharge of
the individual by the Company.
SECTION 12. AMENDMENT OR TERMINATION OF PLAN
The Board may modify, revise or terminate this Plan at any time and
from time to time. However, without the further Company shareholder approval by
a majority of the votes cast at a duly held shareholders' meeting at which a
quorum representing a majority of all outstanding voting stock (or if the
provisions of the Company's articles of incorporation or bylaws or applicable
state law prescribe a greater degree of shareholder approval for this action,
without the degree of shareholder approval thus required) is, either in person
or by proxy, present and voting on the issue, the Board may not (i) increase the
aggregate number of shares that may be subject to Awards pursuant to the
provisions of this Plan; (ii) materially increase the benefits accruing to
participants under this Plan or (iii) materially modify the requirements as to
eligibility for participation in this Plan.
SECTION 13. WRITTEN AGREEMENT
Each Award granted under this Plan shall be embodied in a written
Agreement, which shall be subject to the terms and conditions prescribed above,
and shall be signed by the Award recipient and by the appropriate officer of the
Company for and in the name and on behalf of the Company. Each Agreement shall
contain any other provisions consistent with this Plan that the Committee in its
discretion shall deem advisable.
SECTION 14. INDEMNIFICATION OF THE COMMITTEE
The Company shall indemnify each present and future member of the
Committee against, and each member of the Committee shall be entitled without
further act on his part to indemnity from the Company for, all expenses
(including the amount of judgments and the amount of approved settlements made
with a view to the curtailment of costs of litigation, other than amounts paid
to the Company itself) reasonably incurred by him in connection with or arising
out of any action, suit or proceeding in which he may be involved by reason of
his being or having been a member of the Committee, whether or not he continues
to be such member of the Committee at the time of incurring such expenses;
provided, however, that such indemnity shall not include any expenses incurred
by any such member of the Committee (i) in respect of matters as to which he
shall be finally adjudged in any such action, suit or proceeding to have been
guilty of gross negligence or willful misconduct in the performance of his duty
as such member of the Committee, or (ii) in respect of any matter in which any
settlement is effected, to an amount in excess of the amount approved by the
Company on the advice of its legal counsel; and provided further, that no right
of indemnification under the provisions set forth herein shall be available to
or enforceable by any such member of the Committee unless, within 60 days after
institution of any such action, suit or proceeding, he shall have offered the
Company, in writing, the opportunity to handle and defend the same at its own
expense. The foregoing right of indemnification shall inure to the benefit of
the heirs, executors or administrators of each such member of the Committee and
shall be in addition to all other rights to which such member of the Committee
may be entitled to as a matter of law, contract or otherwise. Nothing in this
Section shall be construed to limit or otherwise affect any right to
indemnification or payment of expense, or any provisions limiting the liability
of any officer or director of the Company or any member of the Committee,
provided by law, the Certificate of Incorporation of the Company or otherwise.
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<PAGE>
SECTION 15. SECTION 83(B) ELECTIONS.
No Employee shall exercise the election permitted under Section
83(b) of the Code with respect to an Award without written approval of the
Committee. If the Committee permits such an election with respect to any Award,
the Company shall require the Award recipient to pay the Company an amount
necessary to satisfy the Company's tax withholding obligation.
SECTION 16. AWARD GRANT TERMINATION.
No Awards shall be granted pursuant to this Plan after February 25,
2005.
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EXHIBIT 10.14
EQUALNET HOLDING CORP.
EMPLOYEE STOCK PURCHASE PLAN
The following terms and provisions constitute The EqualNet Holding Corp.
Employee Stock Purchase Plan ("Plan") as approved by EqualNet Holding Corp. and
in effect as of January 1, 1996.
1. DEFINITIONS.
A. "Account" shall mean an account under the Plan established by the
Administrator for each Participant.
B. "Administrator" shall mean Bank of New York or such other
administrator as EqualNet in its discretion may approve from time to
time after the Effective Date.
C. "Code" shall mean the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.
D. "Commission" shall mean the United States Securities and Exchange
Commission.
E. "Common Stock" shall mean shares of the Common Stock of EqualNet,
$.01 par value per share.
F. "EqualNet" shall mean EqualNet Holding Corp.
G. "EqualNet Contribution" shall mean amounts contributed to the Plan
from EqualNet on behalf of a Participant in an amount equal to 15%
of each Participant's payroll deductions up to a maximum of $750 for
each participant per calendar year.
H. "Effective Date" shall mean January 1, 1996.
I. "Full-Time Employee" shall mean a regular full-time employee of
EqualNet or any of its subsidiaries who has been such an employee
for at least 90 days.
J. "Investment Authorization" shall mean an investment authorization
card.
K. "Participant" shall mean an individual who satisfies the eligibility
requirements set forth in Section 2 of the Plan.
L. "Plan" shall mean The EqualNet Holding Corp. Employee Stock Purchase
Plan.
M. "Plan Shares" shall mean shares of EqualNet Common Stock, $.01 par
value per share.
<PAGE>
N. "Statement" shall mean a statement prepared by the Administrator and
mailed to a Participant summarizing the transactions in the
Participant's Account.
O. "Withholding Authorization" shall mean a payroll withholding
authorization.
2. ELIGIBILITY. To participate in the Plan, an individual:
A. Must be a Full-Time Employee;
B. Must submit a Withholding Authorization to the Human Resources
Department on or before the first day of the month in which the
individual wishes to participate, authorizing EqualNet to make the
payroll deductions specified by the employee, subject to any minimum
deduction set by EqualNet; and
C. Must submit to the Administrator (through the Human Resources
Department) an Investment Authorization, authorizing the
Administrator to act as agent for the employee for purposes set
forth in Section 3.
3. SOURCES OF CASH. The Administrator will establish an Account as agent for
each Participant and will credit the cash received from the following
sources of cash to the Account for the purchase of Plan Shares for each
Participant's Account:
A. Employee payroll reduction contributions made by the Participant;
B. EqualNet Contributions made on behalf of the Participant; and
C. Cash dividends received from EqualNet on all Plan Shares in a
Participant's Account at the time a dividend is paid.
The minimum contribution that a Participant may make to his Account is
$10.00 per pay period and the maximum aggregate contribution that a
Participant may make to his Account is $5,000 per calendar year, or such
other amounts as EqualNet in its sole discretion may determine after the
Effective Date.
4. APPLICATION OF CASH. The Administrator will apply the cash credited to the
Participant's Account under Section 3 to the purchase of full and
fractional Plan Shares and will credit them to the Participant's Account.
In making these purchases, the Administrator may commingle the cash
credited to all Participant's Accounts. The price at which the
Administrator is deemed to have acquired Plan Shares for a Participant's
Account will be the average price, excluding brokerage and other costs of
purchase, of all Plan Shares purchased by the Administrator for all
Participants in the Plan during the calendar month. The Administrator will
make reasonable efforts to apply the cash described in Section 3 that it
receives as agent for the Participant to the purchase of Plan Shares on or
promptly after the first day of the following month after receipt by
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<PAGE>
the Administrator, except as described in Section 6. Dividends received on
Plan Shares and other amounts of cash credited to the Account will be
aggregated with the employee payroll deductions and amounts contributed by
EqualNet received during the calendar month and applied to the purchase of
Plan Shares.
5. ADDITION TO ACCOUNT OF SHARES UNDER SIMILAR PLANS. Participants may elect
to add to their Account any shares of EqualNet Common Stock credited to
their account under any plan that is similar to this Plan, whether offered
to EqualNet employees before or after the establishment of this Plan. All
shares will be held in the name of the Administrator or its nominee as
Plan Shares subject to the terms and conditions of this Plan.
6. PURCHASE OF PLAN SHARES. The Administrator will purchase Plan Shares in
negotiated transactions or on any securities exchange or other securities
trading facility where EqualNet Common Stock is traded from time to time.
The purchases will be on terms as to price, delivery and other matters,
and will be executed through those brokers or dealers, as the
Administrator may determine. Under certain circumstances, observance of
the rules and regulations of the Commission or applicable securities
exchange or other securities trading facility may require temporary
suspension of purchases by the Administrator or may require that a
purchase be spread over a longer period than indicated in Section 5. In
that event, purchases will be made or resumed when permitted by the rules
and regulations of the Commission or applicable securities exchange or
other securities trading facility; and the Administrator will not be
accountable for its inability to make all purchases within the applicable
period. If any Commission, securities exchange or other securities trading
facility suspension of trading in EqualNet Common Stock remains effective
for 90 consecutive days, the Administrator will remit to each Participant,
promptly after the end of the period, all cash in the Participant's
Account attributable to the Participant's payroll deductions and cash
dividends paid to all EqualNet shareholders during such period.
7. STATEMENTS. As soon as practicable after the end of each calendar quarter
(but in no event later than 20 calendar days after the end of each
calendar quarter) the Administrator will mail a Statement to each
Participant summarizing the transactions in the Participant's Account
since the last Statement. The Administrator will hold the Plan Shares of
all Participants in its name or in the name of its nominee evidenced by as
many or as few certificates as the Administrator determines. Subject to
the holding period requirement of Section 14, no certificate representing
Plan Shares purchased for a Participant's Account will be issued to the
Participant unless he or she makes a request in writing or until his or
her Account is terminated and he or she makes the election described in
Section 14. Certificates will not be issued for less than 10 shares unless
the Account is terminated. The participant is responsible for all costs
and charges related to the preparation and issuance of certificates
representing Plan Shares except in the case of certificates issued upon
termination of such participant's Account.
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<PAGE>
8. EXPENSES. EqualNet will pay the service charges, brokerage, costs of
mailing and other charges incurred in connection with the purchase of Plan
Shares.
9. TAX MATTERS. Each Participant is responsible for all taxes (whether local,
state or federal) due because of the EqualNet Contribution, because of the
payment of a dividend or because of the sale of Plan Shares credited to
him or her. The Administrator will timely prepare and forward to the
United States Internal Revenue Service, the appropriate state and local
authorities and the Participants the information returns required by the
Code and all state statutes, presently Forms 1099-Div and 1099-B. All
EqualNet Contributions will constitute taxable income to the Participant
to whose Account they are credited and will be reported to the United
States Internal Revenue Service on the Participant's Form W-2 as taxable
earnings.
10. STOCK DIVIDENDS AND SPLITS. Any stock dividends and any shares received as
a result of a stock split on any Plan Shares accumulated in a
Participant's Account will, when received by the Administrator, be
credited to the Participant's Account.
11. TENDER OR EXCHANGE OFFER. If a tender offer or exchange offer is commenced
for EqualNet Common Stock, the Administrator, upon receipt of information
with respect thereto as the holder of record of the Plan Shares, will
either (i) forward, or arrange for the forwarding of, information provided
by the offeror to holders of record of EqualNet Common Stock to each
Participant or (ii) provide to the offeror the name and mailing address of
each Participant as reflected on the records of the Administrator with
instructions to mail such material to each Participant. The Administrator
will tender all or part of a Participant's Plan Shares in response to
written instructions from the Participant in such form as the
Administrator may reasonably require and only if such instructions are
received by the Administrator at least five days (or such shorter period
as may be required by law) prior to the termination of the offer. Unless
the Administrator has received instructions in accordance with the
previous sentence, it will not tender a Participant's Plan Shares. Except
to the extent disclosure is required to tender Plan Shares pursuant to
proper written instructions, the Administrator will maintain the
confidentiality of a Participant's election to tender or not tender Plan
Shares.
12. NO ADDITION TO ACCOUNT OF SHARES OF COMMON STOCK. Participants may not add
any shares of EqualNet Common Stock held in their name to their Account
except as permitted by Section 5.
13. VOTING OF PLAN SHARES. The Administrator will vote the Participant's Plan
Shares as instructed by the Participant on a form to be furnished by and
returned to the Administrator at least five days (or such shorter period
as the law may require) before the meeting at which such Plan Shares are
to be voted. The Administrator will not vote Plan Shares for which no
instructions are received.
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<PAGE>
14. SALE OF PLAN SHARES. A Participant may request that the Administrator sell
all or any part of his or her Plan Shares, at any time after such Plan
Shares have been held in his or her Account for at least 180 days. A
Participant who wishes to sell any part of his or her Plan Shares may do
so by giving notice to the Human Resources Department, which will inform
the Administrator of the Participant's election to sell Plan Shares within
five business days of the receipt of a notice from the Participant. Upon
receipt of the notice, the Administrator, as the Participant's agent, will
sell the number of Plan Shares specified in the Participant's notice
within five business days of receipt by the Administrator of instructions
to sell the Plan Shares, and will deliver to the Participant the proceeds
of the sale, less a handling charge, brokerage commissions, and other
costs of sale. Whole and fractional shares may be aggregated and sold with
those of other Participants, in which case the proceeds for each
Participant will be based on the average sales price of all shares
aggregated and sold. Any sale may, but need not, be made by purchase for
other Accounts, in which case the price will be the mean of the high and
low selling price of EqualNet Common Stock as reported by the principal
stock exchange or the inter-dealer quotation system on which the stock is
traded on the date of receipt by the Administrator of the notice of the
Participant's desire to sell Plan Shares or, if the stock is not traded on
the date of receipt, the mean on the next prior date that it was so
traded. Any fractional shares that are not sold will be paid for in cash
at a price equal to the mean of the high and low selling prices of
EqualNet Common Stock as reported by the principal stock exchange or
inter-dealer quotation system on which EqualNet Common Stock is traded on
the date of receipt by the Administrator of the notice of the
Participant's desire to sell Plan Shares or, if the stock is not traded on
the date of receipt, the mean on the next prior date that it was traded.
If a Participant elects to sell all of his or her Plan Shares, that
Participant will be deemed to have terminated participation in the Plan,
and the provisions of Section 15 will apply.
15. TERMINATION. Participation in the Plan may be terminated by a Participant
at any time by giving notice to the Human Resources Department. EqualNet
will inform the Administrator of any Participant's election to terminate
participation within five business days of the receipt by EqualNet of the
notice from the Participant. As soon as practicable following receipt of
the notice (but in no event later than 20 days following receipt of the
notice), unless a Participant makes a contrary election in written
response to the Administrator's notice of his Account, the Administrator
will send to the terminating Participant at no charge a certificate or
certificates representing the full Plan Shares accumulated in his Account
and a check for the net proceeds of any fractional share in his Account.
If a Participant elects to terminate, he may not rejoin the Plan for a
period of six months from the date of the termination. In any case of
termination, the Administrator will, if the Participant elects, sell, as
the Participant's agent, all or part of the Participant's shares within
five business days of receipt by the Administrator of instructions to sell
his or her Plan Shares, and will deliver to him or her the proceeds of the
sale, less a handling charge, brokerage commissions, and other costs of
sale; provided that the Administrator may not sell any Plan Shares if they
have not yet been held in the
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<PAGE>
Participant's Account for at least 180 days, the satisfaction of such
holding period to be determined and confirmed by EqualNet. Whole and
fractional shares may be aggregated and sold with those of other
Participants, in which case the proceeds for each Participant will be
based on the average sales price of all shares aggregated and sold. Any
sale may, but need not, be made by purchase for other Accounts in which
case the price will be the mean of the high and low selling price of
EqualNet Common Stock as reported by the principal stock exchange or
inter-dealer quotation system on which the stock is traded on the date of
receipt by the Administrator of the notice of termination or, if the stock
is not traded on the date of receipt, the mean on the next prior date that
it was so traded. On termination, fractional shares accumulated in a
Participant's Account which are not aggregated and sold will be paid for
in cash at a price equal to the mean of the high and low selling prices of
EqualNet Common Stock as reported by the principal stock exchange or
inter-dealer quotation system on which EqualNet Common Stock is traded on
the date of receipt by the Administrator of the notice of termination or,
if the stock is not traded on the date of receipt, the mean on the next
prior date that it was traded.
16. AMENDMENTS. The Administrator may, with the consent of EqualNet, amend
this Plan. EqualNet may terminate the Plan by giving the Administrator 30
days written notice of termination. The Administrator may terminate this
Plan by giving EqualNet 90 days written notice of termination. In addition
the Administrator may, with the consent of EqualNet, or shall, if
requested to do so by EqualNet, appoint a successor to serve as agent for
the Participants under the Plan. In any case, the Administrator and
EqualNet will cause a notice of the action to be mailed to each
Participant. No action will have a retroactive effect that would prejudice
the interests of the Participants. The terms and conditions of this Plan
as in effect on the effective date of the appointment of the successor
will be binding upon the successor.
17. NOTICES. Any notice, instruction, request, election or direction which, by
any provision of the Plan, is required or permitted to be given or made by
a Participant to the Administrator must be in writing and should be given
to the Human Resources Department, which will provide the Administrator
with the notice, instruction, request, election or direction within five
business days of its receipt. Any notice, instruction, request, election
or direction intended for the Administrator will be deemed to be given or
made when received by the Administrator. If a Participant wishes to
contact the Administrator directly, he may do so by prepaid postage mail
addressed to The EqualNet Holding Corp. Employee Stock Purchase Plan, c/o
The Bank of New York, 101 Barclay Street, 22nd Floor, New York, New York
10236. Any notice or certificate which, by any provision of the Plan, is
required or permitted to be given by the Administrator to a Participant,
must be in writing and will be deemed to have been given or made when
received by the Participant, or five business days after it has been
mailed to the Participant's address as it last appears on the
Administrator's records.
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<PAGE>
18. LIMITATION ON ADMINISTRATOR'S LIABILITY. The Administrator will not be
liable for any action which is in compliance with the terms and conditions
of this Plan taken or omitted in good faith, including without limitation,
any claim of liability:
A. Arising out of failure to terminate a Participant's Account upon the
Participant's death or otherwise prior to the receipt of written
notice of the event causing termination, accompanied by
documentation deemed satisfactory by the Administrator;
B. With respect to the prices at which Plan Shares are purchased or
Plan Shares or Rights are sold for a Participant's Account and the
timing and terms on which the purchase or sale is made; or
C. For the market value, or any fluctuation in the market value, after
purchase of the Plan Shares or sale of Plan Shares or Rights for a
Participant's Account.
19. TRANSFER; ASSIGNMENT. Except as is expressly provided in this Plan, no
Participant may sell, pledge, hypothecate or otherwise assign or transfer
his Account, any interest in his Account or any cash or stock credited to
his Account. Any attempt to sell, pledge, hypothecate, assign or transfer
his Account, any interest in his Account or any cash or stock credited to
his Account will be void.
20. EFFECT OF FINANCIAL HARDSHIP DISTRIBUTION. A Participant who receives a
financial hardship distribution from a qualified cash or deferred
arrangement described in Section 401(k) of the Code that is maintained by
EqualNet or any of its affiliates may not contribute to the Plan for a
period of 12 months after receipt of the financial hardship distribution.
The Participant must submit a new Withholding Authorization to the Human
Resources Department in order to recommence contributions to the Plan
after he or she has received the financial hardship distribution.
21. GOVERNING LAW. The Withholding Authorization, the Investment Authorization
and this Plan and its operation will be governed by and construed in
accordance with the laws of the State of Texas.
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EXHIBIT 10.25
CREDIT AGREEMENT
$25,000,000 LOAN FACILITY
dated as of November 30, 1995
AMONG
EQUALNET HOLDING CORP.,
as Borrower;
COMERICA BANK-TEXAS,
as Agent and as a Lender;
AND
THE OTHER LENDERS NOW OR HEREAFTER
PARTIES HERETO
<PAGE>
TABLE OF CONTENTS
PAGE
1. DEFINITIONS............................................................ 1
1.1 CERTAIN DEFINED TERMS.......................................... 1
1.2 MISCELLANEOUS.................................................. 13
2. COMMITMENTS AND LOANS.................................................. 14
2.1 LOANS.......................................................... 14
2.2 LETTERS OF CREDIT.............................................. 15
2.3 TERMINATIONS OR REDUCTIONS OF COMMITMENTS...................... 18
2.4 FEES........................................................... 18
2.5 SEVERAL OBLIGATIONS............................................ 18
2.6 THE NOTES...................................................... 19
2.7 USE OF PROCEEDS................................................ 19
2.8 DOMINION OF FUNDS LOANS........................................ 19
3. BORROWINGS AND PREPAYMENTS............................................. 20
3.1 BORROWINGS OTHER THAN DOMINION OF FUNDS LOANS.................. 20
3.2 PREPAYMENTS.................................................... 20
4. PAYMENTS; PRO RATA TREATMENT; COMPUTATIONS, ETC........................ 21
4.1 PAYMENTS....................................................... 21
4.2 PRO RATA TREATMENT............................................. 22
4.3 CERTAIN ACTIONS, NOTICES, ETC.................................. 22
4.4 NON-RECEIPT OF FUNDS BY THE AGENT.............................. 23
4.5 SHARING OF PAYMENTS, ETC....................................... 23
5. CONDITIONS PRECEDENT................................................... 24
5.1 INITIAL LOANS AND LETTERS OF CREDIT............................ 24
5.2 ALL LOANS AND LETTERS OF CREDIT................................ 25
6. REPRESENTATIONS AND WARRANTIES......................................... 26
6.1 ORGANIZATION................................................... 26
6.2 FINANCIAL STATEMENTS........................................... 26
6.3 ENFORCEABLE OBLIGATIONS; AUTHORIZATION......................... 26
6.4 OTHER DEBT..................................................... 27
6.5 LITIGATION..................................................... 27
6.6 TITLE.......................................................... 27
6.7 TAXES.......................................................... 27
6.8 REGULATIONS G, U AND X......................................... 27
6.9 SUBSIDIARIES................................................... 27
6.10 NO UNTRUE OR MISLEADING STATEMENTS............................. 27
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6.11 ERISA.......................................................... 28
6.12 INVESTMENT COMPANY ACT......................................... 28
6.13 PUBLIC UTILITY HOLDING COMPANY ACT............................. 28
6.14 SOLVENCY....................................................... 28
6.15 FISCAL YEAR.................................................... 28
6.16 COMPLIANCE..................................................... 28
6.17 ENVIRONMENTAL MATTERS.......................................... 28
6.18 CERTIFICATE OF TITLE PROPERTY.................................. 29
7. AFFIRMATIVE COVENANTS.................................................. 29
7.1 TAXES, EXISTENCE, REGULATIONS, PROPERTY, ETC................... 29
7.2 FINANCIAL STATEMENTS AND INFORMATION........................... 29
7.3 FINANCIAL TESTS................................................ 30
7.4 INSPECTION..................................................... 30
7.5 FURTHER ASSURANCES............................................. 31
7.6 BOOKS AND RECORDS.............................................. 31
7.7 INSURANCE...................................................... 31
7.8 NOTICE OF CERTAIN MATTERS...................................... 31
7.9 CAPITAL ADEQUACY............................................... 32
7.10 ERISA INFORMATION AND COMPLIANCE............................... 32
7.11 BANK ACCOUNTS.................................................. 33
7.12 LOCKBOX........................................................ 33
7.13 ADDITIONAL GUARANTIES AND SECURITY............................. 33
7.14 ACCOUNTS AUDITS................................................ 33
8. NEGATIVE COVENANTS..................................................... 34
8.1 INDEBTEDNESS................................................... 34
8.2 LIENS.......................................................... 34
8.3 CONTINGENT LIABILITIES......................................... 34
8.4 MERGERS, CONSOLIDATIONS AND DISPOSITIONS AND ACQUISITIONS
OF ASSETS..................................................... 35
8.5 REDEMPTION, DIVIDENDS AND DISTRIBUTIONS........................ 35
8.6 NATURE OF BUSINESS............................................. 35
8.7 TRANSACTIONS WITH RELATED PARTIES.............................. 35
8.8 LOANS AND INVESTMENTS.......................................... 35
8.9 ORGANIZATIONAL DOCUMENTS....................................... 36
8.10 UNFUNDED LIABILITIES........................................... 36
8.11 FISCAL YEAR.................................................... 36
8.13 SUBORDINATE INDEBTEDNESS....................................... 36
8.14 KEY AGREEMENT AMENDMENTS....................................... 36
9. DEFAULTS............................................................... 36
9.1 EVENTS OF DEFAULT.............................................. 36
9.2 RIGHT OF SETOFF................................................ 39
9.3 COLLATERAL ACCOUNT............................................. 40
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9.4 PRESERVATION OF SECURITY FOR UNMATURED REIMBURSEMENT
OBLIGATIONS................................................... 40
9.5 REMEDIES CUMULATIVE............................................ 41
10. THE AGENT.............................................................. 41
10.1 APPOINTMENT, POWERS AND IMMUNITIES............................. 41
10.2 RELIANCE....................................................... 42
10.3 DEFAULTS....................................................... 42
10.4 RIGHTS AS A LENDER............................................. 43
10.5 INDEMNIFICATION................................................ 43
10.6 NON-RELIANCE ON AGENT AND OTHER LENDERS........................ 43
10.7 FAILURE TO ACT................................................. 44
10.8 RESIGNATION OR REMOVAL OF AGENT................................ 44
10.9 NO PARTNERSHIP................................................. 44
11. MISCELLANEOUS.......................................................... 45
11.1 WAIVER......................................................... 45
11.2 NOTICES........................................................ 45
11.3 EXPENSES, ETC.................................................. 45
11.4 INDEMNIFICATION................................................ 46
11.5 AMENDMENTS, ETC................................................ 46
11.6 SUCCESSORS AND ASSIGNS......................................... 47
11.7 LIMITATION OF INTEREST......................................... 49
11.8 SURVIVAL....................................................... 50
11.9 CAPTIONS....................................................... 50
11.10 COUNTERPARTS................................................... 51
11.11 GOVERNING LAW.................................................. 51
11.12 SEVERABILITY................................................... 51
11.13 TAX FORMS...................................................... 51
11.14 VENUE.......................................................... 51
11.15 WAIVER OF JURY TRIAL........................................... 52
ANNEXES
1 - Interest Rate Provisions
EXHIBITS
A - Security Agreement-Accounts,
Inventory and General Intangibles
B - Borrowing Base Certificate
C - Request for Extension
D - Form of the Note
E - Compliance Certificate
F - Assignment and Acceptance
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CREDIT AGREEMENT
THIS CREDIT AGREEMENT is made and entered into as of November 30, 1995
(the "EFFECTIVE DATE"), by and among EQUALNET HOLDING CORP., a Texas corporation
(the "BORROWER"); each of the lenders which is or may from time to time become a
party hereto (individually, a "LENDER" and, collectively, the "LENDERS"), and
COMERICA BANK-TEXAS ("COMERICA"), a Texas banking association, as agent for the
Lenders (in such capacity, together with its successors in such capacity, the
"AGENT").
The parties hereto agree as follows:
1. DEFINITIONS.
1.1 CERTAIN DEFINED TERMS.
Unless a particular term, word or phrase is otherwise defined or the
context otherwise requires, capitalized terms, words and phrases used herein or
in the Loan Documents (as hereinafter defined) have the following meanings (all
definitions that are defined in this Agreement in the singular to have the same
meanings when used in the plural and VICE VERSA):
ACCOUNTS, EQUIPMENT, GENERAL INTANGIBLES and INVENTORY shall have the
respective meanings assigned to them in the Texas Business and Commerce Code in
force on the Effective Date.
ADDITIONAL SECURITY AGREEMENT shall mean, with respect to any Person, a
security agreement substantially in the form of EXHIBIT A hereof and otherwise
in Proper Form, in favor of the Agent covering the Accounts, Inventory and
General Intangibles of such Person, as security for such Person's obligations
under a Guaranty, together with all related Financing Statements as the Agent
may reasonably require.
AFFILIATE shall mean any Person controlling, controlled by or under common
control with any other Person. For purposes of this definition, "CONTROL"
(including "CONTROLLED BY" and "UNDER COMMON CONTROL WITH") means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities or otherwise.
AGREEMENT shall mean this Credit Agreement, as it may from time to time be
amended, modified, restated or supplemented.
ANNUAL AUDITED FINANCIAL STATEMENTS shall mean the annual consolidated
financial statements of a Person, including all notes thereto, which statements
shall include a balance sheet as of the end of such fiscal year and an income
statement and a statement of cash flows for such fiscal year, all setting forth
in comparative form the corresponding figures from the previous fiscal
1
<PAGE>
year, all prepared in conformity with GAAP, and without expressing any doubt as
to such Person's ability to continue as a going concern, and accompanied by a
report and opinion of Ernst & Young L.L.P. or any other independent certified
public accountants satisfactory to the Agent, which shall state that such
financial statements, in the opinion of such accountants, present fairly the
financial position of such Person as of the date thereof and the results of its
operations for the period covered thereby in conformity with GAAP. Such
statements shall be accompanied by, if requested by the Agent, a certificate of
such accountants that in making the appropriate audit and/or investigation in
connection with such report and opinion, such accountants did not become aware
of any Default relating to the financial tests set forth in SECTION 7.3 or, if
in the opinion of such accountant any such Default exists, a description of the
nature and status thereof.
APPLICATIONS shall mean all applications and agreements for Letters of
Credit, or similar instruments or agreements, in Proper Form, now or hereafter
executed by any Person in connection with any Letter of Credit now or hereafter
issued or to be issued under the terms hereof at the request of any Person.
ASSIGNMENT AND ACCEPTANCE shall have the meaning ascribed to such term in
SECTION 11.6.
BANKRUPTCY CODE shall mean the United States Bankruptcy Code, as amended,
and any successor statute.
BORROWING BASE shall mean, as at any date, the amount of the Borrowing
Base shown on the Borrowing Base Certificate then most recently delivered
pursuant to SECTION 7.2 hereof, determined by calculating the amount equal to
85% of the aggregate amount of the Eligible Accounts of the Borrower and its
Subsidiaries at said date. In the absence of a current Borrowing Base
Certificate, the Agent shall determine the Borrowing Base from time to time in
its reasonable discretion, taking into account all information reasonably
available to it, and the Borrowing Base from time to time so determined shall be
the Borrowing Base for all purposes of this Agreement until a current Borrowing
Base Certificate, in Proper Form, is furnished to and accepted by the Agent.
BORROWING BASE CERTIFICATE shall mean a certificate, duly executed by the
chief executive officer, chief financial officer, president, treasurer or
controller of the Borrower, appropriately completed and in substantially the
form of EXHIBIT B hereto. Each Borrowing Base Certificate shall be effective
only as accepted by the Agent (and with such revisions, if any, as the Agent may
reasonably require as a condition to such acceptance).
BUSINESS DAY shall mean any day other than a day on which commercial banks
are authorized or required to close in Houston, Texas.
CAPITAL EXPENDITURES shall mean expenditures in respect of fixed or
capital assets by a Person, including the capital portion of lease payments made
in respect of Capital Lease Obligations, but EXCLUDING expenditures for the
restoration, repair or replacement of any fixed or capital asset which was
destroyed or damaged, in whole or in part, to the extent financed by the
2
<PAGE>
proceeds of an insurance policy maintained by such Person. Expenditures in
respect of replacements and maintenance consistent with the business practices
of such Person in respect of plant facilities, machinery, fixtures and other
like capital assets utilized in the ordinary course of business are not Capital
Expenditures to the extent such expenditures are not capitalized in preparing a
balance sheet of such Person in accordance with GAAP.
CAPITAL LEASE OBLIGATIONS shall mean, as to any Person, the obligations of
such Person to pay rent or other amounts under a lease of (or other agreement
conveying the right to use) real and/or personal property which obligations are
required to be classified and accounted for as a capital lease on a balance
sheet of such Person under GAAP (including Statement of Financial Accounting
Standards No. 13 of the Financial Accounting Standards Board, as amended) and,
for purposes of this Agreement, the amount of such obligations shall be the
capitalized amount thereof, determined in accordance with GAAP (including such
Statement No. 13). Capital Lease Obligations shall not include the interest
component of any applicable rental payment.
CASH FLOW shall mean, without duplication, for any period the sum of (a)
Net Income AFTER taxes and less non-cash income and (b) the sum of (i) Interest
Expense for such period, (ii) amortization of goodwill and other non-cash
expenses and intangibles (including, without limitation, deferred financing
costs and debt discount) deducted in determining such Net Income and (iii)
depreciation, depletion and obsolescence of Property, in each case, determined
in accordance with GAAP.
CEILING RATE shall have the meaning assigned to it in the Interest Rate
Annex.
CODE shall mean the Internal Revenue Code of 1986, as amended, as now or
hereafter in effect, together with all regulations, rulings and interpretations
thereof or thereunder by the Internal Revenue Service.
COLLATERAL shall mean all Property, tangible or intangible, real, personal
or mixed, now or hereafter subject to the Security Documents.
COMMITMENT shall mean, as to any Lender, the obligation, if any, of such
Lender to make Loans and incur Letter of Credit Liabilities in an aggregate
principal amount at any one time outstanding up to (but not exceeding) the
amount, if any, set forth opposite such Lender's name on the signature pages
hereof under the caption "Commitment", or otherwise provided for in an
Assignment and Acceptance Agreement (as the same may be reduced from time to
time pursuant to SECTION 2.3).
COMMITMENT PERCENTAGE shall mean, as to any Lender, the percentage
equivalent of a fraction the numerator of which is the amount of such Lender's
Commitment and the denominator of which is the aggregate amount of the
Commitments of all Lenders.
COMPLIANCE CERTIFICATE shall have the meaning given to it in SECTION 7.2.
3
<PAGE>
CONTRIBUTION AGREEMENT shall mean that certain Contribution Agreement of
even date herewith, by and among the Borrower and the Current Guarantors, as the
same may be amended, modified, supplemented, restated and joined in pursuant to
a Joinder Agreement, from time to time.
CONTROLLED GROUP shall mean all members of a controlled group of
corporations and all trades or businesses (whether or not incorporated) under
common control which, together with the Borrower, are treated as a single
employer under Section 414 of the Code.
CORPORATION shall mean corporations, limited liability companies,
partnerships, joint ventures, joint stock associations, business trusts and
other business entities.
COVER for Letter of Credit Liabilities shall mean the payment to the Agent
in immediately available funds, to be held by the Agent in a collateral account
maintained by the Agent at its Principal Office and collaterally assigned as
security by the Borrower for the financial accommodations extended pursuant to
this Agreement using documentation satisfactory to the Agent, in the amount
required by any applicable provision hereof. Such amount shall be retained by
the Agent in such collateral account until such time as in the case of the Cover
being provided pursuant to SECTIONS 2.2(A) or 9.3, the applicable Letter of
Credit shall have expired and the Reimbursement Obligations, if any, with
respect thereto shall have been fully satisfied; PROVIDED, HOWEVER, that at such
time if a Default or Event of Default has occurred and is continuing, the Agent
shall not be required to release such amount in such collateral account.
CURRENT ASSETS shall mean all assets of a Person which under GAAP would be
classified as current assets (including cash, marketable securities,
receivables, inventory and prepaid expenses).
CURRENT GUARANTORS shall mean EqualNet Corporation, a Delaware corporation
and TeleSource, Inc., a Texas corporation, and any and all of their respective
successors and assigns
CURRENT LIABILITIES shall mean all liabilities of a Person (including tax
and other proper accruals) which under GAAP would be classified as current
liabilities.
CURRENT RATIO shall mean, as of any day, the ratio of Current Assets to
Current Liabilities, determined as of such day.
DEBT TO EBITDA RATIO shall mean, as of any day, the ratio of (a) the
outstanding balance of Indebtedness on such date to (b) EBITDA for the Rolling
Four Quarters as of such date.
DEFAULT shall mean an Event of Default or an event which with notice or
lapse of time or both would, unless cured or waived, become an Event of Default.
DOLLARS and $ shall mean lawful money of the United States of America.
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DOMINION OF FUNDS LOAN DOCUMENTS shall mean one of more "Dominion of Funds
Processing Account Agreements" or similar agreements between the Borrower and
Guarantors and Comerica, together with any and all related documents, agreements
and notes related thereto, and any and all amendments, modifications,
extensions, renewals, rearrangements and replacements therefor and substitutions
of any thereof.
DOMINION OF FUNDS LOANS shall mean the loans made by Comerica pursuant to
SECTION 2.8.
EBITDA shall mean, without duplication, for any period the sum of (a) Net
Income BEFORE taxes and less non-cash income and (b) the sum of (i) Interest
Expense for such period, (ii) amortization of goodwill and other non-cash
expenses and intangibles (including, without limitation, deferred financing
costs and debt discount) deducted in determining such Net Income and (iii)
depreciation, depletion and obsolescence of Property, in each case, determined
in accordance with GAAP.
ELIGIBLE ACCOUNTS shall mean, as at any date of determination thereof,
each Account of the Borrower or any of its Subsidiaries which is subject to a
Security Document and on which the Agent shall have a first-priority perfected
Lien which is at said date payable to the Borrower or any of its Subsidiaries
and which complies with the following requirements: (a) the subject goods have
been sold to an account debtor on an absolute sale basis on open account and not
on consignment, on approval or on a "sale or return" basis or subject to any
other repurchase or return agreement and no material part of the subject goods
has been returned, rejected, lost or damaged, the Account is stated to be
payable in Dollars and is not evidenced by chattel paper or an instrument of any
kind and said account debtor is not insolvent or the subject of any bankruptcy
or insolvency proceedings of any kind; (b) the account debtor must be located in
the United States; (c) it is a valid obligation of the account debtor thereunder
and is not subject to any offset or other defense on the part of such account
debtor or to any claim on the part of such account debtor denying liability
thereunder; (d) it is subject to no Lien whatsoever, except for the Liens
created or permitted pursuant to the Security Documents; (e) it is evidenced by
an invoice submitted to the account debtor in timely fashion and in the normal
course of business; (f) it has not remained unpaid beyond 90 days after the date
of the invoice; (g) it does not arise out of transactions with an employee,
officer, agent, director or stockholder of the Borrower or any of its
Subsidiaries or any Affiliate of the Borrower or any of its Subsidiaries, other
than Accounts approved in writing by the Agent; (h) the applicable account
debtor is not one who the Agent has, in the exercise of its sole discretion,
determined to be (based on such factors as the Agent deems appropriate), and has
given notice of such determination to the Borrower, an ineligible account
debtor; PROVIDED, HOWEVER, than any such notice shall not apply as to any
Account of such account debtor which has been included on a Borrowing Base
Certificate prior to the giving of such notice by Agent and which meets each and
every other requirement under this Agreement for the denomination of such
Account as an "Eligible Account," and (i) each of the representations and
warranties set forth in the Security Documents executed by the Borrower and its
Subsidiaries with respect thereto is true and correct in all material respects
on such date. In the event of any dispute under the foregoing criteria, about
whether an Account is or has ceased to be an Eligible Account, the decision of
the Agent, made in good faith, shall be conclusive and binding, absent manifest
error.
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ENVIRONMENTAL CLAIM means any third party (including Governmental
Authorities and employees) action, lawsuit, claim or proceeding (including
claims or proceedings at common law or under the Occupational Safety and Health
Act or similar laws relating to safety of employees) which seeks to impose
liability for (i) noise; (ii) pollution or contamination of the air, surface
water, ground water or land or the clean-up of such pollution or contamination;
(iii) solid, gaseous or liquid waste generation, handling, treatment, storage,
disposal or transportation; (iv) exposure to Hazardous Substances; (v) the
safety or health of employees or (vi) the manufacture, processing, distribution
in commerce or use of Hazardous Substances. An "ENVIRONMENTAL CLAIM" includes a
common law action, as well as a proceeding to issue, modify or terminate an
Environmental Permit, or to adopt or amend a regulation to the extent that such
a proceeding attempts to redress violations of an applicable permit, license, or
regulation as alleged by any Governmental Authority.
ENVIRONMENTAL LIABILITIES includes all liabilities arising from any
Environmental Claim, Environmental Permit or Requirement of Environmental Law
under any theory of recovery, at law or in equity, and whether based on
negligence, strict liability or otherwise: remedial, removal, response,
abatement, investigative, monitoring, personal injury and damage to property or
injuries to persons, and any other related costs, expenses, losses, damages,
penalties, fines, liabilities and obligations, and all costs and expenses
necessary to cause the issuance, reissuance or renewal of any Environmental
Permit including reasonable attorneys' fees and court costs.
ENVIRONMENTAL PERMIT means any permit, license, approval or other
authorization under any applicable Legal Requirement relating to pollution or
protection of health or the environment, including laws, regulations or other
requirements relating to emissions, discharges, releases or threatened releases
of pollutants, contaminants or hazardous substances or toxic materials or wastes
into ambient air, surface water, ground water or land, or otherwise relating to
the manufacture, processing, distribution, use, treatment, storage, disposal,
transport, or handling of pollutants, contaminants or Hazardous Substances.
ERISA shall mean the Employee Retirement Income Security Act of 1974, as
amended from time to time, and all rules, regulations, rulings and
interpretations adopted by the Internal Revenue Service or the U.S. Department
of Labor thereunder.
EVENT OF DEFAULT shall have the meaning assigned to it in SECTION 9.
EXPIRING CREDIT FACILITY shall mean the revolving credit facility
established under that certain Revolving Credit Loan Agreement dated as of
October 8, 1993, between Equal Net Communications, Inc., and Comerica, as the
same has been renewed, extended, increased, amended and modified from time to
time prior to the date hereof.
FEDERAL FUNDS RATE shall have the meaning assigned to it in the Interest
Rate Annex.
FINANCING STATEMENTS shall mean all such Uniform Commercial Code financing
statements as the Agent shall require, in Proper Form, duly executed by the
Borrower or others to give notice
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of and to perfect or continue perfection of the Agent's Liens in all Collateral,
as any of the foregoing may from time to time be amended, modified, supplemented
or restated.
FIXED CHARGE COVERAGE RATIO shall mean, as of any day, the ratio of (a)
Cash Flow for the Rolling Four Quarters as of such day to (b) Fixed Charges for
such Rolling Four Quarters.
FIXED CHARGES shall mean (without duplication), for any period, (a) the
amounts of scheduled principal payments made or to be made during such period
with respect to Funded Indebtedness (but excluding any of the Obligations), PLUS
(b) payments made or required to be made during such period with respect to the
Capital Lease Obligations with unrelated third parties, PLUS (c) non-financed
Capital Expenditures made during such period, PLUS (d) Interest Expense for such
period.
FUNDED INDEBTEDNESS means all Indebtedness which by its terms matures more
than one year from the date as of which any calculation of Funded indebtedness
is made, and any Indebtedness maturing within one year from such date which is
renewable at the option of the obligor to a date beyond one year from such date.
GAAP shall mean, as to a particular Person, such accounting practice as,
in the opinion of independent certified public accountants of recognized
national standing regularly retained by such Person and acceptable to the Agent,
conforms at the time to generally accepted accounting principles, consistently
applied. GAAP means those principles and practices (a) which are recognized as
such by the Financial Accounting Standards Board; and (b) which are consistently
applied for all periods after the Effective Date so as to reflect properly the
financial condition, and results of operations and changes in financial
position, of such Person. If any change in any accounting principle or practice
is required by the Financial Accounting Standards Board in order for such
principle or practice to continue as a GAAP or practice, all reports and
financial statements required hereunder may be prepared in accordance with such
change.
GOVERNMENTAL AUTHORITY shall mean any foreign governmental authority, the
United States of America, any State of the United States and any political
subdivision of any of the foregoing, and any central bank, agency, department,
commission, board, bureau, court or other tribunal having jurisdiction over the
Agent, any Lender, the Borrower, any of the Borrower's Subsidiaries or their
respective Property.
GUARANTIES shall mean that certain Master Guaranty of even date herewith
by and among the Current Guarantors, as amended, supplemented, modified, joined
in pursuant to a Joinder Agreement and restated from time to time, and each and
every other guaranty executed from time to time in respect of this Agreement.
GUARANTORS shall mean each and every Person executing a guaranty from time
to time guaranteeing the Indebtedness of the Borrower owing from time to time to
the Lenders pursuant to this Agreement or the Notes, including the Current
Guarantors.
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HAZARDOUS SUBSTANCE shall mean petroleum products, and any hazardous or
toxic waste or substance defined or regulated as such from time to time by any
law, rule, regulation or order described in the definition of "Requirements of
Environmental Law".
INDEBTEDNESS shall mean and include (a) all items which in accordance with
GAAP would be included on the liability side of a balance sheet on the date as
of which Indebtedness is to be determined (excluding capital stock, surplus,
surplus reserves and deferred credits); (b) all guar anties, letter of credit
contingent reimbursement obligations, endorsements and other contingent
obligations in respect of, or any obligations to purchase or otherwise acquire,
Indebtedness of others, and (c) all Indebtedness secured by any Lien existing on
any interest of the Person with respect to which Indebtedness is being
determined in Property owned subject to such Lien whether or not the
Indebtedness secured thereby shall have been assumed; PROVIDED, that the term
"Indebtedness" shall not mean or include any Indebtedness of the type described
in CLAUSE (A) of this definition in respect of which monies sufficient to pay
and discharge the same in full (either on the expressed date of maturity thereof
or on such earlier date as such Indebtedness may be duly called for redemption
and payment) shall be deposited with a depository, agency or trustee acceptable
to the Agent in trust for the payment thereof.
INTEREST EXPENSE shall mean, for any period, the sum of (a) the cash
interest payments by an obligor made or accrued in accordance with GAAP during
such period in connection with all of its interest-bearing Indebtedness and (b)
the interest component of any Capital Lease Obligations.
INTEREST RATE ANNEX shall mean ANNEX I, as it may from time to time be
amended, modified, restated or supplemented.
INVESTMENT shall mean the purchase or other acquisition of any securities
or Indebtedness of, or the making of any loan, advance, transfer of Property or
capital contribution to, or the incurring of any liability, contingently or
otherwise, in respect of the Indebtedness of, any Person.
ISSUER shall mean, with respect to any Letter of Credit, the issuer of
such Letter of Credit under this Agreement.
JOINDER AGREEMENT shall mean any agreement, in Proper Form, executed by a
Subsidiary of the Borrower from time to time, pursuant to which such Subsidiary
joins in the execution and delivery of a Guaranty and the Contribution
Agreement.
KEY AGREEMENTS shall mean all contracts and agreements between the
Borrower and AT&T Communications, Inc., Sprint Communications Company, L.P., any
Affiliate of either thereof, or any other telecommunications access providers,
and any and all renewals, extensions and modifications of any thereof.
LEGAL REQUIREMENT shall mean any law, statute, ordinance, decree,
requirement, order, judgment, rule, or regulation (or interpretation of any of
the foregoing) of, and the terms of any
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license or permit issued by, any Governmental Authority, whether presently
existing or arising in the future.
LETTER OF CREDIT shall have the meaning assigned to such term in SECTION
2.2.
LETTER OF CREDIT LIABILITIES shall mean, at any time and in respect of any
Letter of Credit, the sum of (i) the amount available for drawings under such
Letter of Credit PLUS (ii) the aggregate unpaid amount of all Reimbursement
Obligations at the time due and payable in respect of previous drawings made
under such Letter of Credit. For the purpose of determining at any time the
amount described in clause (i), in the case of any Letter of Credit payable in a
currency other than Dollars, such amount shall be converted by the Agent to
Dollars by any reasonable method, and such converted amount shall be conclusive
and binding, absent manifest error.
LETTER OF CREDIT TERMINATION DATE shall mean the Termination Date.
LIEN shall mean any mortgage, pledge, charge, encumbrance, security
interest, collateral assignment or other lien or restriction of any kind,
whether based on common law, constitutional provision, statute or contract, and
shall include reservations, exceptions, encroachments, easements, rights of way,
covenants, conditions, restrictions and other title exceptions.
LOANS shall mean the loans provided for by SECTION 2.1.
LOAN AVAILABILITY PERIOD shall mean, for each Lender, the period from and
including the Effective Date to (but not including) the Termination Date.
LOAN DOCUMENTS shall mean, collectively, this Agreement, the Notes, all
Applications, the Contribution Agreement, the Security Documents, the Notice of
Entire Agreement, all instruments, certificates and agreements now or hereafter
executed or delivered to the Agent or any Lender pursuant to any of the
foregoing or in connection with the Obligations or any commitment regarding the
Obligations, and all amendments, modifications, renewals, extensions, increases
and rearrangements of, and substitutions for, any of the foregoing.
MAJORITY LENDERS shall mean, at any time while no Loans are outstanding,
Lenders having greater than 75% of the aggregate amount of Commitments.
MATERIAL ADVERSE EFFECT shall mean a material adverse effect on the
business, condition (financial or otherwise), operations or Properties of the
Borrower and its Subsidiaries, taken as a whole, or on the ability of any of
them to perform their respective obligations under any Loan Document to which
any of them is a party.
MATURITY DATE shall mean the maturity of the Notes, December 1, 1997, as
the same may hereafter be accelerated pursuant to the provisions of any of the
Loan Documents.
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MAXIMUM LOAN AVAILABLE AMOUNT shall mean, at any date, an amount equal to
the lesser of (i) the aggregate of the Commitments or (ii) the Borrowing Base.
MONTHLY FINANCIAL STATEMENTS shall mean the calendar monthly financial
statements of a Person, including all notes thereto, which statements shall
include a balance sheet as of the end of such calendar month and an income
statement for such calendar month, and for the fiscal year to date, subject to
normal year-end adjustments, all setting forth in comparative form the
corresponding figures for the corresponding calendar month of the preceding
year, prepared in accordance with GAAP and certified as true and correct by the
chief financial officer or other authorized officer of such Person.
NET INCOME shall mean gross revenues and other proper income credits, less
all proper income charges (including taxes on income), all determined in
accordance with GAAP; PROVIDED, that there shall not be included in such
revenues (a) any equity in the undistributed earnings of any Person which is not
a Subsidiary; (b) any gains resulting from the write-up of assets; (c) any
proceeds of any life insurance policy, or (d) any gain which is classified as
"extraordinary" in accordance with GAAP; and PROVIDED FURTHER, that capital
gains may be included in revenues only to the extent of capital losses.
NET WORTH shall mean total assets (valued at cost less normal
depreciation), LESS all liabilities (excluding contingent and indirect
liabilities), all determined in accordance with GAAP.
NOTES shall have the meaning assigned to such term in SECTION 2.6.
NOTICE OF ENTIRE AGREEMENT shall mean a notice of entire agreement, DTPA
waiver and release of claims, in Proper Form, executed by the Borrower, the
Agent and each other Party, as the same may from time to time be amended,
modified, supplemented or restated.
OBLIGATIONS shall mean, as at any date of determination thereof, the sum
(without duplication) of the following: (i) the aggregate principal amount of
Loans outstanding hereunder, PLUS (ii) the aggregate amount of the Letter of
Credit Liabilities hereunder, PLUS (iii) all other liabilities, obligations and
indebtedness of any Party under any Loan Document.
ORGANIZATIONAL DOCUMENTS shall mean, with respect to a Corporation, the
certificate of incorporation, articles of incorporation and bylaws of such
Corporation; with respect to a partnership, the partnership agreement
establishing such partnership; with respect to a joint venture, the joint
venture agreement establishing such joint venture, and with respect to a trust,
the instrument establishing such trust; in each case including any and all
modifications thereof as of the date of the Loan Document referring to such
Organizational Document and any and all future modifications thereof.
PARTIES shall mean all Persons other than the Agent or any Lender
executing any Loan Document.
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PAST DUE RATE shall mean, on any day, a rate per annum equal to the lesser
of (i) the Ceiling Rate for that day or (ii) the Base Rate (as defined in the
Interest Rate Annex) plus five percent (5%).
PBGC shall mean the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
PERMITTED INVESTMENTS shall mean: (a) readily marketable securities issued
or fully guaranteed by the United States of America with maturities of not more
than one year; (b) commercial paper rated "Prime 1" by Moody's Investors
Service, Inc. or "A-1" by Standard and Poor's Corporation with maturities of not
more than 180 days, and (c) certificates of deposit or repurchase obligations
issued by any U.S. domestic bank having capital surplus of at least $100,000,000
or by any other financial institution acceptable to the Agent, all of the
foregoing not having a maturity of more than one year from the date of issuance
thereof.
PERMITTED LIENS shall mean: (a) Liens and encumbrances in favor of the
Agent; (b) Liens for taxes, assessments or other governmental charges incurred
in the ordinary course of business and not yet past due or being contested in
good faith by appropriate proceedings and, if requested by the Agent, bonded in
a manner satisfactory to the Agent; (c) Liens not delinquent created by statute
in connection with worker's compensation, unemployment insurance, social
security and similar statutory obligations; (d) Liens of mechanics, materialmen,
carriers, warehousemen or other like statutory or common law liens securing
obligations incurred in good faith in the ordinary course of business that are
not yet due and payable; and (e) Encumbrances consisting of zoning restrictions,
rights-of-way, easements or other restrictions on the use of real property, none
of which materially impairs the use of such property by the Borrower or any of
its Subsidiary in the operation of the business for which it is used and none of
which is violated in any material respect by any existing or proposed structure
or land use.
PERSON shall mean any individual, Corporation, trust, unincorporated
organization, Governmental Authority or any other form of entity.
PLAN shall mean an employee pension benefit plan which is covered by Title
IV of ERISA or subject to the minimum funding standards under Section 412 of the
Code and is either (a) maintained by the Borrower or any member of the
Controlled Group or (b) maintained pursuant to a collective bargaining agreement
or any other arrangement under which more than one employer makes contributions
and to which the Borrower or any member of the Controlled Group is then making
or accruing an obligation to make contributions or has within the preceding five
plan years made contributions.
PRINCIPAL OFFICE shall mean the principal office of the Agent, presently
located at 910 Louisiana Street, 4th Floor, Houston, Harris County, Texas 77002.
PROPER FORM shall mean in form and substance reasonably satisfactory to
the Agent.
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PROPERTY shall mean any interest in any kind of property or asset, whether
real, personal or mixed, tangible or intangible.
QUARTERLY DATES shall mean the last day of each March, June, September and
December, PROVIDED that if any such date is not a Business Day, then the
relevant Quarterly Date shall be the next succeeding Business Day.
REGULATORY CHANGE shall mean with respect to any Lender, any change on or
after the date of this Agreement in any Legal Requirement (including Regulation
D) or the adoption or making on or after such date of any interpretation,
directive or request applying to a class of financial institutions including
such Lender under any Legal Requirements (whether or not having the force of
law) by any Governmental Authority.
REIMBURSEMENT OBLIGATIONS shall mean, as at any date, the obligations of
the Borrower then outstanding, or which may thereafter arise, in respect of
Letters of Credit under this Agreement, to reimburse the applicable Issuers for
the amount paid by such Issuers in respect of any drawing under such Letters of
Credit, which obligations shall at all times be payable in Dollars
notwithstanding any such Letter of Credit being payable in a currency other than
Dollars.
REQUEST FOR EXTENSION OF CREDIT shall mean a request for extension of
credit duly executed by the chief executive officer, chief financial officer,
president, treasurer or controller of the Borrower, appropriately completed and
substantially in the form of EXHIBIT D.
REQUIREMENTS OF ENVIRONMENTAL LAW means all requirements imposed by any
law (including for example and without limitation The Resource Conservation and
Recovery Act and The Comprehensive Environmental Response, Compensation, and
Liability Act), rule, regulation, or order of any federal, state or local
executive, legislative, judicial, regulatory or administrative agency, board or
authority in effect at the applicable time which relate to (i) noise; (ii)
pollution, protection or clean-up of the air, surface water, ground water or
land; (iii) solid, gaseous or liquid waste generation, treatment, storage,
disposal or transportation; (iv) exposure to Hazardous Substances; (v) the
safety or health of employees or (vi) regulation of the manufacture, processing,
distribution in commerce, use, discharge or storage of Hazardous Substances.
ROLLING FOUR QUARTERS shall mean, as of any day, the then most recently
ended four (4) quarter period of the Borrower.
SECRETARY'S CERTIFICATE shall mean a certificate, in Proper Form, of the
Secretary or an Assistant Secretary of a Corporation as to (a) the resolutions
of the Board of Directors of such Corporation authorizing the execution,
delivery and performance of the documents to be executed by such Corporation;
(b) the incumbency and signature of the officer of such Corporation executing
such documents on behalf of such Corporation, and (c) the Organizational
Documents of such Corporation.
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SECURITY AGREEMENTS shall mean, collectively, (i) the Security Agreements
dated as of the Effective Date executed among the Borrower and the Agent
covering the Borrower's Accounts and Inventory and securing the Obligations,
(ii) the Security Agreement dated as of the Effective Date executed among the
Subsidiaries and the Agent covering their respective Accounts and Inventory, and
securing the Obligations arising under their respective Guaranties, and (iii)
any and all security agreements now or hereafter executed by any Party in favor
of the Agent, as any of them may from time to time be amended, modified,
restated or supplemented.
SECURITY DOCUMENTS shall mean, collectively, this Agreement, the Security
Agreements, the Guaranties, the Joinder Agreements and any and all other
agreements, deeds of trust, mortgages, chattel mortgages, security agreements,
pledges, guaranties, assignments of production or proceeds of production,
assignments of income, assignments of contract rights, assignments of
partnership interest, assignments of royalty interests, assignments of
performance, completion or surety bonds, standby agreements, subordination
agreements, undertakings and other instruments and Financing Statements now or
hereafter executed and delivered by any Party, as any of them may from time to
time be amended, modified, restated or supplemented.
SUBSIDIARY shall mean, as to a particular parent Corporation, any
Corporation of which more than 50% of the indicia of equity rights (whether
outstanding capital stock or otherwise) is at the time directly or indirectly
owned by, such parent Corporation.
TANGIBLE NET WORTH shall mean the Net Worth less all intangibles, all
determined in accordance with GAAP.
TERMINATION DATE shall mean the earlier of (a) the Maturity Date or (b)
the date specified by the Agent in accordance with SECTION 9.1.
TEXAS CREDIT CODE shall mean Title 79, Texas Revised Civil Statutes, 1925,
as amended.
UNFUNDED LIABILITIES shall mean, with respect to any Plan, at any time,
the amount (if any) by which (a) the present value of all benefits under such
Plan exceeds (b) the fair market value of all Plan assets allocable to such
benefits, all determined as of the then most recent actuarial valuation report
for such Plan, but only to the extent that such excess represents a potential
liability of any member of the Controlled Group to the PBGC or a Plan under
Title IV of ERISA. With respect to multi-employer Plans, the term "Unfunded
Liabilities" shall also include contingent liability for withdrawal liability
under Section 4201 of ERISA to all multi-employer Plans to which Borrower or any
member of a Controlled Group for employees of Borrower contributes in the event
of complete withdrawal from such Plans.
1.2 MISCELLANEOUS. Except where specifically otherwise provided:
(a) The symbol "$" and the word "dollars" shall mean lawful money of the
United States of America.
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(b) Any accounting term not otherwise defined shall have the meaning
ascribed to it under GAAP.
(c) Unless otherwise expressly provided, any accounting concept and all
financial covenants shall be determined on a consolidated basis, and financial
measurements shall be computed without duplication.
(d) Wherever the term "including" or any of its correlatives appears in
the Loan Documents, it shall be read as if it were written "including (by way of
example and without limiting the generality of the subject or concept referred
to)".
(e) Wherever the word "herein," "hereof" or "hereunder" is used in any
Loan Document, it is a reference to that entire Loan Document and not just to
the subdivision of it in which the word is used.
(f) References in any Loan Document to Section numbers are references to
the Sections of such Loan Document.
(g) References in any Loan Document to Exhibits and Annexes are to the
Exhibits and Annexes to such Loan Document, and they shall be deemed
incorporated into such Loan Document by reference.
(h) Any term defined in the Loan Documents which refers to a particular
agreement, instrument or document shall also mean, refer to and include all
modifications, amendments, supplements, restatements, renewals, extensions and
substitutions of the same; PROVIDED that nothing in this subsection shall be
construed to authorize any such modification, amendment, supplement,
restatement, renewal, extension or substitution except as may be permitted by
other provisions of the Loan Documents.
(i) All times of day used in the Loan Documents mean local time in
Houston, Texas.
The words "HEREOF," "HEREIN," "HERETO" and "HEREUNDER" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not any particular provision of this Agreement.
2. COMMITMENTS AND LOANS.
2.1 LOANS. Each Lender severally agrees, subject to all of the terms and
conditions of this Agreement (including SECTIONS 5.1 and 5.2), to make Loans
from time to time on or after the Effective Date and during the Loan
Availability Period, each Lender shall make loans under this Section to the
Borrower in an aggregate principal amount at any one time outstanding (including
its Commitment Percentage of all Dominion of Funds Loans and all Letter of
Credit Liabilities at such time) up to but not exceeding such Lender's
Commitment Percentage of the Maximum Loan Available Amount. Subject to the
conditions in this Agreement, any such Loan repaid prior to the
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Termination Date may be reborrowed pursuant to the terms of this Agreement;
PROVIDED, that any and all such Loans shall be due and payable in full at the
end of the Loan Availability Period. The Borrower, the Agent and the Lenders
agree that Chapter 15 of the Texas Credit Code shall not apply to this
Agreement, the Notes or any Obligation. Except in the case of the Dominion of
Funds Loans, the aggregate of all Loans to be made by the Lenders in connection
with a particular borrowing shall be equal to $100,000 or a multiple of $10,000
in excess of $100,000.
2.2 LETTERS OF CREDIT.
(a) LETTERS OF CREDIT. Subject to the terms and conditions of this
Agreement, and on the condition that aggregate Letter of Credit Liabilities
shall never exceed $500,000, the Borrower shall have the right to, in addition
to Loans provided for in SECTION 2.1, utilize the Commitments from time to time
during the Loan Availability Period by obtaining the issuance of standby letters
of credit for the account of the Borrower and on behalf of the Borrower or any
of the Guarantors as herein provided if the Borrower shall so request in the
notice referred to in SECTION 2.2(I) (such standby letters of credit as any of
them may be amended, supplemented, extended or confirmed from time to time,
being herein collectively called the "LETTERS OF CREDIT"). Upon the date of the
issuance of a Letter of Credit, the applicable Issuer shall be deemed, without
further action by any party hereto, to have sold to each Lender, and each such
Lender shall be deemed, without further action by any party hereto, to have
purchased from such Issuer, a participation, to the extent of such Lender's
Commitment Percentage, in such Letter of Credit and the related Letter of Credit
Liabilities. No Letter of Credit shall have an expiry date later than eighteen
(18) calendar months after the earlier of (1) the date of issuance and (2) the
Letter of Credit Termination Date. Any Letter of Credit that shall have an
expiration date after the end of the Loan Availability Period shall be fully
Covered or backed by a standby letter of credit in form and substance, and
issued by a Person, acceptable to the Agent in its sole discretion.
(b) ADDITIONAL PROVISIONS. The following additional provisions shall apply
to each Letter of Credit:
(i) The Borrower shall give the Agent notice requesting each
issuance of a Letter of Credit hereunder as provided in SECTION 4.3 and
shall furnish such additional information regarding such transaction as
the Agent may reasonably request. Upon receipt of such notice, the Agent
shall promptly notify each Lender of the contents thereof and of such
Lender's Commitment Percentage of the amount of such proposed Letter of
Credit and whether Comerica will require that the applicable Letter of
Credit be issued severally by all of the Lenders.
(ii) No Letter of Credit may be issued if after giving effect
thereto the sum of (A) the aggregate outstanding principal amount of Loans
plus (B) the aggregate Letter of Credit Liabilities would exceed the
Maximum Loan Available Amount. On each day during the period commencing
with the issuance of any Letter of Credit and until such Letter of Credit
shall have expired or been terminated, the Commitment of each Lender shall
be deemed to be utilized for all purposes hereof in an amount equal to
such Lender's
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Commitment Percentage of the amount then available for drawings under such
Letter of Credit.
(iii) Upon receipt from the beneficiary of any Letter of Credit of
any demand for payment thereunder, Issuer shall promptly notify the Agent
and, thereafter, the Agent shall promptly notify the Borrower and each
Lender as to the amount to be paid as a result of such demand and the
payment date. If at any time any Issuer shall have made a payment to a
beneficiary of a Letter of Credit in respect of a drawing or in respect of
an acceptance created in connection with a drawing under such Letter of
Credit, each Lender will pay to the Agent immediately upon demand by such
Issuer at any time during the period commencing after such payment until
reimbursement thereof in full by the Borrower, an amount equal to such
Lender's Commitment Percentage of such payment, together with interest on
such amount for each day from the date of demand for such payment (or, if
such demand is made after 11:00 a.m. on such date, from the next
succeeding Business Day) to the date of payment by such Lender of such
amount at a rate of interest per annum equal to the Federal Funds Rate for
such period.
(iv) The Borrower shall be irrevocably and unconditionally obligated
forthwith to reimburse the Agent for any amount paid by any Issuer upon
any drawing under any Letter of Credit, without presentment, demand,
protest or other formalities of any kind, all of which are hereby waived.
Such reimbursement may, subject to satisfaction of the conditions in
SECTIONS 5.1 and 5.2 and to the Maximum Loan Availability Amount (after
adjustment in the same to reflect the elimination of the corresponding
Letter of Credit Liability), be made by the borrowing of Loans. Agent will
pay to each Lender such Lender's Commitment Percentage of all amounts
received from the Borrower for application in payment, in whole or in
part, of the Reimbursement Obligation in respect of any Letter of Credit,
but only to the extent such Lender has made payment to Agent in respect of
such Letter of Credit pursuant to CLAUSE (III) above.
(v) The Borrower will pay to the Agent at the Principal Office for
the account of each Lender a letter of credit fee with respect to each
Letter of Credit equal to the greater of (x) $250 or (y) an amount,
calculated on the basis of the face amount of such Letter of Credit
available for drawings under such Letter of Credit, in each case for the
period from and including the date of issuance of such Letter of Credit to
and including the date of expiration or termination thereof at one percent
(1%) (on a per annum basis), such fee to be due and payable in advance on
the date of the issuance thereof. The Agent will pay to each Lender,
promptly after receiving any payment in respect of letter of credit fees
referred to in this CLAUSE (V), an amount equal to the product of such
Lender's Commitment Percentage TIMES the amount of such fees. The Borrower
shall pay to the Issuer on the date of issuance of each applicable Letter
of Credit an administration and issuance fee in an amount agreed upon by
the Issuer and the Borrower. Such administration and issuance fee shall be
retained by the Issuer.
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(vi) The issuance by the applicable Issuer of each Letter of Credit
shall, in addition to the conditions precedent set forth in SECTION 5, be
subject to the conditions precedent (A) that such Letter of Credit shall
be in such form and contain such terms as shall be reasonably satisfactory
to the Agent, and (B) that the Borrower shall have executed and delivered
such Applications and other instruments and agreements relating to such
Letter of Credit as the Agent shall have reasonably requested and are not
inconsistent with the terms of this Agreement. In the event of a conflict
between the terms of this Agreement and the terms of any Application, the
terms hereof shall control.
(c) INDEMNIFICATION; RELEASE. The Borrower hereby indemnifies and holds
harmless the Agent, each Lender and each Issuer from and against any and all
claims and damages, losses, liabilities, costs or expenses which the Agent, such
Lender or such Issuer may incur (or which may be claimed against the Agent, such
Lender or such Issuer by any Person whatsoever), REGARDLESS OF WHETHER CAUSED IN
WHOLE OR IN PART BY THE NEGLIGENCE OF ANY OF THE INDEMNIFIED PARTIES, in
connection with the execution and delivery of any Letter of Credit or transfer
of or payment or failure to pay under any Letter of Credit; PROVIDED that the
Borrower shall not be required to indemnify any party seeking indemnification
for any claims, damages, losses, liabilities, costs or expenses to the extent,
but only to the extent, caused by (i) the willful misconduct or gross negligence
of the party seeking indemnification, or (ii) by the failure by the party
seeking indemnification to pay under any Letter of Credit after the presentation
to it of a request required to be paid under applicable law. The Borrower hereby
releases, waives and discharges the Agent, each Lender and each Issuer from any
claims, causes of action, damages, losses, liabilities, costs or expenses which
the Agent, such Lender or such Issuer, as the case may be, may incur, REGARDLESS
OF WHETHER CAUSED IN WHOLE OR IN PART BY THE NEGLIGENCE OF ANY OF THE
INDEMNIFIED PARTIES, by reason of or in connection with the failure of any other
Lender to fulfill or comply with its obligations to the Agent, such Lender or
such Issuer, as the case may be, hereunder (but nothing herein contained shall
affect any rights the Borrower may have against such defaulting Lender). Nothing
in this SECTION 2.2 is intended to limit the obligations of the Borrower under
any other provision of this Agreement.
(d) ADDITIONAL COSTS IN RESPECT OF LETTERS OF CREDIT. If as a result of
any Regulatory Change there shall be imposed, modified or deemed applicable any
tax, reserve, special deposit or similar requirement against or with respect to
or measured by reference to Letters of Credit issued or to be issued hereunder
or participations in such Letters of Credit, and the result shall be to increase
the cost to any Lender of issuing or maintaining any Letter of Credit or any
participation therein, or reduce any amount receivable by any Lender hereunder
in respect of any Letter of Credit or any participation therein (which increase
in cost, or reduction in amount receivable, shall be the result of such Lender's
reasonable allocation of the aggregate of such increases or reductions resulting
from such event), then such Lender shall notify the Borrower through the Agent,
and upon demand therefor by such Lender through the Agent, the Borrower shall
pay to such Lender, from time to time as specified by such Lender, such
additional amounts as shall be sufficient to compensate such Lender for such
increased costs or reductions in amount. A statement as to such increased costs
or reductions in amount incurred by such Lender, submitted
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by such Lender to the Borrower, shall be conclusive as to the amount thereof,
absent manifest error, and may be computed using any reasonable averaging and
attribution method. Each Lender will notify the Borrower through the Agent of
any event occurring after the date of this Agreement which will entitle such
Lender to compensation pursuant to this Section as promptly as practicable after
it obtains knowledge thereof and determines to request such compensation, and
(if so requested by the Borrower through the Agent) will designate a different
lending office of such Lender for the issuance or maintenance of Letters of
Credit by such Lender or will take such other action as the Borrower may
reasonably request if such designation or action is consistent with the internal
policy of such Lender and legal and regulatory restrictions, can be undertaken
at no additional cost, will avoid the need for, or reduce the amount of, such
compensation and will not, in the sole opinion of such Lender, be
disadvantageous to such Lender (PROVIDED that such Lender shall have no
obligation so to designate a different lending office which is not located in
the United States of America).
2.3 TERMINATIONS OR REDUCTIONS OF COMMITMENTS.
(a) MANDATORY. On the Termination Date, all Commitments shall be
terminated in their entirety.
(b) OPTIONAL. The Borrower shall have the right to terminate or reduce the
unused portion of the Commitments at any time or from time to time, PROVIDED
that (i) the Borrower shall give notice of each such termination or reduction to
the Agent as provided in SECTION 4.3 and (ii) each such partial reduction shall
be in an aggregate amount of at least $500,000.
(c) NO REINSTATEMENT. Any termination or reduction of the Commitments may
not be reinstated without the written approval of the Agent and the Lenders.
2.4 FEES.
(a) The Borrower shall pay to the Agent for the account of each
Lender revolving loan commitment fees for the period from the Effective
Date to and including the Termination Date at a rate per annum equal to
0.25%. Such revolving loan commitment fees shall be computed (on the basis
of the actual number of days elapsed in a year composed of 360 days) on
each day and shall be based on the excess of (x) the aggregate amount of
each Lender's Commitment for such day over (y) the sum of (i) the
aggregate unpaid principal balance of such Lender's Note (including the
amount of any participation of Dominion of Funds Loans) on such day PLUS
(ii) the aggregate Letter of Credit Liabilities as to such Lender for such
day. Accrued revolving loan commitment fees shall be payable on the
Quarterly Dates prior to the Termination Date and on the Termination Date.
(b) All past due fees payable under this Section shall bear interest
at the Past Due Rate.
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2.5 SEVERAL OBLIGATIONS. The failure of any Lender to make any Loan to be
made by it on the date specified therefor shall not relieve any other Lender of
its obligation to make its Loan on such date, but neither the Agent nor any
Lender shall be responsible or liable for the failure of any other Lender to
make a Loan to be made by such other Lender or to participate in, or co-issue,
any Letter of Credit. Notwithstanding anything contained herein to the contrary,
(a) no Lender shall be required to make or maintain Loans at any time
outstanding if as a result the total Obligations to such Lender shall exceed the
lesser of (1) such Lender's Commitment Percentage of all Obligations and (2)
such Lender's Commitment Percentage of the Maximum Loan Available Amount, and
(b) if a Lender fails to make a Loan as and when required hereunder, then upon
each subsequent event which would otherwise result in funds being paid to the
defaulting Lender, the amount which would have been paid to the defaulting
Lender shall be divided among the non-defaulting Lenders ratably according to
their respective Commitment Percentages until the Obligations of each Lender
(including the defaulting Lender) are equal to such Lender's Commitment
Percentage of the total Obligations.
2.6 THE NOTES. The Loans made by each Lender shall be evidenced by a
single Note of the Borrower (each, together with all renewals, extensions,
modifications and replacements thereof and substitutions therefor, a "NOTE,"
collectively, the "THE NOTES") in substantially the form of EXHIBIT E hereto,
payable to the order of such Lender in a principal amount equal to the
Commitment of such Lender, and otherwise duly completed. Each Lender is hereby
authorized by the Borrower to endorse on the schedule (or a continuation
thereof) that may be attached to each Note of such Lender, to the extent
applicable, the date, amount, type of and the applicable period of interest for
each Loan made by such Lender to the Borrower hereunder, and the amount of each
payment or prepayment of principal of such Loan received by such Lender,
PROVIDED, that any failure by such Lender to make any such endorsement shall not
affect the obligations of the Borrower under such Note or hereunder in respect
of such Loan.
2.7 USE OF PROCEEDS. The proceeds of the Loans shall be used by the
Borrower to refinance amounts payable by the Borrower owed to Comerica under the
Expiring Facility and to finance general corporate purposes of the Borrower,
including (but subject to the limitations set forth elsewhere herein) the
financing of the acquisition of stock and assets of Persons engaged in similar
businesses to those businesses of the Borrower and its Subsidiaries. No proceeds
of the Loans will be used for any purpose which would violate any applicable
Legal Requirement.
2.8 DOMINION OF FUNDS LOANS. Pursuant to the terms and conditions of the
Dominion of Funds Loan Documents, from time to time on or after the Effective
Date and during the Loan Availability Period, Comerica shall make loans (the
"DOMINION OF FUNDS LOANS") in such amounts as shall be determined by Comerica.
Dominion of Funds Loans shall constitute "LOANS" for all purposes hereunder, and
they shall be considered a utilization of the Commitment of any Lender.
Notwithstanding the foregoing sentence, the aggregate amount of all Dominion of
Funds Loans together with the other Loans shall not at any time exceed the
Maximum Loan Available Amount. Upon the making of a Dominion of Funds Loan, each
Lender (other than Comerica) shall be deemed to have purchased a participating
interest in such Dominion of Funds Loan in an amount equal to its Commitment
Percentage of such Dominion of Funds Loan. Within two (2) business
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days after the end of each calendar week, Comerica shall determine the NET
amount of each other Lender's participations in Dominion of Funds Loans
outstanding at the end of such week and each other Lender's Commitment
Percentage of any accrued and paid interest related to such Dominion of Funds
Loans and will distribute to such Lender its participating interest in such
amount; PROVIDED, HOWEVER, that in the event that such payment received by
Comerica is required to be returned, such Lender will return to Comerica any
portion thereof previously distributed by Comerica to it. Each Lender's
obligation to purchase such participating interests shall be absolute and
unconditional and shall not be affected by any circumstance, including (i) any
set-off, counterclaim, recoupment, defense of other right which such Lender or
any other Person may have against Comerica or any other Person for any reason
whatsoever; (ii) the occurrence or continuance of a Default or Event of Default
or the termination of any Commitment; (iii) any adverse change in the condition
(financial or otherwise) of the Borrower, any of its Subsidiaries or any other
Lender; (iv) any breach of this Agreement or any other Loan Document by the
Borrower, any of its Subsidiaries or any other Lender, or (v) any other
circumstance, happening or event whatsoever, whether or not similar to any of
the foregoing. The Borrower, the Agent and the Lenders agree that Chapter 15 of
the Texas Credit Code shall not apply to the any Dominion of Funds Loan.
3. BORROWINGS AND PREPAYMENTS.
3.1 BORROWINGS OTHER THAN DOMINION OF FUNDS LOANS. The Borrower shall give
the Agent notice of each borrowing (other than in the case of a Dominion of
Funds Loan) to be made hereunder as provided in SECTION 4.3. Not later than
11:00 a.m. on the date specified for each such borrowing hereunder, each Lender
shall make available the amount of the Loan (other than a Dominion of Funds
Loan), if any, to be made by it on such date to the Agent, at its Principal
Office, in immediately available funds, for the account of the Borrower. Such
amounts received by the Agent will be held in an account maintained by the
Borrower with the Agent. The amounts so received by the Agent shall, subject to
the terms and conditions of this Agreement, be made available to the Borrower by
wiring or otherwise transferring, in immediately available funds, such amount to
an account designated by the Borrower and maintained with Agent in Houston,
Texas.
3.2 PREPAYMENTS.
(a) OPTIONAL PREPAYMENTS. Subject to the terms of the Interest Rate Annex,
the Borrower shall have the right to prepay, on any Business Day, in whole or in
part, without the payment of any penalty or fee, Loans at any time or from time
to time, PROVIDED that the Borrower shall give the Agent notice of each such
prepayment as provided in SECTION 4.3. Each optional prepayment on a Loan shall
be in an amount at least equal to the lesser of $100,000 or the unpaid principal
balance of the Note evidencing such Loan.
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(b) MANDATORY PREPAYMENTS. The Borrower shall from time to time on demand
by the Agent prepay the Loans (or provide Cover for Letter of Credit
Liabilities) in such amounts as shall be necessary so that at all times the
aggregate outstanding amount of all Obligations (including all Dominion of Funds
Loans) shall be less than or equal to the Maximum Loan Available Amount.
(c) DOMINION OF FUNDS LOAN MANDATORY PREPAYMENTS. The Borrower shall from
time to time prepay the Dominion of Funds Loans in accordance with the terms and
conditions of the Dominion of Funds Loan Documents. The provisions of this
subsection are cumulative of and in addition to the requirements of SUBSECTION
3.2(B) above.
4. PAYMENTS; PRO RATA TREATMENT; COMPUTATIONS, ETC.
4.1 PAYMENTS.
(a) INTEREST PAYMENTS. Accrued and unpaid interest on the unpaid
principal balance of the Notes shall be due and payable on the Interest Payment
Dates (as defined in the Interest Rate Annex).
(b) PAYMENTS; INTEREST RATE ANNEX. The Borrower shall pay all
amounts required to be paid pursuant to the Interest Rate Annex, the Notes and
the other Loan Documents as and when due.
(c) PAYMENTS AND INTEREST ON REIMBURSEMENT OBLIGATIONS. The Borrower
will pay to the Agent for the account of each Lender the amount of each
Reimbursement Obligation promptly upon its incurrence. The amount of any
Reimbursement Obligation may, if the applicable conditions precedent specified
in SECTIONS 5.1 and 5.2 have been satisfied, be paid with the proceeds of Loans.
Subject to SECTION 11.7, the Borrower will pay to the Agent for the account of
each Lender interest at the applicable Past Due Rate on any Reimbursement
Obligation and on any other amount payable by the Borrower hereunder to or for
the account of such Lender (but, if such amount is interest, only to the extent
legally allowed), which shall not be paid in full when due (whether at stated
maturity, by acceleration or otherwise), for the period commencing on the due
date thereof until the same is paid in full.
(d) PAYMENT IN DOLLARS; TIMES. Except to the extent otherwise
provided herein, all payments of principal, interest, Reimbursement Obligations
and other amounts to be paid by the Borrower hereunder, under the Notes and
under the other Loan Documents shall be made in Dollars, in immediately
available funds, to the Agent at the Principal Office (or in the case of a
successor Agent, at the principal office of such successor Agent in the United
States), not later than 10:00 a.m. on the date on which such payment shall
become due (each such payment made after such time on such due date to be deemed
to have been made on the next succeeding Business Day). The Agent, or any Lender
for whose account any such payment is made, may (but shall not be obligated to)
debit the amount of any such payment which is not made by such time to any
ordinary deposit account of the Borrower with the Agent or such Lender, as the
case may be.
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(e) PAYMENTS SPECIFIED. The Borrower shall, at the time of making
each payment hereunder, under any Note or under any other Loan Document, specify
to the Agent the Loans or other amounts payable by the Borrower hereunder or
thereunder to which such payment is to be applied. Each payment received by the
Agent hereunder, under any Note or under any other Loan Document for the account
of a Lender shall be paid promptly to such Lender, in immediately available
funds.
(f) PAYMENTS ON BUSINESS DAYS. If the due date of any payment
hereunder or under any Note falls on a day which is not a Business Day, the due
date for such payments (except as otherwise provided in the Interest Rate Annex)
shall be extended to the next succeeding Business Day and interest shall be
payable for any principal so extended for the period of such extension.
4.2 PRO RATA TREATMENT. Except to the extent otherwise provided herein:
(a) each borrowing from the Lenders under SECTION 2 shall be made ratably from
the Lenders on the basis of their respective Commitments, each payment of
commitment fees shall be made for the account of the Lenders, and each
termination or reduction of the Commitments of the Lenders under SECTION 2.3
shall be applied, PRO RATA, according to the Lenders' respective Commitments;
(b) each payment by the Borrower of principal of or interest on the Loans shall
be made to the Agent for the account of the Lenders PRO RATA in accordance with
the respective unpaid principal amounts of such Loans held by the Lenders, and
(c) if Comerica is the sole Issuer of a Letter of Credit or, in the case of a
Dominion of Funds Loan, the Lenders (other than Comerica) shall purchase from
Comerica participations in such Letter of Credit to the extent of their
respective Commitment Percentages.
4.3 CERTAIN ACTIONS, NOTICES, ETC. Notices to the Agent of any termination
or reduction of Commitments and of borrowings and prepayments of Loans and
requests for issuances of Letters of Credit shall be irrevocable and shall be
effective only if received by the Agent not later than 10:00 a.m. on the number
of Business Days prior to the date of the relevant termination, reduction,
borrowing and/or prepayment specified below:
NUMBER OF
NOTICE BUSINESS DAYS PRIOR
Termination or
Reduction of Commitments 5
Borrowing at the Base Rate same day
(as defined in the Interest
Rate Annex)
Borrowing at the Eurodollar 3 Eurodollar Business Days (as
Rate (as defined in the defined in the Interest Rate
Interest Rate Annex) Annex)
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Letter of Credit issuance 5
Loan (other than a Dominion of
Funds Loan) repayment same day
Each such notice of termination or reduction shall specify the aggregate amount
of the Commitments to be terminated or reduced. Each such notice of borrowing or
prepayment shall specify the amount of the Loans to be borrowed or prepaid and
the date of borrowing or prepayment (which shall be a Business Day). The Agent
shall promptly notify the affected Lenders of the contents of each such notice.
Any selection of a Eurodollar Rate (as defined in the Interest Rate Annex) with
respect to a Loan shall be subject to the advance notice requirements set forth
in the Interest Rate Annex.
4.4 NON-RECEIPT OF FUNDS BY THE AGENT. Unless the Agent shall have been
notified by a Lender or the Borrower (the "PAYOR") prior to the date on which
such Lender is to make payment to the Agent of the proceeds of a Loan (or
funding of a drawing under a Letter of Credit or reimbursement with respect to
any drawing under a Letter of Credit) to be made by it hereunder or the Borrower
is to make a payment to the Agent for the account of one or more of the Lenders,
as the case may be (such payment being herein called the "REQUIRED PAYMENT"),
which notice shall be effective upon receipt, that the Payor does not intend to
make the Required Payment to the Agent, the Agent may assume that the Required
Payment has been made and may, in reliance upon such assumption (but shall not
be required to), make the amount thereof available to the intended recipient on
such date and, if the Payor has not in fact made the Required Payment to the
Agent, the recipient of such payment (or, if such recipient is the beneficiary
of a Letter of Credit, the Borrower and, if the Borrower fails to pay the amount
thereof to the Agent forthwith upon demand, the Lenders ratably in proportion to
their respective Commitment Percentages) shall, on demand, pay to the Agent the
amount made available by the Agent together with interest thereon in respect of
the period commencing on the date such amount was so made available by the Agent
until the date the Agent recovers such amount at a rate per annum equal to the
Federal Funds Rate for such period or (if the recipient is the Borrower) the
Past Due Rate.
4.5 SHARING OF PAYMENTS, ETC. If a Lender shall obtain payment of any
principal of or interest on any Loan made by it under this Agreement, on any
Reimbursement Obligation or on other Obligation then due to such Lender
hereunder, through the exercise of any right of set-off (including any right of
setoff or lien granted under SECTION 9.2), banker's or other lien, counterclaim
or similar right, or otherwise, it shall promptly purchase from the other
Lenders participations in the Loans made, Reimbursement Obligations or other
Obligations held, by the other Lenders in such amounts, and make such other
adjustments from time to time as shall be equitable to the end that all the
Lenders shall share the benefit of such payment (net of any expenses which may
be incurred by such Lender in obtaining or preserving such benefit) PRO RATA in
accordance with the unpaid principal and interest on the Obligations then due to
each of them. To such end all the Lenders shall make appropriate adjustments
among themselves (by the resale of participations sold or otherwise) if such
payment is rescinded or must otherwise be restored. The Borrower agrees, to the
fullest extent it may effectively do so under applicable law, that any
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Lender so purchasing a participation in the Loans made, Reimbursement
Obligations or other Obligations held, by other Lenders may exercise all rights
of set-off, bankers' or other lien, counterclaim or similar rights with respect
to such participation as fully as if such Lender were a direct holder of Loans,
Reimbursement Obligations or other Obligations in the amount of such
participation. Nothing contained herein shall require any Lender to exercise any
such right or shall affect the right of any Lender to exercise, and retain the
benefits of exercising, any such right with respect to any other indebtedness or
obligation of the Borrower.
5. CONDITIONS PRECEDENT.
5.1 INITIAL LOANS AND LETTERS OF CREDIT. The obligation of each Lender or
any Issuer to make its initial Loans or issue or participate in a Letter of
Credit (if such Letter of Credit is issued prior to the funding of the initial
Loans) hereunder is subject to the following conditions precedent, each of which
shall have been fulfilled or waived to the satisfaction of the Agent:
(a) CORPORATE ACTION AND STATUS. The Agent shall have received from
the appropriate Governmental Authorities certified copies of the Organizational
Documents (other than bylaws) of the Borrower and each of the Current
Guarantors, and evidence satisfactory to the Agent of all corporate action taken
by the Borrower and each of the Current Guarantors authorizing the execution,
delivery and performance of the Loan Documents and all other documents related
to this Agreement to which it is a party (including a certificate of the
secretary of each such party setting forth the resolutions of its Board of
Directors authorizing the transactions contemplated thereby and attaching a copy
of its bylaws), together with such certificates as may be appropriate to
demonstrate the qualification and good standing of and payment of taxes by the
Borrower and each of the Borrower's Subsidiaries in each state where the failure
in which to qualify would have a Material Adverse Effect.
(b) INCUMBENCY. The Borrower, the Current Guarantors and each other
Party shall have delivered to the Agent a certificate in respect of the name and
signature of each of the officers (i) who is authorized to sign on its behalf
the applicable Loan Documents related to any Loan or the issuance of any Letter
of Credit and (ii) who will, until replaced by another officer or officers duly
authorized for that purpose, act as its representative for the purposes of
signing documents and giving notices and other communications in connection with
any Loan or the issuance of any Letter of Credit. The Agent and each Lender may
conclusively rely on such cer tificates until they receive notice in writing
from the Borrower or any of its Subsidiaries or the appropriate Party to the
contrary.
(c) THE NOTES. The Agent shall have received the appropriate the
Notes of the Borrower for each Lender, duly completed and executed.
(d) LOAN DOCUMENTS. The Borrower, the Current Guarantors and each
other Party shall have duly executed and delivered the Loan Documents to which
it is a party (in such number of copies as the Agent shall have requested) and
each such Loan Document shall be in form satisfactory to Agent. Each such Loan
Document shall be in substantially the form furnished
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to the Lenders prior to their execution of this Agreement, together with such
changes therein as the Agent may approve.
(e) SECURITY MATTERS. All such action as the Agent shall have
requested to perfect the Liens created pursuant to the Security Documents shall
have been taken, including the delivery to the Agent of all property with
respect to which possession is necessary for the purpose of perfecting such
Liens, together with the filing of appropriately completed and duly executed
Uniform Commercial Code financing statements with appropriate Governmental
Authorities. The Agent shall also have received evidence satisfactory to it that
the Liens created by the Security Documents constitute first priority Liens,
except for the exceptions expressly provided for herein, including Uniform
Commercial Code search reports, satisfactory title evidence in form and
substance acceptable to the Agent, and executed releases of any prior Liens
(except as permitted by SECTION 8.2).
(f) FEES AND EXPENSES. The Borrower shall have paid to the Agent all
unpaid fees in the amounts previously agreed upon in writing among the Borrower
and the Agent; and shall have in addition paid to the Agent all amounts payable
under SECTION 11.3, on or before the date of this Agreement.
(g) INSURANCE. The Borrower shall have delivered to the Agent
certificates of insurance satisfactory to the Agent evidencing the existence of
all insurance required to be maintained by the Borrower by this Agreement and
the Security Documents.
(h) OPINION OF COUNSEL. The Agent shall have received an opinion of
Dean Fisher, counsel to the Borrower, in form and substance reasonably
satisfactory to the Agent.
(i) CONSENTS. The Agent shall have received evidence satisfactory to
it that all material consents of each Governmental Authority and of each other
Person, if any, reasonably required in connection with (a) the Loans and the
Letters of Credit and (b) the execution, delivery and performance of this
Agreement and the other Loan Documents have been satisfactorily obtained.
(j) OTHER DOCUMENTS. The Agent shall have received such other
documents consistent with the terms of this Agreement and relating to the
transactions contemplated hereby as the Agent may reasonably request.
5.2 ALL LOANS AND LETTERS OF CREDIT. The obligation of each Lender to make
any Loan to be made by it hereunder or to issue or participate in any Letter of
Credit is subject to (a) the accuracy, in all material respects, on the date of
such Loan or such issuance of all representations and warranties of the
Borrower, its Subsidiaries and any other Party contained in this Agreement and
the other Loan Documents; (b) to the performance by the Borrower, its
Subsidiaries and each other Party of its respective obligations under the Loan
Documents, and (c) the Agent shall have received the following, all of which
shall be duly executed and in Proper Form: (1) (except in the case of a Dominion
of Funds Loan) a Request for Extension of Credit as to the Loan or the Letter
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of Credit, as the case may be, no later than 10:00 a.m. on the Business Day on
which such Request for Extension of Credit must be given under SECTION 4.3, (2)
in the case of a Letter of Credit, an Application, and (3) such other documents
as the Agent or any Lender may reasonably require; (d) prior to the making of
such Loan or the issuance of such Letter of Credit, there shall have occurred no
event which has had a Material Adverse Effect; (e) no Default or Event of
Default shall have occurred and be continuing; (f) the making of such Loan or
the issuance of such Letter of Credit shall not be illegal or prohibited by any
Legal Requirement, (g) in the case of a request for a Loan or the issuance of a
Letter of Credit only, on or immediately prior to the date of such borrowing or
issuance the Borrower shall have delivered to the Agent a Borrowing Base
Certificate in accordance with SECTION 7.2 hereof; and (h) the Borrower shall
have paid all fees and expenses of the type described in SECTION 11.3 and all
other fees, which are owed to the Agent or any other Lender under the Loan
Documents and accrued and unpaid through the date of such Loan or such issuance.
6. REPRESENTATIONS AND WARRANTIES.
To induce the Lenders to enter into this Agreement and to make the Loans
and issue or participate in the Letters of Credit, the Borrower represents and
warrants (such representations and warranties to survive any investigation and
the making of the Loans and the issuance of any Letters of Credit) to the
Lenders and the Agent as follows:
6.1 ORGANIZATION. Each of the Borrower and its Subsidiaries (a) is duly
organized, validly existing and in good standing under the laws of the state of
its organization; (b) has all necessary corporate power and authority to conduct
its business as presently conducted, and (c) is duly qualified to do business
and in good standing in the State of its organization and in all jurisdictions
in which the failure to so qualify would have a Material Adverse Effect.
6.2 FINANCIAL STATEMENTS. The financial statements (including a balance
sheet) as to the Borrower and its Subsidiaries on a consolidated basis which
were most recently delivered to Comerica under the Expiring Credit Facility or
hereunder fairly present, in accordance with GAAP, the financial condition and
the results of operations of the Borrower and its Subsidiaries as at the dates
thereof. No events, conditions or circumstances have occurred from the date that
the financial statements were delivered to Comerica through the Effective Date
which would cause said financial statements to be misleading in any material
respect. There are no material instruments or liabilities which should be
reflected in such financial statements provided to the Agent which are not so
reflected.
6.3 ENFORCEABLE OBLIGATIONS; AUTHORIZATION. The Loan Documents are legal,
valid and binding obligations of the Parties, enforceable in accordance with
their respective terms, except as may be limited by bankruptcy, insolvency and
other similar laws and judicial decisions affecting creditors' rights generally
and by general equitable principles. The execution, delivery and performance of
the Loan Documents (a) have all been duly authorized by all necessary corporate
action; (b) are within the corporate power and authority of the Parties; (c) do
not and will not contravene or violate any Legal Requirement applicable to the
Parties or the Organizational
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Documents of the Parties, the contravention or violation of which could have a
Material Adverse Effect on the business, condition (financial or otherwise),
operations or Properties of any Party; (d) do not and will not result in the
breach of, or constitute a default under, any material agreement or instrument
by which the Parties or any of their respective Property may be bound or
affected, and (e) do not and will not result in the creation of any Lien upon
any Property of any of the Parties, except in favor of the Agent or as expressly
contemplated therein. All necessary permits, registrations and consents for such
execution, delivery and performance have been obtained. Except as otherwise
expressly stated in the Security Documents, the Liens of the Security Documents
constitute valid and perfected first and prior Liens on the Property described
therein, subject to no other Liens whatsoever.
6.4 OTHER DEBT. Neither the Borrower nor any of the Borrower's
Subsidiaries is in default in the payment of any other Indebtedness or under any
agreement, mortgage, deed of trust, security agreement or lease to which it is a
party and which default could have a Material Adverse Effect.
6.5 LITIGATION. Except as described on SCHEDULE 6.5, there is no
litigation or administrative proceeding pending or, to the knowledge of the
Borrower or any of the Borrower's Subsidiaries, threatened against, nor any
outstanding judgment, order or decree affecting, the Borrower or any of the
Borrower's Subsidiaries before or by any Governmental Authority. Neither the
Borrower nor any of the Borrower's Subsidiaries is in default with respect to
any judgment, order or decree of any Governmental Authority where such default
would have a Material Adverse Effect.
6.6 TITLE. The Borrower and each of the Borrower's Subsidiaries has good
and indefeasible title to the Collateral pledged (or purported to be pledged)
thereby pursuant to the Security Documents and all of its other material
Property, free and clear of all Liens other than those permitted under SECTION
8.2.
6.7 TAXES. The Borrower and the Borrower's Subsidiaries each has filed all
tax returns required to have been filed and paid all taxes shown thereon to be
due, except those for which extensions have been obtained and those which are
being contested in good faith and for which adequate reserves have been
established.
6.8 REGULATIONS G, U AND X. None of the proceeds of any Obligation will be
used for the purpose of purchasing or carrying directly or indirectly any margin
stock or for any other purpose would constitute this transaction a "purpose
credit" within the meaning of Regulation G, U and X of the Board of Governors of
the Federal Reserve System, as either of them may be amended from time to time.
6.9 SUBSIDIARIES. The Borrower has no Subsidiaries except EqualNet
Corporation, a Delaware corporation, and TeleSource, Inc., a Texas corporation.
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6.10 NO UNTRUE OR MISLEADING STATEMENTS. No representation or warranty
made by the Borrower or any of its Subsidiaries in any Loan Document and no
document, instrument or other writing furnished to the Lenders by or on behalf
of the Borrower, any of its Subsidiaries or any other Party in connection with
the transactions contemplated in any Loan Document does or will contain any
untrue material statement of fact or will omit to state any such fact (of which
the Borrower, any of its Subsidiaries or any other Party has knowledge)
necessary to make the representations, warranties and other statements contained
herein or in such other document, instrument or writing not misleading.
6.11 ERISA. With respect to each Plan, the Borrower and each member of the
Controlled Group have fulfilled their obligations, including obligations under
the minimum funding standards of ERISA and the Code and are in compliance in all
material respects with the provisions of ERISA and the Code. No event has
occurred which could result in a liability of the Borrower or any member of the
Controlled Group to the PBGC or a Plan (other than to make contributions and pay
related expenses in the ordinary course). Since the effective date of Title IV
of ERISA, there have not been any nor are there now existing any events or
conditions that would cause the Lien provided under Section 4068 of ERISA to
attach to any property of the Borrower or any member of the Controlled Group.
There are no Unfunded Liabilities with respect to any Plan. No "prohibited
transaction", within the meaning of Section 4975 of the Code, has occurred with
respect to any Plan which is not exempt and which would result in any material
liability of the Borrower.
6.12 INVESTMENT COMPANY ACT. Neither the Borrower nor any of the
Borrower's Subsidiaries is an investment company within the meaning of the
Investment Company Act of 1940, as amended, or, directly or indirectly,
controlled by or acting on behalf of any Person which is an investment company,
within the meaning of said Act.
6.13 PUBLIC UTILITY HOLDING COMPANY ACT. Neither Borrower nor any of the
Borrower's Subsidiaries is an "affiliate" or a "subsidiary company" of a "public
utility company," or a "holding company," or an "affiliate" or a "subsidiary
company" of a "holding company," as such terms are defined in the Public Utility
Holding Company Act of 1935, as amended.
6.14 SOLVENCY. The Borrower and its Subsidiaries on a consolidated basis
are not "insolvent," as such term is used and defined in (i) the Bankruptcy Code
and (ii) the Texas Uniform Fraudulent Transfer Act, Tex. Bus. & Com. Code Ann.
ss. 24.001 et seq., as amended from time to time.
6.15 FISCAL YEAR. The fiscal year of the Borrower ends on or about June
30.
6.16 COMPLIANCE. The Borrower and the Borrower's Subsidiaries are each in
compliance with all Legal Requirements applicable to it, except to the extent
that the failure to comply therewith does not or would not have a Material
Adverse Effect.
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6.17 ENVIRONMENTAL MATTERS. The Borrower and the Borrower's Subsidiaries
have obtained and maintained in effect all Environmental Permits (or the
applicable Person has initiated the necessary steps to transfer the
Environmental Permits into its name or obtain such permits), the failure to
obtain which could reasonably be expected to have a Material Adverse Effect. The
Borrower and the Borrower's Subsidiaries and their Properties, business and
operations have been and are in compliance with all applicable Requirements of
Environmental Law and Environmental Permits failure to comply with which could
reasonably be expected to have a Material Adverse Effect. The Borrower and the
Borrower's Subsidiaries and their Properties, business and operations are not
subject to any (A) Environmental Claims or (B), to the best of their respective
officers' knowledge (after making reasonable inquiry of the personnel and
records of their respective Corporations), Environmental Liabilities, in either
case direct or contingent, arising from or based upon any act, omission, event,
condition or circumstance occurring or existing on or prior to the Effective
Date which could reasonably be expected to have a Material Adverse Effect. None
of the officers of any of the Borrower and the Borrower's Subsidiaries has
received any notice of any violation or alleged violation of any Requirements of
Environmental Law or Environmental Permit or any Environmental Claim in
connection with its Properties, liabilities, condition (financial or otherwise),
business or operations which could reasonably be expected to have a Material
Adverse Effect. The Borrower does not know of any event or condition with
respect to currently enacted Requirements of Environmental Laws presently
scheduled to become effective in the future with respect to any of its
Properties or the Properties of any of the Borrower's Subsidiaries which could
reasonably be expected to have a Material Adverse Effect, for which the Borrower
or the applicable Subsidiary of the Borrower has not made good faith provisions
in its business plan and projections of financial performance.
6.18 CERTIFICATE OF TITLE PROPERTY. None of the Collateral is subject to
certificate of title laws.
7. AFFIRMATIVE COVENANTS.
The Borrower covenants and agrees with the Agent and the Lenders that
prior to the termination of this Agreement it will do, and cause each of the
Borrower's Subsidiaries to do, and if necessary cause to be done, each and all
of the following:
7.1 TAXES, EXISTENCE, REGULATIONS, PROPERTY, ETC. At all times (a) pay
when due all taxes and governmental charges of every kind upon it or against its
income, profits or Property, unless and only to the extent that the same shall
be contested diligently in good faith and reserves deemed adequate by the
independent certified public accounting firm used by the Borrower to prepare the
Annual Audited Financial Statements of the Borrower and the Borrower's
Subsidiaries have been established therefor; (b) do all things necessary to
preserve its corporate existence, qualifications, rights and franchises in all
States where such failure to qualify would have a Material Adverse Effect; (c)
comply with all applicable Legal Requirements (including Requirements of
Environmental Law) in respect of the conduct of its business and the ownership
of its Property, the noncompliance with which could have a Material Adverse
Effect; and (d) cause
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its Property to be protected, maintained and kept in good repair and make all
replacements and additions to its Property as may be reasonably necessary to
conduct its business properly and efficiently.
7.2 FINANCIAL STATEMENTS AND INFORMATION. Furnish to the Agent and the
Lenders one copy of each of the following: (a) as soon as available and in any
event within 90 days after the end of each fiscal year of the Borrower,
beginning with the fiscal year 1995, Annual Audited Financial Statements of the
Borrower and the Borrower's Subsidiaries together with unaudited consolidating
financial statements of the Borrower and its Subsidiaries; (b) as soon as
available and in any event within 45 days after the end of each calendar month
of each fiscal year of the Borrower, Monthly Financial Statements of the
Borrower and the Borrower's Subsidiaries; (c) concurrently with the financial
statements provided for in SUBSECTIONS 7.2(A) and (B), such schedules,
computations and other information, in reasonable detail, as may be required by
the Agent or any Lender to demonstrate compliance with the covenants set forth
herein or reflecting any non-compliance therewith as of the applicable date, all
certified and signed by the president, chief financial officer or treasurer of
the Borrower (or other authorized officer approved by the Agent) as true,
correct and complete and, a compliance certificate ("COMPLIANCE CERTIFICATE") in
the form of EXHIBIT F hereto, duly executed by such authorized officer, (d) (1)
as of the Effective Date and (2) within 30 days after (i) the end of each
calendar month or (ii) receipt of a request therefor (which may be given from
time to time) from the Agent, a Borrowing Base Certificate as at the Effective
Date or the last day of such calendar month or the date of such receipt, as the
case may be, together with such supporting information as the Agent may
reasonably request; (e) (1) as of the Effective Date and (2) within 30 days
after (i) the end of each calendar month or (ii) receipt of a request therefor
(which may be given from time to time) from the Agent, (y) a listing and aging
of the Accounts of the Borrower and its Subsidiaries and (z) a listing and aging
of the accounts payable of the Borrower and its Subsidiaries, in each case, as
of the end of the most recently ended calendar month, prepared in reasonable
detail and containing such other information as the Agent may request; and (f)
such other information relating to the condition (financial or otherwise),
operations, prospects or business of any of the Borrower and its Subsidiaries as
from time to time may be reasonably requested by the Agent. Each delivery of a
financial statement pursuant to this SECTION 7.2 shall constitute a
republication of the representations contained in SECTION 6.2.
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7.3 FINANCIAL TESTS. Have and maintain on a consolidated basis:
(a) MAINTAIN DEBT TO TANGIBLE NET WORTH RATIO. A ratio of
Indebtedness (including all Obligations) to Tangible Net Worth of not more than
5.00 to 1.00 at all times.
(b) MAINTAIN DEBT TO NET WORTH RATIO. A ratio of Indebtedness
(including all Obligations) to Net Worth of not more than 1.50 to 1.00 at all
times.
(c) MAINTAIN CURRENT RATIO. A Current Ratio of not less than 1.10 to
1.00 at all times.
(d) FIXED CHARGE COVERAGE RATIO. A Fixed Charge Coverage Ratio of
not less than 1.50 to 1.00 on June 30, 1996 and at all times thereafter.
(e) DEBT TO EBITDA RATIO. A Debt to EBITDA Ratio of not less than
4.00 to 1.00 on June 30, 1996 and at all times thereafter.
7.4 INSPECTION. Permit the Agent UPON 3 DAYS' PRIOR NOTICE (unless a
Default or an Event of Default has occurred which is continuing, in which case
no prior notice is required) to inspect its Property, to examine its files,
books and records except privileged communication with legal counsel and
classified governmental material, and make and take away copies thereof, and to
discuss its affairs with its officers and accountants, all during normal
business hours and at such intervals and to such extent as the Agent may
reasonably desire.
7.5 FURTHER ASSURANCES. Promptly execute and deliver, at the Borrower's
expense, any and all other and further instruments which may be reasonably
requested by the Agent to cure any defect in the execution and delivery of any
Loan Document in order to effectuate the transactions contemplated by the Loan
Documents, and in order to grant, preserve protect and perfect the validity and
priority of the security interests created by the Security Documents.
7.6 BOOKS AND RECORDS. Maintain books of record and account in accordance
with GAAP.
7.7 INSURANCE. Maintain insurance with such insurers, on such of its
Property, with responsible companies in such amounts, with such deductibles and
against such risks as are usually carried by owners of similar businesses and
properties in the same general areas in which the Borrower and the Borrower's
Subsidiaries operate or as the Agent may otherwise reasonably require (including
business interruption insurance), and furnish the Agent satisfactory evidence
thereof promptly upon request. These insurance provisions are cumulative of the
insurance provisions of the Security Documents. The Borrower shall cause the
Agent to be named as a beneficiary of such insurance and shall provide the Agent
with copies of the policies of insurance and a certificate of the insurer that
the insurance required by this Section may not be canceled, reduced or affected
in any material manner without thirty (30) days' prior written notice to the
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Agent. Wherever applicable, such insurance shall name the Agent as loss payee
and/or mortgagee insured.
7.8 NOTICE OF CERTAIN MATTERS. Give the Agent prompt written notice of the
following:
(a) the issuance by any Governmental Authority of any injunction, order or
other restraint prohibiting, or having the effect of prohibiting, the
performance of this Agreement, any other Loan Document, or the making of the
Loans or the initiation of any litigation, or any claim or controversy which
might result in the initiation of any litigation, seeking any such injunction,
order or other restraint;
(b) the filing or commencement of any action, suit or proceeding, whether
at law or in equity or by or before any court or any Federal, state, municipal
or other Governmental Authority which may reasonably be expected to materially
impair the right or the ability of either the Borrower or any of its
Subsidiaries to perform its obligations under the Loan Documents or to carry on
their business substantially as then conducted or materially and adversely
affect the business, assets, properties, operations or condition (financial or
otherwise) of the Borrower or any of the Borrower's Subsidiaries;
(c) any Event of Default or Default, specifying the nature and extent
thereof and the action (if any) which is proposed to be taken with the respect
thereto; and
(d) any development in the business or affairs of the Borrower or any of
the Borrower's Subsidiaries which has had or which could have, in the reasonable
judgment of the Borrower a Material Adverse Effect.
The Borrower will also notify the Agent in writing at least 30 days prior to the
date that any Party changes its name or the location of its chief executive
office or principal place of business or the place where it keeps its books and
records.
7.9 CAPITAL ADEQUACY. Agrees that if any Lender shall have determined that
the adoption after the Effective Date or effectiveness after the Effective Date
(whether or not previously announced) of any applicable law, rule, regulation or
treaty regarding capital adequacy, or any change therein after the Effective
Date, or any change in the interpretation or administration thereof after the
Effective Date by any Governmental Authority, central bank or comparable agency
charged with the interpretation or administration thereof, or compliance by any
Lender with any request or directive after the Effective Date regarding capital
adequacy (whether or not having the force of law) of any such Governmental
Authority, central bank or comparable agency has or would have the effect of
reducing the rate of return on such Lender's capital as a consequence of its
obligations hereunder, under the Letters of Credit, the Notes or other
Obligations held by it to a level below that which such Lender could have
achieved but for such adoption, change or compliance (taking into consideration
such Lender's policies with respect to capital adequacy) by an amount deemed by
such Lender to be material, then from time to time, upon satisfaction of the
conditions precedent set forth in this SECTION 7.9, upon demand by such
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Lender (with a copy to the Agent), the Borrower (subject to SECTION 11.7) shall
pay to such Lender such additional amount or amounts as will compensate such
Lender for such reduction. The certificate of any Lender setting forth such
amount or amounts as shall be necessary to compensate it and the basis thereof
shall be delivered as soon as practicable to the Borrower and shall be
conclusive and binding, absent manifest error. The Borrower shall pay the amount
shown as due on any such certificate within ten (10) Business Days after the
delivery of such certificate. In preparing such certificate, a Lender may employ
such assumptions and allocations of costs and expenses as it shall in good faith
deem reasonable and may use any reasonable averaging and attribution method.
7.10 ERISA INFORMATION AND COMPLIANCE. Promptly furnish to the Agent (i)
immediately upon receipt, a copy of any notice of complete or partial withdrawal
liability under Title IV of ERISA and any notice from the PBGC under Title IV of
ERISA of an intent to terminate or appoint a trustee to administer any Plan,
(ii) if requested by the Agent, promptly after the filing thereof with the
United States Secretary of Labor or the PBGC or the Internal Revenue Service,
copies of each annual and other report with respect to each Plan or any trust
created thereunder, (iii) immediately upon becoming aware of the occurrence of
any "reportable event," as such term is defined in Section 4043 of ERISA, for
which the disclosure requirements of Regulation Section 2615.3 promulgated by
the PBGC have not been waived, or of any non-exempt "prohibited transaction," as
such term is defined in Section 4975 of the Code for which the Borrower would
have any liability, in connection with any Plan or any trust created thereunder,
a written notice signed by the President or the principal financial officer of
the Borrower or the applicable member of the Controlled Group specifying the
nature thereof, what action the Borrower or the applicable member of the
Controlled Group is taking or proposes to take with respect thereto, and, when
known, any action taken by the PBGC, the Internal Revenue Service or the
Department of Labor with respect thereto, (iv) promptly after the filing or
receiving thereof by the Borrower or any member of the Controlled Group of any
notice of the institution of any proceedings or other actions which may result
in the termination of any Plan, and (v) each request for waiver of the funding
standards or extension of the amortization periods required by Sections 303 and
304 of ERISA or Section 412 of the Code promptly after the request is submitted
by the Borrower or any member of the Controlled Group to the Secretary of the
Treasury, the Department of Labor or the Internal Revenue Service, as the case
may be. To the extent required under applicable statutory funding requirements,
the Borrower will fund, or will cause the applicable member of the Controlled
Group to fund, all current service pension liabilities as they are incurred
under the provisions of all Plans from time to time in effect, and comply with
all applicable provisions of ERISA. The Borrower covenants that it shall and
shall cause each member of the Controlled Group to (1) make contributions to
each Plan in a timely manner and in an amount sufficient to comply with the
contribution obligations under such Plan and the minimum funding standards
requirements of ERISA; (2) prepare and file in a timely manner all notices and
reports required under the terms of ERISA including annual reports; and (3) pay
in a timely manner all required PBGC premiums.
7.11 BANK ACCOUNTS. The Borrower will not, and will not permit any of its
Subsidiaries to, maintain any accounts with any bank or other financial
institution except for accounts with a
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bank or other financial institution (other than a Lender) containing funds which
do not exceed $100,000 in the aggregate, and except for the accounts with a
Lender.
7.12 LOCKBOX. Simultaneously herewith, the Borrower shall execute and
maintain, and shall cause each of the Current Guarantors to execute and
maintain, with the Agent (a) a lockbox agreement in Proper Form, pursuant to
which, among other things, the Borrower and the Current Guarantors agree to
direct the payment of all Accounts payable to the Current Guarantors to an
account established at the Agent, and (b) any and all related documents as the
Agent may require in its sole discretion.
7.13 ADDITIONAL GUARANTIES AND SECURITY. Promptly cause each Corporation
which becomes a Subsidiary of the Borrower after the date hereof to execute and
deliver to the Agent for the benefit of the Lenders a Guaranty or a Joinder
Agreement and an Additional Security Agreement (or, in the case of a Subsidiary
organized under the laws of a jurisdiction other than the United States, a
guaranty and a security agreement (or similar type agreement), each enforceable
under the laws of such jurisdiction and in the jurisdictions in which the assets
of such Subsidiary are located and otherwise in Proper Form), together with such
related certificates, opinions and documents as the Agent or any Lender may
reasonably require.
7.14 ACCOUNTS AUDITS. Permit the Agent or its designee to, from time to
time, conduct (but, so long as no Default has occurred which is still
continuing, no more often than once during any fiscal year) an audit of the
Accounts of the Borrower and its Subsidiaries. Prior to the occurrence of a
Default or an Event of Default, such audits shall be at the expense of the
Lenders. After the occurrence of a Default or an Event of Default and so long as
it is occurring, such audits shall be at the expense of the Borrower. The
Borrower further covenants and agrees that it will cooperate, and will cause its
Subsidiaries to cooperate, with the Agent or such designee and provide the Agent
or such designee access to all records, books and other information reasonably
requested by Bank in connection with the Borrower and its Subsidiaries'
Accounts.
8. NEGATIVE COVENANTS.
The Borrower covenants and agrees with the Agent and the Lenders that
prior to the termination of this Agreement it will not, and will not suffer or
permit any of the Borrower's Subsidiaries to, do any of the following:
8.1 INDEBTEDNESS. Create, incur, suffer or permit to exist, or assume or
guarantee, directly or indirectly, or become or remain liable with respect to
any Indebtedness, whether direct, indirect, absolute, contingent or otherwise,
except the following: (a) the Obligations, (b) indebtedness subordinated to the
prior payment in full of the Indebtedness upon terms and conditions approved in
writing by the Agent and the Majority Lenders, (c) purchase money Indebtedness
to acquire or lease Equipment not exceeding, in the aggregate at any time
outstanding $5,000,000 which is owed directly to the vendor or supplier of such
Equipment and which has not been assigned to a third-party lender, (d) existing
indebtedness to the extent set forth on SCHEDULE 8.1 or SCHEDULE 8.3, and all
renewals and extensions thereof (but not increases therein), (e) trade
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indebtedness incurred and paid in the ordinary course of business, (f)
contingent indebtedness to the extent permitted by SECTION 8.3, (g) Indebtedness
secured by Permitted Liens, and (h) unsecured owner financing Indebtedness
associated with the acquisition of new Subsidiaries to the extent that such
Indebtedness would not cause the Borrower to violate the restrictions set forth
in SECTION 8.4.
8.2 LIENS. Create or suffer to exist any Lien upon any of its Property now
owned or hereafter acquired, or acquire any Property upon any conditional sale
or other title retention device or arrangement or any purchase money security
agreement; or in any manner directly or indirectly sell, assign, pledge or
otherwise transfer any of its Accounts or General Intangibles; PROVIDED,
HOWEVER, that the Borrower or any of its Subsidiaries may create or suffer to
exist: (a) Permitted Liens; (b) Liens securing purchase money Indebtedness
permitted under SECTION 8.1(C) and covering only the property so purchased or
leased; (c) the Liens described on SCHEDULE 8.2 hereof, and (d) extensions,
renewals and replacements of Liens referred to in paragraphs (a) and (b) of this
Section; PROVIDED that any such extension, renewal or replacement Lien shall be
limited to the Property or assets covered by the Lien extended, renewed or
replaced and that the Indebtedness secured by any such extension, renewal or
replacement Lien shall be in an amount not greater than the amount of the
Indebtedness secured by the Lien extended, renewed or replaced.
8.3 CONTINGENT LIABILITIES. Directly or indirectly guarantee the
performance or payment of, or purchase or agree to purchase, or assume or
contingently agree to become or be secondarily liable in respect of, any
obligation or liability of any other Person except for (a) the endorsement of
checks or other negotiable instruments in the ordinary course of business; (b)
obligations disclosed on SCHEDULE 8.3 (but not increases of such obligations
after the Effective Date); (c) those liabilities permitted under SECTION 8.1,
and (d) liabilities to AT&T Communications, Inc., Sprint Communications Company,
L.P., any Affiliate of either thereof, or any other telecommunications access
providers, with respect to agreements between such providers and any Subsidiary
acquired subsequent to the Effective Date which are in effect on the date of
acquisition of such Subsidiary, and which obligate such Subsidiary to purchase a
minimum amount of access time (but not increases or renewals of such obligations
after the Effective Date).
8.4 MERGERS, CONSOLIDATIONS AND DISPOSITIONS AND ACQUISITIONS OF ASSETS.
In any single transaction or series of transactions, directly or indirectly: (a)
liquidate or dissolve; (b) be a party to any merger or consolidation unless and
so long as (i) no Default or Event of Default has occurred that is then
continuing, (ii) immediately thereafter and giving effect thereto, no event will
occur and be continuing which constitutes a Default, (iii) the Borrower or a
Subsidiary of the Borrower (which must also be a Guarantor) is the surviving
Person; (iv) the surviving Person ratifies and assumes each Loan Document to
which any party to such merger was a party, and (v) the Agent is given at least
30 days' prior notice of such merger or consolidation; (c) sell, convey or lease
all or any substantial part of its assets, except for sale of Inventory in the
ordinary course of business and except for sales of Property (other than
Inventory) in the ordinary course of the Borrower's or the applicable Borrower's
Subsidiary's business; (d) pledge, transfer or otherwise dispose of any shares
of capital stock of any Subsidiary of the Borrower or any Indebtedness of any
Subsidiary of the Borrower, or permit any such Subsidiary to issue any
additional shares of
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capital stock other than to the Borrower or to acquire any shares of capital
stock of the Borrower or any Subsidiary of the Borrower, or (e) acquire all or
substantially all of the assets of any Person or (except as expressly permitted
by SECTION 8.8) any shares of stock of or similar interest in any other Person,
in either case, for cash or for a note if the aggregate cash and note portion of
the acquisition price related to any one or a series of related transactions is
greater than $2,500,000, of if the aggregate amount of the cash and note portion
of all such acquisitions during any fiscal year of the Borrower would be in
excess of $10,000,000.
8.5 REDEMPTION, DIVIDENDS AND DISTRIBUTIONS. At any time: (a) redeem,
retire or otherwise acquire, directly or indirectly, any shares of its capital
stock; (b) pay any dividend or (c) make any other distribution of any Property
or cash to stockholders as such.
8.6 NATURE OF BUSINESS. Change the nature of its business or enter into
any business which is substantially different from the business in which it is
presently engaged.
8.7 TRANSACTIONS WITH RELATED PARTIES. Enter into any transaction or
agreement with any officer, director or holder of any outstanding capital stock
of the Borrower or any of its Subsidiaries (or any Affiliate of any such Person)
unless the same is upon terms substantially similar to those obtainable from
wholly unrelated sources.
8.8 LOANS AND INVESTMENTS. Make any loan, advance, extension of credit or
capital contribution to, or make or have any Investment in, any Person, or make
any commitment to make any such extension of credit or Investment, except (a)
Permitted Investments and (b) normal and reasonable advances in the ordinary
course of business to officers and employees.
8.9 ORGANIZATIONAL DOCUMENTS. Amend, modify, restate or supplement any of
its Organizational Documents if such action could reasonably be expected to
materially and adversely affect any Collateral, Loan or Obligation or the
abilities of any of the Parties to perform their respective Obligations under
any Loan Document, unless such action shall be consented to in writing by the
Agent.
8.10 UNFUNDED LIABILITIES. Incur any Unfunded Liabilities or allow any
Unfunded Liabilities to arise or exist.
8.11 FISCAL YEAR. Change (and will not permit any of the Borrower's
Subsidiaries to change) its fiscal year.
8.12 CAPITAL EXPENDITURES. Make Capital Expenditures on a consolidated
basis in excess of $8,500,000 during any fiscal year of the Borrower beginning
with the Borrower's 1996 fiscal year.
8.13 SUBORDINATE INDEBTEDNESS. Subordinate any indebtedness due to it from
a Person to Indebtedness of other creditors of such Person.
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8.14 KEY AGREEMENT AMENDMENTS. Amend, modify or grant a waiver of any
provision of any of the Key Agreements if such amendment, modification or waiver
could have a material adverse effect, in the opinion of the Majority Lenders, on
the Lenders, any Collateral, any Loan or Letter of Credit or on the ability of
the Borrower to perform its obligations under this Agreement, the Notes or any
of the other Loan Documents unless the same is consented to in writing by the
Agent and the Majority Lenders.
9. DEFAULTS.
9.1 EVENTS OF DEFAULT. If any one or more of the following events (herein
called "EVENTS OF DEFAULT") shall occur, then the Agent may (and at the
direction of the Majority Lenders, shall) do any or all of the following: (1)
without notice to the Borrower or any other Person, declare the Commitments
terminated (whereupon the Commitments shall be terminated) and/or accelerate the
Termination Date to a date as early as the date of termination of the
Commitments; (2) declare the principal amount then outstanding of and the unpaid
accrued interest on the Loans and Reimbursement Obligations and all fees and all
other amounts payable hereunder, under the Notes and under the other Loan
Documents to be forthwith due and payable, whereupon such amounts shall be and
become immediately due and payable, without notice (including notice of
acceleration and notice of intent to accelerate), presentment, demand, protest
or other formalities of any kind, all of which are hereby expressly waived by
the Borrower; PROVIDED that in the case of the occurrence of an Event of Default
with respect to the Borrower or any of its Subsidiaries referred to in CLAUSE
(F), (G) OR (H) of this SECTION 9.1, the Commitments shall be automatically
terminated and the principal amount then outstanding of and unpaid accrued
interest on the Loans and the Reimbursement Obligations and all fees and all
other amounts payable hereunder, under the Notes and under the other Loan
Documents shall be and become automatically and immediately due and payable,
without notice (including notice of acceleration and notice of intent to
accelerate), presentment, demand, protest or other formalities of any kind, all
of which are hereby expressly waived by the Borrower, and (3) exercise any or
other rights and remedies available to the Agent or any of the Lenders under the
Loan Documents, at law or in equity:
(a) PAYMENTS - the Borrower or any other Party fails to make any
payment or required prepayment of principal or accrued interest with
respect to the Loans, any Reimbursement Obligation or any other fee or
amount under the Notes, this Agreement or the other Loan Documents when
due; or
(b) OTHER OBLIGATIONS - the Borrower or any of the Borrower's
Subsidiaries shall default in the payment when due of any principal of or
interest on any Indebtedness having an outstanding principal amount of at
least $50,000 (other than the Loans and Reimbursement Obligations) and
such default shall continue beyond any applicable period of grace; or any
event or condition shall occur which results in the acceleration of the
maturity of any such Indebtedness or enables (or, with the giving of
notice or lapse of time or both, would enable) the holder of any such
Indebtedness or any Person acting on such
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holder's behalf to accelerate the maturity thereof and such event or
condition shall not be cured within any applicable period of grace; or
(c) REPRESENTATIONS AND WARRANTIES - any representation or warranty
made or deemed made by or on behalf of the Borrower, any of the Borrower's
Subsidiaries or any other Party in this Agreement or any other Loan
Document or in any writing, statement, certificate or data furnished or
made by the Borrower, such Subsidiary or any other Party to the Agent or
the Lenders in connection herewith or therewith shall prove to have been
incorrect, false or misleading in any material respect as of the date
thereof or as of the date as of which the facts therein set forth were
stated or certified; or
(d) AFFIRMATIVE COVENANTS - (i) default shall be made in the due
observance or performance of any of the covenants or agreements contained
in SECTIONS 7.3, 7.4 OR 7.8, (ii) the Borrower or any of the Borrower's
Subsidiaries shall permit any of the insurance required under the Loan
Documents to lapse, or (iii) default is made in the due observance or
performance of any of the other covenants and agreements contained in
SECTION 7 or any other affirmative covenant of the Borrower, any of the
Borrower's Subsidiaries or any other Party contained in this Agreement or
any other Loan Document and such default continues unremedied for a period
of five (5) Business Days after (x) notice thereof is given by the Agent
to the Borrower (such grace period to run concurrently with, and not in
addition to, any other grace periods provided for in any of the other Loan
Documents with respect to the same Default) or (y) such default otherwise
becomes known to the Borrower, whichever is earlier; or
(e) NEGATIVE COVENANTS - default is made in the due observance or
performance by the Borrower or any other Party of any of the other
covenants or agreements contained in SECTION 8 of this Agreement or of any
other negative covenant of the Borrower or any other Party contained in
this Agreement or any other Loan Document; or
(f) INVOLUNTARY BANKRUPTCY OR RECEIVERSHIP PROCEEDINGS - a receiver,
conservator, liquidator or trustee of the Borrower or any of the
Borrower's Subsidiaries or of any of its Property is appointed by the
order or decree of any court or agency or supervisory authority having
jurisdiction, and such decree or order remains in effect for more than 30
days; or the Borrower or any of the Borrower's Subsidiaries is adjudicated
bankrupt or insolvent; or any of such Person's property is sequestered by
court order and such order remains in effect for more than 30 days; or a
petition is filed against the Borrower or any of the Borrower's
Subsidiaries under any state or federal bankruptcy, reorganization,
arrangement, insolvency, readjustment or debt, dissolution, liquidation or
receivership law or any jurisdiction, whether now or hereafter in effect,
and is not dismissed within 30 days after such filing; or
(g) VOLUNTARY PETITIONS OR CONSENTS - the Borrower or any of the
Borrower's Subsidiaries commences a voluntary case or other proceeding or
order seeking liquidation, reorganization, arrangement, insolvency,
readjustment of debt, dissolution, liquidation or
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other relief with respect to itself or its debt or other liabilities under
any bankruptcy, insolvency or other similar law now or hereafter in effect
or seeking the appointment of a trustee, receiver, liquidator, custodian
or other similar official of it or any substantial part of its property,
or consents to any such relief or to the appointment of or taking
possession by any such official in an involuntary case or other proceeding
commenced against it, or fails generally to, or cannot, pay its debts
generally as they become due or takes any corporate action to authorize or
effect any of the foregoing; or
(h) ASSIGNMENTS FOR BENEFIT OF CREDITORS OR ADMISSIONS OF INSOLVENCY
- the Borrower or any of the Borrower's Subsidiaries makes an assignment
for the benefit of its creditors, or admits in writing its inability to
pay its debts generally as they become due, or consents to the appointment
of a receiver, trustee, or liquidator of the Borrower or such Subsidiary
or of all or any substantial part of its Property; or
(i) UNDISCHARGED JUDGMENTS - a final judgment or judgments for the
payment of money exceeding, in the aggregate, $100,000 is rendered by any
Governmental Authority against the Borrower or any of the Borrower's
Subsidiaries and the Borrower or such Subsidiary does not discharge the
same or provide for its discharge in accordance with its terms, or procure
a stay of execution thereof within 30 days from the date of entry thereof;
or
(j) SECURITY DOCUMENTS - any Security Document for any reason ceases
to create a valid and perfected first-priority Lien on any of the
Collateral purported to be covered thereby, or the Borrower or any of the
Borrower's Subsidiaries (or any other Person who may have granted or
purported to grant such Lien) will so state in writing; or
(k) COLLATERAL - the sale, encumbrance or abandonment (except as
otherwise expressly permitted by this Agreement or any Security Document)
of any of the Collateral; or the making of any levy, seizure or attachment
of or on any material portion of the Collateral if such levy, seizure or
attachment is not released or effectively stayed within 10 days after its
effectiveness; or the loss, theft, substantial damage or destruction of
any material portion of the Collateral not covered by insurance; or
(l) ATTACHMENT - the Borrower or any of the Borrower's Subsidiaries
shall suffer any writ of attachment or execution or any similar process to
be issued or levied against it or any substantial part of its Property
which is not released, stayed, bonded or vacated within 30 days after its
issue or levy; or
(m) CONCEALMENT - the Borrower or any of the Borrower's Subsidiaries
shall have concealed, removed, or permitted to be concealed or removed,
any part of its Property, with intent to hinder, delay or defraud its
creditors or any of them, or made or suffered a transfer of any of its
Property which may be fraudulent under any bankruptcy, fraudulent
conveyance, insolvency or similar law; or shall have made any transfer of
its
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Property to or for the benefit of a creditor at a time when other
creditors similarly situated have not been paid; or
(n) CHANGE OF CONTROL - Any two of Marc Smith, Zane Russell and
Michael Hlinak shall cease to serve as officers of the Borrower in
substantially the same capacities as they are presently serving.
(o) NO LOSS - the Borrower and its Subsidiaries on a consolidated
basis shall have a net loss (determined in accordance with GAAP) from
operations for any fiscal quarter of the Borrower.
9.2 RIGHT OF SETOFF. Upon the occurrence and during the continuance of any
Event of Default, the Lenders each are hereby authorized at any time and from
time to time, without notice to the Borrower or any of the Guarantors by their
execution of a Guaranty or a Joinder Agreement) (any such notice being expressly
waived by the Borrower and the Guarantors), to setoff and apply any and all
deposits (general or special, time or demand, provisional or final (but
excluding the funds held in accounts clearly designated as escrow or trust
accounts held by the Borrower or such Guarantor for the benefit of Persons which
are not Affiliates of the Borrower or any of the Guarantors, whether or not such
setoff results in any loss of interest or other penalty, and including all
certificates of deposit) at any time held, and any other funds or property at
any time held, and other Indebtedness at any time owing by such Lender to or for
the credit or the account of the Borrower or any such Guarantor against any and
all of the Obligations irrespective of whether or not such Lender or the Agent
will have made any demand under this Agreement, the Notes or any other Loan
Document. Each of the Borrower and the Guarantors (by their execution of a
Guaranty or a Joinder Agreement) also hereby grants to each of the Lenders a
security interest in and hereby transfers, assigns, sets over, and conveys to
each of the Lenders, as security for payment of all Loans and Reimbursement
Obligations, all such deposits, funds or property of the Borrower. Should the
right of any Lender to realize funds in any manner set forth hereinabove be
challenged and any application of such funds be reversed, whether by court order
or otherwise, the Lenders shall make restitution or refund to the Borrower or
the applicable Guarantor PRO RATA in accordance with their Commitments. Each
Lender agrees to promptly notify the Borrower or the applicable Guarantor and
the Agent after any such setoff and application, provided that the failure to
give such notice will not affect the validity of such setoff and application.
The rights of the Agent and the Lenders under this Section are in addition to
other rights and remedies (including without limitation other rights of setoff)
which the Agent or the Lenders may have. This Section is subject to the terms
and provisions of SECTIONS 4.5 and 11.7.
9.3 COLLATERAL ACCOUNT. The Borrower hereby agrees, in addition to the
provisions of SECTION 9.1, that upon the occurrence and during the continuance
of any Event of Default, it shall, if requested by the Agent or the Majority
Lenders (through the Agent), pay to the Agent an amount in immediately available
funds equal to the then aggregate amount available for drawings under all
Letters of Credit issued for the account of the Borrower, which funds shall be
held by the Agent as Cover.
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9.4 PRESERVATION OF SECURITY FOR UNMATURED REIMBURSEMENT OBLIGATIONS. In
the event that, following (i) the occurrence of an Event of Default and the
exercise of any rights available to the Agent or any Lender under the Loan
Documents, and (ii) payment in full of the principal amount then outstanding of
and the accrued interest on the Loans and Reimbursement Obligations and fees and
all other amounts payable hereunder and under the Notes and all other amounts
secured by the Security Documents, any Letters of Credit shall remain
outstanding and undrawn upon, the Agent shall be entitled to hold (and the
Borrower hereby or by its execution of a Loan Document grant and convey to the
Agent a security interest in and to) all cash or other property ("PROCEEDS OF
REMEDIES") realized or arising out of the exercise by the Agent of any rights
available to it under the Loan Documents, at law or in equity, including the
proceeds of any foreclosure, as collateral for the payment of any amounts due or
to become due under or in respect of such Letters of Credit. Such Proceeds of
Remedies shall be held for the ratable benefit of the Lenders. Such Proceeds of
Remedies shall constitute "Collateral" for all purposes under the terms and
provisions of the Security Documents, and the rights, titles, benefits,
privileges, duties and obligations of Agent with respect thereto shall be
governed by the terms and provisions of this Agreement and, to the extent not
inconsistent with this Agreement, the Security Documents. The Agent may, but
shall have no obligation to, invest any such Proceeds of Remedies in such manner
as the Agent, in the exercise of its sole discretion, deems appropriate. Such
Proceeds of Remedies shall be applied to Reimbursement Obligations arising in
respect of any such Letters of Credit and/or the payment of any Lender's
obligations under any such Letter of Credit when such Letter of Credit is drawn
upon. The Borrower agrees to execute and deliver (or cause to be executed and
delivered) to the Agent and the Lenders such security agreements, pledges or
other documents as the Agent or any of the Lenders may, from time to time,
require to perfect the pledge, Lien and security interest in and to any such
Proceeds of Remedies provided for in this Section. Nothing in this Section shall
cause or permit an increase in the maximum amount of the Obligations permitted
to be outstanding from time to time under this Agreement.
9.5 REMEDIES CUMULATIVE. No remedy, right or power conferred upon the
Agent or any Lender is intended to be exclusive of any other remedy, right or
power given hereunder or now or hereafter existing at law, in equity, or
otherwise, and all such remedies, rights and powers shall be cumulative.
10. THE AGENT.
10.1 APPOINTMENT, POWERS AND IMMUNITIES. Each Lender hereby irrevocably
appoints and authorizes the Agent to act as its agent hereunder, under the
Letters of Credit and under the other Loan Documents with such powers as are
specifically delegated to the Agent by the terms hereof and thereof, together
with such other powers as are reasonably incidental thereto. The Agent (the
"Agent" as used in this SECTION 10 shall include reference to its Affiliates and
its own and its Affiliates' respective officers, shareholders, directors,
employees and agents) (a) shall not have any duties or responsibilities except
those expressly set forth in this Agreement, the Letters of Credit, and the
other Loan Documents, and shall not by reason of this Agreement or any other
Loan Document be a trustee or fiduciary for any Lender; (b) shall not be
responsible to any Lender for any recitals, statements, representations or
warranties contained in this Agreement, the
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Letters of Credit or any other Loan Document, or in any certificate or other
document referred to or provided for in, or received by any of them under, this
Agreement, the Letters of Credit or any other Loan Document, or for the value,
validity, effectiveness, genuineness, enforceability, execution, filing,
registration, collectibility, recording, perfection, existence or sufficiency of
this Agreement, the Letters of Credit, or any other Loan Document or any other
document referred to or provided for herein or therein or any property covered
thereby or for any failure by any Party or any other Person to perform any of
its obligations hereunder or thereunder, and shall not have any duty to inquire
into or pass upon any of the foregoing matters; (c) shall not be required to
initiate or conduct any litigation or collection proceedings hereunder or under
the Letters of Credit or any other Loan Document except to the extent requested
by the Majority Lenders; (d) shall not be responsible for any mistake of law or
fact or any action taken or omitted to be taken by it hereunder or under the
Letters or Credit or any other Loan Document or any other document or instrument
referred to or provided for herein or therein or in connection herewith or
therewith, INCLUDING, WITHOUT LIMITATION, PURSUANT TO ITS OWN NEGLIGENCE, EXCEPT
FOR ITS OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT; (e) shall not be bound by or
obliged to recognize any agreement among or between the Borrower or any other
Party and any Lender, regardless of whether the Agent has knowledge of the
existence of any such agreement or the terms and provisions thereof; (f) shall
not be charged with notice or knowledge of any fact or information not herein
set out or provided to the Agent in accordance with the terms of this Agreement
or any other Loan Document; (g) shall not be responsible for any delay, error,
omission or default of any mail, telegraph, cable or wireless agency or
operator, and (h) shall not be responsible for the acts or edicts of any
Governmental Authority. The Agent may employ agents and attorneys-in-fact and
shall not be responsible for the negligence or misconduct of any such agents or
attorneys-in-fact selected by it with reasonable care. Without in any way
limiting any of the foregoing, each Lender acknowledges that the Agent shall
have no greater responsibility in the operation of the Letters of Credit than is
specified in the Uniform Customs and Practice for Documentary Credits (1993
Revision, International Chamber of Commerce Publication No. 500). In any
foreclosure proceeding concerning any Collateral, each holder of an Obligation
if bidding for its own account or for its own account and the accounts of other
Lenders is prohibited from including in the amount of its bid an amount to be
applied as a credit against the Obligations held by it or the Obligations held
by the other Lenders; instead, such holder must bid in cash only. However, in
any such foreclosure proceeding, the Agent may (but shall not be obligated to)
submit a bid for all Lenders (including itself) in the form of a credit against
the Obligations, and the Agent or its designee may (but shall not be obligated
to) accept title to such collateral for and on behalf of all Lenders.
10.2 RELIANCE. The Agent shall be entitled to rely upon any certification,
notice or other communication (including any thereof by telephone, telex,
telegram or cable) believed by it to be genuine and correct and to have been
signed or sent by or on behalf of the proper Person or Persons, and upon advice
and statements of legal counsel (which may be counsel for the Borrower),
independent accountants and other experts selected by the Agent. The Agent shall
not be required in any way to determine the identity or authority of any Person
delivering or executing the same. As to any matters not expressly provided for
by this Agreement, the Letters of Credit, or any other Loan Document, the Agent
shall in all cases be fully protected in acting, or in
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refraining from acting, hereunder and thereunder in accordance with instructions
of the Majority Lenders, and any action taken or failure to act pursuant thereto
shall be binding on all of the Lenders. Pursuant to instructions of the Majority
Lenders, the Agent shall have the authority to execute releases of the Security
Documents on behalf of the Lenders without the joinder of any Lender. If any
order, writ, judgment or decree shall be made or entered by any court affecting
the rights, duties and obligations of the Agent under this Agreement or any
other Loan Document, then and in any of such events the Agent is authorized, in
its sole discretion, to rely upon and comply with such order, writ, judgment or
decree which it is advised by legal counsel of its own choosing is binding upon
it under the terms of this Agreement, the relevant Loan Document or otherwise;
and if the Agent complies with any such order, writ, judgment or decree, then it
shall not be liable to any Lender or to any other Person by reason of such
compliance even though such order, writ, judgment or decree may be subsequently
reversed, modified, annulled, set aside or vacated.
10.3 DEFAULTS. The Agent shall not be deemed to have knowledge of the
occurrence of a Default (other than the non-payment of principal of or interest
on Loans or Reimbursement Obligations) unless it has received notice from a
Lender or the Borrower specifying such Default and stating that such notice is a
"NOTICE OF DEFAULT." In the event that the Agent receives such a Notice of
Default, the Agent shall give prompt notice thereof to the Lenders (and shall
give each Lender prompt notice of each such non-payment). The Agent shall
(subject to SECTION 10.7) take such action with respect to such Notice of
Default as shall be directed by the Majority Lenders and within its rights under
the Loan Documents and at law or in equity, PROVIDED that, unless and until the
Agent shall have received such directions, the Agent may (but shall not be
obligated to) take such action, or refrain from taking such action, permitted
hereby with respect to such Notice of Default as it shall deem advisable in the
best interests of the Lenders and within its rights under the Loan Documents, at
law or in equity.
10.4 RIGHTS AS A LENDER. With respect to its Commitments and the Loans
made and Letter of Credit Liabilities, Comerica in its capacity as a Lender
hereunder shall have the same rights and powers hereunder as any other Lender
and may exercise the same as though it were not acting in its agency capacity,
and the term "LENDER" or "LENDERS" shall, unless the context otherwise
indicates, include the Agent in its individual capacity. The Agent may (without
having to account therefor to any Lender) accept deposits from, lend money to
and generally engage in any kind of banking, trust, letter of credit, agency or
other business with the Borrower (and any of its Affiliates) as if it were not
acting as the Agent, and the Agent may accept fees and other consideration from
the Borrower (in addition to the fees heretofore agreed to between the Borrower
and the Agent) for services in connection with this Agreement or otherwise
without having to account for the same to the Lenders.
10.5 INDEMNIFICATION. The Lenders agree to indemnify the Agent each (to
the extent not reimbursed under SECTION 2.2(C), SECTION 11.3 or SECTION 11.4,
but without limiting the obligations of the Borrower under said SECTIONS 2.2(C),
11.3 and 11.4), ratably in accordance with the sum of the Lenders' respective
Commitments, for any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements of any
kind and nature
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whatsoever, REGARDLESS OF WHETHER CAUSED IN WHOLE OR IN PART BY THE
NEGLIGENCE OF ANY INDEMNIFIED PARTIES, which may be imposed on, incurred by
or asserted against the Agent in any way relating to or arising out of this
Agreement, the Letters of Credit or any other Loan Document or any other
documents contemplated by or referred to herein or therein or the transactions
contemplated hereby or thereby (including, without limitation, the costs and
expenses which the Borrower is obligated to pay under SECTIONS 2.2(C), 11.3 and
11.4, interest, penalties, attorneys' fees and amounts paid in settlement, but
excluding, unless a Default has occurred and is continuing, normal
administrative costs and expenses incident to the performance of its agency
duties hereunder) or the enforcement of any of the terms hereof or thereof or of
any such other documents; PROVIDED that no Lender shall be liable for any of the
foregoing to the extent they arise from the gross negligence or willful
misconduct of the party to be indemnified. The obligations of the Lenders under
this SECTION 10.5 shall survive the termination of this Agreement and the
repayment of the Obligations.
10.6 NON-RELIANCE ON AGENT AND OTHER LENDERS. Each Lender agrees that it
has received current financial information with respect to the Borrower and that
it has, independently and without reliance on the Agent or any other Lender and
based on such documents and information as it has deemed appropriate, made its
own credit analysis of the Borrower and decision to enter into this Agreement
and that it will, independently and without reliance upon the Agent or any other
Lender, and based on such documents and information as it shall deem appropriate
at the time, continue to make its own analysis and decisions in taking or not
taking action under this Agreement or any of the other Loan Documents. The Agent
shall not be required to keep itself informed as to the performance or
observance by any Party of this Agreement, the Letters of Credit or any of the
other Loan Documents or any other document referred to or provided for herein or
therein or to inspect the properties or books of the Borrower or any Party.
Except for notices, reports and other documents and information expressly
required to be furnished to the Lenders by the Agent hereunder, under the
Letters of Credit or the other Loan Documents, the Agent shall not have any duty
or responsibility to provide any Lender with any credit or other information
concerning the affairs, financial condition or business of the Borrower or any
other Party (or any of their Affiliates) which may come into the possession of
the Agent.
10.7 FAILURE TO ACT. Except for action expressly required of the Agent
hereunder, under the Letters of Credit or under the other Loan Documents, the
Agent shall in all cases be fully justified in failing or refusing to act
hereunder and thereunder unless it shall receive further assurances to its
satisfaction by the Lenders of their indemnification obligations under SECTION
10.5 against any and all liability and expense which may be incurred by it by
reason of taking or continuing to take any such action.
10.8 RESIGNATION OR REMOVAL OF AGENT. Subject to the appointment and
acceptance of a successor Agent as provided below, the Agent may resign at any
time by giving notice thereof to the Lenders and the Borrower, and the Agent may
be removed at any time with or without cause by the Majority Lenders. Upon any
such resignation or removal, (i) the Majority Lenders without the consent of the
Borrower shall have the right to appoint a successor Agent so long as such
successor Agent is also a Lender at the time of such appointment and (ii) the
Majority Lenders
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shall have the right to appoint a successor Agent that is not a Lender at the
time of such appointment so long as the Borrower consents to such appointment
(which consent shall not be unreasonably withheld). If no successor Agent shall
have been so appointed by the Majority Lenders and accepted such appointment
within 30 days after the retiring Agent's giving of notice of resignation or the
Majority Lenders' removal of the retiring Agent, then the retiring Agent may, on
behalf of the Lenders, appoint a successor Agent. Any successor Agent shall be a
bank which has an office in the United States and a combined capital and surplus
of at least $250,000,000. Upon the acceptance of any appointment as Agent
hereunder by a successor Agent, such successor Agent shall thereupon succeed to
and become vested with all the rights, powers, privileges and duties of the
retiring Agent, and the retiring Agent shall be discharged from its duties and
obligations hereunder and under any other Loan Documents. Such successor Agent
shall promptly specify by notice to the Borrower its Principal Office referred
to in SECTION 3.1 and SECTION 4. After any retiring Agent's resignation or
removal hereunder as Agent, the provisions of this SECTION 10 shall continue in
effect for its benefit in respect of any actions taken or omitted to be taken by
it while it was acting as the Agent.
10.9 NO PARTNERSHIP. Neither the execution and delivery of this Agreement
nor any of the other Loan Documents nor any interest the Lenders, the Agent or
any of them may now or hereafter have in all or any part of the Obligations
shall create or be construed as creating a partnership, joint venture or other
joint enterprise between the Lenders or among the Lenders and the Agent. The
relationship between the Lenders, on the one hand, and the Agent, on the other,
is and shall be that of principals and agent only, and nothing in this Agreement
or any of the other Loan Documents shall be construed to constitute the Agent as
trustee or other fiduciary for any Lender or to impose on the Agent any duty,
responsibility or obligation other than those expressly provided for herein and
therein.
11. MISCELLANEOUS.
11.1 WAIVER. No waiver of any Default or Event of Default shall be a
waiver of any other Default or Event of Default. No failure on the part of the
Agent or any Lender to exercise and no delay in exercising, and no course of
dealing with respect to, any right, power or privilege under any Loan Document
shall operate as a waiver thereof, nor shall any single or partial exercise of
any right, power or privilege thereunder preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The remedies
provided in the Loan Documents are cumulative and not exclusive of any remedies
provided by law or in equity.
11.2 NOTICES. All notices and other communications provided for herein
(including any modifications of, or waivers or consents under, this Agreement)
shall be given or made by telex, telegraph, telecopy (confirmed by mail), cable
or other writing and telexed, telecopied, telegraphed, cabled, mailed or
delivered to the intended recipient at the "Address for Notices" specified below
its name on the signature pages hereof (or provided for in an Assignment and
Acceptance); or, as to any party, at such other address as shall be designated
by such party in a notice to the Borrower and the Agent given in accordance with
this SECTION 11.2. Except as otherwise provided in this Agreement, all such
notices or communications shall be deemed to have
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been duly given when (i) transmitted by telex or telecopier, delivered to the
telegraph or cable office, (ii) personally delivered (iii) one Business Day
after deposit with an overnight mail or delivery service, postage prepaid or
(iv) three Business Days' after deposit in a receptacle maintained by the United
States Postal Service, postage prepaid, registered or certified mail, return
receipt requested, in each case given or addressed as aforesaid.
11.3 EXPENSES, ETC. Whether or not any Loan is ever made or any Letter of
Credit ever issued, the Borrower shall pay or reimburse on demand (a) the Agent
for paying the reasonable fees and expenses of legal counsel to the Agent,
together with the reasonable fees and expenses of each local counsel to the
Agent, in connection with the preparation, negotiation, execution and delivery
of this Agreement (including the exhibits, annexes and schedules hereto), the
Security Documents and the other Loan Documents and the making of the Loans and
the issuance of Letters of Credit hereunder, and any modification, supplement or
waiver of any of the terms of this Agreement, the Letters of Credit or any other
Loan Document; (b) the Agent for any lien search fees, collateral audit fees,
appraisal fees, survey fees, environmental study fees, and title insurance costs
and premiums required in connection with any of the Loan Documents; (c) the
Agent for reasonable out-of-pocket expenses incurred in connection with the
preparation, documentation, administration and syndication of the Loans or any
of the Loan Documents (including the advertising, marketing, printing,
publicity, duplicating, mailing and similar expenses) of the Loans and Letter of
Credit Liabilities; (d) the Agent or any Lender for paying all transfer, stamp,
documentary or other similar taxes, assessments or charges levied by any
governmental or revenue authority in respect of this Agreement, any Letter of
Credit or any other Loan Document or any other document referred to herein or
therein; (e) the Agent or any Lender for paying all costs, expenses, taxes,
assessments and other charges incurred in connection with any filing,
registration, recording or perfection of any security interest contemplated by
this Agreement, any Security Document or any document referred to herein or
therein, and (f) any Lender or the Agent for paying all amounts reasonably
expended, advanced or incurred by such Lender or Agent to satisfy any obligation
of the Borrower under this Agreement or any other Loan Document, to protect the
Collateral, to collect the Obligations or to enforce, protect, preserve or
defend the rights of such Lender or Agent under this Agreement or any other Loan
Document, including reasonable fees and expenses incurred in connection with
such Lender's or Agent's participation as a member of a creditor's committee in
a case commenced under the Bankruptcy Code or other similar law, fees and
expenses incurred in connection with lifting the automatic stay prescribed in
ss. 362 of the Bankruptcy Code and fees and expenses incurred in connection with
any action pursuant to ss. 1129 of the Bankruptcy Code and all other customary
out-of-pocket expenses incurred by such Lender or Agent in connection with such
matters, together with interest thereon at the Past Due Rate on each such amount
until the date of reimbursement to such Lender or Agent.
11.4 INDEMNIFICATION. The Borrower shall indemnify each of the Agent, the
Lenders, and each affiliate thereof and their respective directors, officers,
employees and agents from, and hold each of them harmless against, any and all
losses, liabilities, claims or damages to which any of them may become subject,
REGARDLESS OF WHETHER CAUSED IN WHOLE OR IN PART BY THE NEGLIGENCE OF ANY
INDEMNIFIED PARTIES, insofar as such losses, liabilities, claims or damages
arise out of or result from any (i) actual or proposed use by the
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Borrower of the proceeds of any extension of credit (whether a Loan or a Letter
of Credit) by any Lender hereunder; (ii) breach by the Borrower of this
Agreement or any other Loan Document or the breach by any other Party of any
Loan Document; (iii) violation by the Borrower or any other Party of any Legal
Requirement; (iv) investigation, litigation or other proceeding relating to any
of the foregoing, and the Borrower shall reimburse the Agent, each Lender, and
each Affiliate thereof and their respective directors, officers, employees and
agents, upon demand for any reasonable expenses (including reasonable legal
fees) incurred in connection with any such investigation or proceeding, or (v)
taxes (excluding income taxes and franchise taxes) payable or ruled payable by
any Governmental Authority in respect of the Obligations or any Loan Document,
together with interest and penalties, if any; PROVIDED, HOWEVER, that the
Borrower shall not have any obligations pursuant to this Section with respect to
any losses, liabilities, claims, damages or expenses incurred by the Person
seeking indemnification by reason of the gross negligence or willful misconduct
of that Person. Nothing in this Section is intended to limit the obligations of
the Borrower under any other provision of this Agreement.
11.5 AMENDMENTS, ETC. No amendment or modification of this Agreement, the
Notes or any other Loan Document shall in any event be effective against the
Borrower unless the same shall be agreed or consented to in writing by the
Borrower. No amendment, modification or waiver of any provision of this
Agreement, the Notes or any other Loan Document, nor any consent to any
departure by the Borrower therefrom, shall in any event be effective against the
Lenders unless the same shall be agreed or consented to in writing by the
Majority Lenders, and each such waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given; PROVIDED, that
no amendment, modification, waiver or consent shall, unless in writing and
signed by each Lender affected thereby, do any of the following: (a) increase
any Commitment of any of the Lenders or subject the Lenders to any additional
obligations; (b) reduce the principal of, or interest on, any Loan,
Reimbursement Obligation or fee hereunder; (c) postpone or extend the Maturity
Date, the Termination Date, the Loan Availability Period or any scheduled date
fixed for any payment of principal of, or interest on, any Loan, Reimbursement
Obligation, fee or other sum to be paid hereunder or waive any Event of Default
described in SECTION 9.1(A); (d) change the percentage of any of the Commitments
or of the aggregate unpaid principal amount of any of the Loans and Letter of
Credit Liabilities, or the number of Lenders, which shall be required for the
Lenders or any of them to take any action under this Agreement; (e) change any
provision contained in SECTIONS 2.2(C), 7.9, 11.3 OR 11.4 or this SECTION 11.5;
(f) increase any of the fixed percentages to be multiplied by the aggregate
amounts of the components comprising the Borrowing Base that are described in
(i) and (ii) of the definition of Borrowing Base herein; (g) release any
Guarantor from any Guaranty; (h) change the definition of "Majority Lenders"
contained herein, or (i) release any material portion of the security for the
Obligations. To the extent that the Agent requests in writing any Lender to
agree or consent in writing to a proposed amendment, modification or waiver of
any provision of this Agreement, the Notes or any Loan Document or to a consent
to any departure by the Borrower therefrom, such Lender shall have 15 Business
Days from the date of the Agent's giving of such request in accordance with
SECTION 11.2 to give to the Agent its approval or disapproval in writing of such
proposed amendment, modification, waiver or consent. Notwithstanding anything in
this
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SECTION 11.5 to the contrary, no amendment, modification, waiver or consent
shall be made with respect to SECTION 10 without the consent of the Agent to the
extent it affects the Agent.
11.6 SUCCESSORS AND ASSIGNS.
(a) This Agreement shall be binding upon and inure to the benefit of the
Borrower, the Agent and the Lenders and their respective successors and assigns;
PROVIDED, HOWEVER, that the Borrower may not assign or transfer any of its
rights or obligations hereunder without the prior written consent of all of the
Lenders, and any such assignment or transfer without such consent shall be null
and void. Each Lender may sell participations to any Person in all or part of
any Loan, or all or part of its the Notes or Commitments, to another bank or
other entity, in which event, without limiting the foregoing, the provisions of
the Loan Documents (including the Interest Rate Annex) shall inure to the
benefit of each purchaser of a participation; PROVIDED, HOWEVER, the PRO RATA
treatment of payments, as described in SECTION 22, shall be determined as if
such Lender had not sold such participation. Any Lender that sells one or more
participations to any Person shall not be relieved by virtue of such
participation from any of its obligations to Borrower under this Agreement
relating to the Loans. In the event any Lender shall sell any participation,
such Lender shall retain the sole right and responsibility to enforce the
obligations of the Borrower relating to the Loans, including the right to
approve any amendment, modification or waiver of any provision of this Agreement
other than amendments, modifications or waivers with respect to (i) any fees
payable hereunder to the Lenders, (ii) the amount of principal or the rate of
interest payable on, or the dates fixed for the scheduled repayment of principal
of, the Loans and (iii) the release of the Liens on any of the Collateral.
(b) Each Lender may assign to one or more Lenders or any other Person all
or a portion of its interests, rights and obligations under this Agreement;
PROVIDED, HOWEVER, that (i) the aggregate amount of the Commitments of the
assigning Lender subject to each such assignment shall in no event be less than
$5,000,000 (or such other amount the Borrower and the Majority Agents may
agree); (ii) other than in the case of an assignment to another Lender (that is,
at the time of the assignment, a party hereto) or to an Affiliate of such Lender
or to a Federal Reserve Bank, the Agent and, so long as no Event of Default
shall have occurred and be continuing, the Borrower must each give its prior
written consent, which consents shall not be unreasonably withheld, and (iii)
the parties to each such assignment shall execute and deliver to the Agent, for
its acceptance an Assignment and Acceptance in the form of EXHIBIT G hereto
(each an "ASSIGNMENT AND ACCEPTANCE") with blanks appropriately completed,
together with any Note or the Notes subject to such assignment. Upon such
execution, delivery and acceptance, from and after the effective date specified
in each Assignment and Acceptance, (A) the assignee thereunder shall be a party
hereto and, to the extent provided in such Assignment and Acceptance, have the
rights and obligations of a Lender hereunder and (B) the Lender thereunder
shall, to the extent provided in such Assignment and Acceptance, be released
from its obligations under this Agreement (and, in the case of an Assignment and
Acceptance covering all or the remaining portion of an assigning Lender's rights
and obligations under this Agreement, such Lender shall cease to be a party
hereto). Notwithstanding anything contained in this Agreement to the contrary,
any Lender may at any time assign all or any portion of its rights under this
Agreement and the
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Notes issued to it as collateral to a Federal Reserve Bank; provided that no
such assignment shall release such Lender from any of its obligations hereunder.
(c) By executing and delivering an Assignment and Acceptance, the Lender
assignor thereunder and the assignee thereunder confirm to and agree with each
other and the other parties hereto as follows: (i) other than the representation
and warranty that it is the legal and beneficial owner of the interest being
assigned thereby free and clear of any adverse claim, such Lender assignor makes
no representation or warranty and assumes no responsibility with respect to any
statements, warranties or representations made in or in connection with this
Agreement or any of the other Loan Documents or the execution, legality,
validity, enforceability, genuineness, sufficiency or value of this Agreement or
any of the other Loan Documents or any other instrument or document furnished
pursuant thereto; (ii) such Lender assignor makes no representation or warranty
and assumes no responsibility with respect to the financial condition of the
Borrower or the performance or observance by the Borrower of any of its
obligations under this Agreement or any of the other Loan Documents or any other
instrument or document furnished pursuant hereto; (iii) such assignee confirms
that it has received a copy of this Agreement, together with copies of the
financial statements referred to in SECTION 6.2 and such other documents and
information as it has deemed appropriate to make its own credit analysis and
decision to enter into such Assignment and Acceptance; (iv) such assignee will,
independently and without reliance upon the Agent, such Lender assignor or any
other Lender and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking action under this Agreement and the other Loan Documents; (v) such
assignee appoints and authorizes the Agent to take such action as agent on its
behalf and to exercise such powers under this Agreement and the other Loan
Documents as are delegated to the Agent by the terms hereof, together with such
powers as are reasonably incidental thereto; and (vi) such assignee agrees that
it will perform in accordance with their terms all obligations that by the terms
of this Agreement and the other Loan Documents are required to be performed by
it as a Lender.
(d) The entries in the records of the Agent as to each Assignment and
Acceptance delivered to it and the names and addresses of the Lenders and the
Commitments of, and principal amount of the Loans owing to, each Lender from
time to time shall be conclusive, in the absence of manifest error, and the
Borrower, the Agent and the Lenders may treat each Person the name of which is
recorded in the books and records of the Agent as a Lender hereunder for all
purposes of this Agreement and the other Loan Documents.
(e) Upon the Agent's receipt of an Assignment and Acceptance executed by
an assigning Lender and the assignee thereunder, together with any Note or the
Notes subject to such assignment and the written consent to such assignment, the
Agent shall, if such Assignment and Acceptance has been completed with blanks
appropriately filled, (i) accept such Assignment and Acceptance, (ii) record the
information contained therein in its records and (iii) give prompt notice
thereof to the Borrower. Within five (5) Business Days after receipt of notice,
the Borrower, at its own expense, shall execute and deliver to the Agent in
exchange for the surrendered the Notes new the Notes to the order of such
assignee in an amount equal to the Commitments assumed by
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it pursuant to such Assignment and Acceptance and, if the assigning Lender has
retained Commitments hereunder, new the Notes to the order of the assigning
Lender in an amount equal to the Commitment retained by it hereunder. Such new
the Notes shall be in an aggregate principal amount equal to the aggregate
principal amount of such surrendered the Notes, shall be dated the effective
date of such Assignment and Acceptance and shall otherwise be in substantially
the form of the respective Note. Thereafter, such surrendered the Notes shall be
marked renewed and substituted and the originals thereof delivered to the
Borrower (with copies, certified by the Borrower as true, correct and complete,
to be retained by the Agent).
(f) Any Lender may, in connection with any assignment or participation or
proposed assignment or participation pursuant to this SECTION 11.6, disclose to
the assignee or participant or proposed assignee or participant, any information
relating to the Borrower furnished to such Lender by or on behalf of the
Borrower.
11.7 LIMITATION OF INTEREST. The Borrower and the Lenders intend to
strictly comply with all applicable federal and Texas laws, including applicable
usury laws (or the usury laws of any jurisdiction whose usury laws are deemed to
apply to the Notes or any other Loan Documents despite the intention and desire
of the parties to apply the usury laws of the State of Texas). Accordingly, the
provisions of this SECTION 11.7 shall govern and control over every other
provision of this Agreement or any other Loan Document which conflicts or is
inconsistent with this Section, even if such provision declares that it
controls. As used in this Section, the term "interest" includes the aggregate of
all charges, fees, benefits or other compensation which constitute interest
under applicable law, PROVIDED that, to the maximum extent permitted by
applicable law, (a) any non-principal payment shall be characterized as an
expense or as compensation for something other than the use, forbearance or
detention of money and not as interest, and (b) all interest at any time
contracted for, reserved, charged or received shall be amortized, prorated,
allocated and spread, in equal parts during the full term of the Obligations. In
no event shall the Borrower or any other Person be obligated to pay, or any
Lender have any right or privilege to reserve, receive or retain, (a) any
interest in excess of the maximum amount of nonusurious interest permitted under
the laws of the State of Texas or the applicable laws (if any) of the United
States or of any other state, or (b) total interest in excess of the amount
which such Lender could lawfully have contracted for, reserved, received,
retained or charged had the interest been calculated for the full term of the
Obligations at the Ceiling Rate. On each day, if any, that the interest rate
(the "STATED RATE") called for under this Agreement or any other Loan Document
exceeds the Ceiling Rate, the rate at which interest shall accrue shall
automatically be fixed by operation of this sentence at the Ceiling Rate for
that day, and shall remain fixed at the Ceiling Rate for each day thereafter
until the total amount of interest accrued equals the total amount of interest
which would have accrued if there were no such ceiling rate imposed by this
sentence. Thereafter, interest shall accrue at the Stated Rate unless and until
the Stated Rate again exceeds the Ceiling Rate, in which case, the provisions of
the immediately preceding sentence shall again automatically operate to limit
the interest accrual rate to the Ceiling Rate. The daily interest rates to be
used in calculating interest at the Ceiling Rate shall be determined by dividing
the applicable Ceiling Rate per annum by the number of days in the calendar year
for which such calculation is being made. None of the terms and provisions
contained in this Agreement or in
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any other Loan Document (including SECTION 9.1) which directly or indirectly
relate to interest shall ever be construed without reference to this SECTION
11.7, or be construed to create a contract to pay for the use, forbearance or
detention of money at an interest rate in excess of the Ceiling Rate. If the
term of any Obligation is shortened by reason of acceleration of maturity as a
result of any Default or by any other cause, or by reason of any required or
permitted prepayment, and if for that (or any other) reason any Lender at any
time, including the stated maturity, is owed or receives (and/or has received)
interest in excess of interest calculated at the Ceiling Rate, then and in any
such event all of any such excess interest shall be canceled automatically as of
the date of such acceleration, prepayment or other event which produces the
excess, and, if such excess interest has been paid to such Lender, it shall be
credited PRO TANTO against the then-outstanding principal balance of the
Borrower's obligations to such Lender, effective as of the date or dates when
the event occurs which causes it to be excess interest, until such excess is
exhausted or all of such principal has been fully paid and satisfied, whichever
occurs first, and any remaining balance of such excess shall be promptly
refunded to its payor.
11.8 SURVIVAL. The obligations of the Borrower under SECTIONS 2.2(C),
2.2(D), 7.9, 11.3 AND 11.4 and all other obligations of the Borrower in any
other Loan Document (to the extent stated therein), and the obligations of the
Lenders under SECTION 10.5 and 11.7, shall survive the repayment of the Loans
and Reimbursement Obligations and the termination of the Commitments and the
Letters of Credit.
11.9 CAPTIONS. Captions and section headings appearing herein are included
solely for convenience of reference and are not intended to affect the
interpretation of any provision of this Agreement.
11.10 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
agreement and any of the parties hereto may execute this Agreement by signing
any such counterpart.
11.11 GOVERNING LAW. THIS AGREEMENT AND (EXCEPT AS THEREIN PROVIDED) THE
OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
APPLICABLE LAWS (OTHER THAN THE CONFLICT OF LAWS RULES) OF THE STATE OF TEXAS
AND THE UNITED STATES OF AMERICA FROM TIME TO TIME IN EFFECT.
11.12 SEVERABILITY. Whenever possible, each provision of the Loan
Documents shall be interpreted in such manner as to be effective and valid under
applicable law. If any provision of any Loan Document shall be invalid, illegal
or unenforceable in any respect under any applicable law, the validity, legality
and enforceability of the remaining provisions of such Loan Document shall not
be affected or impaired thereby.
11.13 TAX FORMS. With respect to each Lender which is organized under the
laws of a jurisdiction outside the United States, on the day of the initial
borrowing from each such Lender hereunder and from time to time thereafter if
requested by the Borrower or the Agent, such Lender
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shall provide the Agent and the Borrower with the forms prescribed by the
Internal Revenue Service of the United States certifying as to such Lender's
status for purposes of determining exemption from United States withholding
taxes with respect to all payments to be made to such Lender hereunder or other
documents satisfactory to the Lender and the Agent indicating that all payments
to be made to such Lender hereunder are subject to such tax at a rate reduced by
an applicable tax treaty. Unless the Borrower and the Agent shall have received
such forms or such documents indicating that payments hereunder are not subject
to United States withholding tax or are subject to such tax at a rate reduced by
an applicable tax treaty, the Borrower or the Agent shall withhold taxes from
such payments at the applicable statutory rate in the case of payments to or for
any Lender organized under the laws of a jurisdiction outside the United States.
11.14 VENUE. The Borrower hereby irrevocably (a) agrees that any legal
proceeding against the Agent or any Lender arising out of or in connection with
the Loan Documents shall be brought in the district courts of Harris County,
Texas, or in the United States District Court for the Southern District of
Texas, Houston Division (collectively, the "HOUSTON COURTS"); (b) submits to the
non-exclusive jurisdiction of the Houston Courts; (c) agrees and consents that
service of process may be made upon it in any proceeding arising out of the Loan
Documents or any transaction contemplated thereby by service of process as
provided by Texas law; (d) WAIVES, to the fullest extent permitted by law, any
objection which it may now or hereafter have to the laying of venue of any suit,
action or proceeding arising out of any Loan Document or the transactions
contemplated thereby in the Houston Courts; and (e) WAIVES any claim that any
such suit, action or proceeding in any Houston Court has been brought in an
inconvenient forum. All of the obligations of the Borrower under the Loan
Documents are performable in Harris County, Texas. Nothing herein shall affect
the right of the Agent or any Lender to commence legal proceedings or otherwise
proceed against the Borrower in any jurisdiction or to serve process in any
manner permitted by applicable law. The Borrower agrees that a final judgment in
any such action or proceeding shall be conclusive and may be enforced in other
jurisdictions in any manner provided by law.
11.15 WAIVER OF JURY TRIAL. THE BORROWER AND THE BANK HEREBY IRREVOCABLY
WAIVE THE RIGHT TO TRAIL BY JURY WITH RESPECT TO ANY AND ALL ACTIONS OR
PROCEEDINGS AT ANY TIME IN WHICH BORROWER AND BANK ARE PARTIES ARISING OUT OF
THIS AGREEMENT.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the Effective Date.
EQUALNET HOLDING CORP.
By: /s/ ZANE RUSSELL
Name: Zane Russell
Title: Chief Executive Officer
Address for Notices:
EqualNet Plaza
1250 Wood Branch Park Drive
Houston, Texas 77079
Telecopy No.: (713)
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COMERICA BANK-TEXAS, a Texas banking
association, as Agent and as a Lender
By: /s/ MARK H. METCALFE
Name: Mark H. Metcalfe
Title: Vice President
Address for Notices:
Commitment: 910 Louisiana, 4th Floor
Houston, Texas 77002
$18,000,000 Attention: Mark Metcalfe
Telecopy No.: (713) 722-6550
with a copy to:
Comerica Bank - Texas
1601 Elm Street
Dallas, Texas 775201
Attention: Gary W. Orr, Executive Vice President
<PAGE>
FIRST INTERSTATE BANK OF TEXAS,
N. A., a national banking association
By: /s/ KENNETH TEUSINK
Name: Kenneth Teusink
Title: Vice President
Address for Notices:
Commitment: 1000 Louisiana
Houston, Texas 77002
$7,000,000
<PAGE>
AMENDMENT TO SECURED LOAN AGREEMENT
THIS AMENDMENT TO SECURED LOAN AGREEMENT (hereinafter referred to as the
"AMENDMENT") is made and entered into on this 21st day of February 1996, to be
effective as of February 21, 1996 by and between EQUALNET HOLDING CORP., a
Texas (hereinafter referred to as "BORROWER"), and COMERICA BANK-TEXAS, a Texas
state banking association, as agent for the Lenders (hereinafter referred to as
"BANK").
RECITALS
A. Borrower and Bank have entered into (i) that certain Secured
Loan Agreement, dated November 30, 1995, (hereinafter collectively referred to
as the "AGREEMENT".
B. Borrower and Bank desire to amend the Agreement as hereinafter
set forth.
NOW, THEREFORE, in consideration of the premises herein contained and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties, intending to be legally bound, hereby agree as
follows:
ARTICLE I
DEFINITIONS
Section 10.1. DEFINITIONS. Capitalized terms used in this Amendment,
to the extent not otherwise defined herein, shall have the same meaning as in
the Agreement, as amended hereby.
ARTICLE II
AMENDMENTS
Section 2.01. AMENDMENT TO PARAGRAPH (A) OF SECTION 2.2. Paragraph
(a) of SECTION 2.2 of the Agreement is hereby amended by deleting therefrom the
dollar amount "$500,000" and substituting therefor the dollar amount
"$1,500,000."
ARTICLE III
CONSIDERATIONS PRECEDENT
Section 3.01 CONDITIONS. The effectiveness of this Amendment is subject
to the satisfaction of the following conditions precedent, unless specifically
waived by Bank:
(a) Bank shall have received from Borrower duly executed copies of this
Amendment, in form and substance satisfactory to Bank, in its sole discretion;
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(b) The representations and warranties contained herein, in the
Agreement, as amended hereby, and/or in each other document, instrument
and agreement executed in connection with or relating to the Agreement
or this Amendment (hereinafter individually referred to as a "LOAN
DOCUMENT" and collectively referred to as the "LOAN DOCUMENTS") shall be
true and correct as of the date hereof, as if made on the date hereof;
(c) No Event of Default shall have occurred and be continuing and no
Default shall exist, unless such Event of Default or Default has been
specifically waived in writing by Bank; and
(d) All corporate proceedings taken in connection with the transactions
contemplated by this Amendment and all documents, instruments and other
legal matters incident thereto, shall be satisfactory to Bank.
ARTICLE IV
RATIFICATIONS, REPRESENTATIONS AND WARRANTIES
Section 4.01. RATIFICATIONS. The terms and provisions set forth in this
Amendment shall modify and supersede all inconsistent terms and provisions set
forth in the Agreement and except as expressly modified and superseded by this
Amendment, the terms and provisions of the Agreement and the other Loan
Documents are ratified and confirmed and shall continue in full force and
effect. Borrower and Bank agree that the Agreement, as amended hereby, and the
other Loan Documents shall continue to be legal, valid, binding and enforceable
in accordance with their respective terms.
Section 4.02. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents
and warrants to the Bank that (i) the execution, delivery and performance of
this Amendment and any and all other Loan Documents executed and/or delivered in
connection herewith have been authorized by all requisite corporate action on
the part of Borrower and will not violate the Articles of Incorporation or
Bylaws of Borrower, (ii) the representations and warranties contained in the
Agreement, as amended hereby, and any other Loan Document are true and correct
on and as of the date hereof as though made on and as of the date hereof, except
to the extent such representations and warranties relate to an earlier date,
(iii) Borrower is in full compliance with all covenants and agreements contained
in the Agreement, as amended hereby, and (iv) Borrower has not amended its
Articles of Incorporation or Bylaws since the date of execution of the
Agreement.
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ARTICLE V
MISCELLANEOUS
Section 5.01. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
representations and warranties made in the Agreement or any other document or
documents relating thereto, including, without limitation, any Loan Document
furnished in connection with this Amendment, shall survive the execution and
delivery of this Amendment and the other Loan Documents, and no investigation by
Bank or any closing shall affect the representations and warranties or the right
of Bank to rely upon them.
Section 5.02. REFERENCE TO AGREEMENT. Each of the Loan Documents,
including the Agreement and any and all other agreements, documents or
instruments now or hereafter executed and delivered pursuant to the terms hereof
or pursuant to the terms of the Agreement, as amended hereby, are hereby amended
so that any reference in such Loan Documents to the Agreement shall mean a
reference to the Agreement, as amended hereby.
Section 5.03. EXPENSES OF BANK. As provided in the Agreement, Borrower
agrees to pay on demand all reasonable costs and expenses incurred by Bank in
connection with the preparation, negotiation and execution of this Amendment and
the other Loan Documents executed pursuant hereto and any and all amendments,
modifications, and supplements thereto, including, without limitation, the
reasonable costs and fees of Bank's legal counsel, and all reasonable costs and
expenses incurred by Bank in connection with the enforcement or preservation of
any rights under the Agreement, as amended hereby, or any other Loan Document,
including, without limitation, the reasonable costs and fees of Bank's legal
counsel.
Section 5.04. SEVERABILITY. Any provision of this Amendment held by a
court of competent jurisdiction to be invalid or unenforceable shall not impair
or invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
SECTION 5.05. APPLICABLE LAW. THIS AMENDMENT AND ALL OTHER LOAN
DOCUMENTS EXECUTED PURSUANT HERETO SHALL BE DEEMED TO HAVE BEEN MADE AND TO BE
PERFORMABLE IN DALLAS, TEXAS AND SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS.
Section 5.06. SUCCESSORS AND ASSIGNS. This Amendment is binding upon and
shall inure to the benefit of Bank and Borrower and their respective successors
and assigns, except Borrower may not assign or transfer any of its rights or
obligations hereunder without the prior written consent of Bank.
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Section 5.07. COUNTERPARTS. This Amendment may be executed in one or
more counterparts, each of which when so executed shall be deemed to be an
original, but all of which when taken together shall constitute one and the same
instrument.
Section 5.08. EFFECT OF WAIVER. No consent or waiver, express or
implied, by Bank to or for any breach of or deviation from any covenant or
condition of the Agreement shall be deemed a consent or waiver to or of any
other breach of the same or any other covenant, condition or duty.
Section 5.09. HEADINGS. The headings, captions, and arrangements used
in this Amendment are for convenience only and shall not affect the
interpretation of this Amendment.
Section 5.10. FINAL AGREEMENT. THE AGREEMENT, AS AMENDED HEREBY AND THE
OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY
NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
IN WITNESS WHEREOF, Borrower and Bank have caused this Amendment to be
executed on the date first written above by their duly authorized officers.
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BORROWER:
EQUALNET HOLDING CORP.
By: ZANE RUSSELL
--------------------------
Zane Russell
Chief Executive Officer
BANK:
COMERICA BANK - TEXAS
By: MARK H. METCALFE
---------------------------
Mark H. Metcalfe
Vice President
FIRST INTERSTATE BANK OF TEXAS, N.A.
By: KENNETH G. TEUSINK
---------------------------
Kenneth G. Teusink
Vice President
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SECOND AMENDMENT TO
CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "AMENDMENT") is made and
entered into as of March 20, 1996, by and among EQUALNET HOLDING CORP., a Texas
corporation (the "BORROWER"); each of the lenders which is or may from time to
time become a party hereto (individually, a "LENDER" and, collectively, the
"LENDERS"), and COMERICA BANK-TEXAS, a Texas banking association, as agent for
the Lenders (in such capacity, together with its successors in such capacity,
the "AGENT").
RECITALS:
A. Borrower, Agent and Lenders entered into a Credit Agreement dated as of
November 30, 1995 (as the same may have heretofore been amended, restated,
modified or supplemented, the "CREDIT AGREEMENT").
B. Borrower has requested Agent and Lenders to amend the Maximum Loan
Available Amount definition contained in the Credit Agreement to include the
value of the investment securities contained in an trading account at Merrill
Lynch Pierce Fenner & Smith Incorporated owned by Zane Russell and wife, Dina
Russell (the "PLEDGORS").
C. Borrower, Agent and Lenders now enter into this Amendment to evidence
their agreements as the matters described above, all of which is more fully
described hereinbelow, which such provisions contained below shall control over
any inconsistencies with the foregoing recitals.
AGREEMENTS:
In consideration of the premises and the mutual agreements herein set
forth, the parties hereto hereby agree as follows:
1. MAXIMUM LOAN AVAILABLE AMOUNT AMENDED. The definition of Maximum Loan
Available Amount contained in Section 1.1 of the Credit Agreement is hereby
amended in its entirety to be and read as follows:
"MAXIMUM LOAN AVAILABLE AMOUNT shall mean, at any date, an amount equal to
the lesser of (i) the aggregate of the Commitments or (ii) the sum of the
Borrowing Base PLUS the lesser of (1) the Pledged Account Value and (2)
$500,000; all as of such date."
2. SECURITY AGREEMENTS AMENDED. The definition of Security Agreements
contained in Section 1.1 of the Credit Agreement is hereby amended in its
entirety to be and read as follows:
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"SECURITY AGREEMENTS shall mean, collectively, (i) the Security Agreements
dated as of the Effective Date executed among the Borrower and the Agent
covering the Borrower's Accounts and Inventory and securing the
Obligations, (ii) the Security Agreement dated as of the Effective Date
executed among the Subsidiaries and the Agent covering their respective
Accounts and Inventory, and securing the Obligations arising under their
respective Guaranties, (iii) any and all security agreements now or
hereafter executed by any Party in favor of the Agent, as any of them may
from time to time be amended, modified, restated or supplemented, and (iv)
the Security Agreement dated as of March 20, 1996, executed and delivered
by Zane Russell and wife, Dina Russell, covering, among other property
more fully described therein, the Pledged Account, together with any and
all account control agreements executed in connection with said Security
Agreement, and all substitutions for and replacements of any of the
foregoing."
3. DEFINITIONS ADDED. Section 1.1 of the Credit Agreement is hereby
amended by adding thereto the following definition:
"PLEDGED ACCOUNT" shall mean that certain trading account number 443-27939
maintained by Zane Russell and wife, Dina Russell, with Merrill Lynch
Pierce Fenner & Smith Incorporated.
"PLEDGED ACCOUNT VALUE shall mean, as of any date of determination, the
sum of (a) 95% of the market value of the CMA Account in the Pledged
Account PLUS (b) 80% of the market value of municipal bonds in the Pledged
Account rated "AAA" by Standard and Poor's Corporation PLUS 70% of market
value of all equity securities in the Pledged Account traded on the New
York Stock Exchange PLUS 60% of the market value of equity securities in
the Pledged Account traded on NASDAQ; all as of such date."
4. NO DEFAULT. Borrower hereby warrants and represents to Agent and
Lenders that no Default or Event of Default has occurred and is continuing.
5. CERTAIN DEFINITIONS AND REFERENCES. Terms used but not herein which are
defined in the Credit Agreement (as amended hereby) or in the other Loan
Documents shall have the meanings herein ascribed to them therein. The term
"Agreement" as used in the Credit Agreement and the term "Credit Agreement," as
used in the other Loan Documents or any other instrument, document or writing
furnished to Agent or any Lender by Borrower shall mean the Credit Agreement as
hereby amended.
6. EXPENSES; INDEMNIFICATION. TO THE EXTENT NOT PROHIBITED BY APPLICABLE
LAW, BORROWER WILL PAY ALL COSTS AND EXPENSES AND REIMBURSE AGENT AND LENDERS
FOR ANY AND ALL EXPENDITURES OF EVERY CHARACTER INCURRED OR EXPENDED FROM TIME
TO TIME, REGARDLESS OF WHETHER A DEFAULT HAS OCCURRED, IN CONNECTION WITH THE
PREPARATION, NEGOTIATION,
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DOCUMENTATION, RECORDING, CLOSING, RENEWAL, REVISION, MODIFICATION, INCREASE,
REVIEW OR RESTRUCTURING OF THIS AMENDMENT.
7. NO USURY INTENDED; SPREADING. Notwithstanding any provision to the
contrary contained in the Credit Agreement as amended by this Amendment, the
Notes or any of the other Loan Documents, it is expressly provided that in no
case or event shall the aggregate of (i) all interest on the unpaid balance of
the Notes, accrued or paid from the date hereof and (ii) the aggregate of any
other amounts accrued or paid pursuant to the Notes or any of the other Loan
Documents, which under applicable laws are or may be deemed to constitute
interest upon the indebtedness evidenced by the Notes ever exceed the Ceiling
Rate. In this connection, the parties hereto expressly stipulate and agree that
it is their common and overriding intent to contract in strict compliance with
the applicable usury laws. In furtherance thereof, none of the terms of the
Notes or any of the other Loan Documents shall ever be construed to create a
contract to pay, as consideration for the use, forbearance or detention of
money, interest at a rate in excess of the Ceiling Rate. Borrower or other
parties now or hereafter becoming liable for payment of the indebtedness
evidenced by the Notes shall never be liable for interest in excess of the
Ceiling Rate. If, for any reason whatever, the interest paid or received on any
Note during its full term produces a rate which exceeds the Ceiling Rate, the
holder of such Note shall credit against the principal of such Note (or, if such
indebtedness shall have been paid in full, shall refund to the payor of such
interest) such portion of said interest as shall be necessary to cause the
interest paid on such Note to produce a rate equal to the Ceiling Rate. All sums
paid or agreed to be paid to the holder of any Note for the use, forbearance or
detention of the indebtedness evidenced thereby shall, to the extent permitted
by applicable law, be amortized, prorated, allocated and spread in equal parts
throughout the full term of such Note, so that the interest rate is uniform
throughout the full term of such Note. The provisions of this paragraph shall
control all agreements, whether now or hereafter existing and whether written or
oral, among Borrower and Agent and Lenders.
8. BUSINESS LOANS. Borrower warrants and represents to Agent and Lenders
and all other holders of the Notes that all loans evidenced by the Notes are and
will be for business, commercial, investment or other similar purpose and not
primarily for personal, family, household or agricultural use, as such terms are
used in Chapter One.
9. LIEN CONTINUATION; MISCELLANEOUS. The Liens are hereby ratified and
confirmed as securing and continuing to secure the payment of the Notes, as if
it were originally described as "Indebtedness" (as defined in and) under each of
the Security Agreements. Nothing herein shall in any manner diminish, impair or
extinguish the Notes, any of the other Loan Documents or the Liens. The Liens
are not waived. To the extent of any conflict between the Notes or any of the
other Loan Documents (or any earlier modification of any of them) and this
Amendment, this Amendment shall control. Except as hereby expressly modified,
all terms of the Notes and the other Loan Documents (as any of them may have
been previously modified by any written agreement) remain in full force and
effect. This Amendment (a) shall bind and benefit Borrower and, except as herein
expressly limited, Agent and Lenders, and their respective receivers, trustees,
successors and assigns (PROVIDED, that Borrower may not assign its rights
hereunder
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without the prior written consent of Agent and Lenders); (b) may be modified or
amended only by a writing signed by each party; (c) SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE APPLICABLE LAWS OF THE STATE OF TEXAS AND THE
UNITED STATES OF AMERICA FROM TIME TO TIME IN EFFECT; (d) may be executed in
several counterparts, and by the parties hereto in separate counterparts, and
each counterpart, when executed and delivered, shall constitute an original
agreement enforceable against all who signed it without production of or
accounting for any other counterpart, and all separate counterparts shall
constitute the same agreement and (e) embodies the entire agreement and
understanding between the parties with respect to modifications of instruments
provided for herein and supersedes all prior conflicting or inconsistent
agreements, consents and understandings relating to such subject matter.
Borrower acknowledges and agrees that there are no oral agreements among any of
them with respect to the transactions contemplated by the Loan Documents which
have not been incorporated in this Amendment or in the Loan Documents. If any
provision of this Amendment should be determined by any court of competent
jurisdiction to be illegal, invalid or unenforceable under present or future
laws, the legality, validity and enforceability of the remaining provisions of
this Amendment shall not be affected thereby. Each waiver in this Amendment is
subject to the overriding and controlling rule that it shall be effective only
if and to the extent that (a) it is not prohibited by applicable law and (b)
applicable law neither provides for nor allows any material sanctions to be
imposed against Agent and Lenders for having bargained for and obtained it.
Wherever the term "including" or a similar term is used in this Amendment, it
shall be read as if it were "including by way of example only and without in any
way limiting the generality of the clause or concept referred to." Any exhibits,
appendices and annexes described in this Amendment as being attached to it are
hereby incorporated into it. The headings in this Amendment shall be accorded no
significance in interpreting it. EACH OF BORROWER AND GUARANTORS, BY THEIR
JOINDER HEREIN, HEREBY RELEASES, DISCHARGES AND ACQUITS FOREVER AGENT AND
LENDERS AND ITS OFFICERS, DIRECTORS, TRUSTEES, AGENTS, EMPLOYEES AND COUNSEL (IN
EACH CASE, PAST, PRESENT AND FUTURE) FROM ANY AND ALL CLAIMS EXISTING AS OF THE
DATE HEREOF (OR THE DATE OF ACTUAL EXECUTION HEREOF BY THE APPLICABLE PERSON OR
ENTITY, IF LATER). AS USED HEREIN, THE TERM "CLAIM" SHALL MEAN ANY AND ALL
LIABILITIES, CLAIMS, DEFENSES, DEMANDS, ACTIONS, CAUSES OF ACTION, JUDGMENTS,
DEFICIENCIES, INTEREST, LIENS, COSTS OR EXPENSES (INCLUDING BUT NOT LIMITED TO
COURT COSTS, PENALTIES, ATTORNEYS' FEES AND DISBURSEMENTS, AND AMOUNTS PAID IN
SETTLEMENT) OF ANY KIND AND CHARACTER WHATSOEVER, INCLUDING BUT NOT LIMITED TO
CLAIMS FOR USURY, BREACH OF CONTRACT, BREACH OF COMMITMENT, NEGLIGENT
MISREPRESENTATION OR FAILURE TO ACT IN GOOD FAITH, IN EACH CASE WHETHER NOW
KNOWN OR UNKNOWN, SUSPECTED OR UNSUSPECTED, ASSERTED OR UNASSERTED OR PRIMARY OR
CONTINGENT, AND WHETHER ARISING OUT OF WRITTEN
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DOCUMENTS, UNWRITTEN UNDERTAKINGS, COURSE OF CONDUCT, TORT, VIOLATIONS OF LAWS
OR REGULATIONS OR OTHERWISE.
NOTICE PURSUANT TO TEX. BUS. & COMM. CODE SS.26.02
THIS AMENDMENT AND ALL OTHER LOAN DOCUMENTS EXECUTED BY ANY OF THE PARTIES
BEFORE OR SUBSTANTIALLY CONTEMPORANEOUSLY WITH THE EXECUTION HEREOF
TOGETHER CONSTITUTE A WRITTEN CREDIT AGREEMENT WHICH REPRESENTS THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE
ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
EQUALNET HOLDING CORP., a Texas corporation
By:
Name:
Title:
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COMERICA BANK-TEXAS, a Texas banking
association, as Agent and as a Lender
By:
Name:
Title:
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FIRST INTERSTATE BANK OF TEXAS,
N. A., a national banking association
By:
Name:
Title:
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GUARANTORS' CONSENTS
Guarantors hereby join in this Amendment to evidence Guarantors' consent to
execution by Borrower and the Agent and Lenders of this Amendment, to confirm
that the Guaranties apply and shall continue to apply to the Credit Agreement
(as amended hereby), and the other Loan Documents and to acknowledge that
without such consent and confirmation, Agent and Lenders would not execute this
Amendment or otherwise consent to the amendments set forth herein.
EXECUTED effective as of the date first set forth above.
EQUALNET CORPORATION, a Delaware corporation
By:
Name:
Title:
TELESOURCE, INC., a Texas corporation
By:
Name:
Title:
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<PAGE>
THIRD AMENDMENT TO
CREDIT AGREEMENT
THIS THIRD AMENDMENT TO CREDIT AGREEMENT (this "AMENDMENT") is made and
entered into as of , 1996, by and among EQUALNET HOLDING CORP., a Texas
corporation (the "BORROWER"); each of the lenders which is or may from time to
time become a party hereto (individually, a "LENDER" and, collectively, the
"LENDERS"), and COMERICA BANK- TEXAS, a Texas banking association, as agent for
the Lenders (in such capacity, together with its successors in such capacity,
the "AGENT").
RECITALS:
A. Borrower, Agent and Lenders entered into a Credit Agreement dated as of
November 30, 1995 (as the same may have heretofore been amended, restated,
modified or supplemented, the "CREDIT AGREEMENT").
B. Borrower has requested Agent and Lenders to (a) waive defaults under
certain covenants set forth in the Credit Agreement, (b) permanently reduce the
aggregate amount of the Commitments, (c) modify the definitions of Eligible
Accounts, Maximum Loan Available Amount and Borrowing Base and other provisions
related to the determination of the Borrowing Base, (d) modify the right of the
Borrower to request the issuance of Letters of Credit, (e) modify the rate at
which interest on the Indebtedness evidenced or governed by the Loan Documents
accrues, including elimination of Eurodollar Rate option, (f) modify certain
financial covenants, (g) delete certain definitions and add others, and (h) make
certain other changes to the Credit Agreement and the other Loan Documents.
C. Borrower, Agent and Lenders now enter into this Amendment to evidence
their agreements as the matters described above, all of which is more fully
described hereinbelow, which such provisions contained below shall control over
any inconsistencies with the foregoing recitals.
AGREEMENTS:
In consideration of the premises and the mutual agreements herein set
forth, the parties hereto hereby agree as follows:
1. COMMITMENTS REDUCED. Each Lender's Commitment is hereby irrevocably
reduced to the amount set forth opposite such Lender's name on the signature
pages hereof.
2. MAXIMUM LOAN AVAILABLE AMOUNT AMENDED. The definition of Maximum Loan
Available Amount contained in Section 1.1 of the Credit Agreement is hereby
amended in its entirety to be and read as follows:
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"MAXIMUM LOAN AVAILABLE AMOUNT shall mean, at any date, an amount equal to
the lesser of (i) the aggregate of the Commitments or (ii) the Borrowing
Base."
3. BORROWING BASE AMENDED. The definition of Borrowing Base contained in
Section 1.1 of the Credit Agreement is hereby amended by deleting the phrase
"85% of" where it appears therein and substituting therefor the phrase "the
Applicable Borrowing Base Percentage as of such date times."
4. ELIGIBLE ACCOUNTS AMENDED. The definition of Eligible Accounts
contained in Section 1.1 of the Credit Agreement is hereby amended in its
entirety to be and read as follows:
"ELIGIBLE ACCOUNTS shall mean, as at any date of determination thereof,
each Account of the Borrower or any of its Subsidiaries which is subject
to a Security Document and on which the Agent shall have a first-priority
perfected Lien, which Account is at said date payable to the Borrower or
any of its Subsidiaries and which complies with the following
requirements: (a) the subject goods have been sold to an account debtor on
an absolute sale basis on open account and not on consignment, on approval
or on a "sale or return" basis or subject to any other repurchase or
return agreement and no material part of the subject goods has been
returned, rejected, lost or damaged, the Account is stated to be payable
in Dollars and is not evidenced by chattel paper or an instrument of any
kind and said account debtor is not insolvent or the subject of any
bankruptcy or insolvency proceedings of any kind; (b) the account debtor
must be located in the United States; (c) it is a valid obligation of the
account debtor thereunder and is not subject to any offset or other
defense on the part of such account debtor or to any claim on the part of
such account debtor denying liability thereunder; (d) it is subject to no
Lien whatsoever, except for the Liens created or permitted pursuant to the
Security Documents; (e) it is evidenced by an invoice submitted to the
account debtor in timely fashion and in the normal course of business; (f)
it has not remained unpaid beyond 90 days after the date of the applicable
invoice; (g) if such date is on or after August 5, 1996, and if the
applicable account debtor is one which is no longer being serviced by the
Borrower, the applicable account debtor does not have any other Accounts
owed to the Borrower or any of its Subsidiaries which remain unpaid beyond
90 days after the date of the applicable invoice; (h) not more than (1)
75% (if such date is on or after July 5, 1996 but prior to August 5,
1996), (2) 50% (if such date is on or after August 5, 1996 but prior to
September 5, 1996) or (3) 25% (if such date is on or after September 5,
1996), of the other Accounts of the applicable account debtor or any of
its Affiliates owed in the aggregate to the Borrower or any
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of its Subsidiaries fail to satisfy all of the requirements of an
"Eligible Account"; (i) it does not arise out of transactions with an
employee, officer, agent, director or stockholder of the Borrower or any
of its Subsidiaries or any Affiliate of the Borrower or any of its
Subsidiaries, other than Accounts approved in writing by the Agent; (j)
the applicable account debtor is not one who the Agent has, in the
exercise of its sole discretion, determined to be (based on such factors
as the Agent deems appropriate), and has given notice of such
determination to the Borrower, an ineligible account debtor; PROVIDED,
HOWEVER, than any such notice shall not apply as to any Account of such
account debtor which has been included on a Borrowing Base Certificate
prior to the giving of such notice by Agent and which meets each and every
other requirement under this Agreement for the denomination of such
Account as an "Eligible Account," and (k) each of the representations and
warranties set forth in the Security Documents executed by the Borrower
and its Subsidiaries with respect thereto is true and correct in all
material respects on such date. In the event of any dispute under the
foregoing criteria, about whether an Account is or has ceased to be an
Eligible Account, the decision of the Agent, made in good faith, shall be
conclusive and binding, absent manifest error."
5. INTEREST RATES AMENDED.
(a) The option of the Borrower to have the unpaid principal balance
of the Loans bear interest at the Eurodollar Rate is hereby irrevocably
terminated. Upon the expiration of any Eurodollar Rate Borrowing Interest
Period currently in effect on the date hereof, the applicable Eurodollar
Rate Borrowing shall automatically be converted to a Base Rate Borrowing.
(b) The definition of Base Rate contained in the Interest Rate Annex
is hereby amended effective as of June 1, 1996, by deleting therefrom
clause (1) of the first sentence thereof and substituting therefor the
following:
"(1) the Prime Rate for that day plus three percent (3%) and".
6. DEFERRED INTEREST PAYMENTS. Notwithstanding anything contained in the
Credit Agreement, as amended hereby, to the contrary, on each Interest Payment
Date (as that term is defined in the Interest Rate Annex) occurring after May
31, 1996 and prior to October 1, 1996 (and subject to Section 11.7 of the Credit
Agreement), payments of interest on Base Rate Borrowings shall be made as if the
Base Rate in effect on each day during the calendar month to which such Interest
Payment Date relates was equal to the Prime Rate for such day plus one percent
(1%). All interest so deferred which has accrued to October 1, 1996 and which
has not otherwise been paid shall be due and payable on such day.
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7. DELIVERY TIMES EXTENDED. Section 7.2(d) of the Credit Agreement is
hereby amended by deleting therefrom the number "30" where it appears therein
and substituting therefor the number "35".
8. LETTER OF CREDIT FACILITY AMENDED. Section 2.2(a) of the Credit
Agreement is hereby amended to provide that the aggregate Letter of Credit
Liabilities shall never exceed $250,000 after the date hereof. In addition,
Section 2.2(b) of the Credit Agreement is hereby amended to provide that any and
all Letters of Credit issued by the Issuer after the date hereof shall be fully
Covered or backed by a standby letter of credit in form and substance, and
issued by a Person, acceptable to the Agent in its sole discretion.
9. DEFINITION ADDED. Section 1.1 of the Credit Agreement is hereby amended
by adding thereto the following definition:
"APPLICABLE BORROWING BASE PERCENTAGE shall mean on any day occurring on
or prior to October 5, 1996, 85%, on any day occurring after October 5,
but prior to or on November 5, 1996, 80%, and on any day thereafter, 75%."
10. DEFINITIONS DELETED. Section 1.1 of the Credit Agreement is hereby
amended by deleting therefrom the definitions of "Pledged Account" and "Pledged
Account Value."
11. FINANCIAL TESTS AMENDED. Section 7.3 of the Credit Agreement is hereby
amended in its entirety to be and read as follows:
"7.3 FINANCIAL TESTS. Have and maintain on a consolidated basis:
"(a) MAINTAIN DEBT TO TANGIBLE NET WORTH RATIO. A ratio of
Indebtedness (including all Obligations) to Tangible Net Worth of not more
than (i) 13.00 to 1.00 at all times on or before April 30, 1996, (ii)
12.00 to 1.00 at all times from and including May 1, 1996 through and
including May 31, 1996, (iii) 10.00 to 1.00 at all times from including
June 1, 1996 through and including June 30, 1996, (iv) 9.00 to 1.00 at all
times from and including July 1, 1996 through and including July 31, 1996,
and (v) 8.00 to 1.00 from including August 1, 1996 and at all time
thereafter.
"(b) MAINTAIN DEBT TO NET WORTH RATIO. A ratio of Indebtedness
(including all Obligations) to Net Worth of not more than 1.90 to 1.00
prior to and on September 30, 1996 and 1.50 to 1.00 at all times
thereafter.
"(c) MAINTAIN CURRENT RATIO. A Current Ratio of not less than 1.10
to 1.00 at all times. For purposes of calculation of the Current Ratio,
Current
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Liabilities shall not include any of the Indebtedness arising pursuant to
or under the Credit Agreement and the other Loan Documents.
"(d) FIXED CHARGE COVERAGE RATIO. A Fixed Charge Coverage Ratio of
not less than 0.275 to 1.00 at all times prior to and on September 30,
1996 and 1.50 to 1.00 at all times thereafter.
"(e) DEBT TO EBITDA RATIO. A Debt to EBITDA Ratio of not more than
12.25 to 1.00 prior to and on September 30, 1996 and 4.00 to 1.00 at all
times thereafter."
12. PURCHASE MONEY INDEBTEDNESS; SECURITY. Section 8.1 of the Credit
Agreement is hereby deemed amended to provide that after the date hereof, the
Borrower shall not, and shall not permit any of its Subsidiaries to, incur any
additional purchase money indebtedness after the date of this Amendment. In
addition, clause (b) of Section 8.2 of the Credit Agreement is hereby deemed
amended to provide that no additional Liens may be granted to secure purchase
money security indebtedness not already in existence as of the date of this
Amendment.
13. NO CASH ACQUISITIONS. Section 8.4 of the Credit Agreement is hereby
amended by deleting therefrom clause (e) in its entirety.
14. NO LOSS DEFAULT AMENDED. Section 9.1(o) of the Credit Agreement is
hereby amended in its entirety to be and read as follows:
"(o) NO LOSS - the Borrower and its Subsidiaries on a consolidated basis
shall have a net loss (determined in accordance with GAAP) from operations
for the six (6) consecutive calendar months ending on September 30, 1996
in excess of $1,900,000 in the aggregate, or shall have a net loss
(determined in accordance with GAAP) from operations for any fiscal
quarter of the Borrower ending thereafter."
15. WAIVER OF CERTAIN DEFAULTS. The Bank hereby waives the occurrence of
any Default or Event of Default which has occurred through April 30, 1996 (but
not thereafter) and of which the Bank has received written notice from the
Borrower, under the provisions of Section 7.3 or Section 9.1(o) of the Credit
Agreement.
16. JOINDER EFFECTED. Pursuant to Section 7.13 of the Credit Agreement,
the Borrower shall cause, simultaneously with its execution and delivery of this
Amendment, EqualNet Wholesale Services, Inc. ("WHOLESALE"), a Delaware
corporation, a Subsidiary of the Borrower, to execute and deliver to the Agent a
Joinder Agreement and an Additional Security Agreement, in Proper Form, together
with any and all related Financing Statements, certificates of the
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Secretary or Assistant Secretary of Wholesale as to the execution and delivery
thereof and any and all other related documents required by the Agent.
17. RESTRUCTURE FEE. In consideration, among other consideration, for the
Agent and the Banks entering into this Amendment, the Borrower hereby agrees to
pay to the Agent for distribution to the Lenders a restructure fee in the amount
of $50,000, which shall be due and payable on the date hereof. Upon receipt of
said restructure fee, the Agent shall distribute the same to Lenders in
accordance with their respective Commitment Percentages.
18. VENUE. Section 11.14 of the Credit Agreement as well as each other
provision relating to venue contained in any of the other Loan Documents is
hereby amended by deleting the reference to "Harris County, Texas" wherever it
appears and substituting therefor "Dallas County, Texas" in each instance, and,
FURTHER, by deleting therefrom the reference to Southern District of Texas,
Houston Division" wherever it appears therein and substituting therefor in each
instance "Northern District of Texas, Dallas Division".
19. NO OTHER DEFAULT. Borrower hereby warrants and represents to Agent and
Lenders that no Default or Event of Default has occurred and is continuing which
has not been disclosed in writing to the Agent and the Lenders and waived
pursuant hereto.
20. CONDITIONS. No part of this Amendment shall become effective until the
Borrower shall have delivered (or shall have caused to be delivered) to the
Agent each of the following, in Proper Form:
(a) certificates dated as of the date hereof of the Secretary or any
Assistant Secretary of the Borrower and each of the Guarantors
(including, without limitation, Wholesale) as of the date hereof,
authorizing the execution, delivery and performance of this
Amendment, the Loan Documents described in SECTION 16 hereof, and
such other related documents and information as the Lenders may
request;
(b) an Additional Security Agreement and a Joinder Agreement, each of
even date herewith, each executed and delivered by Wholesale;
(c) certificates issued by the appropriate governmental authorities from
the States of Delaware and Texas as to the existence, good standing
and qualification to do business in Texas of the Borrower and the
Guarantors;
(d) copies of all billing contracts between the Borrower or any of its
Subsidiaries and third-party billing services (including, without
limitation, ACUS, Claremont and Centillion), certified by the
Secretary or Assistant Secretary of the Borrower or
6
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such Subsidiary (as the case may be) as being true, correct and
complete copies of all such contracts;
(e) a listing and aging of accounts receivable of the Borrower and its
Subsidiaries as of the date of this Amendment;
(f) a Notice of Entire Agreement executed by the Company and each of the
Guarantors as of the date hereof;
(g) the Lenders' restructuring fee in the amount of $50,000; and
(h) evidence of the payment of any and all legal fees and expenses
incurred to date by the Agent and the Lenders in connection with
this Amendment (including, without limitation, the negotiation and
preparation of this Amendment and the related Loan Documents).
21. CERTAIN DEFINITIONS AND REFERENCES. Terms used herein but not defined
herein which are defined in the Credit Agreement (as amended hereby) or in the
other Loan Documents shall have the meanings herein ascribed to them therein.
The term "Agreement" as used in the Credit Agreement and the term "Credit
Agreement," as used in the other Loan Documents or any other instrument,
document or writing furnished to Agent or any Lender by Borrower shall mean the
Credit Agreement as hereby amended.
22. EXPENSES; INDEMNIFICATION. TO THE EXTENT NOT PROHIBITED BY APPLICABLE
LAW, BORROWER WILL PAY ALL COSTS AND EXPENSES AND REIMBURSE AGENT AND LENDERS
FOR ANY AND ALL EXPENDITURES OF EVERY CHARACTER INCURRED OR EXPENDED FROM TIME
TO TIME, REGARDLESS OF WHETHER A DEFAULT HAS OCCURRED, IN CONNECTION WITH THE
PREPARATION, NEGOTIATION, DOCUMENTATION, RECORDING, CLOSING, RENEWAL, REVISION,
MODIFICATION, INCREASE, REVIEW OR RESTRUCTURING OF THIS AMENDMENT.
23. NO USURY INTENDED; SPREADING. Notwithstanding any provision to the
contrary contained in the Credit Agreement as amended by this Amendment, the
Notes or any of the other Loan Documents, it is expressly provided that in no
case or event shall the aggregate of (i) all interest on the unpaid balance of
the Notes, accrued or paid from the date hereof and (ii) the aggregate of any
other amounts accrued or paid pursuant to the Notes or any of the other Loan
Documents, which under applicable laws are or may be deemed to constitute
interest upon the indebtedness evidenced by the Notes ever exceed the Ceiling
Rate. In this connection, the parties hereto expressly stipulate and agree that
it is their common and overriding intent to contract in strict compliance with
the applicable usury laws. In furtherance thereof, none of the terms of the
Notes or any of the other Loan Documents shall ever be construed to create a
contract to pay, as consideration for the use, forbearance or detention of
money, interest at a rate in excess of the Ceiling Rate. Borrower or other
parties now or hereafter becoming liable for payment of the
7
<PAGE>
indebtedness evidenced by the Notes shall never be liable for interest in excess
of the Ceiling Rate. If, for any reason whatever, the interest paid or received
on any Note during its full term produces a rate which exceeds the Ceiling Rate,
the holder of such Note shall credit against the principal of such Note (or, if
such indebtedness shall have been paid in full, shall refund to the payor of
such interest) such portion of said interest as shall be necessary to cause the
interest paid on such Note to produce a rate equal to the Ceiling Rate. All sums
paid or agreed to be paid to the holder of any Note for the use, forbearance or
detention of the indebtedness evidenced thereby shall, to the extent permitted
by applicable law, be amortized, prorated, allocated and spread in equal parts
throughout the full term of such Note, so that the interest rate is uniform
throughout the full term of such Note. The provisions of this paragraph shall
control all agreements, whether now or hereafter existing and whether written or
oral, among Borrower and Agent and Lenders.
24. BUSINESS LOANS. Borrower warrants and represents to Agent and Lenders
and all other holders of the Notes that all loans evidenced by the Notes are and
will be for business, commercial, investment or other similar purpose and not
primarily for personal, family, household or agricultural use, as such terms are
used in Chapter One.
25. LIEN CONTINUATION; MISCELLANEOUS. The Liens are hereby ratified and
confirmed as securing and continuing to secure the payment of the Notes, as if
it were originally described as "Indebtedness" (as defined in and) under each of
the Security Agreements. Nothing herein shall in any manner diminish, impair or
extinguish the Notes, any of the other Loan Documents or the Liens. The Liens
are not waived. To the extent of any conflict between the Notes or any of the
other Loan Documents (or any earlier modification of any of them) and this
Amendment, this Amendment shall control. Except as hereby expressly modified,
all terms of the Notes and the other Loan Documents (as any of them may have
been previously modified by any written agreement) remain in full force and
effect. This Amendment (a) shall bind and benefit Borrower and, except as herein
expressly limited, Agent and Lenders, and their respective receivers, trustees,
successors and assigns (PROVIDED, that Borrower may not assign its rights
hereunder without the prior written consent of Agent and Lenders); (b) may be
modified or amended only by a writing signed by each party; (c) SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE APPLICABLE LAWS OF THE STATE OF
TEXAS AND THE UNITED STATES OF AMERICA FROM TIME TO TIME IN EFFECT; (d) may be
executed in several counterparts, and by the parties hereto in separate
counterparts, and each counterpart, when executed and delivered, shall
constitute an original agreement enforceable against all who signed it without
production of or accounting for any other counterpart, and all separate
counterparts shall constitute the same agreement and (e) embodies the entire
agreement and understanding between the parties with respect to modifications of
instruments provided for herein and supersedes all prior conflicting or
inconsistent agreements, consents and understandings relating to such subject
matter. Borrower acknowledges and agrees that there are no oral agreements among
any of them with respect to the transactions contemplated by the Loan Documents
which have not been incorporated in this Amendment or in the Loan Documents. If
any provision of this Amendment should be determined by any court of competent
jurisdiction to
8
<PAGE>
be illegal, invalid or unenforceable under present or future laws, the legality,
validity and enforceability of the remaining provisions of this Amendment shall
not be affected thereby. Each waiver in this Amendment is subject to the
overriding and controlling rule that it shall be effective only if and to the
extent that (a) it is not prohibited by applicable law and (b) applicable law
neither provides for nor allows any material sanctions to be imposed against
Agent and Lenders for having bargained for and obtained it. Wherever the term
"including" or a similar term is used in this Amendment, it shall be read as if
it were "including by way of example only and without in any way limiting the
generality of the clause or concept referred to." Any exhibits, appendices and
annexes described in this Amendment as being attached to it are hereby
incorporated into it. The headings in this Amendment shall be accorded no
significance in interpreting it.
26. RELEASE. EACH OF BORROWER AND GUARANTORS, BY THEIR JOINDER HEREIN,
HEREBY RELEASES, DISCHARGES AND ACQUITS FOREVER AGENT AND LENDERS AND ITS
OFFICERS, DIRECTORS, TRUSTEES, AGENTS, EMPLOYEES AND COUNSEL (IN EACH CASE,
PAST, PRESENT AND FUTURE) FROM ANY AND ALL CLAIMS EXISTING AS OF THE DATE HEREOF
(OR THE DATE OF ACTUAL EXECUTION HEREOF BY THE APPLICABLE PERSON OR ENTITY, IF
LATER). AS USED HEREIN, THE TERM "CLAIM" SHALL MEAN ANY AND ALL LIABILITIES,
CLAIMS, DEFENSES, DEMANDS, ACTIONS, CAUSES OF ACTION, JUDGMENTS, DEFICIENCIES,
INTEREST, LIENS, COSTS OR EXPENSES (INCLUDING BUT NOT LIMITED TO COURT COSTS,
PENALTIES, ATTORNEYS' FEES AND DISBURSEMENTS, AND AMOUNTS PAID IN SETTLEMENT) OF
ANY KIND AND CHARACTER WHATSOEVER, INCLUDING BUT NOT LIMITED TO CLAIMS FOR
USURY, BREACH OF CONTRACT, BREACH OF COMMITMENT, NEGLIGENT MISREPRESENTATION OR
FAILURE TO ACT IN GOOD FAITH, IN EACH CASE WHETHER NOW KNOWN OR UNKNOWN,
SUSPECTED OR UNSUSPECTED, ASSERTED OR UNASSERTED OR PRIMARY OR CONTINGENT, AND
WHETHER ARISING OUT OF WRITTEN DOCUMENTS, UNWRITTEN UNDERTAKINGS, COURSE OF
CONDUCT, TORT, VIOLATIONS OF LAWS OR REGULATIONS OR OTHERWISE.
NOTICE PURSUANT TO TEX. BUS. & COMM. CODE SS.26.02
THIS AMENDMENT AND ALL OTHER LOAN DOCUMENTS EXECUTED BY ANY OF THE PARTIES
BEFORE OR SUBSTANTIALLY CONTEMPORANEOUSLY WITH THE EXECUTION HEREOF
TOGETHER CONSTITUTE A WRITTEN LOAN AGREEMENT WHICH REPRESENTS THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE
ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
EQUALNET HOLDING CORP., a Texas corporation
By: /s/ ZANE RUSSELL
Name: Zane Russell
Title: President
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COMERICA BANK-TEXAS, a Texas banking association, as Agent
and as a Lender
By: /s/ MARK H. METCALFE
Name: Mark H. Metcalfe
Title: Vice President
Commitment:
$9,000,000
11
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FIRST INTERSTATE BANK OF TEXAS, N. A., a national banking
association
By: /s/ KENNETH TEUSINK
Name: Kenneth Teusink
Title: Vice President
Commitment:
$3,500,000
12
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GUARANTORS' CONSENTS
Guarantors hereby join in this Amendment to evidence Guarantors' consent to
execution by Borrower and the Agent and Lenders of this Amendment, to confirm
that the Guaranties apply and shall continue to apply to the Credit Agreement
(as amended hereby), and the other Loan Documents and to acknowledge that
without such consent and confirmation, Agent and Lenders would not execute this
Amendment or otherwise consent to the amendments set forth herein.
EXECUTED effective as of the date first set forth above.
EQUALNET CORPORATION, a Delaware corporation
By: /s/ ZANE RUSSELL
Name: Zane Russell
Title: President
TELESOURCE, INC., a Texas corporation
By: /s/ MARK VAN EMAN
Name: Mark Van Eman
Title: President
13
EXHIBIT 10.26
EQUALNET HOLDING CORP.
1995 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
1. PURPOSE. The 1995 Non-Employee Director Stock Option Plan (the "Plan")
is to benefit EqualNet Holding Corp. (the "Company") by offering its
non-employee directors (the "Eligible Directors") an opportunity to become
owners of the Common Stock, $.01 par value, of the Company (the "Stock") and is
intended to advance the best interests of the Company by increasing their
proprietary interests of the Company by increasing their proprietary interest in
the success of the Company and its subsidiary corporations.
2. ADMINISTRATION. The Plan shall be administered by the Board of
Directors of the Company (the "Board"). Subject to the terms of the Plan, the
Board shall have the power to construe the provisions of the Plan, or of options
granted hereunder (the "Options"), to determine all questions arising
thereunder, and to adopt and amend such rules and regulations for administering
the Plan as the Board deems desirable.
3. AVAILABLE SHARES. The total amount of the Stock with respect to which
Options that may be granted under this Plan shall not exceed in the aggregate
250,000 shares; provided, that the class and aggregate number of shares of Stock
with respect to which Options may be granted hereunder shall be subject to
adjustment in accordance with the provisions of Paragraph 16 hereof. Such shares
of Stock may be treasury shares or authorized but unissued shares of Stock. In
the event that any outstanding Option for any reason shall expire or is
terminated or canceled, the shares of Stock allocable to the unexercised portion
of such Option may again be subject to an Option or Options under the Plan.
4. AUTHORITY TO GRANT OPTIONS AND STOCK. All Options granted under the
Plan shall be non-qualified stock options. No Options shall be granted under the
Plan subsequent to May 8, 2005. The only Options under the Plan that may be
granted are those that are granted after both adoption of the Plan and approval
thereof by the stockholders of the Company within twelve months after the date
of such adoption, all as provided in Paragraph 19 hereof.
5. ELIGIBILITY FOR STOCK OPTIONS. Except as specifically provided below,
the individuals who shall be eligible to receive Options under the Plan shall be
Eligible Directors of the Company.
6. OPTION GRANT SIZE AND GRANT DATES.
(a) INITIAL GRANTS.
(i) ELIGIBLE DIRECTORS ON THE EFFECTIVE DATE OF THE PLAN. An
Option to purchase 5,000 shares of Stock (as adjusted pursuant to
Paragraph 16) (an "Initial Grant") shall be granted on the day
following the effective date of the Plan to each person who is an
Eligible Director on the date of the annual meeting of stockholders
("Annual Meeting") at which the Plan is approved. If however, the
Chairman of the Board of the Company determines, in his sole
discretion following discussions with the Company's legal counsel,
that the Company is in possession of material, nonpublic information
about the Company, then the Initial Grant to the Eligible Directors
shall be suspended until
<PAGE>
the second trading day after public dissemination of such
information.
(ii) ELIGIBLE DIRECTORS ELECTED OR APPOINTED AFTER THE
EFFECTIVE DATE OF THE PLAN. An Initial Grant (as adjusted pursuant
to Paragraph 16) shall be granted to each person who shall become an
Eligible Directors after the effective date of the Plan on the day
following the day on which such Eligible Director is first elected
or appointed to be a Director, whichever is applicable; provided,
that if an Eligible Director who previously received an Initial
Grant terminates service as a Director and is subsequently elected
or appointed to the Board, such Director shall not be eligible to
receive a second Initial Grant, but shall be eligible to receive
only Annual Grants (defined below) as provided in this Paragraph 6,
beginning with the Annual Meeting held immediately following the
date on which such Director was reelected or appointed. If however,
the Chairman of the Board of the Company determines, in his sole
discretion following discussions with the Company's legal counsel,
that the Company is in possession of material, nonpublic information
about the Company, then the Initial Grant to the Eligible Directors
shall be suspended until the second trading day after public
dissemination of such information.
(b) ANNUAL GRANTS. An Option to purchase 1,000 shares of Stock (as
adjusted pursuant to Paragraph 16) shall be granted to each Eligible
Director as an annual retainer fee for service as a member of the
Company's Board of Directors (each, an "Annual Grant").
(i) ELIGIBLE DIRECTORS ON THE EFFECTIVE DATE OF THE PLAN. An
Annual Grant shall be granted to each person who is an Eligible
Director on the effective date of the Plan on the day following each
Annual Meeting beginning with the first Annual Meeting to occur
after the date on which the stockholders approve the Plan. If,
however, the Chairman of the Board of the Company determines, in his
sole discretion following discussions with the Company's legal
counsel, that the Company is in possession of material, nonpublic
information about the Company, then the Annual Grant shall be
delayed until the second trading day after public dissemination of
such information.
(ii) ELIGIBLE DIRECTORS ELECTED OR APPOINTED AFTER THE
EFFECTIVE DATE OF THE PLAN. An Annual Grant shall be granted to each
person who shall become an Eligible Director after the effective
date of this Plan on the day following each Annual Meeting beginning
with the later of (A) the first Annual Meeting to occur after the
date on which the stockholders approve the Plan and (B) the first
Annual Meeting after such Eligible Director is first elected or
appointed to be a Director, whichever is applicable. If, however,
the Chairman of the Board of the Company determines, in his sole
discretion following discussions with the Company's legal counsel,
that the Company is in possession of material, nonpublic information
about the
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<PAGE>
Company, then the Annual Grant shall be delayed until the second
trading day after public dissemination of such information.
7. OPTION PRICE; FAIR MARKET VALUE. The price at which shares of Stock may
be purchased by an Eligible Director pursuant to an Option (the "Optionee")
shall be the fair market value of the shares of Stock on the date the Option is
granted. For all purposes of this Plan, the "fair market value" of the Stock
shall be the mean of the highest and lowest selling prices of the Stock as
reported in THE WALL STREET JOURNAL for the last trading day before the date as
of which such fair market value is to be determined. No Option may be repriced.
8. DURATION OF OPTIONS. The term of each Option hereunder shall be ten
years, and no Option shall be exercisable after the expiration of ten years from
the date such Option is granted. An Option shall expire immediately following
the last day of which such Option is exercisable pursuant to this Paragraph 8.
9. AMOUNT EXERCISABLE.
(a) No Option shall be exercisable earlier than the six month
anniversary of the date of grant.
(b) An Initial Grant becomes exercisable according to the following
schedule:
PERIOD FROM PORTION OF GRANT THAT
THE DATE THE BECOMES EXERCISABLE
OPTION IS GRANTED AFTER SUCH PERIOD
----------------- ---------------------
One year after grant............. 33-1/3%
Two years after grant............ 33-1/3%
Three years after grant.......... 33-1/3%
(c) An Annual Grant becomes exercisable on the six month
anniversary of the date of grant.
10. EXERCISE OF OPTIONS. Options shall be exercised by the delivery of
written notice to the Company setting forth the number of shares of Stock with
respect to which the Option is to be exercised, together with cash, wire
transfer, certified check, bank draft or postal or express money payable to the
order of the Company (the "Acceptable Funds") for an amount equal to the Option
price of such shares of Stock, or at the election of the Optionee, by exchanging
shares of Stock owned by the Optionee, so long as the exchanged shares of Stock
plus Acceptable Funds paid, if any, have a total fair market value (determined
in accordance with Paragraph 7, as of the date of exercise) equal to the
purchase prices for such shares to be acquired upon exercise of said Option, and
specifying the address to which the certificates for such shares are to be
mailed. Whenever an Option is exercised by exchanging shares of Stock
theretofore owned by the Optionee: (a) no shares of Stock received upon exercise
of that Option thereafter may be exchanged to pay the Option price for
additional shares of Stock within the following six months; and (b) the Optionee
shall deliver to the Company certificates registered in the name of such
Optionee, free of all liens, claims, and encumbrances of every kind, accompanied
by stock powers duly endorsed in blank by the record holder of the shares
represented by such certificates, with signature guaranteed by a commercial bank
or trust company or by a brokerage firm having a membership on a registered
national stock exchange. Such notice may be delivered in person to the Secretary
of the Company, or may be sent by mail to the Secretary of the Company, in which
case delivery shall be deemed made on the date such notice is received. As
promptly as practicable after receipt of such written notification
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<PAGE>
and payment, the Company shall deliver to the Optionee certificates for the
number of shares with respect to which such Option has been so exercised, issued
in the Optionee's name; provided, that such delivery shall be deemed effected
for all purposes when a stock transfer agent of the Company shall have deposited
such certificates in the United States mail, addressed to the Optionee, at the
address specified pursuant to this Paragraph 10. The delivery of certificates
upon the exercise of Options is subject to the condition that the person
exercising such Option provide the Company with such information as the Company
might reasonably request pertaining to such exercise, sale or other disposition.
11. TRANSFERABILITY OF OPTIONS. Options shall not be transferable by the
Optionee other than by will or under the laws of descent and distribution.
Options shall be exercisable, during the Optionee's lifetime, only by the
Optionee or his legal guardian or representative.
12. TERMINATION OF DIRECTORSHIP OF OPTIONEE. If, before the date of
expiration of the Option, the Optionee shall cease to be a Director of the
Company, the Option shall terminate on the earlier of such date of expiration or
one year after the date of ceasing to serve as a Director. In such event, the
Optionee shall have the right prior to the termination of such Option to
exercise the Option to the extent to which he was entitled to exercise such
Option immediately prior to ceasing to serve as a Director; however, in the
event that the Optionee has ceased to serve as a Director on or after attaining
the age of sixty-two (62) years, the Optionee shall be entitled to exercise all
or any part of such Option (without regard to any limitations imposed pursuant
to Paragraph 9(b) hereof, but subject to Paragraph 9(a)). Upon the death of the
Optionee, his executors, administrators, or any person or persons to whom his
Option may be transferred by will or by the laws of descent and distribution,
shall have the right, at any time prior to the earlier of the date of expiration
or one year following the date of such death, to exercise the Option, in whole
or in part (without regard to any limitations imposed pursuant to Paragraph 9(b)
hereof, but subject to Paragraph 9(a)).
13. REQUIREMENTS OF LAW. The Company shall not be required to issue any
shares under any Option or as partial payment for annual retainer fees if the
issuance of such shares shall constitute a violation by the Optionee or the
Company of any provisions of any law or regulation of any governmental
authority.
14. NO RIGHTS AS STOCKHOLDER. No Optionee shall have rights as a
stockholder with respect to shares covered by any Option until the date of
issuance of a stock certificate for such shares; and, except as otherwise
provided in Paragraph 16 hereof, no adjustment for dividends, or otherwise,
shall be made if the record date thereof is prior to the date of issuance of
such certificate.
15. NO EMPLOYMENT OR NOMINATION OBLIGATION. The granting of any Option
shall not impose upon the Company or its stockholders any obligation to employ
any Optionee or to continue to nominate any Optionee for election as a Director
of the Company.
16. CHANGES IN THE COMPANY'S CAPITAL STRUCTURE. The existence of
outstanding Options shall not affect in any way the right or power of the
Company or its stockholders to make or authorize any or all adjustments,
recapitalizations, reorganization or other changes in the Company's capital
structure or its business, or any merger or consolidation of the Company, or any
issuance of bonds, debentures, preferred or prior preference stock ahead of or
affecting the Stock or the rights thereof, or the dissolution or liquidation of
the Company, or any sale or transfer of all or any part of its assets or
business, or any other corporate act or proceeding, whether of a similar
character or otherwise.
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<PAGE>
If the Company shall effect a subdivision or consolidation or shares or
other capital readjustment, the payment of a stock dividend, or other increase
or reduction of the number of shares of the Stock outstanding, without receiving
compensation therefor in money, services or property, then (a) the number, class
and per share price of shares of Stock subject to outstanding Options hereunder
shall be appropriately adjusted in such a manner as to entitle an Optionee to
receive upon exercise of an Option, for the same aggregate cash consideration,
an equivalent total number and class of shares as he would have received had he
exercised his Option in full immediately prior to the event requiring the
adjustment; and (b) the number and class of shares then reserved for issuance
under the Plan shall be adjusted by substituting for the total number and class
of shares of Stock then reserved the number and class of shares of Stock that
would have been received by the owner of an equal number of outstanding shares
of each class of Stock as the result of the event requiring the adjustment.
After a merger of one or more corporations into the Company, or after a
consolidation of the Company and one or more corporations in which the Company
shall be the surviving corporation, each holder of an outstanding Option shall,
at no additional cost, be entitled upon exercise of such Option to receive
(subject to any required action by stockholders) in lieu of the number and class
of shares into which such Option would have been so exercisable in the absence
of such event, the number and class of shares of stock or other securities to
which such holder would have been entitled pursuant to the terms of the
agreement of merger or consolidation if, immediately prior to such merger or
consolidation, such holder had been the holder of record of the number and class
of shares of Stock equal to the number and class of shares into which such
Option shall be so exercised.
If the Company is merged into or consolidated with another corporation
under circumstances where the Company is not the surviving corporation, or if
the Company sells or otherwise disposes of substantially all its assets to
another corporation and is liquidated while unexercised Options remain
outstanding under the Plan, (a) after the effective date of such merger,
consolidation or sale and liquidation, as the case may be, each holder of an
outstanding Option shall be entitled, upon exercise of such Option, to receive,
in lieu of shares of the Stock, shares of such stock or other securities as the
holders of shares of such class of Stock received pursuant to the terms of the
merger, consolidation or sale; and (b) notwithstanding Paragraphs 9(b) and 9(c)
hereof, but subject to Paragraph 9(a), all Options, from and after the date of
any agreement regarding such merger, consolidation, or sale and liquidation, as
the case may be, shall be exercisable in full prior to the effective date of
such merger, consolidation or sale or liquidation.
Except as hereinbefore expressly provided, the issuance by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, for cash or property, or for labor or services either upon direct
sale or upon the exercise of rights or warrants to subscribe therefor, or upon
conversion of shares or obligations of the Company convertible into such shares
or other securities, shall not affect, and no adjustment by reason thereof shall
be made with respect to, the number, class or price of shares of Stock then
subject to outstanding Options.
17. TERMINATION AND AMENDMENT OF PLAN. The Board of Directors of the
Company may amend, terminate or suspend the Plan at any time, in is sole and
absolute discretion; provided, however, to the extent required to qualify the
Plan under Rule 16b-3 promulgated under Section 16 of the Securities Exchange
Act of 1934, as amended, no amendment shall be made more than once every six
months that would change the amount, price or timing of the Initial and Annual
Grants, other than to comport with changes in the Internal Revenue Code of 1986,
as amended, the Employee Retirement Income Security Act or the rules and
regulations promulgated thereunder; and provided, further, to the extent
required to qualify
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<PAGE>
the Plan under Rule 16b-3, no amendment that would (a) materially increase the
number of shares of Stock that may be issued under the Plan, (b) materially
modify the requirements as to eligibility for participation in the Plan, or (c)
otherwise materially increase the benefits accruing to participants under the
Plan, shall be made without the approval of the Company's stockholders.
18. WRITTEN AGREEMENT. Each Option granted hereunder of Stock issued
hereunder shall be embodied in a written agreement, which shall be subject to
the terms and conditions prescribed above and shall be signed by the Eligible
Director and by the Chairman of the Board, the President or any Senior Vice
President of the Company for and in the name and on behalf of the Company.
19. ADOPTION, APPROVAL AND EFFECTIVE DATE OF PLAN. The Plan shall be
considered adopted and shall become effective, subject to approval by the
stockholders of the Company, on May 8, 1995. The Plan and all Options granted
under the Plan prior to stockholder approval shall be void and of no further
force and effect unless the Plan shall have been approved by the requisite vote
of the stockholders entitled to vote at a meeting of the stockholders of the
Company called for such purpose prior to May 8, 1996.
20. GOVERNING LAW. The Plan and all determinations made and actions taken
pursuant hereto shall be governed by the laws of the State of Texas, without
reference to principles of conflict of laws, and shall be construed accordingly.
21. COMPLIANCE WITH SEC REGULATIONS. It is the Company's intent that the
Plan comply in all respects with Rule 16b-3, and any successor rule pursuant
thereto. If any provision of this Plan is later found not to be in compliance
with Rule 16b-3, the provision shall be deemed null and void. All grants of
Options and all exercises of Options under this Plan shall be executed in
accordance with the requirements of Section 16 of the Securities Exchange Act of
1934, as amended, and any regulations promulgated thereunder.
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EXHIBIT 21.1
Subsidiaries of EqualNet Holding Corp.
Name of Subsidiary Jurisdiction of Incorporation
- - ------------------ -----------------------------
EqualNet Corporation (100%) Delaware
Telesource, Inc. (100%) Texas
EqualNet Wholesale Services, Inc. (100%)* Delaware
Unified Network Services LLC (50%) Delaware
- - -------------
* Indirect subsidiary
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-97200) pertaining to the Employee Stock Option and Restricted
Stock Plan of EqualNet Holding Corp., the EqualNet Holding Corp. Employee Stock
Purchase Plan (Form S-8 No. 33-04485), and the EqualNet Holding Corp. 1995
Non-Employee Director Stock Option Plan (Form S-8 No. 33-04483) of our report
dated September 28, 1996, with respect to the consolidated financial statements
of EqualNet Holding Corp. included in the Annual Report (Form 10-K) for the year
ended June 30, 1996.
ERNST & YOUNG LLP
Houston, Texas
October 14, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 381,849
<SECURITIES> 0
<RECEIVABLES> 17,657,744
<ALLOWANCES> 3,284,886
<INVENTORY> 0
<CURRENT-ASSETS> 19,005,397
<PP&E> 5,552,340
<DEPRECIATION> 1,864,068
<TOTAL-ASSETS> 34,595,832
<CURRENT-LIABILITIES> 22,166,834
<BONDS> 0
0
0
<COMMON> 60,237
<OTHER-SE> 12,323,761
<TOTAL-LIABILITY-AND-EQUITY> 34,595,832
<SALES> 78,354,858
<TOTAL-REVENUES> 78,354,858
<CGS> 61,807,113
<TOTAL-COSTS> 61,807,113
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,820,701
<INTEREST-EXPENSE> 679,745
<INCOME-PRETAX> (11,077,266)
<INCOME-TAX> (2,659,853)
<INCOME-CONTINUING> (8,417,413)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,417,413)
<EPS-PRIMARY> (1.40)
<EPS-DILUTED> (1.40)
</TABLE>
