UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ____, 19__ to _____, 19__.
Commission File Number: 0-25482
EQUALNET HOLDING CORP.
(Exact Name of Registrant as Specified in its Charter)
TEXAS 76-0457803
(State of Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
1250 WOOD BRANCH PARK DRIVE
HOUSTON, TEXAS 77079
Address of Principal Executive Offices, Including Zip Code
(281) 529-4600
(Registrant's Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
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 [ ]
There were 6,152,000 shares of the Registrant's $.01 par value common stock
outstanding as of May 12, 1997.
<PAGE>
Part I Financial Information
Item 1. Financial Statements
EQUALNET HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
June 30, March 31,
1996 1997
------------ ------------
(Note) (Unaudited)
Assets
Current assets
Cash and equivalents ........................ $ 381,849 $ 1,667,568
Accounts receivable, net of allowance
for doubtful accounts of $3,284,886
at June 30, 1996 and $1,439,825 at
March 31, 1997 ............................ 14,372,858 9,106,252
Receivable from officers .................... 28,367 28,367
Due from agents ............................. 1,640,808 2,830,461
Prepaid expenses and other .................. 582,052 637,196
Recoverable federal income taxes ............ 1,302,595 103,881
Deferred tax assets ......................... 696,868 696,868
------------ ------------
Total current assets .......................... 19,005,397 15,070,593
Property and equipment
Computer equipment .......................... 3,172,950 3,259,376
Office furniture and fixtures ............... 1,204,880 1,209,032
Leasehold improvements ...................... 1,174,510 1,174,777
------------ ------------
5,552,340 5,643,185
Accumulated depreciation and
amortization ................................ (1,864,068) (3,281,204)
------------ ------------
3,688,272 2,361,981
Customer acquisition costs, net of
accumulated amortization of $5,379,338
at June 30, 1996 and $12,476,667 at
March 31, 1997 .............................. 9,019,774 1,990,241
Deferred tax asset ............................ 1,531,209 2,334,054
Other assets .................................. 1,351,180 1,725,666
Intangible assets ............................. -- 897,340
------------ ------------
Total assets .................................. $ 34,595,832 $ 24,379,875
============ ============
Note: The balance sheet at June 30, 1996 has been derived from the audited
financial statements at that date.
2
<PAGE>
EQUALNET HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
June 30, March 31,
1996 1997
------------ ------------
(Note) (Unaudited)
Liabilities and shareholders' equity
Current Liabilities
Accounts payable .............................. $ 2,057,092 $ 3,172,510
Accrued expenses .............................. 879,484 865,657
Accrued sales taxes ........................... 912,123 435,481
Brokerage commissions payable ................. 177,891 167,303
Payable to providers of long distance services 7,194,856 8,494,018
Current maturities of capital lease obligations 90,000 72,000
Note payable to long distance provider ........ -- 366,379
Revolving line of credit ...................... 10,654,245 5,122,259
------------ ------------
Total current liabilities ....................... 21,965,691 18,695,607
Subordinated note payable ....................... -- 2,851,372
Long term obligations under capital leases ...... 45,000 --
Deferred rent ................................... 201,143 212,342
Shareholders' equity
Preferred stock (non-voting),$.01 par value
1,000,000 shares authorized and 0 shares
issued and outstanding ...................... -- --
Common stock, $.01 par value, 20,000,000
shares authorized and 6,002,000 shares
issued and outstanding at June 30, 1996
and 6,152,000 at March 31, 1997 .............. 60,237 61,738
Treasury stock at cost, 21,750 shares at
June 30, 1996 and March 31, 1997 ............. (104,881) (104,881)
Additional paid in capital .................... 19,942,428 20,390,927
Warrants to purchase common stock ............. -- 368,000
Deferred compensation ......................... (335,836) (268,330)
Accumulated deficit ........................... (7,177,950) (17,826,900)
------------ ------------
Total shareholders' equity ...................... 12,383,998 2,620,554
------------ ------------
Total liabilities and shareholders' equity ...... $ 34,595,832 $ 24,379,875
============ ============
Note: The balance sheet at June 30, 1996 has been derived from the audited
financial statements at that date.
3
<PAGE>
EQUALNET HOLDING CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31, Nine Months Ended March 31,
------------------------------- -------------------------------
1996 1997 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales .................................................. $ 19,212,135 $ 10,662,051 $ 62,179,037 $ 36,067,019
Cost of sales .......................................... 18,424,661 7,844,314 50,235,498 27,777,251
------------ ------------ ------------ ------------
787,474 2,817,737 11,943,539 8,289,768
Selling, general and administrative expenses ........... 3,515,196 2,822,974 10,327,098 9,037,655
Depreciation and amortization .......................... 1,606,499 1,502,343 3,849,812 5,200,166
Write down of long term assets ......................... 3,182,661 -- 6,882,661 4,400,000
------------ ------------ ------------ ------------
Operating loss ......................................... (7,516,882) (1,507,580) (9,116,032) (10,348,053)
Other income (expense)
Interest income ...................................... 11 1,683 55,488 1,745
Interest expense ..................................... (196,128) (240,370) (439,629) (719,010)
Miscellaneous ........................................ (264,830) (193,240) (309,777) (386,477)
------------ ------------ ------------ ------------
(460,947) (431,927) (693,918) (1,103,742)
Loss before federal income taxes ....................... (7,977,829) (1,939,507) (9,809,950) (11,451,795)
Benefit for federal income taxes ....................... (1,547,699) -- (2,258,563) (802,845)
------------ ------------ ------------ ------------
Net loss ............................................... $ (6,430,130) $ (1,939,507) $ (7,551,387) $(10,648,950)
============ ============ ============ ============
Net loss per share ..................................... $ (1.07) $ (0.32) $ (1.25) $ (1.75)
============ ============ ============ ============
Weighted average number of shares ...................... 6,023,750 6,152,000 6,023,750 6,078,909
============ ============ ============ ============
</TABLE>
See accompanying notes.
4
<PAGE>
EQUALNET HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended March 31,
--------------------------------------
1996 1997
------------ ------------
<S> <C> <C>
Operating activities
Net loss ......................................................... $ (7,551,387) $(10,648,950)
Adjustments to reconcile net loss to
cash provided by operating activities:
Depreciation and amortization ................................. 3,849,812 5,200,166
Provision for uncollectible receivables ....................... 4,463,939 1,448,033
Deferred gain on sale leaseback transaction ................... (99,935) --
Equity in loss on investment .................................. -- 295,704
Benefit for deferred income taxes ............................. (3,049,978) (802,845)
Loss on sale of assets ........................................ -- 341
Imputed interest on note payable .............................. 20,372
Compensation expense recognized
for common stock issue ...................................... 105,000 67,506
Write down of long term assets ................................ 6,882,661 4,400,000
Change in operating assets and liabilities:
Accounts receivable ........................................ (1,638,304) 3,818,573
Due from agents ............................................ (802,668) (1,589,008)
Prepaid expenses and other ................................. (1,077,551) 1,123,319
Other assets ............................................... 320,844 (1,303,866)
Accounts payable and accrued liabilities ................... (1,184,632) 2,019,751
------------ ------------
Net cash provided by operating activities ........................ 217,801 4,049,096
Investing activities
Purchase of property and equipment ............................... (4,213,645) (92,734)
Commission rate buydown .......................................... (710,347) --
Purchase of customer accounts .................................... (8,217,874) (76,457)
Proceeds from sale of equipment .................................. -- 800
------------ ------------
Net cash used in investing activities ............................ (13,141,866) (168,391)
Financing activities
Proceeds from subordinated note payable .......................... -- 3,000,000
Proceeds from revolving line of credit ........................... 68,228,536 36,155,000
Repayments on revolving line of credit ........................... (59,798,971) (41,686,986)
Proceeds from sale leaseback transaction ......................... 1,186,269 --
Repayments on capital lease obligations .......................... (81,000) (63,000)
------------ ------------
Net cash provided by (used in) financing activities .............. 9,534,834 (2,594,986)
------------ ------------
Net increase (decrease) in cash .................................. (3,389,231) 1,285,719
Cash and equivalents, beginning of period ........................ 3,526,543 381,849
------------ ------------
Cash and equivalents, end of period .............................. $ 137,312 $ 1,667,568
============ ============
Supplemental Cash Flow Information:
Noncash investing activities:
Common stock issued for acquisition ........................... $ 450,000
Warrants issued for acquisition ............................... 199,000
Liabilities assumed ........................................... 271,350
------------
$ 920,350
============
</TABLE>
See accompanying notes.
5
<PAGE>
EQUALNET HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - MANAGEMENT'S REPRESENTATION
The consolidated financial statements included herein have been
prepared by the management of EqualNet Holding Corp. (the "Company")
without audit. Certain information and note disclosures normally
included in consolidated financial statements prepared in accordance
with generally accepted accounting principles have been omitted. In
the opinion of the management of the Company, all adjustments
considered necessary for fair presentation of the consolidated
financial statements have been included and were of a normal
recurring nature, and the accompanying consolidated financial
statements present fairly the financial position of the Company as
of March 31, 1997, and the results of operations for the three and
nine months ended March 31, 1996 and 1997, and cash flows for the
nine months ended March 31, 1996 and 1997.
It is suggested that these consolidated financial statements be read
in conjunction with the consolidated financial statements and notes
for the three years ended June 30, 1996, included in the Company's
Annual Report on Form 10-K for the year ended June 30, 1996, as
amended, which was filed with the Securities and Exchange
Commission. The interim results are not necessarily indicative of
the results for a full year.
NOTE 2 - INCOME TAXES
The Company has recorded an income tax benefit at the federal
statutory rate of 34% for the three months ended September 30, 1996,
and has recorded no benefit for the six months ended March 31, 1997.
A valuation allowance has been provided to record deferred tax
assets to a level which, more likely than not, will be realized. The
net deferred tax assets reflect management's estimate of the amount
that 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 recorded no tax benefit for state and local taxes.
NOTE 3 - DEBT
At March 31, 1997, the Company has a $7.5 million revolving line of
credit with a bank which will expire July 1, 1997 with an effective
interest rate equal to the bank's prime rate plus four percent,
escalating one percent a month until it reaches six percent. The
Company amended its credit agreement with its senior lender in
February 1997. The amendment provides less restrictive financial
covenants, waives previous financial covenant defaults and resets
the maturity date of the revised credit facility to July 1, 1997.
See also Note 7.
6
<PAGE>
NOTE 4 - COMMITMENTS AND CONTINGENCIES
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 has responded to formal
consumer protection inquiries from eleven states. The inquiries do
not state specific damage amounts, and the potential liability, if
any, is not determinable. The Company 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 year ended June 30, 1996, the Company recorded
an accrual of $250,000 for such estimated settlements. No assurances
can be made however, that the inquiries can be settled for amounts
within that currently accrued, that additional states will not begin
inquiries or that the current accruals 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.
NOTE 5 - INTANGIBLE ASSETS
On November 12, 1996, the Company purchased certain assets of
Creative Communications International, Inc., a Texas-based debit
card company, for 150,000 shares of EqualNet Holding Corp. common
stock, $.01 par value per share ("Common Stock"), a warrant to
purchase 100,000 shares of Common Stock, and the assumption of
certain liabilities totaling approximately $271,000. The warrant
issued in this transaction was outstanding at March 31, 1997 and
allows the holder to purchase an aggregate of 100,000 shares of
Common Stock at a price of $7.50 per share. The warrant expires on
November 1, 2001. The Company has not completed the allocation of
the purchase price to the assets acquired and liabilities assumed.
However, a significant amount of the purchase price is expected to
be allocated to goodwill. The Company is evaluating the estimated
useful life of the related goodwill but expects to amortize the
goodwill over a period not to exceed ten years.
NOTE 6 - SUBORDINATED NOTE PAYABLE
Effective February 3, 1997, the Company executed an agreement with
The Furst Group, Inc., a privately held reseller of long-distance
and other telecommunications services, pursuant to which The Furst
Group has loaned the Company $3 million at an annual interest rate
of 10%, maturing December 31, 1998. In addition, the Company has
issued stock purchase warrants to The Furst Group, exercisable for
an aggregate of 1,500,000 shares of Common Stock at a purchase price
of $2.00 per share, subject to adjustment in certain events
(including (i) changes in the capitalization of the Company, (ii)
the cessation of Zane Russell to serve as Chief Executive Officer of
the Company and (iii) the failure of the Company to satisfy the
quantitative continued listing requirements of the Nasdaq National
Market or suspension or delisting of the Company from trading on
that market). In connection with this transaction, the Company began
purchasing telecommunications services, effective November 1, 1996,
under The Furst Group's contract with Sprint Communications Company,
L.P.
7
<PAGE>
NOTE 7 - SUBSEQUENT EVENTS
On May 14, 1997 the Company executed a new Carrier Agreement with
AT&T. The new agreement provides for, among other things, a lower
purchase rate for long distance services provided, forgiveness of
previously existing minimum revenue commitments, and a significant
reduction in future revenue commitments.
Additionally, the Company signed a letter of commitment with a
provider of working capital financing which would replace the
Company's current line of credit that expires in July 1997.
Availability and cost of funds under the new agreement are expected
to be an improvement over the Company's existing bank line. The
transaction is subject to completion of documentation and approval
by EqualNet's board of directors, and is expected to close in June
1997.
NOTE 8- RECLASSIFICATION
Certain balances from the year ended June 30,1996 have been
reclassified to be consistent with March 31, 1997 classifications.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
Sales for the three months ended March 31, 1997 decreased 44.5% to $10.7 million
compared with sales of $19.2 million for the same period of the prior year.
Gross margin increased to $2.8 million compared to $787,000 for the same period
of the prior year. The Company recorded a $1.9 million loss before taxes for the
three months ended March 31, 1997, compared to a loss of $8.0 million for the
same period in the prior year. The net loss for the three months ended March 31,
1997 was $1.9 million and included no tax benefit. The net loss for the
corresponding period in the previous year was $6.4 million and included a tax
benefit of $1.5 million (an effective rate of 19.4%). The loss for the three
months ended March 31, 1996 included a $7.5 million pre-tax charge related to
the write down of capitalized costs associated with a customer service
information system that was abandoned, an increase in allowance for doubtful
accounts related to revised estimates of uncollectible receivables, additional
write-offs of acquired customer traffic and recognition of allowances for
certain contingent liabilities.
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:
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
3/31/96 3/31/97 3/31/96 3/31/97
----- ----- ----- -----
<S> <C> <C> <C> <C>
Total sales... ................................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales .................................................. 95.9% 73.6% 80.8% 77.0%
----- ----- ----- -----
Gross margin ................................................... 4.1% 26.4% 19.2% 23.0%
Selling, general and administrative expenses ................... 18.3% 26.5% 16.6% 25.1%
Depreciation and amortization .................................. 8.4% 14.0% 6.2% 14.4%
Write down of long term assets ................................. 16.6% 0.0% 11.1% 12.2%
----- ----- ----- -----
Operating loss ................................................. (39.2%) (14.1%) (14.7%) (28.7%)
Other income (expense)
Interest income .............................................. 0.0% 0.0% 0.1% 0.0%
Interest expense ............................................. (1.0%) (2.3%) (0.7%) (2.0%)
Miscellaneous ................................................ (1.4%) (1.8%) (0.5%) (1.1%)
----- ----- ----- -----
(2.4%) (4.1%) (1.1%) (3.1%)
Loss before federal income taxes ................................ (41.6%) (18.2%) (15.8%) (31.8%)
Benefit for federal income taxes ................................ (8.1%) 0.0% (3.6%) (2.2%)
----- ----- ----- -----
Net loss ........................................................ (33.5%) (18.2%) (12.2%) (29.6%)
===== ===== ===== =====
</TABLE>
9
<PAGE>
SALES
The Company experienced a decrease in sales in the three months ended March
31, 1997 of 44.5% to $10.7 million compared to $19.2 million for the
comparable period of the prior year. For the nine months ended March 31, 1997
sales decreased 42.0% to $36.1 million compared to $62.2 million for the same
period in the previous year. The decrease for both periods was due primarily
to a decrease in the number of customer accounts and a corresponding decrease
in billable minutes. Total billable minutes for the quarter ended March 31,
1997 decreased 41.7% to 38.8 million minutes from 66.5 million minutes for
the same period of the prior year and for the nine months ended March 31,
1997 decreased 40.4% to 125.8 million minutes from 211.2 million minutes for
the comparable period of fiscal 1996. The decline in revenues and billable
minutes was the result of an increased rate of attrition for existing
customers and a decline in order activity beginning in January 1996. The
Company began reducing order activity in early calendar 1996 to reduce the
incidence of loss due to delayed provisioning times at AT&T and because it
discovered the NetBase Plus customer management system was severely hampering
the Company's ability to provision and service new customers. The Company
slowly began increasing order activity once it had reverted to the original
customer management system and provisioning times had returned to acceptable
levels; however, the Company began experiencing liquidity problems during
this time frame and has been unable to fund order activity as significant as
that achieved prior to January 1996.
COST OF SALES
The cost of sales for the three months ended March 31, 1997 decreased 57.4%
to $7.8 million compared to $18.4 million for the comparable period of the
prior year. Cost of sales for the nine months ended March 31, 1997 decreased
44.7% to $27.8 million compared to $50.2 million for the nine months ended
March 31, 1996. The decreases were primarily attributable to a decrease in
sales. Cost of sales as a percentage of sales decreased to 73.6% and 77.0%
for the three and nine months ended March 31, 1997, respectively, from 95.9%
and 80.8% for the corresponding periods in the previous year. The decreases
relate primarily to the additional charges of $3.6 million for uncollectible
receivables and $350,000 for estimated settlements on disputed carrier
charges and long distance commitment shortfalls recorded in the third quarter
of the prior year. Cost of sales as a percentage of sales for the second
quarter of fiscal 1997 was 79.8%. The decrease in the percentage in the third
quarter of fiscal 1997 was primarily the result of a $400,000 backlog of
carrier disputes being processed by the Company and credited by the Company's
carriers. The backlog was the result of the difficulties the Company had with
the NetBase Plus customer management system and the corresponding inability
of the Company to electronically obtain the necessary information to process
the carrier disputes.
The Company's cost of long-distance (which is a component of cost of sales)
decreased as a percentage of sales to 54.4% and 59.7% from 65.8% and 64.3%
for the three and nine months ended March 31, 1997 and 1996, respectively.
The decrease in the percentage in the third quarter of fiscal 1997 as
compared to the same period in fiscal 1996 was primarily the result of the
$400,000 backlog of carrier disputes being credited to the Company by its
10
<PAGE>
carriers. The backlog of disputes also affected the percentage for the nine
months ended March 31, 1997; however, the year to date decrease was primarily
the result of the Company reducing its cost of long-distance by negotiating
more favorable rates and amending its contract with AT&T effective in June
1996.
Commission expense as a percent of sales decreased to 7.7% for the third
quarter of fiscal 1997, compared to 9.9% for the third quarter of fiscal
1996. Commission expense for the quarter ended March 31, 1996 included a $1
million charge to the agent advance allowance, inflating the percentage for
that quarter. Commission expense as a percent of sales for the second quarter
of fiscal 1997 was 7.6% and the expense included a $400,000 charge to reduce
advances to agents that are not expected to be recovered through future
commissions earned by those agents. Excluding the charge for advances,
commission expense as a percent of sales was 4.7% for the quarter ended March
31, 1996. The increase in the third quarter of fiscal 1997 continues to
reflect the Company's return to acquiring new customers utilizing advances
and residual commissions rather than through purchased orders. Commission
expense as a percent of revenues reflected a similar trend for the nine
months ended March 31, 1997 increasing to 6.1%, compared to 5.4% prior to the
additional charge for agent advances (7.0% after) for the first nine months
of fiscal 1996.
Billing expense as a percentage of sales increased to 9.2% for the three
months ended March 31, 1997 compared to 4.3% for the same period in the
previous year, and 7.1% for the nine months ended March 31, 1997 compared to
4.0% for the same period in fiscal 1996 as a result of the Company beginning
to bill a significant portion of its customers through Local Exchange
Carriers ("LECs"). Billings through the LECs represented 33.5% and 21.3% of
the Company's revenues for the three and nine months ended March 31, 1997,
respectively. The cost of billing through LECs is generally greater than
billing customers through independent billing companies; however, the Company
believes that by billing customers through the LECs, savings will also be
recognized by decreased bad debt expense and reduced customer attrition. In
addition, because the majority of customer service is performed by the LECs,
the Company has been able to reduce overhead related to the cost of servicing
these customers directly.
Bad debt expense as a percentage of sales decreased for the three and nine
months ended March 31, 1997 to 2.2% and 4.0% of sales, respectively, as
compared to 15.9% and 5.6% of sales for the three and nine months ended March
31, 1996, respectively. Bad debt expense for the quarter ending March 31,
1996 included a $2.6 million additional charge for uncollectible receivables.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased 19.7% to $2.8 million
for the three months ended March 31, 1997, from $3.5 million for the same
period of the prior year. Selling, general and administrative expenses
increased as a percentage of sales to 26.5% for the three months ended March
31, 1997 from 18.3% for the same period of the prior year. Selling, general
and administrative expense decreased 12.5% to $9.0 million from $10.3 million
for the nine months ended March 31, 1997 and 1996, respectively. These
expenses
11
<PAGE>
as a percent of sales increased to 25.1% from 16.6% for the first
nine months of fiscal 1997 and 1996, respectively. The increase in selling,
general and administrative expenses as a percentage of sales relates
primarily to the substantial decrease in revenues and the corresponding loss
of back office economies of scale and the inability to reduce fixed cost
structures established when revenues of the Company were substantially
larger. Salary expense decreased $555,000 for the quarter ended March 31,
1997 compared to the same quarter of the previous year. Staffing decreased
from 195 employees at March 31, 1996 to 144 employees at March 31, 1997. The
remaining decrease in comparing the three month results is due to overall
cost reduction efforts. The $1.3 million decrease in selling, general and
administrative costs for the nine months ended March 31, 1997 compared to the
nine months ended March 31, 1996 resulted primarily from the staffing
reductions begun in December 1995. Salary related expenses have decreased
$1.5 million for the nine month comparative periods with staffing reaching a
peak of 283 employees in December 1995 and decreasing steadily since that
time. Administrative costs have been reduced $322,000 during the comparative
nine month periods as part of the cost cutting efforts. These decreases were
partially offset by an increase in lease expense of approximately $298,000.
The increase was the result of the addition of two significant leases in
January 1996, one of which related to the phone system and the other to
computer equipment. In addition, professional fees increased approximately
$169,000 for the nine months ending March 31, 1997 compared to the same
period in the previous year. Included in professional fees are fees paid to
third party verification companies which the Company utilized to verify
customer orders. These fees totaled approximately $105,000 for the nine
months ended March 31, 1997 while no third party verification companies were
utilized during fiscal 1996.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased 6.5% to $1.5 million for the quarter
ended March 31, 1997 as compared to $1.6 million for the same period in the
previous year and increased 35.1% to $5.2 million for the nine months ended
March 31, 1997 as compared to $3.8 million for the nine months ended March
31, 1996. The increase for the nine month period is the result of the
significant purchases of customer accounts during the first and second
quarters of fiscal year 1996. The purchased orders are amortized utilizing a
declining balance method, resulting in the modest decrease in amortization
when comparing the third quarters of fiscal 1996 and 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $4.0 million in cash flow from operations for the nine
months ended March 31, 1997, compared to $218,000 for the same period of the
prior year. Cash flow from operations was generated primarily through the
increase of the payable to providers and other vendors and the decrease in
net accounts receivable due to aggressive collection of accounts receivable.
Cash used in investing activities totaled $168,000 for the nine months ended
March 31, 1997, compared to $13.1 million for the same period of the previous
year. Cash used
12
<PAGE>
in investing activities in the first three quarters of fiscal 1997 included
the acquisition of $76,000 of customer accounts and $93,000 of asset
additions, primarily computer equipment and software development costs
related to the Company's new proprietary billing system. The new billing
system was placed into service for select customer groups in February 1997.
The Company moved the majority of its customers onto the internal billing
system in May 1997 which should reduce direct billing costs substantially.
The significant decrease in cash expended in investing activities during the
first nine months of fiscal 1997 in comparison to the same period in the
previous year is the result of the discontinuation of the Company's purchased
customer account program and the discontinuation of the development of the
NetBase Plus customer management system.
Cash used in financing activities was $2.6 million for the nine months ended
March 31, 1997, substantially all of which related to net repayments of $5.5
million on borrowings under the Company's line of credit. The Company's
declining revenue base along with increasingly restrictive borrowing
requirements imposed by the Company's senior lender have resulted in a
significant decrease in funds available under the Company's line of credit.
This use of cash was offset by $3.0 million in proceeds received from the
issuance of notes payable with detachable warrants to The Furst Group. Cash
provided by financing activities totaled $9.5 million for the nine months
ended March 31, 1996, substantially all of which related to net borrowings
under the Company's line of credit.
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 various states
and other regulatory and taxing authorities. The Company has accrued
liabilities for the resolution of this matter totaling $200,000 at March 31,
1997. Additionally, the Company has an installment agreement with the
Internal Revenue Service which allows the Company to satisfy the past due
federal excise taxes in installment payments of $25,000 per month. The
improper treatment of sales taxes arose from the Company's failure to remit
the sales tax due to the various taxing authorities on the incremental
component of revenue in excess of the cost of the underlying service (for
which taxes were properly paid). While there can be no assurance, the Company
believes that the amount accrued is adequate for the satisfaction of this tax
liability, including any interest payable. No accrual has been made for
potential penalties that may be assessed; however the Company does not
believe the assessment of penalties would have a material adverse effect on
the Company's financial condition.
Effective February 3, 1997, the Company issued to The Furst Group a $3
million 10% subordinated note due December 31, 1998 and warrants exercisable
for 1.5 million shares of Common Stock at $2.00 per share, subject to
adjustment in certain events (including (i) changes in the capitalization of
the Company, (ii) the cessation of Zane Russell to serve as Chief Executive
Officer of the Company and (iii) the failure of the Company to satisfy the
quantitative continued listing requirements of the Nasdaq National Market or
suspension or delisting of the Company from trading on that market). The
transaction was completed February 24, 1997, and the proceeds are to be used
for general corporate purposes, including the payment of certain trade
payables. The notes are secured by an interest in EqualNet's receivables
which is subordinated to the interest of the Company's senior
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lender. In connection with this transaction, the Company began purchasing
long-distance services effective November 1, 1996, under The Furst Group's
contract with Sprint.
On May 14, 1997, the Company agreed to amended terms with AT&T, its primary
underlying carrier, which included improved pricing, payment terms,
forgiveness of previous shortfalls on minimum revenue commitments,
significant reductions in future minimum revenue commitments, and other
concessions. The Company has also successfully negotiated revised payment
terms with its secondary carrier.
Additionally, the Company signed a letter of commitment with a provider of
working capital financing which would replace the Company's current line of
credit that expires in July 1997. Availability and cost of funds under the
new agreement are expected to be an improvement over the Company's existing
bank line. The transaction is subject to completion of documentation and
approval by EqualNet's board of directors, and is expected to close in June
1997.
The Company continues to pursue the final steps of its financial
restructuring: an additional financing of between $2.0 and $4.0 million in
debt or equity and the replacement of its existing credit agreement, which
expires July 1, 1997, with alternate long-term working capital financing. If
the Company is unsuccessful in achieving 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
PART II - OTHER INFORMATION
Item 1. 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-0142
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
been advised by the Attorneys General for eight other states that they
would like to participate in any joint settlement of the above
described litigation. Each of these
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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 and consumer
protection statutes of these states. While the Company acknowledges
that some customers may not fully understand the 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 either the Company's results of
operations or financial condition. However, the Company's inability to
resolve these matters for amounts and upon terms acceptable to the
Company could have a material adverse effect upon either the financial
condition of the Company or the results of its operations. See Note 4
to the financial statements in Item 1 hereof.
Item 2. Changes in Securities
On February 3, 1997, the Company issued to a third party investor,
warrants to purchase 1,500,000 shares of Common Stock at $2.00 per
share, subject to adjustment in certain events (including (i) changes
in the capitalization of the Company, (ii) the cessation of Zane
Russell to serve as Chief Executive Officer of the Company and (iii)
the failure of the Company to satisfy the quantitative continued
listing requirements of the Nasdaq National Market or suspension or
delisting of the Company from trading on that market). The warrants
were issued in conjunction with a $3 million note issued by EqualNet
and payable to such investor. The warrants can be exercised in exchange
for the note or separately through a cash payment by such investor. The
Company received approximately $3,000,000 from the issuance of the note
and warrant. This issuance was exempt from registration under the
Securities Act of 1933 pursuant to Section 4 (2) thereof, as the
transaction did not involve any public offering.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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Item 5. Other Information
Cautionary Statements:
The Company's expectations with respect to operating results and
other matters described in this Quarterly Report on Form 10-Q 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:
NO ASSURANCE OF ADDITIONAL NECESSARY CAPITAL - The Company
continues to pursue additional financing of between $2.0 million
and $4.0 million in debt or equity and the replacement of its
existing credit agreement, which expires July 1, 1997, with
alternate long-term working capital financing. If the Company is
unsuccessful in achieving one or a combination of these
objectives sufficient to meet the Company's liquidity needs, it
will be necessary to 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.
ATTRITION RATES - In the event that the Company experiences
attrition rates in excess of those anticipated either as a result
of increased provisioning times by its underlying carrier, the
purchase of poor performing traffic, or the inability to properly
manage the existing customer base due to difficulties with the
NetBase system, additional charges that affect earnings may be
incurred.
DEPENDENCE ON INDEPENDENT MARKETING AGENTS - The Company has a
small internal sales force and obtains a significant majority of
its new customers from 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. 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.
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,
through its contract with The Furst Group, to provide 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 relationships 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
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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.
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 resulted in a backlog of customers who would
otherwise have been activated on the Company's long-distance
service and billing. Although the carrier has taken certain steps
to decrease the provisioning time which has resulted in an
elimination of a significant 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 primary carrier to resell long-distance services. The
Company's contract with its carrier contains clauses that could
materially and adversely impact the Company should the Company
incur a shortfall in meeting its commitments. Although the
Company has from time to time failed to meet its commitment
levels under a particular contract and in each case has been able
to negotiate a settlement with the carrier which resulted in no
penalty being incurred by the Company, there can be no assurances
that the Company will be able to reach similar favorable
settlements with its carriers in the event that the Company
should fail to meet its future commitments.
In recent years, AT&T, MCI Communications Corporation ("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.
DEFERRED INCOME TAXES - The Company had deferred tax assets
totaling $3.0 million at March 31, 1997. Financial Accounting
Standards Board Statement No. 109, "Accounting for Income Taxes",
allows for the recognition of deferred tax assets by considering,
among other things, the ability of the Company to generate future
taxable income. A valuation allowance is required to reduce tax
assets to their expected realizability if it is more likely than
not that some portion or all of the deferred tax assets will not
be realized. Statement 109 explicitly provides that reaching a
conclusion that a valuation allowance is not required is
difficult when there is negative evidence such as cumulative
losses in recent years. It is anticipated that the Company will
be in a cumulative loss position at June 30, 1997. Accordingly,
sufficient positive evidence of the ability to generate future
taxable income will be required to counteract negative evidence,
the cumulative losses, in order to support a conclusion that a
valuation allowance for the full amount of the recorded deferred
tax assets is not required.
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The recording of a $3.0 million valuation allowance, while a
non-cash impact, would have a material adverse effect on recorded
operating results of the Company.
DEVELOPMENTAL 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 is presently
responding to consumer protection inquiries from eleven states.
The Company 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 year ended June 30, 1996, the Company
recorded an accrual of $250,000 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.
VOLATILITY OF SECURITIES PRICES - Historically, the market price
of the Common Stock has been highly volatile. During the last two
quarters of fiscal 1996 and the first three quarters of fiscal
1997, the market price for the Common Stock as reported by The
Nasdaq Stock Market has ranged from a high of $10-1/2 per share
to a low of $0-9/16 per share. There can be no assurance that the
market price of the Common Stock will remain at any level for any
period of time or that it will increase or decrease to any level.
Changes in the market price of the Common Stock may bear no
relation to EqualNet's actual operational or financial results.
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Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
4.1 The Company's 10% Senior Subordinated Note due
December 31, 1998, in the principal amount of
$3,000,000 (incorporated by reference to Exhibit 4.3
to the Company's Registration Statement on Form S-3
(Registration No. 333-23427), filed
March 13, 1997).
10.1 Note and Warrant Purchase Agreement, dated February 3,
1997, among the Company, EqualNet Corporation, a
Delaware corporation, and The Furst Group, Inc., a New
Jersey corporation.
10.2 Warrant for Purchase of Common Stock, issued
February 11, 1997.
10.3 Security Agreement, dated February 11, 1997, among the
Company, its subsidiaries and The Furst Group, Inc., a
New Jersey corporation.
10.4 Right in the Event of a Change of Control,
dated February 11, 1997.
10.5 Fourth Amendment to Credit Agreement, dated February
3, 1997, among the Company, the lenders thereto and
Comerica Bank-Texas, a Texas banking association, as
agent.
10.6 Intercreditor and Subordination Agreement, dated as of
February 3, 1997, among the Company, the lenders
thereto and Comerica Bank-Texas, a Texas banking
association, as agent, and The Furst Group, Inc., a
New Jersey corporation.
27.1 Financial Data Schedule
b. Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EQUALNET HOLDING CORP.
Date May 15, 1997 /s/ CARL V. SCHMIDT
Carl V. Schmidt
Chief Financial Officer
(duly authorized officer and
principal financial officer)
EXHIBIT 10.1
NOTE AND WARRANT PURCHASE AGREEMENT
EQUALNET HOLDING CORP.
EQUALNET CORPORATION
TELESOURCE, INC.
EQUALNET WHOLESALE SERVICES, INC.
EQUALNET PLAZA
1250 WOOD BRANCH PARK DRIVE
HOUSTON, TX 77079-1212
February 3, 1997
The Furst Group, Inc.
459 Oakshade Road
Shamong, NJ 08088
Re: $3,000,000 10% Notes due December 31, 1998, Warrants
for the Purchase of 1,500,000 Shares of Common Stock
and Refinancing Notes due December 31, 1998
Gentlemen:
Since November 1, 1996, EqualNet Holding Corp., a Texas corporation
(the "COMPANY"), and its subsidiary, EqualNet Corporation, a Delaware
corporation ("EQUALNET SUBSIDIARY"), have used The Furst Group, Inc., a New
Jersey corporation (the "PURCHASER"), as their long-distance carrier for
long-distance services ultimately provided by Sprint Corp., and, since that
time, have been billed by Purchaser at Purchaser's cost without premium (the
"SPRINT ARRANGEMENT"). In consideration for this valuable service, the Company
agreed to issue Purchaser a warrant to purchase Common Stock (as herein defined)
at an exercise price of $2.00 per share, somewhat above the trading price of the
Common Stock on November 1, 1996 of $1.93 per share. In consideration for the
Company's prior agreement to issue a warrant, and for the
<PAGE>
considerations described herein, the Company, EqualNet Subsidiary, TeleSource
Inc., a Texas corporation ("TELESOURCE"), and EqualNet Wholesale Services, Inc.,
a Delaware corporation ("WHOLESALE") (each of the Company, EqualNet Subsidiary,
TeleSource and Wholesale are referred to herein individually as an "EQUALNET
COMPANY" and collectively as the "EQUALNET COMPANIES"), agree with the
Purchaser, as follows:
ARTICLE 1.
PURCHASE AND SALE AND TERMS OF NOTES AND WARRANTS
a. THE NOTES. The EqualNet Companies have authorized the issuance
and sale to the Purchaser of the EqualNet Companies' 10% Notes due December 31,
1998 (the "NOTES"), in the original aggregate principal amount of $3,000,000.
The Notes shall be substantially in the form set forth in EXHIBIT A attached
hereto.
b. THE WARRANTS. The Company has authorized the issuance and sale to
the Purchaser of the Company's Warrants to Purchase Common Stock (the
"WARRANTS") relating to the purchase of 1,500,000 shares, as adjusted from time
to time pursuant to the terms of the Warrants (the "WARRANT STOCK"), of common
stock, par value $.01 per share (the "COMMON STOCK"), of the Company. The
Warrants shall be substantially in the form set forth in EXHIBIT B attached
hereto.
c. PURCHASE AND SALE OF NOTES AND WARRANTS. The EqualNet Companies
and the Company, respectively, shall issue and sell to the Purchaser, and,
subject to and in reliance upon the representations, warranties, terms and
conditions of this Agreement, the Purchaser shall purchase, the Notes and the
Warrants. Such purchase and sale shall take place at a closing (the "CLOSING")
to be held at the offices of Morgan, Lewis & Bockius LLP, 101 Park Avenue, New
York, New York, at 10:00 a.m. on the date of execution and delivery of this
Agreement, or on such other date and at such time as may be mutually agreed upon
(the "CLOSING DATE"). At the Closing, each EqualNet Company will issue and
deliver Notes, and the Company will issue and deliver the Warrants, in
denominations designated by the Purchaser and registered in the name of the
Purchaser or its nominee to Chase Manhattan Bank, a New York State chartered
bank ("ESCROWEE") under an Escrow Agreement substantially in the form attached
hereto as EXHIBIT E (the "ESCROW AGREEMENT"), against payment of the purchase
price of $3,000,000, of which $2,070,000 (which represents the purchase price
net of payments to be made out of proceeds to Purchaser and its counsel as
designated in Section 1.4 to be paid upon release of funds from under the Escrow
Agreement) shall be delivered in immediately available funds to the Escrowee
under the Escrow Agreement.
d. USE OF PROCEEDS. The EqualNet Companies will use the proceeds
from the sale of the Notes and Warrants as follows: $1 million for general
working capital needs excluding repayment of the Loans, as hereinafter defined,
of which (a) $790,000 shall be used to repay trade payables currently owed to
Purchaser, (b) $100,000 shall be used as a credit towards certain trade
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payables owed to Purchaser and (c) $40,000 shall be paid to Purchaser's legal
counsel; $1 million to reduce the EqualNet Companies' account payable to AT&T;
$1 million for sales and marketing activities directly related to new account
generation, of which $500,000 shall be used exclusively for such activities
related to the generation of new Sprint accounts.
ARTICLE 2.
DELIVERY OF REFINANCING NOTES; REFINANCING LOANS
a. INITIAL REFINANCING LOAN. The Company is a party to a Credit
Agreement dated as of November 30, 1995 (as amended to date, the "CREDIT
AGREEMENT") among the Company and each of the lenders who is or may become from
time to time a party thereto (the "LENDERS") and Comerica Bank-Texas, a Texas
banking association ("COMERICA"), as Agent (the "AGENT") for such Lenders,
pursuant to which the Lenders have and will from time to time make loans
("LOANS") to the Company. Under the terms of an Intercreditor and Subordination
Agreement, dated as of February 3, 1997 (the "INTERCREDITOR AGREEMENT") among
the Purchaser, the Agent, the Lenders and the Company, the Purchaser has the
right to repay on behalf of the Company a portion of the Loans by paying an
amount equal to 100% of the principal amount of the Loans so paid plus unpaid
accrued interest. In the event that the Purchaser repays such Loans pursuant to
the Intercreditor Agreement, each EqualNet Company agrees that the amount paid
by the Purchaser, without any further authorization from any EqualNet Company,
shall constitute a loan (the "INITIAL REFINANCING LOAN") by the Purchaser to the
EqualNet Companies in a principal amount equal to the amount so paid by the
Purchaser, including accrued interest. The obligation to repay such Initial
Refinancing Loan and any further loans made by the Purchaser pursuant to Section
2.2 (the Initial Refinancing Loan and any further loans are herein called the
"REFINANCING LOANS") shall be evidenced by refinancing promissory notes of the
EqualNet Companies delivered at the Closing (the "REFINANCING NOTES"). The
Refinancing Notes shall be substantially in the form of EXHIBIT C attached
hereto.
b. ADDITIONAL REFINANCING LOANS. If the Purchaser makes the Initial
Refinancing Loan, the Purchaser agrees to make further Refinancing Loans as
follows, subject to the terms and conditions set forth herein. The aggregate
principal amount of the Refinancing Loans outstanding at any time shall not
exceed the lesser of (i) the Borrowing Base (as hereinafter defined) or (ii) an
amount (the "MAXIMUM COMMITMENT") equal to the lesser of 100% of the Initial
Refinancing Loan or such lower amount, not less than the principal amount of the
Refinancing Notes outstanding, as the Maker may specify from time to time in
writing to the Purchaser. Notwithstanding the foregoing, in the event that the
outstanding principal amount of the Refinancing Loans shall ever exceed the
amount set forth above, such Refinancing Loans shall nevertheless constitute
Refinancing Loans and, as such, shall be entitled to all the benefits thereof
and the security therefor. The Purchaser is hereby authorized to endorse, or
cause to be endorsed, the date and the amount of each Refinancing Loan made by
the Purchaser and each repayment thereof on a schedule annexed to each
Refinancing Note, which endorsement shall constitute PRIMA FACIE evidence of the
accuracy of the information so endorsed; in lieu of
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endorsing such schedule, the Purchaser is hereby authorized, at its option, to
record the amount of each Refinancing Loan and repayments thereof on its books
and records, such books and records to constitute PRIMA FACIE evidence of the
accuracy of the information contained therein.
c. REPAYMENT OF REFINANCING LOANS. The Refinancing Loans shall be
due and payable as follows:
(a) In the event that the outstanding principal amount of the
Refinancing Loans shall ever exceed the maximum amount set forth in Section 2.2,
the EqualNet Companies shall immediately repay the excess of the outstanding
principal balance, and interest thereon, over such maximum amount, together with
unpaid accrued interest thereon; and
(b) The entire principal amount of the Refinancing Loans,
together with all unpaid interest accrued thereon, unless earlier paid, shall be
due and payable on the earlier of (i) December 31, 1998 or (ii) the Maturity
Date (as defined in the Credit Agreement), as such Maturity Date may be
accelerated or extended under the terms of the Credit Agreement.
(c) All payments of principal, accrued interest, and any other
amounts owed to Purchaser by the EqualNet Companies, shall be effected by wire
transfer to the account of Purchaser, or Purchaser's agent, in the State of New
York. Payments hereunder or in connection with any of the Notes or Refinancing
Notes shall not be made or delivered to Purchaser in any jurisdiction except in
the State of New York.
d. CONDITIONS TO REFINANCING LOANS. The obligation of the Purchaser
to make any Refinancing Loans (other than the Initial Refinancing Loan) is
subject to the following conditions:
(a) The Purchaser shall have received by 10:00 a.m. on any
business day a request in writing signed by the EqualNet Companies specifying
the amount of the proposed borrowing, the proposed borrowing date, which shall
not be earlier than 11:00 a.m. that day (or the next day if notice is given
after 10:00 a.m.), and the account of the EqualNet Companies to which funds are
to be disbursed and a Borrowing Base Certificate as of the most recent
practicable date (and in no event more than 31 days in advance of the date of
the proposed borrowing) demonstrating that the aggregate principal amount of the
Refinancing Loans, after taking into account the proposed borrowing, will not
exceed the amount of the Borrowing Base or otherwise exceed the maximum
principal amount of the Refinancing Loans specified in Section 2.2; and
(b) Each of the representations and warranties of the EqualNet
Companies set forth in Article IV of this Agreement and in the Security
Agreement shall be true and correct on the date of such request and on the
proposed date of borrowing, the EqualNet Companies shall have complied with all
covenants set forth in Article V of this Agreement and in the Security
Agreement, no Event of Default (as defined in the Refinancing Notes) or event or
occurrence that with notice or passage of time, or both, would constitute an
Event of Default, shall have occurred and be continuing and the Purchaser shall
have received a certificate signed by
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the President or the Chief Financial Officer of each of the EqualNet Companies
certifying the foregoing matters.
e. DEFINITIONS. The following terms shall have the meanings set
forth below.
"ACCOUNTS" shall mean all accounts within the meaning assigned
to such term in the Uniform Commercial Code as in effect in the State of New
York.
"BORROWING BASE" shall mean, as of any date, an amount equal
to 87.5% of the Eligible Accounts of the EqualNet Companies at such date.
"BORROWING BASE CERTIFICATE" shall mean a certificate duly
executed by the Chief Executive Officer, Chief Financial Officer, Treasurer or
Controller of the EqualNet Companies setting forth in reasonable detail
satisfactory to the Purchaser the EqualNet Companies' calculation of the
Eligible Accounts and the Borrowing Base.
"ELIGIBLE ACCOUNTS" shall mean, as at any date of
determination thereof, each Account of the EqualNet Companies that is subject to
the Security Agreement and on which the Purchaser shall have a first-priority,
perfected security interest and that complies with the following requirements:
(a) The Account arises from the provision of
telecommunications services to an account debtor on an absolute sale
basis on open account and not subject to any other refund agreement,
and no material part of the service has been rejected or is subject
to any claimed dissatisfaction, the Account is stated to be payable
in U.S. dollars and is not evidenced by chattel paper or an
instrument of any kind and such account debtor is not insolvent or
subject to any bankruptcy or insolvency proceedings of any kind;
(b) The account debtor is located in the United States;
(c) The Account 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) Such Account is subject to no lien or security interest
whatsoever, except for liens created or permitted pursuant to the
Security Agreement;
(e) Such Account is evidenced by an invoice submitted to the
account debtor in a timely fashion in the normal course of business;
(f) Such Account has not remained unpaid beyond 90 days after
the date of the invoice; provided that if such invoice date is on or
after August 5, 1996, and if the applicable account debtor is one
which is no longer being serviced by the EqualNet Companies, the
applicable account debtor does not have any
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other Account owed to the EqualNet Companies which remain unpaid
beyond 90 days after the date of the applicable invoice;
(g) 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 EqualNet Companies fail to satisfy all of the
requirements of an "Eligible Account;"
(h) Such Account does not arise out of transactions with an
employee, officer, agent, director or stockholder of any of the
EqualNet Companies unless approved in writing by the Purchaser; and
(i) The applicable account debtor is not one which the
Purchaser has, in the exercise of its sole discretion, determined to
be (based on such factors as the Purchaser deems appropriate), and
has given notice of such determination to the EqualNet Companies, an
ineligible account debtor; PROVIDED, HOWEVER, that any such notice
shall not apply as to any Account of such account debtor that has
previously been included in the Borrowing Base prior to the giving
of such notice by the Purchaser and that meets each and every other
requirement for the denomination of such Account as a "Eligible
Account;"
(j) Each of the representations and warranties set forth in
the Security Agreement executed by the EqualNet Companies 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
Purchaser, made in good faith, shall be conclusive and binding, absent manifest
error.
f. DELIVERY OF BORROWING BASE CERTIFICATES. The EqualNet Companies
will deliver to the Purchaser a Borrowing Base Certificate at any time that the
Purchaser notifies the Borrower that it is considering making the Initial
Refinancing Loan as provided in Section 2.1 hereof and thereafter during any
period in which any Refinancing Loans are outstanding as often as the Purchaser
shall reasonably request.
ARTICLE 3.
CONDITIONS TO PURCHASER'S OBLIGATION
The obligation of the Purchaser to purchase and pay for the Notes
and Warrants at the Closing is subject to the following conditions:
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a. REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties of the EqualNet Companies set forth in Article 4 hereof shall be true
on the Closing Date.
b. EXECUTION AND DELIVERY OF INTERCREDITOR AGREEMENT. The
Intercreditor Agreement shall have been executed and delivered by all the
parties thereto.
c. EXECUTION AND DELIVERY OF SECURITY AGREEMENT. A Security
Agreement ("SECURITY AGREEMENT") in substantially the form of EXHIBIT D attached
hereto, securing the obligations of the EqualNet Companies under the Notes and
the Refinancing Notes, shall have been executed and delivered by each EqualNet
Company.
d. EXECUTION AND DELIVERY OF RIGHT AGREEMENT. The Right in the Event
of a Change of Control (the "RIGHT AGREEMENT") between the Company and Purchaser
shall have been executed and delivered by both parties thereto.
e. DOCUMENTATION AT CLOSING. The Purchaser shall have received all
of the following, each in form and substance satisfactory to the Purchaser and
its counsel:
(a) Copies of all charter documents and bylaws of each
EqualNet Company and of resolutions of the Board of Directors of each EqualNet
Company evidencing approval of this Agreement, the Notes, the Warrants and the
Refinancing Notes, all certified by the Secretary or any Assistant Secretary of
such EqualNet Company;
(b) An opinion of Fulbright & Jaworski L.L.P., counsel for the
EqualNet Companies, regarding the due authorization, execution and delivery of
this Agreement, the Notes, the Warrants, the Refinancing Notes, the
Intercreditor Agreement, the Security Agreement, and the Right Agreement, the
validity, binding effect and enforceability thereof, and the due authorization,
validity and fully paid and nonassessable status when issued of the Warrant
Stock and such other matters as the Purchaser shall reasonably request;
(c) A certificate of the Secretary or an Assistant Secretary
of each EqualNet Company that shall certify the names of the officers of such
EqualNet Company authorized to sign the Documents (as hereinafter defined) to
which such EqualNet Company is a party together with the true signatures of such
officers; and
(d) If this Agreement is executed and delivered on a date
other than the Closing Date, a certificate of each EqualNet Company signed by a
duly authorized officer of such EqualNet Company stating that the
representations and warranties of the EqualNet Companies contained in Article 4
hereof are true and correct.
f. PERFORMANCE; NO DEFAULT. The EqualNet Companies shall have
performed and complied with all agreements and conditions contained in this
Agreement required to be performed or complied with by them prior to or at the
Closing and, after giving effect to the issue and sale of the Notes and Warrants
(and the application of the proceeds thereof as contemplated
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hereby) and delivery of the Refinancing Notes, no Default or Event of Default
(as hereinafter defined) shall have occurred and be continuing.
g. PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in
connection with the transactions contemplated by this Agreement and all
documents and instruments incident to such transactions shall be satisfactory to
Purchaser and its counsel, and Purchaser and its counsel shall have received all
such counterpart originals or certified or other copies of such documents as
they may reasonably request.
h. UCC MATTERS. The EqualNet Companies shall have provided to
Purchaser's counsel searches, acceptable in all respects to such counsel, of all
appropriate Uniform Commercial Code filing offices for financing statements
filed against any EqualNet Company as debtor, which searches disclose no liens
or filings other than those related to the Credit Agreement and those listed on
Schedule 3.8 hereto, and each EqualNet Company shall have executed and caused
the filing with the appropriate offices of all financing statements reasonably
requested by Purchaser or its counsel in connection with this Agreement or any
other Document and shall have furnished evidence of filing of such financing
statements to Purchaser or its counsel.
i. BUSINESS REVIEW. The Purchaser shall be satisfied in its sole
discretion with the results of its review of the business, licenses, properties,
assets, liabilities, technology, contractual arrangements, financial condition,
results of operations and prospects of the EqualNet Companies.
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF THE EQUALNET COMPANIES The EqualNet
Companies, jointly and severally, represent and warrant to the
Purchaser that:
a. ORGANIZATION AND STANDING OF THE COMPANY. Each EqualNet Company
is a corporation duly organized, validly existing and in good standing under the
laws of its state of incorporation and has all requisite corporate power and
authority to own and operate its properties, to carry on its business as now
conducted and to enter into and, as applicable, perform its obligations
hereunder and under the Notes, the Warrants, the Refinancing Notes, the
Intercreditor Agreement, the Security Agreement and under all other documents
and instruments to be executed and delivered as contemplated by this Agreement
(this Agreement, the Notes, the Warrants, the Refinancing Notes, the
Intercreditor Agreement, the Security Agreement, the Right Agreement and all
such other documents and instruments to be executed by the EqualNet Companies in
connection with the Closing hereinafter referred to, individually, as a
"DOCUMENT" and collectively, as the "DOCUMENTS") to which it is a party. Each
EqualNet Company is qualified to do business and is in good standing in each
jurisdiction in which it is required to so qualify and
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where the failure to be so qualified would have a material adverse effect on the
business, assets, financial condition or results of operations of the Company or
the EqualNet Companies taken as a whole (a "MATERIAL ADVERSE EFFECT").
b. CORPORATE ACTION. Each EqualNet Company has taken all corporate
action required to make the Documents to which it is a party valid and
enforceable obligations of such EqualNet Company, including, without limitation,
approval by each EqualNet Company's board of directors.
c. VALIDITY OF DOCUMENTS. This Agreement and the other Documents
have been duly authorized and executed by each EqualNet Company that is a party
thereto and constitute valid and legally binding obligations of each such
EqualNet Company, enforceable in accordance with their terms. A sufficient
number of shares of duly authorized and unissued Common Stock of the Company has
been reserved for issuance upon the exercise of the Warrants, and no further
corporate action is required for the valid issuance of the Warrant Stock (as
defined in the form of Warrant) upon the exercise of the Warrants. The issuance
of the Warrant Stock in accordance with the terms of the Warrants will, at the
Closing and thereafter, not be subject to preemptive, antidilution or similar
rights of any Person, and when issued and delivered against payment therefor in
accordance with the terms of the Warrants, will be duly and validly issued,
fully paid and nonassessable.
d. CONSENTS. The execution and delivery by each EqualNet Company of
this Agreement and the other Documents to which it is a party and the
performance of the transactions contemplated hereby and thereby (a) do not and
under present law will not violate, or require any consent or approval pursuant
to, any law, rule, regulation, order, writ, judgment, injunction, decree,
determination or award, (b) do not violate any provision of its certificate or
articles of incorporation or bylaws, (c) do not and will not give rise to any
lien upon any of its assets, except as otherwise contemplated hereby, and (d) do
not violate any provision of, or cause a default under, any material agreement,
lease, instrument or other contract to which it is a party.
e. CAPITALIZATION; STATUS OF CAPITAL STOCK. The Company has a total
authorized capitalization consisting of (i) 20,000,000 shares of Common Stock,
of which 6,152,000 shares are currently issued and outstanding and 402,000 are
reserved for issuance upon exercise of outstanding stock options and warrants
and (ii) 1,000,000 shares of Preferred Stock, par value $.01 per share, none of
which are currently issued and outstanding. All the outstanding shares of Common
Stock of the Company have been duly authorized, are validly issued and are fully
paid and nonassessable. No options or rights to purchase shares of capital
stock, or securities convertible into shares of capital stock, are authorized,
issued or outstanding, nor is the Company obligated in any other manner to issue
shares of its capital stock or securities convertible into or evidencing any
right to acquire shares of its capital stock, except as set forth above,
pursuant to this Agreement or as set forth on Schedule 4.5. There are no
restrictions on the transfer of shares of Warrant Stock, other than those
imposed by relevant state and federal securities laws or as expressly set forth
in the form of the Warrants.
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f. PRIVATE OFFERING. Based on and assuming the accuracy of the
representations of Purchaser set forth in Section 6.2 hereof, the offer, sale,
issuance and delivery to the Purchaser pursuant to the terms of this Agreement
of the Notes, the Warrants, the Refinancing Notes and the Warrant Stock, are
exempt from registration under the Securities Act of 1933, as amended (the
"SECURITIES ACT") and no qualification of an indenture under the Trust Indenture
Act of 1939, as amended, is required in connection with such transaction.
g. TITLE TO ASSETS. Each of the EqualNet Companies has good and
marketable title to all of its properties and assets, free and clear of all
liens and encumbrances, other than liens and encumbrances (i) contemplated
hereby, (ii) in existence on the date hereof granted in connection with the
Credit Agreement, (iii) or as set forth on Schedule 4.7 hereto.
h. INSURANCE. Each of the EqualNet Companies maintains with
financially sound and reputable insurers, risk of physical loss or damage
insurance covering its assets wherever the same may be located, insuring against
the risk of fire, explosion, theft and such other risks as are prudently insured
against by corporations engaged in the same business and similarly situated with
the EqualNet Companies in an amount usually carried by corporations engaged in
the same business and similarly situated with the Companies.
i. SECURITY INTEREST. The Security Agreement, when it has been duly
executed and delivered by the EqualNet Companies and the financing statements
required to be filed thereunder have been duly filed, will create and grant to
the Purchaser a valid and perfected security interest in the Collateral (as
defined in the Security Agreement).
j. FINANCIAL STATEMENTS. The Company's consolidated financial
statements, set forth in the Company's Annual Report on Form 10-K for its latest
fiscal year ended, consisting of balance sheets and statements of operations and
cash flows and accompanying footnotes, certified by the Company's independent
accountants, and the interim financial statements, set forth in the Company's
Quarterly Report on Form 10-Q filed after such Form 10-K, as filed with the
Securities and Exchange Commission (the "SEC FILINGS"), fairly present, in all
material respects, the financial condition and results of operations of the
Company and its subsidiaries as of the dates and for the periods presented
therein, all in accordance with generally accepted accounting principles
consistently applied ("GAAP"). Except as set forth on Schedule 4.10 hereto, (i)
there are no liabilities, fixed or contingent, which are material but not
reflected in such financial statements other than liabilities arising in the
ordinary course of business since the date of the interim financial statements
and (ii) there has been no material change in the business, financial condition
or operations of the Company since September 30, 1996.
k. BOOKS AND RECORDS. The books and records of the EqualNet
Companies accurately reflect in all material respects the transactions to which
any EqualNet Company is a party or by which its properties are subject or bound,
and such books and records have been properly kept and maintained.
l. ACCOUNTING CONTROLS. The EqualNet Companies maintain a system of
internal accounting controls sufficient to provide reasonable assurance that (a)
transactions are
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executed in accordance with management's general and specific authorization, (b)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with GAAP and to maintain accountability for assets,
(c) access to assets is permitted only in accordance with management's general
or specific authorization, and (d) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
m. NO LITIGATION. Except as disclosed in the SEC Filings filed prior
to the date of this Agreement, no EqualNet Company is now engaged in or
threatened in writing with any litigation or other proceeding in connection with
its affairs which would or could reasonably be expected to have a Material
Adverse Effect.
n. NO DEFAULT. No Event of Default (as defined in the Notes) or
other event which, with the giving of notice or the passage of time or both,
would constitute an Event of Default has occurred and is continuing.
o. DISCLOSURE GENERALLY. The representations and statements made by
the EqualNet Companies or on their behalf in connection with this Agreement do
not and will not contain any untrue statement of a material fact or, taken
collectively, omit to state a material fact or any fact necessary to make the
representations and statements made not materially misleading. No written
information, exhibit, report or financial statement furnished by the EqualNet
Companies to the Purchaser in connection with this Agreement contains or will
contain any material misstatement of fact or, taken collectively, omit to state
a material fact or any fact necessary to make the statements contained therein
not materially misleading.
p. REGISTRATION RIGHTS. Except as disclosed on Schedule 4.17, (i) no
person has rights to the registration of any securities of the Company or any
subsidiary and (ii) neither the Company nor any of its subsidiaries will have
any liability for any rights of any person for the registration of any
securities of the Company.
q. NO SUBSIDIARIES. Except for EqualNet Subsidiary, TeleSource and
Wholesale, the Company has no equity, partnership or other similar interest,
direct or indirect, in any person.
ARTICLE 5.
COVENANTS
Each EqualNet Company shall, for so long as any portion of the Notes
or the Refinancing Notes is unpaid, comply with the covenants set forth in
Sections 7.1 through 7.8, 7.10 through 7.14 and Article VIII (substituting the
Purchaser for the Agent and the Lenders where appropriate) of the Credit
Agreement, as such covenants are in effect on the date hereof and irrespective
of any amendment, modification or termination of the Credit Agreement or any
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waiver by the Lenders thereunder. In addition to such covenants, the Company
agrees to promptly have any shares of Warrant Stock that are issued pursuant to
the Warrants approved for quotation on the Nasdaq National Market or such other
primary market or trading system on which the Common Stock then trades.
ARTICLE 6.
REPRESENTATIONS AND WARRANTIES
AND COVENANTS OF THE PURCHASER
The Purchaser represents and warrants to the EqualNet Companies and
covenants and agrees with the EqualNet Companies as follows:
a. AUTHORIZATION. This Agreement constitutes a valid and legally
binding obligation of the Purchaser enforceable in accordance with its terms.
b. INVESTMENT REPRESENTATIONS; TRANSFER.
(a) The Notes, the Warrants and the Refinancing Notes are
being acquired by the Purchaser for investment for its own account, and not with
a view to the sale or distribution of any part thereof or of the Warrant Stock,
and it has no present intention of selling, granting participation in, or
otherwise distributing the same except for distributions that are exempt from
the registration requirements of applicable securities laws (other than any
notice provisions thereof) or pursuant to a registered offering.
(b) The Purchaser understands that the Notes, the Refinancing
Notes, the Warrants and the Warrant Stock have not been registered under the
Securities Act of 1933, as amended (the "SECURITIES ACT") on the basis that the
offer and sale thereof as provided for in this Agreement and the issuance of the
Warrant Stock are exempt from registration under the Securities Act pursuant to
Section 4(2) thereof, and that the Company's reliance on such exemption is
predicated on the Purchaser's representations set forth herein.
(c) The Purchaser is an "accredited investor" within the
meaning of Rule 501 of Regulation D promulgated under the Securities Act, is
experienced in evaluating investments in companies such as the Company, has such
knowledge and experience in financial and business matters as to be capable of
evaluating the merits and risks of its investment and has the ability to bear
the entire economic risk of its investment. The Purchaser has made its own
evaluation of its investment in the Notes and the Warrants, and will make its
own evaluation of its investment in the Refinancing Notes, based upon such
information as is available to it and without reliance upon the Company or any
other person or entity, and the Purchaser agrees that neither the Company nor
any other person or entity has any obligation to furnish any additional
information to the Purchaser except as expressly set forth herein.
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(d) The Purchaser understands that the Notes, the Refinancing
Notes, the Warrants and Warrant Stock may not be sold, transferred, pledged,
hypothecated or otherwise disposed of without registration under the Securities
Act or an exemption therefrom, and that in the absence of an effective
registration statement covering the Notes, the Refinancing Notes, the Warrants
or the Warrant Stock or an available exemption from registration under the
Securities Act, the Notes, the Refinancing Notes, the Warrants and the Warrant
Stock must be held indefinitely.
c. LEGENDS; STOP TRANSFER. Each Purchaser agrees that all Notes,
Refinancing Notes, Warrants and Warrant Stock shall bear legends in
substantially the following form:
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR
THE SECURITIES LAWS OF ANY OTHER STATE. THE SECURITIES REPRESENTED
HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD OR
OFFERED FOR SALE OR OTHERWISE TRANSFERRED, EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR AN
OPINION OF COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE CORPORATION
THAT SUCH REGISTRATION IS NOT REQUIRED."
For Notes and Refinancing Notes only:
THIS NOTE IS SUBJECT TO THE PROVISIONS OF THE INTERCREDITOR
AGREEMENT REFERRED TO HEREIN.
ARTICLE 7.
MISCELLANEOUS
a. COSTS, EXPENSES AND TAXES. The EqualNet Companies shall bear all
costs and expenses in connection with the preparation, execution and delivery of
this Agreement, the Notes, the Refinancing Notes, the Warrants and the Warrant
Stock, provided that EqualNet shall only be obligated for up to $30,000 of
Purchaser's reasonable attorney fees incurred in connection therewith. The
EqualNet Companies shall pay any and all stamp and other taxes payable or
determined to be payable in connection with the execution and delivery of this
Agreement, and the original issuance of the Notes, the Refinancing Notes, the
Warrants and the Warrant Stock.
b. LIMITATION ON LIABILITY; INDEMNIFICATION.
(a) Purchaser shall not have any liability to any EqualNet
Company for any matter arising under or relating in any manner to the Documents
unless caused exclusively by
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the gross negligence or willful misconduct of Purchaser. To the extent permitted
by applicable law, in addition to the payment of costs and expenses pursuant to
Section 7.1 hereof, and irrespective of whether the transactions contemplated
hereby shall be consummated, the EqualNet Companies agree to indemnify,
exonerate, pay and hold the Purchaser, and any holder of any interest in the
Notes, the Refinancing Notes, the Warrants or the Warrant Stock, and the
officers, directors, employees and agents of the Purchaser or such holders
(collectively, the "INDEMNITEES") harmless from and against any and all
liabilities, obligations, losses, damages, penalties, actions, causes of action,
judgments, suits, claims, costs, expenses, and disbursements of any kind or
nature whatsoever (including, without limitation, the reasonable fees and
disbursements of counsel for such Indemnitees in connection with any
investigative, administrative or judicial proceeding, irrespective of whether
such Indemnitee shall be designated a party thereto), which may be imposed on,
incurred by, or asserted against such Indemnitee, in any matter relating to or
arising out of this Agreement or any of the other Documents or in connection
with any claim asserted against the Purchaser by any person or entity arising
out of or in any way connected with this Agreement or any of the other Documents
(collectively, the "INDEMNIFIED LIABILITIES"); provided however, that the
EqualNet Companies shall have no obligation hereunder with respect to an
Indemnitee for any Indemnified Liabilities proximately caused by the gross
negligence or willful misconduct of such Indemnitee.
(b) If for any reason the indemnification provided in
paragraph (a) is unavailable to any Indemnitee or insufficient to hold it
harmless as contemplated thereby then the EqualNet Companies shall contribute to
the amount paid or payable by the Indemnitee as a result of such loss, claim,
liability or expense in such proportion as is appropriate to reflect not only
the relative benefits received by the EqualNet Companies, on the one hand and
such Indemnitee on the other hand, but also the relative fault of the EqualNet
Companies and the Indemnitee, as well as any equitable considerations.
c. SURVIVAL OF REPRESENTATIONS. The representations and warranties
contained in this Agreement or in any certificate furnished hereunder shall
survive the Closing. Notwithstanding any investigation conducted by the
Purchaser before or after the Closing or the decision of the Purchaser to
complete the Closing, the Purchaser shall be entitled to rely upon the
representations and warranties set forth herein.
d. PRIOR AGREEMENTS. This Agreement and the other Documents
constitute the entire agreement between the parties concerning the subject
matter hereof and supersede any prior representations, understandings or
agreements. There are no representations, warranties, agreements, conditions or
covenants, of any nature whatsoever (whether express or implied, written or
oral) between the parties hereto with respect to such subject matter except as
expressly set forth herein or therein, and the Purchaser acknowledges not having
relied upon any such representations, warranties, agreements, conditions or
covenants which may have been previously made by or on behalf of the EqualNet
Companies or any officers or agents or any other person or entity.
e. SEVERABILITY. The invalidity or unenforceability of any provision
hereof shall in no way affect the validity or enforceability of any other
provision.
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f. GOVERNING LAW. THIS AGREEMENT AND THE OTHER DOCUMENTS SHALL BE
GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF NEW YORK, WITHOUT REGARD TO ITS CHOICE OF LAW RULES.
g. LITIGATION. Each of the EqualNet Companies and the Purchaser
hereby waives trial by jury in any action or proceeding of any kind or nature in
any court in which an action may be commenced by or against it arising out of or
relating this Agreement or any of the other Documents. The EqualNet Companies
and the Purchaser hereby agree that the United States District Court for the
Southern District of New York, if a basis for jurisdiction exists, and otherwise
the courts of the State of New York located in the Borough of Manhattan, the
City of New York, shall have exclusive jurisdiction to hear and determine any
claims or disputes between any of the EqualNet Companies and the Purchaser,
pertaining directly or indirectly to this Agreement or to any of the Documents
or to any matter arising therefrom, provided that notwithstanding the foregoing,
Purchaser may bring any suit action or proceeding arising out of or relating to
this Agreement or any of the other Documents, in the courts of any place where
Purchaser can establish jurisdiction over the EqualNet Companies. The parties
hereto expressly submit and consent in advance to such jurisdiction in any
action or proceeding commenced in such courts, hereby waiving personal service
of the summons and complaint, or other process or papers issued therein and
agreeing that service of such summons and complaint or other process or papers
may be made by registered or certified mail addressed to such party at its
address provided herein. Each of the parties hereto waives any objection that it
may now or hereafter have to the laying of venue brought in the aforementioned
courts and hereby waives and agrees not to plead or claim in such courts that
any such action or proceeding brought in such court is brought in an
inconvenient forum.
h. HEADINGS. Article and Section headings in this Agreement are
included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose.
i. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument, and either of the parties hereto may execute this Agreement by
signing any such counterpart.
j. BINDING EFFECT. This Agreement shall be binding upon and enure to
the benefit of the parties hereto and their respective successors and permitted
assigns.
k. PUBLICITY. Except as required by law or the rules of the Nasdaq
Stock Market, neither the EqualNet Companies nor the Purchaser shall, nor shall
they permit their respective stockholders, directors, officers or advisors to,
issue or cause the publication of any press release or make any other public
statement, filing or announcement with respect to this Agreement and the
transactions contemplated hereby without the prior consent of the other parties.
The Company and the Purchaser shall cooperate in issuing press releases or
otherwise making public statements with respect to this Agreement and the
transactions contemplated
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hereby, which cooperation shall include first consulting the other party hereto
concerning the requirement for, and timing and content of, such public
announcement.
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IN WITNESS WHEREOF, the parties hereto, intending to be legally
bound, have caused this Agreement to be executed by their respective duly
authorized officers, as of the date first above written.
EQUALNET COMPANIES:
EQUALNET HOLDING CORP.
By: /s/ ZANE RUSSELL
President
EQUALNET CORPORATION
By: /s/ ZANE RUSSELL
President
TELESOURCE, INC.
By: /s/ (SIG. ILLEGIBLE)
President
EQUALNET WHOLESALE SERVICES, INC.
By: /s/ ZANE RUSSELL
President
PURCHASER:
THE FURST GROUP, INC.
By:SIG. ILLEGIBLE
Executive Vice President
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EXHIBIT A
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR
THE SECURITIES LAWS OF ANY OTHER STATE. THE SECURITIES
REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT
BE SOLD OR OFFERED FOR SALE OR OTHERWISE TRANSFERRED, EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OR AN OPINION OF COUNSEL OR OTHER EVIDENCE
ACCEPTABLE TO THE CORPORATION THAT SUCH REGISTRATION IS NOT
REQUIRED.
THIS NOTE IS SUBJECT TO THE PROVISIONS OF THE INTERCREDITOR
AGREEMENT REFERRED TO HEREIN.
No. ____ EQUALNET HOLDING CORP.
EQUALNET CORPORATION
TELESOURCE, INC.
EQUALNET WHOLESALE SERVICES, INC.
10% Note due December 31, 1998
$_______ ________, 199__
FOR VALUE RECEIVED, EqualNet Holding Corp., a Texas corporation,
EqualNet Corporation, a Delaware corporation, TeleSource, Inc., a Texas
corporation, and EqualNet Wholesale Services, Inc., a Delaware corporation, each
having an address at EqualNet Plaza, 1250 Wood Branch Park Drive, Houston, TX
77079 (hereinafter referred to collectively as the "MAKER"), jointly and
severally hereby promise to pay to the order of _____________________, having an
address at ___________________________ (the "PAYEE"), on or before December 31,
1998, the principal sum of ______________ Dollars ($_________), and to pay
interest from the date funds are advanced by the Payee to the Escrowee pursuant
to Section 1.3 of the Agreement (as herein defined) and the Escrow Agreement
dated February 11, 1997 among the Maker, The Furst Group, Inc., a New Jersey
corporation ("TFG") and the Escrowee (defined therein) on the principal sum
remaining from time to time unpaid at the rate of ten percent (10%) per annum,
such interest to be payable monthly in arrears on the first business
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day of every calendar month commencing __________, 1997. Principal and
interest shall be payable and delivered, without surrender or presentation of
this Note, in lawful money of the United States of America by wire transfer of
immediately available funds to Payee, or to Payee's agent, in the State of New
York. Any amounts not paid when due shall bear interest at the rate of thirteen
percent (13%) compounded monthly. Interest shall be computed on the basis of a
360-day year of twelve 30-day months.
This Note is one of an issue of 10% Notes due December 31, 1998 of
the Maker in an aggregate principal amount of $3,000,000 (collectively, the
"NOTES") issued pursuant to a certain Notes and Warrants Purchase Agreement,
dated as of February 3, 1997, between the Maker and TFG (the "AGREEMENT").
Capitalized terms used herein but not defined herein shall have the meaning
ascribed to them in the Agreement.
Section 1. OPTIONAL REDEMPTION. The Maker may at any time redeem the
Notes in whole or in part (in integral multiples of $1,000) by a payment of a
redemption price equal to the principal amount thereof, together with interest
due on the amount so redeemed to the date of redemption, without premium or
penalty of any nature. In the event of prepayment of this Note in full, any
prepaid but unearned interest shall be credited against the redemption price.
Section 2. NOTICE OF REDEMPTION. Notice of any redemption shall be
given to the Payee at least three days prior to the date of such redemption.
Each redemption of Notes shall be made so that, as nearly as may be practicable,
the Notes then held by each holder shall be redeemed in a principal amount which
shall bear the same ratio to the total principal amount of Notes being redeemed
as the principal amount of Notes then held by such holder bears to the aggregate
principal amount of the Notes then outstanding.
Section 3. PAYMENT ON NON-BUSINESS DAYS. Whenever any payment to be
made on the Notes shall be due on a Saturday, Sunday or a public holiday under
the laws of the State of New York or the State of Texas, such payment may be
made on the next succeeding business day with the same effect as if made on the
nominal date for payment.
Section 4. REGISTRATION. The Maker shall maintain at its principal
office a register of the Notes and shall record therein the names and addresses
of the holders of the Notes, the address to which notices are to be sent and the
address to which payments are to be made as designated by the holder if other
than the address of the holder, and the particulars of all transfers, exchanges
and replacements of Notes. Each Note issued hereunder, whether originally or
upon transfer, exchange or replacement of a Note, shall be registered on the
date of execution thereof by the Maker.
Section 5. TRANSFER AND EXCHANGE. Transfer of a Note may be effected
by endorsement and delivery. The holder of any Note may, prior to maturity or
redemption thereof, surrender such Note at the principal office of the Maker for
transfer or exchange. Within a reasonable time after notice to the Maker from a
holder of its intention to make such exchange and without expense (other than
applicable transfer taxes, if any) to such holder, the Maker shall issue in
exchange therefor another Note or Notes dated the date to which interest has
been paid
A-2
<PAGE>
on, and for the unpaid principal amount of, the Note or Notes so surrendered,
containing the same provisions and subject to the same terms and conditions as
the Note or Notes so surrendered. Each new Note shall be made payable to such
person or entity, as the registered holder of such surrendered Note or Notes may
designate. Notes issued upon any transfer or exchange shall be only in
authorized denominations, which shall be $100,000 and integral multiples of
$50,000 in excess thereof or, in the event of partial redemption by the Maker of
any Notes or partial surrender of such Notes in connection with the exercise of
the Warrants (as defined in the Agreement), such lesser amount as shall
constitute the entire remaining principal amount of such Note.
Section 6. REPLACEMENT. Upon receipt of evidence reasonably
satisfactory to the Maker of the loss, theft, destruction or mutilation of any
Note and, if requested by the Maker in the case of any such loss, theft or
destruction, upon delivery of an indemnity agreement of the holder satisfactory
to the Maker, or, in the case of any such mutilation, upon surrender and
cancellation of such Note, the Maker will issue a new Note, of like tenor, in
the amount of the unpaid principal of such Note, and dated the date to which
interest has been paid, in lieu of such lost, stolen, destroyed or mutilated
Note.
Section 7. INTERCREDITOR AGREEMENT. The Maker, for itself and its
successors and assigns, covenants and agrees, and the Payee and each successor
holder of Notes by such holder's acceptance thereof, likewise covenants and
agrees, that notwithstanding any other provision of the Notes, the payment of
the principal and interest on each Note and all other obligations of any kind,
now or hereafter owing under this Note or in respect of the indebtedness
evidenced hereby, shall be governed by that certain Intercreditor and
Subordination Agreement dated January __, 1997 (the "INTERCREDITOR AGREEMENT")
among the Maker, certain lenders party thereto, Comerica Bank-Texas, as agent
for such lenders, and The Furst Group, Inc., a New Jersey corporation.
Section 8. EVENTS OF DEFAULT. Any of the following shall constitute
an "EVENT OF DEFAULT" with respect to the Notes:
(a) an Event of Default, as defined in the Credit Agreement on
the date of the Agreement and irrespective of any amendment, modification
or termination of the Credit Agreement or any waiver by the Lenders
thereunder, shall have occurred;
(b) a failure to pay principal of or interest on any Note, or
any other amount payable thereunder when due;
(c) a failure of the Maker to observe or perform any term,
covenant or agreement contained in the Agreement or any of the Documents
and, in the case of affirmative covenants contained in Article VII of the
Credit Agreement, continuation of such failure for a period ending five
business days after notice to the EqualNet Companies at the address set
forth above (or such other address as the EqualNet Companies may furnish
to the holder hereof in writing) by any holder of the Notes or the time
such failure becomes known to any officer of an EqualNet Company,
whichever is earlier;
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(d) any statement, certificate, report, representation or
warranty made or furnished on behalf of the Maker in the Agreement or any
of the Documents shall prove to have been false or misleading in any
material respect when made;
Upon the occurrence of an Event of Default, while such event shall be
continuing, holders representing a majority of the then outstanding principal
amount of the Notes may, by notice to the Maker, declare the entire unpaid
principal amount of the Notes and all interest accrued and unpaid thereon to be
forthwith due and payable, whereupon all such amounts shall become and be
forthwith due and payable (unless there shall have occurred an Event of Default
under paragraph (a) above because of an Event of Default as set forth in Section
9.1(f), (g) or (h) of the Credit Agreement as in effect on the date of the
Agreement and irrespective of any amendment, modification or termination of the
Credit Agreement or any waiver by the Lenders thereunder, in which case all such
amounts shall automatically become due and payable), without presentment,
demand, protest or further notice of any kind, all of which are hereby expressly
waived by the Maker.
This Note is secured in accordance with the provisions of the
Security Agreement dated as of February 3, 1997 between the Maker and The Furst
Group, Inc., a New Jersey corporation.
The Maker hereby agrees to pay on demand all costs and expenses
incurred in collecting the Maker's obligations hereunder or in enforcing or
attempting to enforce any of the holder's rights hereunder or under the
Agreement or the Security Agreement, including, but not limited to, reasonable
attorneys' fees and expenses if collected by or through any attorney, whether or
not suit is filed.
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK,
WITHOUT REGARD TO ITS CHOICE OF LAW RULES.
The Maker hereby waives presentment, demand, notice of nonpayment,
protest and all other demands and notices in connection with the delivery,
acceptance, performance or enforcement of this Note.
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<PAGE>
EQUALNET HOLDING CORP.
By:_________________________________
President
EQUALNET CORPORATION
By:_________________________________
President
TELESOURCE, INC.
By:_________________________________
President
EQUALNET WHOLESALE SERVICES, INC.
By:_________________________________
President
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<PAGE>
EXHIBIT B
THE SECURITIES REPRESENTED HEREBY AND THE COMMON STOCK ISSUABLE HEREUNDER
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY OTHER STATE. THE
SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY
NOT BE SOLD OR OFFERED FOR SALE OR OTHERWISE TRANSFERRED, EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR AN
OPINION OF COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE CORPORATION THAT
SUCH REGISTRATION IS NOT REQUIRED.
WARRANT NO.___ _____ SHARES
EQUALNET HOLDING CORP.
Warrant for Purchase of Common Stock
___________, 199__
This is to certify that ________________ (the "HOLDER"), with an
address at _______________________________, is entitled to purchase _______
shares of Common Stock, par value $.01 per share (the "WARRANT STOCK"), of
EqualNet Holding Corp., a Texas corporation (the "COMPANY"), at a price and
subject to the terms and conditions contained herein. This warrant is one of the
warrants (collectively, "WARRANTS") of the Company issued under a Notes and
Warrants Purchase Agreement (the "AGREEMENT") dated as of February 3, 1997
between the Company, EqualNet Corporation, TeleSource, Inc. and EqualNet
Wholesale Services, Inc. and The Furst Group, Inc., a New Jersey corporation.
Capitalized terms used herein and not otherwise defined herein (including in
Section 13 hereof) have the meanings specified in the Agreement.
Section 1. EXERCISE OF THE WARRANT
(a) This Warrant shall be exercisable at any time subsequent to the
date hereof until 5:00 P.M. Houston, Texas time on December 31, 1999, at which
time this Warrant shall expire.
(b) This Warrant may be exercised by the Holder in whole or in part
upon surrender of the Warrant with the duly completed and executed subscription
form attached hereto at the office of the Company at its address set forth in
Section 7, or at such other place in the
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United States as the Company may designate for such purpose by notice hereunder,
upon payment to the Company of the Warrant Price (as hereinafter defined in
Section 2). Payment of the Warrant Price may be made:
(i) by delivery of Notes or Refinancing Notes in an unpaid
principal amount which is, together with unpaid accrued interest, equal to
the Warrant Price;
(ii) by delivery of cash or a bank cashier's or certified
check payable in United States currency to the order of the Company in the
amount of the Warrant Price or wire transfer of the Warrant Price in
immediately available funds; or
(iii) by delivery of a combination of (i) and (ii).
(c) The Holder may also effect a cashless exercise by surrender of
this Warrant at such office with a duly completed and executed cashless exercise
form attached hereto (a "CASHLESS EXERCISE"). In the event of a Cashless
Exercise, the Holder shall exchange this Warrant for that number of shares of
Warrant Stock determined by multiplying the number of shares of Warrant Stock as
to which a Cashless Exercise is made by a fraction, the numerator of which shall
be the difference between the then Current Price Per Share as of the close of
business on the business day prior to the date of exercise and the Warrant
Price, and the denominator of which shall be such Current Price Per Share.
(d) Stock issuable upon the exercise of this Warrant shall be and
will be deemed to be issued to the Holder or its nominee as record owner of such
shares as of the close of business on the date on which this Warrant shall have
been surrendered and the Warrant Price paid as provided above (and any Notes or
Refinancing Notes delivered as aforesaid shall be deemed paid on such date) or
Cashless Exercise is effected. Certificates for such shares shall be delivered
to the Holder as soon as practicable but not later than seven business days
after such exercise to the Holder or its agent at an address in the State of New
York provided to the Company by the Holder.
Section 2. WARRANT PRICE AND WARRANT STOCK ADJUSTMENTS.
(a) The price at which the shares of Warrant Stock shall be
purchasable upon the exercise of this Warrant shall be $2.00 per share (the
"WARRANT PRICE"), subject to adjustments as hereinafter set forth:
(i) If the Company shall issue or sell Options or Convertible
Securities (other than Excluded Securities) for consideration less than
the Warrant Price at the date of such issue or sale, the Warrant Price
shall be adjusted down to an amount that is equivalent to such
consideration.
(ii) If the Company shall issue or sell Common Stock (other
than pursuant to Excluded Securities or pursuant to Options or Convertible
Securities outstanding on the date hereof) for a consideration per share
less than the Warrant Price at
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the date of such issue or sale, the Warrant Price shall be adjusted down
to an amount that is equivalent to such consideration.
(iii) The Warrant Price shall be adjusted as provided in
subsection 2(b)(v) hereof.
(iv) In the event that (A) at any time Zane Russell ceases to
be and act as the chief executive officer of the Company or (B) Michael
Hlinak ceases to be and act as chief operating officer of the Company, the
Warrant Price shall be adjusted down to that number that is equal to the
Warrant Price at the time of such failure or cessation divided by two;
provided that, if such cessation is a result of a termination for good
cause, as determined in good faith by the Board of Directors of the
Company, or the death, disability or incapacity of Zane Russell or Michael
Hlinak, respectively, no adjustment in the Warrant Price shall be made
under this subparagraph (iv); provided further that no adjustments shall
be made to the Warrant Price with respect to (B) above after the earlier
to occur of the passage of one year from the date of the Agreement or the
date on which Michael Hlinak and the Company enter into an employment
agreement containing terms consistent with industry practice and Michael
Hlinak's position with the Company and with a term of at least one year.
(v) The Warrant Price shall be adjusted as provided in
subsection 2(c) hereof.
(b) The number of shares purchasable upon the exercise of this
Warrant and the Warrant Price shall upon the occurrence of any of the following
events after the date hereof be subject to adjustment as follows:
(i) In case the Company shall issue shares of Common Stock,
Options or Convertible Securities (except Excluded Securities and shares
of Common Stock issuable pursuant to the exercise of Excluded Securities),
the number of shares of Warrant Stock that immediately prior to such
issuance the Holder of this Warrant shall have been entitled to purchase
pursuant to this Warrant shall be increased in direct proportion to the
increase in the number of shares of Common Stock outstanding immediately
prior to such issuance (in the case of the issuance of Options or
Convertible Securities, the number of shares of Common Stock outstanding
shall include the maximum aggregate number of shares of Common Stock
issuable pursuant to such Options and Convertible Securities assuming full
exercisability thereof at the time of issuance); provided that if such
shares of Common Stock, Options or Convertible Securities (except Excluded
Securities and shares of Common Stock issuable pursuant to the Exercise of
Excluded Securities) are issued for a consideration per share less than
the Warrant Price at the date of such issue or sale, the number of shares
of Warrant Stock that immediately prior to such issuance the Holder of
this Warrant shall have been entitled to purchase pursuant to this Warrant
shall be increased to the greater of (A) that number of shares that is
equal to the number of shares of Warrant Stock that immediately prior to
such issuance the Holder of this Warrant shall have been entitled to
purchase pursuant to this Warrant multiplied by a fraction, the
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<PAGE>
numerator of which is the Warrant Price and the denominator of which is
such consideration per share, and (B) the number of shares of Warrant
Stock otherwise calculated under this paragraph (i).
(ii) In case the Company shall (A) pay a dividend in Common
Stock, (B) subdivide its outstanding Common Stock, or (C) combine its
outstanding Common Stock into a smaller number of shares, the number of
shares of Warrant Stock which immediately prior to such event the Holder
of this Warrant shall have been entitled to purchase pursuant to this
Warrant shall be increased or decreased in direct proportion to the
increase or decrease, respectively, in the number of shares of Common
Stock outstanding immediately prior to such event. An adjustment made
pursuant to this subsection 2(b)(ii) shall become effective retroactively
immediately after the record date in the case of a dividend and shall
become effective immediately after the effective date in the case of a
subdivision or combination.
(iii) In case the Company shall distribute to all holders of
its Common Stock evidences of its indebtedness or other assets (other than
distributions payable in Common Stock, then in each such case the number
of shares of Warrant Stock thereafter purchasable upon the exercise of
this Warrant shall be determined by multiplying the number of shares of
Warrant Stock theretofore purchasable upon the exercise of this Warrant,
by a fraction, of which the numerator shall be the then Current Price Per
Share on the date of such distribution and of which the denominator shall
be such Current Price Per Share less the then Fair Market Value of the
portion of the assets or evidences of indebtedness so distributed to one
share of Common Stock. Such adjustment shall be made whenever any such
distribution is made, and shall become effective retroactively immediately
after the record date for the determination of stockholders entitled to
receive such distribution.
(iv) No adjustment in the number of shares purchasable
hereunder shall be required unless such adjustment would require an
increase or decrease of at least one percent (1%) in the number of shares
purchasable upon the exercise of this Warrant; provided, however, that any
adjustments which by reason of this sentence are not required to be made
shall be carried forward and taken into account on any subsequent
adjustment.
(v) Whenever the number of shares purchasable upon the
exercise of this Warrant is adjusted as herein provided in subsection
2(b)(ii) or 2(b)(iii) above, the Warrant Price per share payable upon
exercise of this Warrant shall be adjusted by multiplying such Warrant
Price immediately prior to such adjustment by a fraction, of which the
numerator shall be the number of shares purchasable upon the exercise of
each Warrant immediately prior to such adjustment, and of which the
denominator shall be the number of shares so purchasable immediately
thereafter.
(vi) In case of any capital reorganization or reclassification
of the capital stock of the Company, the Holder of this Warrant shall
thereafter be entitled to purchase, for the aggregate Warrant Price
payable hereunder in order to exercise this Warrant, the
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<PAGE>
Other Securities and property receivable upon such capital reorganization
or reclassification by a holder of the number of shares of Common Stock
which this Warrant entitled the Holder hereof to purchase immediately
prior to such capital reorganization or reclassification.
(vii) If the Company shall at any time consolidate with or
merge with or into another corporation or entity or shall sell or transfer
to another entity all or substantially all of the assets of the Company,
the Holder of this Warrant will thereafter have the right to purchase, for
the aggregate Warrant Price payable hereunder in order to exercise this
Warrant, the Other Securities and/or property receivable by a holder of
the number of shares of Common Stock which this Warrant entitled the
Holder of this Warrant to purchase immediately prior to such
consolidation, merger, sale or transfer, if any. The Company shall take
such steps in connection with such consolidation, merger, sale or
transfer, as may be necessary to assure that the provisions hereof shall
thereafter be applicable, as nearly as reasonably may be, in relation to
Other Securities or property thereafter deliverable upon the exercise of
this Warrant. The Company, the successor corporation or the purchasing
entity, as the case may be, shall execute and deliver to the Holder a
supplemental Warrant so providing.
(viii) In the event that at any time, as a result of an
adjustment made pursuant to subsection 2(a)(vi) or 2(a)(vii) above, the
Holder of this Warrant shall become entitled to purchase any Other
Securities or property other than Common Stock, thereafter the number of
such Other Securities or property so purchasable upon exercise of this
Warrant and the Warrant Price shall be subject to adjustment from time to
time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common Stock contained in this Section 2.
(ix) The number of shares purchasable upon the exercise of
this Warrant shall be adjusted as set forth in subsection 2(c)
(c) (i) In the event that the Company becomes aware that it will
fail to satisfy the quantitative continued listing requirements of the Nasdaq
National Market, the Company shall, as promptly as practicable, give written
notice (the "DELISTING NOTICE") to the Holder and request the Holder to exercise
all or a portion of the Warrant. The Delisting Notice shall set forth the dollar
amount (the "EXERCISE AMOUNT") that the Company requires to continue satisfying
the quantitative continued listing requirements. Upon receipt of the Delisting
Notice, the Holder shall have the right at its sole option to exercise (or elect
not to exercise) all or part of the Warrant, provided that, as to that portion
of the Warrant so exercised (up to the Exercise Amount), the Warrant Price shall
be adjusted down to that number that is equal to the Warrant Price at the time
of receipt of the Delisting Notice divided by two (but not less than $1.00 per
share), and the number of shares purchasable under that portion of the Warrant
so exercised at the time of receipt of the Delisting Notice shall be increased
by multiplying such number by two (but not more than 3,000,000 shares). No
change shall be made as to the Warrant Price or the number of shares purchasable
under all or that portion of the Warrant that is not so exercised. (As an
example, if the Warrant Price is $2.00 and the number of shares purchasable
under the Warrant is 1,500,000
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<PAGE>
at the time the Holder receives a Delisting Notice, and the Exercise Amount set
forth in the Delisting Notice is $1,000,000, the Holder shall have the option of
exercising Warrants to purchase 1,000,000 shares at $1.00 per share, and, if the
Holder elects to so exercise, the remaining Warrant will continue to permit the
Holder to purchase 1,000,000 shares at $2.00 per share).
(ii) If the Company fails to provide the Delisting Notice to
the Holder and the Company is subsequently suspended or delisted from trading on
the Nasdaq National Market, the Warrant Price shall be adjusted down to that
number that is equal to the Warrant Price at the time of such suspension or
delisting divided by two, and the number of shares purchaseable under the
Warrant at the time of such suspension or delisting shall be increased by
multiplying such number by two.
(d) For the purposes of this Section 2:
(i) the consideration for the issue or sale of any Common
Stock shall, irrespective of the accounting treatment of such
consideration,
(A) insofar as it consists of cash, be computed at the
net amount of cash received by the Company, after deducting
any expenses paid or incurred by the Company and any
commissions or compensations paid or concessions or discounts
allowed to underwriters, dealers or others performing similar
services in connection with such issue or sale,
(B) insofar as it consists of property (including
securities) other than cash, be computed at the Fair Market
Value thereof at the time of such issue or sale, and
(C) in case Common Stock, Options or Convertible
Securities are issued or sold together with other stock or
securities or other assets of the Company for a consideration
which covers both, be the portion of such consideration so
received, computed as provided in clauses (A) and (B) above,
allocable to such Common Stock, Options or Convertible
Securities all as determined by an independent appraiser
reasonably satisfactory to both the Holder and the Company;
(ii) Options and Convertible Securities shall be deemed to
have been issued for a consideration per share determined by
dividing
(A) the total amount, if any, received and receivable by
the Company as consideration for the issue, sale, grant or
assumption of the Options or Convertible Securities in
question, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating
thereto, without regard to any provision contained therein for
a subsequent adjustment of such consideration to protect
against dilution) payable to the
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Company upon the exercise in full of such options or the
conversion or exchange of such Convertible Securities or, in
the case of Options for Convertible Securities, the exercise
of such Options for Convertible Securities and the conversion
or exchange of such Convertible Securities, in each case
computing such consideration as provided in the foregoing
subsection 2(d)(i).
by
(B) the maximum number of shares of Common Stock (as set
forth in the instruments relating thereto, without regard to
any provision contained therein for a subsequent adjustment of
such number to protect against dilution) issuable upon the
exercise of such Options or the conversion or exchange of such
Convertible Securities; and
(iii) Common Stock issued as a result of stock dividends,
stock splits, etc., shall be deemed to have been issued for no
consideration.
Section 3. NOTIFICATION UPON THE OCCURRENCE OF CERTAIN EVENTS. (a) Upon
any adjustment pursuant to Section 2 hereof, the Company within 10 days
thereafter shall give notice thereof to the Holder of this Warrant, in the
manner specified in Section 7 hereof, which notice shall state the adjusted
Warrant Price, the increased or decreased number of shares or the adjusted other
securities or property purchasable hereunder and the method of calculation and
the facts upon which such calculation is based.
(b) In case:
(i) the Company shall propose to take a record of the holders
of its Common Stock (or other securities at the time receivable upon the
exercise of the Warrant) for the purpose of entitling them to receive any
dividend or distribution or any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other
securities, or to receive any other right, or
(ii) of any capital reorganization of the Company, any
reclassification of the capital stock of the Company, any consolidation
with or merger of the Company with and into another corporation or other
entity, or any conveyance of all or substantially all of the assets of the
Company to another entity, or
(iii) of any voluntary or involuntary dissolution, liquidation
or winding-up of the Company,
then, and in each such case, the Company will mail or cause to be mailed to the
Holder of this Warrant, at least 30 days in advance of any of the foregoing
actions, a notice specifying, as the case may be, (y) the date on which a record
is to be taken for the purpose of such dividend, distribution or right, and
stating the amount and character of such dividend, distribution or right,
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<PAGE>
or (z) the date on which such reorganization, reclassification, consolidation,
merger, conveyance, dissolution, liquidation or winding-up is to take place, and
the time, if any, as to which the holders of record of Common Stock (or such
other securities at the time receivable upon the exercise of the Warrant) shall
be entitled to exchange their shares of Common Stock (or such other securities)
for securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger.
Section 4. RESERVATION OF WARRANT STOCK; REPRESENTATIONS.
The Company covenants that it will at all times reserve and keep
available out of its authorized shares of stock, solely for the purpose of issue
upon exercise of this Warrant as herein provided, such number of shares of
Common Stock or Other Securities as shall then be issuable upon the exercise of
the Warrant. The Company represents that all shares of Warrant Stock to which
the Holders of the Warrants shall be entitled upon the exercise thereof (i) are
duly authorized by the Articles of Incorporation of the Company in accordance
with the laws of the State of Texas, (ii) have been duly authorized to be issued
upon the exercise of the Warrants from time to time in whole or in part, (iii)
will be, when issued in accordance with the terms of the Warrants, duly
authorized and validly issued and fully paid and nonassessable and free and
clear of all liens and rights of others whatsoever (other than liens and rights
of others claiming by, through or under the Holder) and (iv) will not be at the
time of such exercise subject to any restrictions on transfer or sale except as
provided by applicable securities laws or otherwise herein.
Section 5. REGISTRATION RIGHTS.
(a) As promptly as practicable after the Closing Date, the Company
will file a registration statement (the "SHELF REGISTRATION") with the
Commission under the Securities Act permitting the disposition of the Warrant
Stock in accordance with the intended methods thereof as specified in writing by
the Purchaser. The Company will use its commercially reasonable efforts to have
the Shelf Registration declared effective by the Commission as soon as
practicable after the filing date and to at all times maintain the effectiveness
thereof. The Holders of Warrants and Warrant Stockholders representing (assuming
exercise of all Warrants) more than 50% of the Warrant Stock ("MAJORITY
HOLDERS") may, at any time, request that the Company supplement or amend the
Shelf Registration to effect an underwritten offering of the Warrant Stock by
one or more underwriters selected by the Majority Holders; provided that the
Majority Holders may only make such request a total of three (3) times. The
Company will as promptly as practicable supplement or amend such Shelf
Registration to the extent required to permit the disposition in accordance with
such request and use its commercially reasonable efforts to have the amendment
declared effective by the SEC as soon as practicable after the filing date. The
Company shall enter into an underwriting agreement in customary form used by
such underwriter or underwriters, which shall include, among other provisions,
contribution and indemnities of the Company and the Holders to the effect and to
the extent provided in this Section 5. The Warrant Stockholders whose Warrant
Stock is to be distributed by such underwriters shall be parties to such
underwriting agreement. No Warrant Stockholder may participate in such
underwritten offering unless such Warrant Stockholder agrees to sell its Warrant
Stock on the basis provided in such underwriting agreement and completes and
executes all questionnaires, powers of attorney,
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indemnities and other documents reasonably required under the terms of such
underwriting agreement. The obligations of the Company under this Section 5 (a)
shall terminate on the earlier to occur of (i) the third anniversary of the date
of this Warrant and (ii) at such time as all Holders and Warrant Stockholders
may transfer, without restriction whatsoever, all of the Warrant Stock held by
them or issuable to them upon conversion of Warrants held by them, pursuant to
Rule 144(k) promulgated under the Securities Act.
(b) At any time that the Shelf Registration is not available for any
reason or not required pursuant to Section 5(a), upon written notice
("REGISTRATION NOTICE") from the Majority Holders to the Company requesting that
the Company effect the registration under the Securities Act of at least 15% of
the Warrant Stock or any lesser percentage so long as the anticipated proceeds
from such offering exceed $500,000, which Registration Notice shall specify the
intended method or methods of disposition of such Warrant Stock, the Company
shall use its commercially reasonable efforts to effect (at the earliest
practicable date) the registration under the Securities Act of such Warrant
Stock (each, a "DEMAND REGISTRATION") for disposition in accordance with the
intended method or methods of disposition stated in such Registration Notice;
PROVIDED that a Holder shall have the right to deliver Registration Notices to
effect three (3) demand registrations pursuant to this Section 5(b) and no more
without regard to the number of underwritten offerings requested pursuant to
Section 5(a) hereof.
(c) Whenever the Company proposes to file a Registration Statement
with the Commission pursuant to the Securities Act in connection with a public
offering by the Company of its Common Stock, whether for the Company's own
account or for the account of others, other than a Registration Statement on
Form S-4 or Form S-8 or any successor forms thereto (a "PIGGYBACK
REGISTRATION"), the Company will give prompt written notice to all Holders and
Warrant Stockholders and will include in such Piggyback Registration all Warrant
Stock with respect to which the Company has received written requests for
inclusion within 20 days after the Company's mailing of such notice; provided
that if the managing underwriters advise the Company in writing that in their
opinion the number of securities requested to be included in such registration
exceeds the number that can be sold in such offering, at a price reasonably
related to fair value, the Company will allocate the securities to be included
first to the Company, then on a pro rata basis among the Holders and Warrant
Stockholders and any other person with registration rights not subordinated to
those of the Warrant Stockholders.
(d) If the proposed filing of a Registration Statement of which the
Company gives notice pursuant to Section 5(c) hereof is for a registered public
offering involving an underwriting, the Company shall so advise the Holders and
the Warrant Stockholders as part of the written notice given pursuant to Section
5(c). In such event, if a Warrant Stockholder proposes to distribute Warrant
Stock through such underwriting, such Warrant Stockholder shall (together with
the Company and the other holders of securities of the Company distributing
their securities through such underwriting) enter into an underwriting agreement
in such form as shall have been negotiated and agreed to by the Company with the
underwriter or underwriters selected for such underwriting by the Company. The
Company will give the Holders and the Warrant Stockholders notice (the "Pricing
Notice") of the anticipated range of the public offering price not later than
two weeks prior to the anticipated effective date of any Registration Statement
which
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includes Warrant Stock to be sold for the account of a Holder or Warrant
Stockholder. A Holder or Warrant Stockholder may in its discretion withdraw any
time prior to five days after receipt of the Pricing Notice, but may not
thereafter withdraw any Warrant Stock, unless the public offering price is below
the lowest price in the range of anticipated public offering prices specified in
the Pricing Notice. In order to facilitate the execution of the underwriting
agreement and the closing thereunder, a Holder or Warrant Stockholder will, at
the request of the managing underwriter, enter into a custody agreement and
power of attorney consistent with the preceding sentence.
(e) Notwithstanding the foregoing, if, at any time after giving
written notice of its proposal to file a Registration Statement pursuant to
Section 5(c) hereof and prior to the effective date of such Registration
Statement, the Company shall determine for any reason not to register the
securities proposed to be covered thereby, the Company may, at its election,
give written notice of such determination to the Holders and Warrant
Stockholders and upon the withdrawal of such Registration Statement shall have
no further obligation to register any Warrant Stock held by the Holders or
Warrant Stockholders in connection with such registration. In the event of such
withdrawal by the Company, the Company shall promptly reimburse the Holders and
Warrant Stockholders for the reasonable fees and expenses of their own legal
counsel and other reasonable expenses incurred in connection with such
registration.
(f) Subject to subsection 5(g)(ii) below, in connection with any
registration effected hereunder, the Company shall bear all expenses incurred by
it in connection therewith and in connection with the related distribution,
which shall include, without limitation, the following costs and expenses: (i)
printing and engraving costs; (ii) transfer agent's and registrar's fees; (iii)
legal and accounting fees and expenses (provided that such expenses shall
include only one counsel for all selling Warrant Stockholders); (iv)
registration and filing fees with the Commission and any other regulatory or
self-regulatory agencies or bodies; and (v) reasonable costs of investigation of
matters subject to disclosure in the Registration Statement, including the fees
and appraisers or other experts. Notwithstanding the foregoing, and subject to
subsection 5(g)(i) below, in connection with any registration effected
hereunder, a Warrant Stockholder shall bear all of his own expenses, including,
without limitation, any underwriting commissions or discounts in respect of the
sale of its Warrant Stock and the legal fees of its own counsel.
(g) In connection with any Registration Statement filed hereunder in
which the Holder participates as a selling stockholder, the following provisions
as to indemnification shall apply:
(i) The Company shall indemnify and hold harmless the Warrant
Stockholders against any losses, claims, damages or liabilities to which he may
become subject under the Securities Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in the Registration Statement, any preliminary
prospectus, the prospectus or any amendment or supplement thereto, or arise out
of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they are made, not
misleading; and the Company will reimburse any legal or other expenses
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reasonably incurred by the Warrant Stockholders in connection with investigating
or defending any such loss, claim, damage, liability, action or proceeding;
provided, however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage, liability, action or proceeding arises
out of or is based upon any untrue statement or alleged untrue statement, or
upon any omission or alleged omission, of any material fact contained in the
Registration Statement, any preliminary prospectus, the prospectus or any such
amendment or supplement, to the extent that such fact was included or omitted in
reliance upon and in conformity with information furnished to the Company by or
through such Warrant Stockholder specifically for use in the preparation
thereof. This indemnity will be in addition to any liability which the Company
may otherwise have.
(ii) A Warrant Stockholder will indemnify and hold harmless
the Company, each of its directors, each of its officers who has signed the
Registration Statement and each person, if any, who controls the Company, within
the meaning of the Securities Act or otherwise, against any losses, claims,
damages or liabilities to which it may become subject under the Securities Act
or otherwise insofar as such losses, claims, damages or liabilities (or actions
or proceedings in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any preliminary prospectus, the prospectus or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they are made, not misleading; and a Warrant
Stockholder will reimburse any legal or other expenses reasonably incurred by
the Company or any such director, officer or controlling person in connection
with investigating or defending any such loss, claim, damage, liability, action
or proceeding; provided, however, that the Holder will be liable in each case
under this subsection 5(g)(ii) to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission was
made in the Registration Statement, any preliminary prospectus, the prospectus
or any such amendment or supplement in reliance upon and in conformity with
information furnished to the Company by or through such Warrant Stockholder
specifically for use in the preparation thereof. This indemnity will be in
addition to any liability which the Warrant Stockholder may otherwise have.
(iii) Promptly after receipt by an indemnified party pursuant
to the foregoing provisions of notice of the commencement of any action or
proceeding, such indemnified party will, if a claim in respect thereof is to be
made against an indemnifying party hereunder, notify the indemnifying party of
the commencement thereof, provided that the omission to so notify the
indemnifying party will not relieve the indemnifying party from any liability
which it may have to any indemnified party under this Agreement or otherwise
unless such failure results in material prejudice to the indemnifying party. In
case any such action or proceeding is brought against any indemnified party, and
such party notifies an indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein and, to the extent
that it may wish, to assume the defense thereof with counsel reasonably
satisfactory to such indemnified party, and after notice from the indemnifying
party to such indemnified party or its election so to assume the defense
thereof, the indemnifying party will not be liable to such indemnified party
hereunder for any legal or other expense subsequently incurred by such
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indemnified party in connection with the defense thereof other than reasonable
costs of investigation; provided, however, that if an indemnified party
determines in good faith that it has existing or potential claims against, or
other conflicts with, the indemnifying party, the indemnifying party may not
assume the defense of such indemnified party but shall remain liable for the
separate legal and other expenses of such indemnified party incurred in
connection therewith. An indemnifying party shall not be liable for any
settlement of any action or claim affected without its written consent thereto.
Section 6. TRANSFER, EXCHANGE OR REPLACEMENT OF WARRANT, ETC.
(a) Subject to compliance with the transfer restrictions set forth
herein and in the Agreement, the Holder may surrender this Warrant at the office
of the Company determined in accordance with Section 7 hereof for transfer or
exchange. Within a reasonable time after notice to the Company from a Holder of
its intention to make such transfer or exchange and without expense (other than
applicable transfer taxes, if any) to such Holder, the Company shall issue in
exchange therefor another Warrant or Warrants containing the same provisions and
in the aggregate for the same number of shares of Common Stock as the Warrant so
surrendered. Subject to the restrictions on transfer set forth in the Agreement,
each new Warrant shall be registered in the name of such person or entity as the
Holder of the surrendered Warrant may designate. Warrants issued upon any
transfer or exchange shall be only in authorized denominations, which shall be
for 1,000 shares of Common Stock and amounts in excess thereof.
(b) Upon receipt of evidence satisfactory to the Company of the
loss, theft, mutilation or destruction of this Warrant, and in the case of any
such loss, theft, or destruction upon delivery of any indemnity agreement of the
Holder as shall be reasonably satisfactory to the Company, or in the case of
such mutilation upon surrender and cancellation of this Warrant, the Company
will issue at the expense of the Company in lieu thereof a new Warrant of like
tenor for the same number of shares of Common Stock.
Section 7. NOTICES
(a) Any notice hereunder shall be given to the Company in writing
and such notice and any payment by the Holder of this Warrant hereunder shall be
deemed duly given or made only upon receipt thereof at the Company's office at
EqualNet Plaza, 1250 Wood Branch Park Drive, Houston, TX 77079-1212 or at such
other address as the Company may designate by notice to the Holder. A copy of
the notice shall be given to Fulbright & Jaworski L.L.P., 1301 McKinney, Suite
5100, Houston, Texas 77010-3095, to the attention of Robert F. Gray, Jr.
(b) Any notice or other communication to the Holder of this Warrant
or to a Warrant Stockholder upon exercise of this Warrant shall be in writing
and such notice shall be deemed duly given or made only upon receipt thereof at
the address specified herein or such other address as the Holder or a Warrant
Stockholder may designate by notice to the Company.
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Section 8. WAIVER.
Neither this Warrant nor any term thereof may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which enforcement of the change, waiver, discharge or
termination is sought.
Section 9. FRACTIONAL SHARES.
Nothing contained herein shall obligate the Company to issue
fractional shares of its securities. Any exercise of this Warrant shall be for
the purpose of whole shares only. If any fraction of a share of stock would be,
except for this provision, issuable on the exercise of this Warrant, the Company
may at its option purchase such fraction for an amount equal in cash to the
Current Price Per Share of such fraction.
Section 10. GOVERNING LAW.
THIS WARRANT SHALL BE GOVERNED BY, AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK,
WITHOUT REGARD TO ITS CHOICE OF LAW RULES.
Section 11. SUCCESSORS AND ASSIGNS.
All of the provisions of this Warrant shall be binding upon the
Company and its successors and assigns.
Section 12. NO RIGHTS AS STOCKHOLDER; LIMITATION OF LIABILITY.
This Warrant shall not entitle the Holder hereof to any of the
rights of a stockholder of the Company. No provision hereof, in the absence of
affirmative action by the Holder hereof to purchase shares of Warrant Stock, and
no mere enumeration herein of the rights or privileges of the Holder hereof,
shall give rise to any liability of such Holder for the Warrant Price or as a
stockholder of the Company, whether such liability is asserted by the Company or
by creditors of the Company.
Section 13. DEFINITIONS.
As used herein, unless the context otherwise requires, the following
terms have the following respective meanings:
COMMISSION: the Securities and Exchange Commission or any other
Federal agency at the time administering the Securities Act.
COMMON STOCK: the class of stock designated as Common Stock, par
value $.01 per share, of the Company on the date of this Agreement. For purposes
of Section 2 only, Common Stock shall also include any capital stock with voting
rights of the Company.
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CONVERTIBLE SECURITIES: any evidences of indebtedness, shares of
stock (other than Common Stock) or other securities directly or indirectly
convertible into or exchangeable for Common Stock.
CURRENT PRICE PER SHARE: the Current Trading Price Per Share or, if
no Current Trading Price Per Share is available, Fair Market Value.
CURRENT TRADING PRICE PER SHARE: the "Current Trading Price Per
Share" of any security, including the Common Stock (a "Security"), on any date
shall be deemed to be the average of the daily closing prices (as such term is
hereinafter defined) per share of such Security for the 20 consecutive Trading
Days (as such term is hereinafter defined) immediately prior to such date. The
"closing price" for each day shall be the last sale price, regular way, or, in
case no such sale takes place on such day, the average of the closing bid and
asked prices, regular way, in either case as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which the Security is listed or
admitted to trading or, if the Security is not listed or admitted to trading on
any national securities exchange but is included in the Nasdaq Stock Market, the
last quoted price or, if not so quoted, the average of the high bid and low
asked prices, in the over-the-counter market, as reported by the National
Association of Securities Dealers, Inc. Automated Quotations System or such
other system then in use. The term "Trading Day" shall mean a day on which the
principal national securities exchange on which the Security is listed or
admitted to trading is open for the transaction of business or, if the Security
is not listed or admitted to trading on any national securities exchange, a
Business Day. The term "Business Day" shall mean any day other than a Saturday,
a Sunday, or a day on which The New York Stock Exchange is closed.
EXCLUDED SECURITIES: the 1,050,000 shares of Common Stock reserved
for issuance pursuant to the EqualNet Holding Corp. Employee Stock Option and
Restricted Stock Plan and the EqualNet Holding Corp. Non-Employee Director Stock
Plan and any additional shares of Common Stock issuable pursuant to any
antidilution provisions thereof; the warrants to purchase not more than
1,000,000 shares of Common Stock issuable to certain agents of the Company
pursuant to agent agreements substantially in the form delivered to the Holder
prior to the date of the Agreement; the 100,000 shares of Common Stock issuable
to Creative Communications, Inc. pursuant to a warrant dated November 12, 1996,
and not more than 150,000 shares of Common Stock that the Company may issue in
future periods for purposes of management incentive compensation to officers and
employees.
FAIR MARKET VALUE: the amount a willing buyer under no compulsion to
buy and in possession of all relevant information would pay a willing seller
under no compulsion to sell.
HOLDER: the person or entity in whose name this Warrant is
registered.
HOLDERS: the persons or entities in whose name this Warrant and
other Warrants are registered.
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OPTIONS: rights, options or warrants to subscribe for, purchase or
otherwise acquire either Common Stock or Convertible Securities.
OTHER SECURITIES: any stock (other than Common Stock) and other
securities of the Company or any other person (corporate or otherwise) which the
holders of the Warrants at any time shall be entitled to receive, or shall have
received, upon the exercise of the Warrants, in lieu of or in addition to Common
Stock, or which at any time shall be issuable or shall have been issued in
exchange for or in replacement of Common Stock or Other Securities pursuant to
Section 2 or otherwise.
SECURITIES ACT: the Securities Act of 1933, as amended.
WARRANT STOCKHOLDERS: the persons or entities in whose names Warrant
Stock is registered unless such shares have been sold pursuant to a Registration
Statement filed pursuant to Section 5 hereof or pursuant to Rule 144 under the
Securities Act.
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<PAGE>
IN WITNESS WHEREOF, EQUALNET HOLDING CORP. has caused this
Warrant to be signed in its corporate name by its President as of the day and
year above written.
EQUALNET HOLDING CORP.
By________________________
President
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ASSIGNMENT
(To be Executed by the Holder if such Holder Desires to
Transfer the Within Warrant)
FOR VALUE RECEIVED the undersigned hereby sells, assigns and transfers unto
--------------------------
(Name)
--------------------------
(Address)
the right to purchase ____ shares of Common Stock, covered by the within Warrant
and does hereby irrevocably constitute and appoint ________________ Attorney to
make such transfer on the books of the Company maintained for the purpose, with
full power of substitution.
Signature__________________
Dated: , 19__
NOTICE
The signature of the foregoing Assignment must correspond to the
name as written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever.
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SUBSCRIPTION FORM
(TO BE EXECUTED UPON EXERCISE PURSUANT TO SECTION 1(B)(I), (II) OR (III))
TO: EQUALNET HOLDING CORP.
1. The undersigned Holder of the attached original, executed Warrant to
purchase Common Stock of EqualNet Holding Corp., a Texas corporation (the
"COMPANY"), hereby elects to exercise its purchase right under such Warrant with
respect to _________ shares of Warrant Stock.
2. The undersigned Holder elects to pay the aggregate exercise price for
such Warrant Shares in the following manner:
_____ by delivery of Notes or Refinancing Notes in a principal
amount plus unpaid accrued interest of $__________;
_____ by lawful money of the United States or the enclosed bank
cashier's check or certified check to the order of the
Company in the amount of
$________;
_____ by wire transfer of United States funds to the account of
the Company in the amount of $____________, which transfer
has been made before or simultaneously with the delivery of
this Subscription Form pursuant to the instructions of the
Company; or
_____ by the combination of the foregoing indicated above or on
the attached sheet.
3. Please issue a stock certificate or certificates representing the
appropriate number of shares of Warrant Stock in the name of the undersigned as
is specified below:
Name:
Address:
Tax Identification No.:
HOLDER:
By:
Its:
Date:
NOTE: The signature of the Warrant Holder must conform in all respects to the
name of the Warrant Holder as specified on the face of the Warrant, without
alteration, enlargement or any change whatsoever.
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<PAGE>
CASHLESS EXERCISE FORM
(TO BE EXECUTED UPON EXERCISE OF WARRANT
PURSUANT TO SECTION 1(C))
TO: EQUALNET HOLDING CORP.
1. The undersigned Holder of the attached original, executed Warrant to
purchase Common Stock of EqualNet Holding Corp., a Texas corporation (the
"Company"), hereby irrevocably elects to make a Cashless Exercise, as provided
for in Section 1(c) of such Warrant, with respect to _______ shares of Warrant
Stock, as defined in the Warrant.
2. Please issue a stock certificate or certificates representing the
appropriate number of shares of Common Stock issuable upon such Cashless
Exercise in the name of the undersigned as is specified below:
Name:
Address:
Tax Identification No.:
HOLDER:
By:
Its:
Date:
NOTE: The signature of the Warrant Holder must conform in all respects to the
name of the Warrant Holder as specified on the face of the Warrant, without
alteration, enlargement or any change whatsoever.
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<PAGE>
EXHIBIT C
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE
SECURITIES LAWS OF ANY OTHER STATE. THE SECURITIES REPRESENTED
HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD OR
OFFERED FOR SALE OR OTHERWISE TRANSFERRED, EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR AN
OPINION OF COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE CORPORATION
THAT SUCH REGISTRATION IS NOT REQUIRED.
THIS NOTE IS SUBJECT TO THE PROVISIONS OF THE INTERCREDITOR AGREEMENT
REFERRED TO HEREIN.
No. ____
EQUALNET HOLDING CORP.
EQUALNET CORPORATION
TELESOURCE, INC.
EQUALNET WHOLESALE SERVICES, INC.
Refinancing Note
________, 199_
FOR VALUE RECEIVED, EqualNet Holding Corp., a Texas corporation, EqualNet
Corporation, a Delaware corporation, TeleSource, Inc., a Texas corporation, and
EqualNet Wholesale Services, Inc., a Delaware corporation, each having an
address at EqualNet Plaza, 1250 Wood Branch Park Drive, Houston, TX 77079
(hereinafter referred to collectively as the "MAKER"), jointly and severally
hereby promise to pay to the order of ______________________, having an address
at ____________________________________ (the "PAYEE"), on or before the dates
for payment set forth in Section 2.3 of the Agreement (as hereinafter defined)
the unpaid principal balance (if any) of the Refinancing Loans to or for the
benefit of the Maker (or such percentage of such principal balance as shall be
set forth on the signature page hereof) and to pay
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interest on such principal balance at the interest rate then payable under the
Credit Agreement or, if for any reason no such rate shall apply, the rate of ten
percent per annum (the "INTEREST RATE"), such interest to be payable monthly in
arrears on the first day of every calendar month. Principal and interest shall
be payable, without surrender or presentation of this Refinancing Note, in
lawful money of the United States of America by wire transfer of immediately
available funds to Payee, or to Payee's agent, in the State of New York. Any
amounts not paid when due shall bear interest at the rate of the Interest Rate
plus three percent (3%) compounded monthly (the "PAST DUE RATE"). Interest shall
be computed on the basis set forth in the Credit Agreement or, if the rate under
the Credit Agreement shall not be applicable, on the basis of a 360-day year of
twelve 30-day months.
Section 1. AGREEMENT. This Refinancing Note is issued pursuant to a
certain Notes and Warrants Purchase Agreement, dated as of February 3, 1997 (the
"AGREEMENT"), between the Maker, certain subsidiaries of the Maker and The Furst
Group, Inc., a New Jersey corporation (the "PURCHASER"). Capitalized terms used
herein but not defined herein shall have the meaning ascribed to them in the
Agreement.
Section 2. REVOLVING LOAN. The principal balance hereof may be
prepaid at any time in whole or in part by the Maker and, if prepaid, may
thereafter be reborrowed by the Maker, subject to the conditions set forth in
the Agreement.
Section 3. COMMITMENT FEE. The Maker shall pay to the Payee a
commitment fee (the "COMMITMENT FEE") for the period from the date that the
Initial Refinancing Loan is made to and including the earlier of December 31,
1998 or the date on which the Maker notifies the Purchaser in writing that its
obligation to make Refinancing Loans is terminated, calculated daily, equal to
0.25% per annum on the excess of (a) the aggregate amount of the Maximum
Commitment for such day over (b) the amount of the aggregate unpaid principal
balance on the Refinancing Notes. Accrued Commitment Fee shall be payable
monthly when payments of interest are due hereunder. Any past due Commitment Fee
shall bear interest at the Past Due Rate.
Section 4. PAYMENT ON NON-BUSINESS DAYS. Whenever any payment to be
made on the Refinancing Notes shall be due on a Saturday, Sunday or a public
holiday under the laws of the State of New York or the State of Texas, such
payment may be made on the next succeeding business day with the same effect as
if made on the nominal date for payment.
Section 5. REGISTRATION. The Maker shall maintain at its principal
office a register of the Refinancing Notes and shall record therein the names
and addresses of the holders of the Refinancing Notes, the address to which
notices are to be sent and the address to which payments are to be made as
designated by the holder if other than the address of the holder, and the
particulars of all transfers, exchanges and replacements of Refinancing Notes.
Each Refinancing Note issued hereunder, whether originally or upon transfer,
exchange or replacement of a Refinancing Note, shall be registered on the date
of execution thereof by the Maker.
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Section 6. TRANSFER AND EXCHANGE. Transfer of a Refinancing Note may
be effected by endorsement and delivery. The holder of any Refinancing Note may,
prior to maturity or prepayment thereof, surrender such Refinancing Note at the
principal office of the Maker for transfer or exchange. Within a reasonable time
after notice to the Maker from a holder of its intention to make such transfer
or exchange and without expense (other than applicable transfer taxes, if any)
to such holder, the Maker shall issue in exchange therefor another Refinancing
Note or Notes dated the date to which interest has been paid on, and for the
unpaid principal amount of, the Refinancing Note or Refinancing Notes so
surrendered, containing the same provisions and subject to the same terms and
conditions as the Refinancing Note or Refinancing Notes so surrendered. Each new
Refinancing Note shall be made payable to such person or entity, as the
registered holder of such surrendered Refinancing Note or Refinancing Notes may
designate.
Section 7. REPLACEMENT. Upon receipt of evidence reasonably
satisfactory to the Maker of the loss, theft, destruction or mutilation of any
Refinancing Note and, if requested by the Maker in the case of any such loss,
theft or destruction, upon delivery of an indemnity agreement of the holder
satisfactory to the Maker, or, in the case of any such mutilation, upon
surrender and cancellation of such Refinancing Note, the Maker will issue a new
Refinancing Note, of like tenor, in the amount of the unpaid principal of such
Refinancing Note, and dated the date to which interest has been paid, in lieu of
such lost, stolen, destroyed or mutilated Refinancing Note.
Section 8. INTERCREDITOR AGREEMENT. The Maker, for itself and its
successors and assigns, covenants and agrees, and each original and successor
holder of Refinancing Notes by such holder's acceptance thereof, likewise
covenants and agrees, that notwithstanding any other provision of the
Refinancing Notes, the payment of the principal and interest on each Refinancing
Note and all other obligations of any kind, now or hereafter owing under this
Refinancing Note or in respect of the indebtedness evidenced hereby, shall be
governed by that certain Intercreditor and Subordination Agreement dated January
__, 1997 (the "INTERCREDITOR AGREEMENT") among EqualNet Holding Corp., Comerica
Bank-Texas ("COMERICA") and Wells Fargo Bank (Texas) N.A., as Lenders, Comerica,
as Agent, and the Purchaser.
Section 9. EVENTS OF DEFAULT. Any of the following shall constitute
an "EVENT OF DEFAULT" with respect to the Refinancing Notes:
(a) an Event of Default as defined in the Credit Agreement on
the date of the Agreement and irrespective of any amendment, modification
or termination of the Credit Agreement or any waiver by the Lenders
thereunder, shall have occurred;
(b) a failure to pay principal of or interest on any Note or
Refinancing Note, or any other amount payable thereunder, when due;
(c) a failure of the Maker to observe or perform any term,
covenant or agreement contained in the Agreement or any of the Documents
and, in the case of affirmative covenants contained in Article VII of the
Credit Agreement, continuation of such failure for a period ending five
business days after notice to the Maker at the address
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set forth above (or such other address as the Maker may furnish to the
holder hereof in writing) by any holder of the Refinancing Notes or the
time such failure becomes known to any officer of the Maker, whichever is
earlier; or
(d) any statement, certificate, report, representation or
warranty made or furnished on behalf of the Maker in the Agreement or any
of the Documents shall prove to have been false or misleading in any
material respect when made.
Upon the occurrence of an Event of Default, while such event shall be
continuing, holders representing a majority of the then outstanding principal
amount of the Refinancing Notes may, by notice to the Maker, declare the entire
unpaid principal amount of the Refinancing Notes and all interest accrued and
unpaid thereon to be forthwith due and payable, whereupon all such amounts shall
become and be forthwith due and payable (unless there shall have occurred an
Event of Default under paragraph (a) above because of an Event of Default as set
forth in Section 9.1(f), (g) or (h) of the Credit Agreement as in effect on the
date of the Agreement and irrespective of any amendment, modification or
termination of the Credit Agreement or any waiver by the Lenders thereunder, in
which case all such amounts shall automatically become due and payable), without
presentment, demand, protest or further notice of any kind, all of which are
hereby expressly waived by the Maker.
This Refinancing Note is secured in accordance with the provisions
of the Security Agreement dated February 11, 1997 between the Maker and The
Furst Group, Inc., a New Jersey corporation.
The Maker hereby agrees to pay on demand all costs and expenses
incurred in collecting the Maker's obligations hereunder or in enforcing or
attempting to enforce any of the holder's rights hereunder or under the
Agreement or the Security Agreement, including, but not limited to, reasonable
attorneys' fees and expenses if collected by or through any attorney, whether or
not suit is filed.
THIS REFINANCING NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD
TO ITS CHOICE OF LAW RULES.
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The Maker hereby waives presentment, demand, notice of nonpayment,
protest and all other demands and notices in connection with the delivery,
acceptance, performance or enforcement of this Refinancing Note.
Percentage of Refinancing Loans EQUALNET HOLDING CORP.
payable to Payee:
_____________% By:_________________________________
President
EQUALNET CORPORATION
By:_________________________________
President
TELESOURCE, INC.
By:_________________________________
President
EQUALNET WHOLESALE SERVICES, INC.
By:_________________________________
President
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EXHIBIT D
SECURITY AGREEMENT
SECURITY AGREEMENT (this "AGREEMENT"), dated as of February __,
1997, by and between EqualNet Holding Corp., a Texas corporation (the
"COMPANY"), having an office at EqualNet Plaza, 1250 Wood Branch Park Drive,
Houston, Texas 77079-1212, its subsidiaries, EqualNet Corporation, a Delaware
corporation ("E SUB"), TeleSource, Inc., a Texas corporation ("TELESOURCE"), and
EqualNet Wholesale Services, Inc., a Delaware corporation ("WHOLESALE," and
together with E Sub and TeleSource, the "SUBSIDIARIES" and the Subsidiaries
together with the Company, the "EQUALNET COMPANIES"), and The Furst Group, Inc.,
a New Jersey corporation (the "PURCHASER"), having an office at 459 Oakshade
Road, Shamong, New Jersey 08088.
PRELIMINARY STATEMENT
The EqualNet Companies have entered into a Note and Warrant Purchase
Agreement, dated as of January __, 1997 (the "NOTE AGREEMENT"; capitalized terms
defined in the Note Agreement and not otherwise defined herein being used herein
as therein defined), with the Purchaser. It is a condition to the Purchaser's
obligation to purchase the Notes, Refinancing Notes and Warrants under the Note
Agreement that this Security Agreement be executed and delivered.
NOW, THEREFORE, in consideration of the premises and intending to be
legally bound hereby, the parties hereto agree as follows:
1. GRANT OF SECURITY INTEREST. Each EqualNet Company hereby pledges,
hypothecates, transfers, grants and assigns to the Purchaser, and agrees that
the Purchaser shall have, a security interest in and lien on the following:
a. all of the accounts and general intangibles, whether now owned or
hereafter created arising or acquired, of such EqualNet Company or
in which EqualNet Company now or hereafter has any interest, and all
guarantees thereof and all security now or hereafter held by such
EqualNet Company for the payment or satisfaction thereof; and
b. all proceeds of the foregoing and proceeds of other proceeds; and
c. without limiting the generality of (a) or (b) above, all customer
lists, letters of authorization, letters of agency, verification
tapes and other supporting documentation and books and records
relative to (a) or (b) above.
All of the foregoing being referred to herein as the "Collateral." The terms
"accounts," "general intangible" and "proceeds" as used herein shall have the
meanings specified from time to time in the Uniform Commercial Code as in effect
in the State of New York (the "UCC").
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2. OBLIGATIONS SECURED. The Collateral secures the payment in full,
when due, of any and all indebtedness (including but not limited to network
usage and non-usage charges and other trade indebtedness) and other obligations
of such EqualNet Company to the Purchaser, whether now existing or hereafter
incurred or arising, of every kind and description, direct or indirect, primary
or secondary, including, without limitation, indebtedness and other obligations
arising out of the Note Agreement, the Notes, the Refinancing Notes, the
Warrants, this Agreement, or any supplement thereto or hereto, in each case as
the same may be increased or reduced from time to time, and whether or not
evidenced by any note or other instrument, including without limitation any and
all sums from time to time advanced by the Purchaser in payment of taxes,
assessments and other public charges and expenses, or to satisfy prior
encumbrances, or for the payment of which such EqualNet Company otherwise is
obligated and which, if not paid, might encumber any property of such EqualNet
Company, it being understood and agreed, nevertheless, that the Purchaser shall
not have any obligation to make any such advance (all of the indebtedness and
other obligations described in this Section 2 being herein sometimes referred to
collectively as the "OBLIGATIONS SECURED"). Payments of all amounts owed
hereunder by any of the EqualNet Companies to Purchaser shall be made and
delivered to Secured Party, or its agent, in the State of New York, by wire
transfer of immediately available funds. Secured Party shall deliver to the
EqualNet Companies written wire transfer instructions with respect to the
foregoing.
3. REPRESENTATIONS AND WARRANTIES. The EqualNet Companies jointly
and severally represent and warrant to the Purchaser that:
a. None of the EqualNet Companies have changed their name in the last
year;
b. The location of the chief executive office of each of the EqualNet
Companies is the office whose address is set forth above; and
c. Except as set forth in a notice delivered to the Purchaser, none of
the presently existing Collateral arises out of a contract with the
United States or any department, agency or instrumentality thereof.
So long as any Obligations Secured remain unpaid or the EqualNet Companies shall
be entitled to borrow under the Note Agreement, the EqualNet Companies shall be
deemed to represent and warrant continuously to the Purchaser all of the
representations and warranties set forth in this Section 3.
4. MAINTENANCE OF COLLATERAL AND TITLE THERETO. The Equal Net
Companies jointly and severally represent, warrant and covenant to and with the
Purchaser that they have or will acquire and maintain absolute and exclusive
title to each and every item of the Collateral, free and clear of all liens,
claims, security interests and other encumbrances (except only security
interests in favor of the Purchaser and except for those liens and security
interests granted pursuant to the Credit Agreement dated as of November 30, 1995
(the "CREDIT AGREEMENT") among the Company and each of the lenders who is or may
become from time to time a party
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thereto and Comerica Bank-Texas, as agent). The EqualNet Companies will jointly
and severally warrant and defend unto the Purchaser and its successors and
assigns title to all of the Collateral purported to be owned by them against the
claims and demands of all persons whomsoever except the liens granted pursuant
to the Credit Agreement. The EqualNet Companies shall pay any and all taxes,
assessments and other public accounts and charges of every kind and nature which
may be levied upon or assessed against any part of the Collateral. The EqualNet
Companies shall not permit any liens, claims, security interests or other
encumbrances (except only security interests in favor of the Purchaser and
except for those liens and security interests granted pursuant to the Credit
Agreement) to attach to any part of the Collateral, nor permit any part of the
Collateral to be levied upon under any legal process. Without the prior written
consent of the Purchaser, the EqualNet Companies shall not amend or terminate
any contract or other document or instrument constituting part of the
Collateral, except for routine transactions in the ordinary course of business.
Except in the ordinary course of business consistent with past practice, the
EqualNet Companies shall not do or permit to be done anything which might impair
the value of any item of the Collateral owned by them or the security intended
to be afforded hereby.
5. COLLECTION OF ACCOUNTS.
a. The EqualNet Companies will cause all moneys, checks, notes, drafts
and other payments relating to or constituting proceeds of accounts
of the EqualNet Companies upon which the Purchaser has a first
priority security interest to be forwarded to a U.S. Postal Service
box ("LOCKBOX") specified by Purchaser for deposit in an account
("COLLATERAL ACCOUNT") of the EqualNet Companies under the control
of Purchaser as may be specified in an agreement among the Company,
the Purchaser and the institution where such Collateral Account is
located. The EqualNet Companies will advise each account debtor to
address all remittances with respect to amounts payable on account
of any accounts to the specified Lockbox and all invoices relating
to any such accounts to indicate that payment is to be made via the
specified Lockbox.
b. The EqualNet Companies and the Purchaser shall cause all collected
balances in the Collateral Account to be:
(i) paid to the Purchaser or other holders of the
Refinancing Notes to the extent of any amount due and payable
pursuant to Section 2.3(a) of the Note Agreement, and
(ii)with respect to the balance, so long as no Event of
Default under the Notes or the Refinancing Notes has occurred and is
continuing, transferred to a deposit account of the EqualNet
Companies as instructed by the EqualNet Companies from time to time.
c. Any monies, checks, notes, drafts or other payments referred to in
paragraph (a) of this Section 5 which, notwithstanding the terms of
such
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paragraph, are received by or on behalf of the EqualNet Companies,
will be held in trust and transferred as promptly as possible, in
the exact form received, together with any necessary endorsements
for deposit in the Collateral Account.
6. VERIFICATION AND NOTIFICATION. The Purchaser shall have the right
at any time and from time to time,
a. in the name of any of the EqualNet Companies or in the name of the
Purchaser to verify the validity, amount or any other matter
relating to any accounts by mail, telephone, telegraph or otherwise,
and
b. to notify the account debtors under any accounts of the assignment
of such accounts to the Purchaser and to direct such account debtor
to make payment of all amounts due or to become due thereunder
directly to the Purchaser upon such notification and after the
occurrence of an Event of Default, to enforce collection of any such
accounts, and to adjust, settle or compromise the amount or payment
thereof, in the same manner and to the same extent as the EqualNet
Companies might have done.
7. DELIVERY OF INSTRUMENTS. In the event any Account becomes
evidenced by a promissory note, trade acceptance or any other instrument for the
payment of money, the EqualNet Companies will immediately thereafter deliver
such instrument to the Purchaser, appropriately endorsed to the Purchaser.
8. INSPECTION. The Purchaser (by any of its officers, employees or
agents) shall have the right at any time or times to inspect all files relating
to the Collateral to discuss the EqualNet Companies' affairs and finances,
insofar as the same are reasonably related to the rights of the Purchaser
hereunder or under any of the Documents, with any Person to verify the amount,
quantity, value and condition of, or any other matter relating to, any of the
Collateral and, in this connection, to review, audit and make extracts from all
records and files related to any of the Collateral.
9. SCHEDULE OF ACCOUNTS. At the request of the Purchaser, the
EqualNet Companies shall deliver to the Purchaser on or before the 15th day of
each month a schedule of their accounts receivable which
a. shall be as of the end of the immediately preceding month,
b. shall be reconciled to the Borrowing Base Certificate, if any, as of
the end of such month,
c. shall set forth a detailed aged trial balance of all its then
existing Accounts, specifying the names, addressed and balance due
for each account debtor obligated on an Account so listed, and
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d. shall set forth a detailed report of balances due from each account
debtors, specifying the names and addresses of each account debtor.
10. POWER OF ATTORNEY. Each EqualNet Company hereby appoints the
Purchaser as its attorney, with power
a. as long as an Event of Default has occurred and is continuing, to
endorse the name of such EqualNet Company on any checks, notes,
acceptances, money orders, drafts or other forms of payment or
security that may come into the Purchaser's possession, and
b. to sign the name of such EqualNet Company on any notices of
assignment, financing statements and other public records relating
to the perfection or priority of the security interest or
verification of accounts and on notices to or from customers.
11. GOVERNMENT ACCOUNTS. If any account arises out of a contract
with the United States or any department, agency or instrumentality thereof, the
EqualNet Companies shall immediately notify the Purchaser thereof in writing and
execute any instruments and take any steps required by the Purchaser in order
that the security interest hereunder in the applicable EqualNet Company's
contract right under such contract and in all accounts arising thereunder and in
the proceeds thereof shall be perfected under the provisions of the Federal
Assignment of Claims Act.
12. CHANGE IN NAME OR CHIEF EXECUTIVE OFFICE. The EqualNet Companies
shall notify the Purchaser in writing 30 days prior to any change in the name of
an EqualNet Company or any change in the location of its chief executive office.
13. RIGHTS AND REMEDIES UPON DEFAULT. Upon the occurrence and during
the continuation of any Event of Default under the Notes or the Refinancing
Notes, the Lender shall have, in addition to all other rights and remedies
provided by law, all of the rights and remedies of a secured creditor under the
UCC.
14. WAIVERS AND OTHER AGREEMENTS. Each EqualNet Company to the
extent of its interest in the Collateral hereby waives and releases any and all
right to require the Purchaser to collect any of the Obligations Secured from
any specific item or items of the Collateral or from any other collateral
security under any theory of marshaling of assets or otherwise, and each
EqualNet Company specifically authorizes the Purchaser to apply any item or
items of the Collateral in which any EqualNet Company may have any interest
against any portion of the Obligations Secured in such manner as the Purchaser
may determine in the Purchaser's exclusive discretion. Purchaser is hereby
authorized by the EqualNet Companies without any liability to the Purchaser, in
its exclusive discretion and without notice to or demand upon any of the
EqualNet Companies and without otherwise affecting any of the EqualNet
Companies' obligations hereunder, from time to time to take and hold other
collateral (in addition to or other than the Collateral itself) for the payment
of the Obligations Secured or any
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part thereof, and to accept and hold any endorsement or guaranty of payment of
the Obligations Secured or any part thereof and to release or substitute any
endorser or guarantor or any other person granting security for or in any other
way obligated upon the Obligations Secured or any part thereof.
15. FURTHER ASSURANCES, ETC. With respect to the Collateral, each
EqualNet Company agrees to do, file, record, make, execute and deliver all such
acts, deeds, things, notices and instruments as may be necessary or desirable in
the opinion of the Purchaser in order to vest more fully in and assure to the
Purchaser the liens on and security interests in the Collateral created hereby
or intended so to be and the enforcement and realization of the benefits of, all
of the rights, remedies and powers of the Purchaser hereunder relating to the
Collateral. The Purchaser shall not have any obligation to take any steps, and
each EqualNet Company shall in each case duly take all steps, necessary to
perfect and otherwise preserve against all other parties the rights of such
EqualNet Company and those of the Purchaser in the Collateral and each and every
item thereof.
16. TRANSFER OF INTEREST. Any or all of the rights, benefits and
advantages of the Purchaser under this Agreement or any of the other Documents,
and the right to receive payment of the principal of and premium, if any, and
interest on the Notes and Refinancing Notes as and when due and payable by the
EqualNet Companies may be assigned by the Purchaser and reassigned by any
assignee at any time and from time to time.
17. EXPENSES. The EqualNet Companies shall pay all costs of filing
of any financing, continuation or termination statements or security agreements
with respect to the Collateral deemed by the Purchaser to be necessary or
advisable in order to perfect and protect the liens and security interests
hereby created in favor of the Purchaser or intended so to be. Each EqualNet
Company agrees that the Collateral secures, and further agrees to pay on demand,
all reasonable expenses (including but not limited to reasonable attorneys' fees
and other costs for legal services, costs of insurance and payments of taxes or
other charges) of or incidental to the custody, care, sale or collection of or
realization on any of the Collateral or in any way relating to the enforcement
or protection of the rights of the Purchaser hereunder or under the other
Documents.
18. SEVERABILITY. The invalidity or unenforceability of any
provision hereof shall in no way affect the validity or enforceability of any
other provision.
19. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK,
WITHOUT REGARD TO ITS CHOICE OF LAW RULES.
20. HEADINGS. Article and Section headings in this Agreement are
included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose.
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21. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument, and either of the parties hereto may execute this Agreement by
signing any such counterpart.
22. INTERCREDITOR AGREEMENT. This Agreement and the security
interest granted hereby are subject to the terms of the Intercreditor Agreement.
23. BINDING EFFECT. This Agreement shall be binding upon and enure
to the benefit of the parties and their respective successors and assigns.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their proper corporate officers thereunto duly authorized as of
the day and year first above written.
EQUALNET COMPANIES:
EQUALNET HOLDING CORP.
By:_____________________________________
President
EQUALNET CORPORATION
By:_____________________________________
President
TELESOURCE, INC.
By:_____________________________________
President
EQUALNET WHOLESALE SERVICES, INC.
By:_____________________________________
President
PURCHASER:
THE FURST GROUP, INC.
By:_____________________________________
President
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EXHIBIT E
ESCROW AGREEMENT
This Escrow Agreement dated as of February__, 1997 by and among EqualNet
Holding Corp., a Texas corporation (the "COMPANY"), its wholly-owned
subsidiaries, EqualNet Corporation, a Delaware corporation, TeleSource, Inc., a
Texas corporation, EqualNet Wholesale Services, Inc., a Delaware corporation
(the Company and its subsidiaries, the "ISSUERS"), The Furst Group, Inc., a New
Jersey corporation (the "PURCHASER"), and the Chase Manhattan Bank, a New York
State chartered bank (the "ESCROW AGENT").
WITNESSETH
WHEREAS, the Issuers and the Purchaser have executed the Note and Warrant
Purchase Agreement dated as of February 3, 1997 (the "PURCHASE AGREEMENT") and
certain instruments and documents referred to therein, and the Company and the
Purchaser have executed the Right Agreement dated as of February 11, 1997 (the
"RIGHT AGREEMENT"); and
WHEREAS, it is the intent of the Issuers and the Purchaser that the
transactions contemplated by the Purchase Agreement and the Right Agreement not
become effective until the Effective Time ( as herein defined) and that such
transactions not be effective at all if a Termination Event (as herein defined)
occurs prior to the Effective Time.
NOW THEREFORE, in order to evidence such intent and provide for certain
other matters, and in consideration of the mutual covenants herein contained,
the parties hereto hereby agree as set forth herein.
1. ESTABLISHMENT OF ESCROW
Simultaneously with the execution and delivery of this Agreement,
the following property (the "ESCROW PROPERTY") shall be deposited with the
Escrow Agent by the Issuers and the Purchaser:
a. Four executed counterparts of the Purchase Agreement;
b. Four executed counterparts of the Right Agreement;
c. A 10% Note due December 31, 1998 of the Issuers in the principal
amount of $3,000,000 payable to the Purchaser;
d. A Refinancing Note of the Issuers payable to the Purchaser;
e. A Warrant for the purchase of 1,500,000 shares of Common Stock of
the Company registered in the name of the Purchaser;
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f. Four executed counterparts of a Security Agreement between the
Issuer and the Purchasers;
g. Cash (paid to the Escrow Agent by wire transfer from the Purchaser)
in the amount of $2,070,000;
h. Two executed counterparts of an opinion of Fulbright & Jaworski
L.L.P. addressed to the Purchaser; and
i. A Secretary's Certificate and an Officers' Certificate for each of
the Issuers.
2. HOLDING OF ESCROW PROPERTY
The Escrow Agent shall hold the Escrow Property until disposed of in
accordance with paragraph 4 hereof. All cash shall be invested and reinvested by
the Escrow Agent in the Chase Manhattan Bank Money Management Account.
3. DEFINITIONS; AGREEMENT TO NOTIFY
a. As used in this Agreement, the following terms shall have the
meanings stated:
"EFFECTIVE DATE" shall mean 10:00 a.m. New York City time,
on February __, 1997 or such other date as may be designated in a
written notice signed on behalf of the Company and the Purchaser by
their respective officers and delivered to the Escrow Agent at or
prior to the Effective Time.
"TERMINATION EVENT" shall mean:
i. Commencement of any action, suit or proceeding against
any of the Issuers, the Purchaser or any of their
respective directors or officers seeking to restrain or
enjoin any of the transactions contemplated by the
Purchase Agreement or the Right Agreement or otherwise
challenging the legality or validity thereof; or
ii. Commencement by or against any Issuer of a case or other
proceeding seeking liquidation, reorganization or other
relief with respect to such Issuer or its debts under
any bankruptcy, insolvency or other similar law now or
hereinafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or similar
official of any Issuer or any substantial part of its
property or providing for a general assignment for the
benefit of creditors on
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behalf of any Issuer or any corporate action on behalf
of any Issuer to authorize any of the foregoing.
"TERMINATION NOTICE" shall mean a written notice given by
any Issuer or the Purchaser to the other and to the Escrow Agent
stating that a Termination Event has occurred.
b. Each of the Issuers and the Purchaser agrees to give a Termination
Notice immediately upon obtaining knowledge of the occurrence of a
Termination Event.
4. DISPOSITION OF ESCROW PROPERTY
a. If the Escrow Agent receives a Termination Notice, the Escrow Agent
shall hand mark (the "MARK") each page of any of the documents set
forth in paragraph 1 hereof containing an original signature "VOID"
and shall deliver:
i. two executed counterparts of each of the documents
specified in 1.a, 1.b and 1.f, each bearing the Mark, to
each of the Company and the Purchaser;
ii. each of the documents specified in 1.c, 1.d, 1.e and 1.i
to the Company;
iii. the cash specified in 1.g plus interest earned thereon,
net of any unpaid fees and expenses of the Escrow Agent,
to the Purchaser; and
iv. both counterparts of the document specified in 1.h to
Fulbright & Jaworski, L.L.P. at the address specified on
its letterhead.
b. If no Notice of Termination is received prior to the Effective Date,
the Escrow Agent shall deliver:
i. two executed counterparts of each of the documents
specified in 1.a, 1.b and 1.f to each of the Company and
the Purchaser;
ii. each of the documents specified in 1.c, 1.d, 1.e, and
1.i to the Purchaser.
iii. the cash specified in 1.g, plus interest earned thereon,
net of any unpaid fees and expenses of the Escrow Agent,
to the Issuers; and
iv. both counterparts of the opinion document specified in
1.h. to the Purchaser.
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c. All Escrow Property and deposit account balances other than cash
shall be sent by Federal Express or other recognized overnight
delivery service to the Company or the Purchaser, as appropriate, at
their respective addresses specified in paragraph 13, and cash and
deposit account balances shall be sent by wire transfer of
immediately available funds in accordance with the wire transfer
instructions set forth in paragraph 13.
d. Notwithstanding the foregoing, the Issuers and the Purchaser may
jointly instruct the Escrow Agent in writing to dispose of the
Escrow Property in any other manner.
5. DUTIES LIMITED
The Escrow Agent undertakes to perform only such duties as are
expressly set forth herein.
6. RELIANCE ON INSTRUMENTS
The Escrow Agent may rely and shall be protected in acting or
refraining from acting upon any written notice, instruction or request furnished
to it hereunder and believed by it to be genuine and to have been signed or
presented by the proper party or parties. The Escrow Agent shall be under no
duty to inquire into or investigate the validity, accuracy or content of any
such document. The Escrow Agent shall have no duty to solicit any payments which
may be due it hereunder.
7. LIMITATION OF LIABILITY
The Escrow Agent shall not be liable for any action taken or omitted
by it in good faith unless a court of competent jurisdiction determines that the
Escrow Agent's gross negligence willful misconduct was the primary cause of any
loss to the Issuers or the Purchaser. In the administration of the escrow
account hereunder, the Escrow Agent may execute any of its powers and perform
its duties hereunder directly or through agents or attorneys and may, consult
with counsel, accountants and other skilled persons to be selected and retained
by it. The Escrow Agent shall not be liable for anything done, suffered or
omitted in good faith by it in accordance with the advice or opinion of any such
counsel, accountants or other skilled persons.
8. RESIGNATION
The Escrow Agent may resign and be discharged from its duties or
obligations hereunder by giving notice in writing of such resignation specifying
a date when such resignation shall take effect. The Escrow Agent shall have the
right to withhold an amount equal to the amount due and owing to the Escrow
Agent, plus any costs and expenses the Escrow Agent shall reasonably believe may
be incurred by the Escrow Agent in connection with the termination of the Escrow
Agreement.
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9. COMPENSATION
The Issuers hereby agree to jointly and severally (i) pay the Escrow
Agent compensation for the services to be rendered hereunder, as described in
Schedule I attached hereto and (ii) pay or reimburse the Escrow Agent upon
request for all expenses, disbursements and advances, including reasonable
attorney's fees, incurred or made by it in connection with the preparation,
execution, performance, delivery, modification and termination of this
Agreement.
10. INDEMNITY
The Issuers hereby agree to jointly and severally indemnify the
Escrow Agent for, and to hold it harmless against any loss, liability or expense
arising out of or in connection with this Agreement and carrying out its duties
hereunder, including the costs and expenses of defending itself against any
claim of liability, except in those cases where the Escrow Agent has been guilty
of gross negligence or willful misconduct. Anything in this agreement to the
contrary notwithstanding, in no event shall the Escrow Agent be liable for
special, indirect or consequential loss or damage of any kind whatsoever
(including but not limited to lost profits), even if the Escrow Agent has been
advised of the likelihood of such loss or damage and regardless of the form of
action.
11. INTEREST
The Company and the Purchaser shall, in the notice section of this
Agreement, provide the Escrow Agent with their respective Tax Identification
Numbers as assigned by the Internal Revenue Service. All interest or other
income earned under the Escrow Agreement shall be allocated and paid as provided
herein and reported by the recipient to the Internal Revenue Service as having
been so allocated and paid.
12. NO FUTURE OR OTHER DUTIES
The duties and responsibilities of the Escrow Agent hereunder shall
be determined solely by the express provisions of this Agreement, and no other
or future duties or responsibilities shall be implied. The Escrow Agent shall
not have any liability under, nor duty to inquire into the terms and provisions
of any agreement or instructions, other than outlined in this Agreement.
13. NOTICES
All notices and communications hereunder shall be in writing and
shall be delivered by hand (including by a recognized overnight delivery
service) and by fax and addressed as follows:
The Chase Manhattan Bank
Corporate Trust Group
450 West 33rd Street
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New York, NY 10001
Attention: Escrow Administration, 15th Floor
FAX: (212) 946-8156
To the Company or to any of the Other Issuers:
EqualNet Holding Corp.
EqualNet Plaza
1250 Wood Branch Park Drive
Houston, TX 77079-1212
Attention: Chief Financial Officer
FAX: (281) 529-4650
TIN: 76-0457803
Wire Transfers: ABA #111000753
Account # 7871 003492
To the Purchaser:
The Furst Group, Inc.
459 Oakshade Road
Shamong, NJ 08088
Attention: Chief Financial Officers
FAX: (609) 268-7058
TIN: 22-3015385
Wire Transfers: (account at Chase to be provided)
or at such other address as any of the above may have furnished to the other
parties in writing by notice given in the same manner. Any such notice or
communication given in the manner specified in this Paragraph 13 shall be deemed
to have been given when received in any manner. In the event that the Escrow
Agent, in its sole discretion, shall determine that an emergency exists, the
Escrow Agent may use such other reasonable means of communications as the Escrow
Agent deems advisable.
14. FUNDS TRANSFER
a. In the event funds transfer instructions are given (other than in
writing at the time of execution of this Agreement), whether in
writing or by telecopier, the Escrow Agent is authorized to seek
confirmation of such instructions by telephone call-back to the
person or persons designated on Schedule II hereto, and the Escrow
Agent may rely upon the confirmations of anyone purporting to be the
person or persons so designated. The persons and telephone numbers
for call- back may be changed only in a writing actually received
and acknowledged by the Escrow Agent. The parties to this Agreement
acknowledge that such security procedure is commercially reasonable.
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b. It is understood that the Escrow Agent and the beneficiary's bank in
any funds transfer may rely solely upon any account numbers or
similar identifying number provided in writing by either of the
other parties hereto to identify (i) the beneficiary, (ii) the
beneficiary's bank, or (iii) an intermediary bank. The Escrow Agent
may apply any of the escrowed funds for any payment order it
executes using any such identifying number, even where its use may
result in a person other than the beneficiary being paid, or the
transfer of funds to a bank other than the beneficiary's bank, or an
intermediary bank designated.
15. WAIVERS
The provisions of this Escrow Agreement may be waived, altered,
amended or supplemented, in whole or in part, only by a writing signed by all of
the parties hereto.
16. NO ASSIGNMENT
Neither this Escrow Agreement nor any right or interest hereunder
may be assigned in whole or in part by any party without the prior consent of
the other parties.
17. COUNTERPARTS
This Escrow Agreement may be executed in one or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
18. NO LIABILITY FOR ESCROW AGENT
The Escrow Agent shall not incur any liability for following the
instructions herein contained or expressly provided for, or written instructions
given by the parties hereto.
19. FURTHER INSTRUCTIONS
In the event that the Escrow Agent shall be uncertain as to its
duties or rights hereunder or shall receive instructions, claims or demands from
any party hereto which, in its opinion, conflict with any of the provisions of
this Agreement, it shall be entitled to refrain from taking any action and its
sole obligation shall be to keep safely all property held in escrow until it
shall be directed otherwise in writing by all of the other parties hereto or by
a final order or judgement of a court of competent jurisdiction.
20. MERGER, ETC. OF ESCROW AGENT
Any corporation into which the Escrow Agent in its individual
capacity may be merged or converted or with which it may be consolidated, or any
corporation resulting from any merger, conversion or consolidation to which the
Escrow Agent in its individual capacity shall be a party, or any corporation to
which substantially all the corporate trust business of the Escrow
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Agent in its individual capacity may be transferred, shall be the Escrow Agent
under this Escrow Agreement without further act.
21. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York without regard to its principles of conflicts
of laws and any action brought hereunder shall be brought in the courts of the
State of New York, located in the County of New York. Each party hereto
irrevocably waives any objection on the grounds of venue, forum non-conveniens
or any similar grounds and irrevocably consents to service of process by mail or
in any other manner permitted by applicable law and consents to the jurisdiction
of said courts.
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IN WITNESS WHEREOF, the parties hereto have executed this Escrow Agreement
on the date and year first above written.
EQUALNET COMPANIES:
EQUALNET HOLDING CORP.
By:_____________________________________
Vice President
EQUALNET CORPORATION
By:_____________________________________
Vice President
TELESOURCE, INC.
By:_____________________________________
Vice President
EQUALNET WHOLESALE SERVICES, INC.
By:_________________________________
Vice President
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PURCHASER:
THE FURST GROUP, INC.
By:_____________________________________
Vice President
ESCROW AGENT:
THE CHASE MANHATTAN BANK
By:_____________________________________
Title:
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SCHEDULE I
1. A fee shall be paid upon the execution hereof equal to .00125 multiplied by
the highest value of cash in escrow held on deposit with the Escrow Agent or any
part thereof without proration for partial years, subject to a minimum of $5,000
per annum or any part thereof without proration for partial years, (such fee
includes all costs of investment in a Chase Manhattan Bank Money Market Account
or The Chase Manhattan Bank Mutual Fund known as the Vista Fund).
2. There will be a $75 transaction charge per investment of cash in escrow
(excludes Money Market or Vista Fund investments).
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SCHEDULE II
TELEPHONE NUMBER(S) FOR CALL-BACKS AND
PERSON(S) DESIGNATED TO CONFORM FUNDS TRANSFER INSTRUCTIONS
If to the Purchaser:
NAME TELEPHONE NUMBER
---- ----------------
1. Jeff Bockol (609) 268-4346
2. ___________________________ ___________________________
3. ___________________________ ___________________________
If to the Issuers:
NAME TELEPHONE NUMBER
---- ----------------
1. Carl Schmidt (281) 529-4659
2. ___________________________ ___________________________
3. ___________________________ ___________________________
Telephone call-backs shall be made to each of the Purchaser and the Issuers if
joint instructions are required pursuant to the Agreement.
E-12
EXHIBIT 10.2
THE SECURITIES REPRESENTED HEREBY AND THE COMMON STOCK ISSUABLE HEREUNDER HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY OTHER STATE. THE SECURITIES
REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD OR
OFFERED FOR SALE OR OTHERWISE TRANSFERRED, EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR AN OPINION OF COUNSEL OR
OTHER EVIDENCE ACCEPTABLE TO THE CORPORATION THAT SUCH REGISTRATION IS NOT
REQUIRED.
WARRANT NO. 1 1,500,000 SHARES
EQUALNET HOLDING CORP.
Warrant for Purchase of Common Stock
Febuary 11, 1997
This is to certify that The Furst Group, Inc. (the "HOLDER"),
with an address at 459 Oakshade Road, Shamong, NJ 08088, is entitled to purchase
1,500,000 shares of Common Stock, par value $.01 per share (the "WARRANT
STOCK"), of EqualNet Holding Corp., a Texas corporation (the "COMPANY"), at a
price and subject to the terms and conditions contained herein. This warrant is
one of the warrants (collectively, "WARRANTS") of the Company issued under a
Notes and Warrants Purchase Agreement (the "AGREEMENT") dated as of February 3,
1997 between the Company, EqualNet Corporation, TeleSource, Inc. and EqualNet
Wholesale Services, Inc. and the Holder. Capitalized terms used herein and not
otherwise defined herein (including in Section 13 hereof) have the meanings
specified in the Agreement.
Section 1. EXERCISE OF THE WARRANT
(a) This Warrant shall be exercisable at any time subsequent to the
date hereof until 5:00 P.M. Houston, Texas time on December 31, 1999, at which
time this Warrant shall expire.
(b) This Warrant may be exercised by the Holder in whole or in part
upon surrender of the Warrant with the duly completed and executed subscription
form attached hereto at the office of the Company at its address set forth in
Section 7, or at such other place in the
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United States as the Company may designate for such purpose by notice hereunder,
upon payment to the Company of the Warrant Price (as hereinafter defined in
Section 2). Payment of the Warrant Price may be made:
(i) by delivery of Notes or Refinancing Notes in an unpaid
principal amount which is, together with unpaid accrued interest, equal to
the Warrant Price;
(ii) by delivery of cash or a bank cashier's or certified
check payable in United States currency to the order of the Company in the
amount of the Warrant Price or wire transfer of the Warrant Price in
immediately available funds; or
(iii) by delivery of a combination of (i) and (ii).
(c) The Holder may also effect a cashless exercise by surrender of
this Warrant at such office with a duly completed and executed cashless exercise
form attached hereto (a "CASHLESS EXERCISE"). In the event of a Cashless
Exercise, the Holder shall exchange this Warrant for that number of shares of
Warrant Stock determined by multiplying the number of shares of Warrant Stock as
to which a Cashless Exercise is made by a fraction, the numerator of which shall
be the difference between the then Current Price Per Share as of the close of
business on the business day prior to the date of exercise and the Warrant
Price, and the denominator of which shall be such Current Price Per Share.
(d) Stock issuable upon the exercise of this Warrant shall be and
will be deemed to be issued to the Holder or its nominee as record owner of such
shares as of the close of business on the date on which this Warrant shall have
been surrendered and the Warrant Price paid as provided above (and any Notes or
Refinancing Notes delivered as aforesaid shall be deemed paid on such date) or
Cashless Exercise is effected. Certificates for such shares shall be delivered
to the Holder as soon as practicable but not later than seven business days
after such exercise to the Holder or its agent at an address in the State of New
York provided to the Company by the Holder.
Section 2. WARRANT PRICE AND WARRANT STOCK ADJUSTMENTS.
(a) The price at which the shares of Warrant Stock shall be
purchasable upon the exercise of this Warrant shall be $2.00 per share (the
"WARRANT PRICE"), subject to adjustments as hereinafter set forth:
(i) If the Company shall issue or sell Options or Convertible
Securities (other than Excluded Securities) for consideration less than
the Warrant Price at the date of such issue or sale, the Warrant Price
shall be adjusted down to an amount that is equivalent to such
consideration.
(ii) If the Company shall issue or sell Common Stock (other
than
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pursuant to Excluded Securities or pursuant to Options or Convertible
Securities outstanding on the date hereof) for a consideration per share
less than the Warrant Price at the date of such issue or sale, the Warrant
Price shall be adjusted down to an amount that is equivalent to such
consideration.
(iii) The Warrant Price shall be adjusted as provided in
subsection 2(b)(v) hereof.
(iv) In the event that (A) at any time Zane Russell ceases to
be and act as the chief executive officer of the Company or (B) Michael
Hlinak ceases to be and act as chief operating officer of the Company, the
Warrant Price shall be adjusted down to that number that is equal to the
Warrant Price at the time of such failure or cessation divided by two;
provided that, if such cessation is a result of a termination for good
cause, as determined in good faith by the Board of Directors of the
Company, or the death, disability or incapacity of Zane Russell or Michael
Hlinak, respectively, no adjustment in the Warrant Price shall be made
under this subparagraph (iv); provided further that no adjustments shall
be made to the Warrant Price with respect to (B) above after the earlier
to occur of the passage of one year from the date of the Agreement or the
date on which Michael Hlinak and the Company enter into an employment
agreement containing terms consistent with industry practice and Michael
Hlinak's position with the Company and with a term of at least one year.
(v) The Warrant Price shall be adjusted as provided in
subsection 2(c) hereof.
(b) The number of shares purchasable upon the exercise of this
Warrant and the Warrant Price shall upon the occurrence of any of the following
events after the date hereof be subject to adjustment as follows:
(i) In case the Company shall issue shares of Common Stock,
Options or Convertible Securities (except Excluded Securities and shares
of Common Stock issuable pursuant to the exercise of Excluded Securities),
the number of shares of Warrant Stock that immediately prior to such
issuance the Holder of this Warrant shall have been entitled to purchase
pursuant to this Warrant shall be increased in direct proportion to the
increase in the number of shares of Common Stock outstanding immediately
prior to such issuance (in the case of the issuance of Options or
Convertible Securities, the number of shares of Common Stock outstanding
shall include the maximum aggregate number of shares of Common Stock
issuable pursuant to such Options and Convertible Securities assuming full
exercisability thereof at the time of issuance); provided that if such
shares of Common Stock, Options or Convertible Securities (except Excluded
Securities and shares of Common Stock issuable pursuant to the Exercise of
Excluded Securities) are issued for a consideration per share less than
the Warrant Price at the date of such issue or sale, the number of shares
of Warrant Stock that immediately prior to such issuance the
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Holder of this Warrant shall have been entitled to purchase pursuant to
this Warrant shall be increased to the greater of (A) that number of
shares that is equal to the number of shares of Warrant Stock that
immediately prior to such issuance the Holder of this Warrant shall have
been entitled to purchase pursuant to this Warrant multiplied by a
fraction, the numerator of which is the Warrant Price and the denominator
of which is such consideration per share, and (B) the number of shares of
Warrant Stock otherwise calculated under this paragraph (i).
(ii) In case the Company shall (A) pay a dividend in Common
Stock, (B) subdivide its outstanding Common Stock, or (C) combine its
outstanding Common Stock into a smaller number of shares, the number of
shares of Warrant Stock which immediately prior to such event the Holder
of this Warrant shall have been entitled to purchase pursuant to this
Warrant shall be increased or decreased in direct proportion to the
increase or decrease, respectively, in the number of shares of Common
Stock outstanding immediately prior to such event. An adjustment made
pursuant to this subsection 2(b)(ii) shall become effective retroactively
immediately after the record date in the case of a dividend and shall
become effective immediately after the effective date in the case of a
subdivision or combination.
(iii) In case the Company shall distribute to all holders of
its Common Stock evidences of its indebtedness or other assets (other than
distributions payable in Common Stock, then in each such case the number
of shares of Warrant Stock thereafter purchasable upon the exercise of
this Warrant shall be determined by multiplying the number of shares of
Warrant Stock theretofore purchasable upon the exercise of this Warrant,
by a fraction, of which the numerator shall be the then Current Price Per
Share on the date of such distribution and of which the denominator shall
be such Current Price Per Share less the then Fair Market Value of the
portion of the assets or evidences of indebtedness so distributed to one
share of Common Stock. Such adjustment shall be made whenever any such
distribution is made, and shall become effective retroactively immediately
after the record date for the determination of stockholders entitled to
receive such distribution.
(iv) No adjustment in the number of shares purchasable
hereunder shall be required unless such adjustment would require an
increase or decrease of at least one percent (1%) in the number of shares
purchasable upon the exercise of this Warrant; provided, however, that any
adjustments which by reason of this sentence are not required to be made
shall be carried forward and taken into account on any subsequent
adjustment.
(v) Whenever the number of shares purchasable upon the
exercise of this Warrant is adjusted as herein provided in subsection
2(b)(ii) or 2(b)(iii) above, the Warrant Price per share payable upon
exercise of this Warrant shall be adjusted by multiplying such Warrant
Price immediately prior to such adjustment by a fraction, of
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<PAGE>
which the numerator shall be the number of shares purchasable upon the
exercise of each Warrant immediately prior to such adjustment, and of
which the denominator shall be the number of shares so purchasable
immediately thereafter.
(vi) In case of any capital reorganization or reclassification
of the capital stock of the Company, the Holder of this Warrant shall
thereafter be entitled to purchase, for the aggregate Warrant Price
payable hereunder in order to exercise this Warrant, the Other Securities
and property receivable upon such capital reorganization or
reclassification by a holder of the number of shares of Common Stock which
this Warrant entitled the Holder hereof to purchase immediately prior to
such capital reorganization or reclassification.
(vii) If the Company shall at any time consolidate with or
merge with or into another corporation or entity or shall sell or transfer
to another entity all or substantially all of the assets of the Company,
the Holder of this Warrant will thereafter have the right to purchase, for
the aggregate Warrant Price payable hereunder in order to exercise this
Warrant, the Other Securities and/or property receivable by a holder of
the number of shares of Common Stock which this Warrant entitled the
Holder of this Warrant to purchase immediately prior to such
consolidation, merger, sale or transfer, if any. The Company shall take
such steps in connection with such consolidation, merger, sale or
transfer, as may be necessary to assure that the provisions hereof shall
thereafter be applicable, as nearly as reasonably may be, in relation to
Other Securities or property thereafter deliverable upon the exercise of
this Warrant. The Company, the successor corporation or the purchasing
entity, as the case may be, shall execute and deliver to the Holder a
supplemental Warrant so providing.
(viii)In the event that at any time, as a result of an
adjustment made pursuant to subsection 2(a)(vi) or 2(a)(vii) above, the
Holder of this Warrant shall become entitled to purchase any Other
Securities or property other than Common Stock, thereafter the number of
such Other Securities or property so purchasable upon exercise of this
Warrant and the Warrant Price shall be subject to adjustment from time to
time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common Stock contained in this Section 2.
(ix) The number of shares purchasable upon the exercise of
this Warrant shall be adjusted as set forth in subsection 2(c)
(c) (i) In the event that the Company becomes aware that it will
fail to satisfy the quantitative continued listing requirements of the Nasdaq
National Market, the Company shall, as promptly as practicable, give written
notice (the "DELISTING NOTICE") to the Holder and request the Holder to exercise
all or a portion of the Warrant. The Delisting Notice shall set forth the dollar
amount (the "EXERCISE AMOUNT") that the Company requires to continue satisfying
the quantitative continued listing requirements. Upon receipt of the Delisting
Notice, the Holder
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shall have the right at its sole option to exercise (or elect not to exercise)
all or part of the Warrant, provided that, as to that portion of the Warrant so
exercised (up to the Exercise Amount), the Warrant Price shall be adjusted down
to that number that is equal to the Warrant Price at the time of receipt of the
Delisting Notice divided by two (but not less than $1.00 per share), and the
number of shares purchasable under that portion of the Warrant so exercised at
the time of receipt of the Delisting Notice shall be increased by multiplying
such number by two (but not more than 3,000,000 shares). No change shall be made
as to the Warrant Price or the number of shares purchasable under all or that
portion of the Warrant that is not so exercised. (As an example, if the Warrant
Price is $2.00 and the number of shares purchasable under the Warrant is
1,500,000 at the time the Holder receives a Delisting Notice, and the Exercise
Amount set forth in the Delisting Notice is $1,000,000, the Holder shall have
the option of exercising Warrants to purchase 1,000,000 shares at $1.00 per
share, and, if the Holder elects to so exercise, the remaining Warrant will
continue to permit the Holder to purchase 1,000,000 shares at $2.00 per share).
(ii) If the Company fails to provide the Delisting Notice to
the Holder and the Company is subsequently suspended or delisted from trading on
the Nasdaq National Market, the Warrant Price shall be adjusted down to that
number that is equal to the Warrant Price at the time of such suspension or
delisting divided by two, and the number of shares purchaseable under the
Warrant at the time of such suspension or delisting shall be increased by
multiplying such number by two.
(d) For the purposes of this Section 2:
(i) the consideration for the issue or sale of any Common
Stock shall, irrespective of the accounting treatment of such
consideration,
(A) insofar as it consists of cash, be computed at the
net amount of cash received by the Company, after deducting
any expenses paid or incurred by the Company and any
commissions or compensations paid or concessions or discounts
allowed to underwriters, dealers or others performing similar
services in connection with such issue or sale,
(B) insofar as it consists of property (including
securities) other than cash, be computed at the Fair Market
Value thereof at the time of such issue or sale, and
(C) in case Common Stock, Options or Convertible
Securities are issued or sold together with other stock or
securities or other assets of the Company for a consideration
which covers both, be the portion of such consideration so
received, computed as provided in clauses (A) and (B) above,
allocable to such Common Stock, Options or Convertible
Securities all as determined by an independent appraiser
reasonably
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satisfactory to both the Holder and the Company;
(ii) Options and Convertible Securities shall be deemed to
have been issued for a consideration per share determined by
dividing
(A) the total amount, if any, received and receivable by
the Company as consideration for the issue, sale, grant or
assumption of the Options or Convertible Securities in
question, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating
thereto, without regard to any provision contained therein for
a subsequent adjustment of such consideration to protect
against dilution) payable to the Company upon the exercise in
full of such options or the conversion or exchange of such
Convertible Securities or, in the case of Options for
Convertible Securities, the exercise of such Options for
Convertible Securities and the conversion or exchange of such
Convertible Securities, in each case computing such
consideration as provided in the foregoing subsection 2(d)(i).
by
(B) the maximum number of shares of Common Stock (as set
forth in the instruments relating thereto, without regard to
any provision contained therein for a subsequent adjustment of
such number to protect against dilution) issuable upon the
exercise of such Options or the conversion or exchange of such
Convertible Securities; and
(iii) Common Stock issued as a result of stock dividends,
stock splits, etc., shall be deemed to have been issued for no
consideration.
Section 3. NOTIFICATION UPON THE OCCURRENCE OF CERTAIN EVENTS. (a) Upon
any adjustment pursuant to Section 2 hereof, the Company within 10 days
thereafter shall give notice thereof to the Holder of this Warrant, in the
manner specified in Section 7 hereof, which notice shall state the adjusted
Warrant Price, the increased or decreased number of shares or the adjusted other
securities or property purchasable hereunder and the method of calculation and
the facts upon which such calculation is based.
(b) In case:
(i) the Company shall propose to take a record of the holders
of its Common Stock (or other securities at the time receivable upon
the exercise of the Warrant) for the purpose of entitling them to
receive any dividend or distribution or any right to subscribe for,
purchase or otherwise acquire any shares of stock of any class or
any other securities, or to receive any other right, or
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(ii) of any capital reorganization of the Company, any
reclassification of the capital stock of the Company, any
consolidation with or merger of the Company with and into another
corporation or other entity, or any conveyance of all or
substantially all of the assets of the Company to another entity, or
(iii) of any voluntary or involuntary dissolution, liquidation
or winding-up of the Company,
then, and in each such case, the Company will mail or cause to be mailed to the
Holder of this Warrant, at least 30 days in advance of any of the foregoing
actions, a notice specifying, as the case may be, (y) the date on which a record
is to be taken for the purpose of such dividend, distribution or right, and
stating the amount and character of such dividend, distribution or right, or (z)
the date on which such reorganization, reclassification, consolidation, merger,
conveyance, dissolution, liquidation or winding-up is to take place, and the
time, if any, as to which the holders of record of Common Stock (or such other
securities at the time receivable upon the exercise of the Warrant) shall be
entitled to exchange their shares of Common Stock (or such other securities) for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger.
Section 4. RESERVATION OF WARRANT STOCK; REPRESENTATIONS.
The Company covenants that it will at all times reserve and keep
available out of its authorized shares of stock, solely for the purpose of issue
upon exercise of this Warrant as herein provided, such number of shares of
Common Stock or Other Securities as shall then be issuable upon the exercise of
the Warrant. The Company represents that all shares of Warrant Stock to which
the Holders of the Warrants shall be entitled upon the exercise thereof (i) are
duly authorized by the Articles of Incorporation of the Company in accordance
with the laws of the State of Texas, (ii) have been duly authorized to be issued
upon the exercise of the Warrants from time to time in whole or in part, (iii)
will be, when issued in accordance with the terms of the Warrants, duly
authorized and validly issued and fully paid and nonassessable and free and
clear of all liens and rights of others whatsoever (other than liens and rights
of others claiming by, through or under the Holder) and (iv) will not be at the
time of such exercise subject to any restrictions on transfer or sale except as
provided by applicable securities laws or otherwise herein.
Section 5. REGISTRATION RIGHTS.
(a) As promptly as practicable after the Closing Date, the Company
will file a registration statement (the "SHELF REGISTRATION") with the
Commission under the Securities Act permitting the disposition of the Warrant
Stock in accordance with the intended methods thereof as specified in writing by
the Purchaser. The Company will use its commercially reasonable efforts to have
the Shelf Registration declared effective by the Commission as soon as
practicable after the filing date and to at all times maintain the effectiveness
thereof. The
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Holders of Warrants and Warrant Stockholders representing (assuming exercise of
all Warrants) more than 50% of the Warrant Stock ("MAJORITY HOLDERS") may, at
any time, request that the Company supplement or amend the Shelf Registration to
effect an underwritten offering of the Warrant Stock by one or more underwriters
selected by the Majority Holders; provided that the Majority Holders may only
make such request a total of three (3) times. The Company will as promptly as
practicable supplement or amend such Shelf Registration to the extent required
to permit the disposition in accordance with such request and use its
commercially reasonable efforts to have the amendment declared effective by the
SEC as soon as practicable after the filing date. The Company shall enter into
an underwriting agreement in customary form used by such underwriter or
underwriters, which shall include, among other provisions, contribution and
indemnities of the Company and the Holders to the effect and to the extent
provided in this Section 5. The Warrant Stockholders whose Warrant Stock is to
be distributed by such underwriters shall be parties to such underwriting
agreement. No Warrant Stockholder may participate in such underwritten offering
unless such Warrant Stockholder agrees to sell its Warrant Stock on the basis
provided in such underwriting agreement and completes and executes all
questionnaires, powers of attorney, indemnities and other documents reasonably
required under the terms of such underwriting agreement. The obligations of the
Company under this Section 5 (a) shall terminate on the earlier to occur of (i)
the third anniversary of the date of this Warrant and (ii) at such time as all
Holders and Warrant Stockholders may transfer, without restriction whatsoever,
all of the Warrant Stock held by them or issuable to them upon conversion of
Warrants held by them, pursuant to Rule 144(k) promulgated under the Securities
Act.
(b) At any time that the Shelf Registration is not available for any
reason or not required pursuant to Section 5(a), upon written notice
("REGISTRATION NOTICE") from the Majority Holders to the Company requesting that
the Company effect the registration under the Securities Act of at least 15% of
the Warrant Stock or any lesser percentage so long as the anticipated proceeds
from such offering exceed $500,000, which Registration Notice shall specify the
intended method or methods of disposition of such Warrant Stock, the Company
shall use its commercially reasonable efforts to effect (at the earliest
practicable date) the registration under the Securities Act of such Warrant
Stock (each, a "DEMAND REGISTRATION") for disposition in accordance with the
intended method or methods of disposition stated in such Registration Notice;
PROVIDED that a Holder shall have the right to deliver Registration Notices to
effect three (3) demand registrations pursuant to this Section 5(b) and no more
without regard to the number of underwritten offerings requested pursuant to
Section 5(a) hereof.
(c) Whenever the Company proposes to file a Registration Statement
with the Commission pursuant to the Securities Act in connection with a public
offering by the Company of its Common Stock, whether for the Company's own
account or for the account of others, other than a Registration Statement on
Form S-4 or Form S-8 or any successor forms thereto (a "PIGGYBACK
REGISTRATION"), the Company will give prompt written notice to all Holders and
Warrant Stockholders and will include in such Piggyback Registration all Warrant
Stock with respect to which the Company has received written requests for
inclusion within 20 days after the
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Company's mailing of such notice; provided that if the managing underwriters
advise the Company in writing that in their opinion the number of securities
requested to be included in such registration exceeds the number that can be
sold in such offering, at a price reasonably related to fair value, the Company
will allocate the securities to be included first to the Company, then on a pro
rata basis among the Holders and Warrant Stockholders and any other person with
registration rights not subordinated to those of the Warrant Stockholders.
(d) If the proposed filing of a Registration Statement of which the
Company gives notice pursuant to Section 5(c) hereof is for a registered public
offering involving an underwriting, the Company shall so advise the Holders and
the Warrant Stockholders as part of the written notice given pursuant to Section
5(c). In such event, if a Warrant Stockholder proposes to distribute Warrant
Stock through such underwriting, such Warrant Stockholder shall (together with
the Company and the other holders of securities of the Company distributing
their securities through such underwriting) enter into an underwriting agreement
in such form as shall have been negotiated and agreed to by the Company with the
underwriter or underwriters selected for such underwriting by the Company. The
Company will give the Holders and the Warrant Stockholders notice (the "Pricing
Notice") of the anticipated range of the public offering price not later than
two weeks prior to the anticipated effective date of any Registration Statement
which includes Warrant Stock to be sold for the account of a Holder or Warrant
Stockholder. A Holder or Warrant Stockholder may in its discretion withdraw any
time prior to five days after receipt of the Pricing Notice, but may not
thereafter withdraw any Warrant Stock, unless the public offering price is below
the lowest price in the range of anticipated public offering prices specified in
the Pricing Notice. In order to facilitate the execution of the underwriting
agreement and the closing thereunder, a Holder or Warrant Stockholder will, at
the request of the managing underwriter, enter into a custody agreement and
power of attorney consistent with the preceding sentence.
(e) Notwithstanding the foregoing, if, at any time after giving
written notice of its proposal to file a Registration Statement pursuant to
Section 5(c) hereof and prior to the effective date of such Registration
Statement, the Company shall determine for any reason not to register the
securities proposed to be covered thereby, the Company may, at its election,
give written notice of such determination to the Holders and Warrant
Stockholders and upon the withdrawal of such Registration Statement shall have
no further obligation to register any Warrant Stock held by the Holders or
Warrant Stockholders in connection with such registration. In the event of such
withdrawal by the Company, the Company shall promptly reimburse the Holders and
Warrant Stockholders for the reasonable fees and expenses of their own legal
counsel and other reasonable expenses incurred in connection with such
registration.
(f) Subject to subsection 5(g)(ii) below, in connection with any
registration effected hereunder, the Company shall bear all expenses incurred by
it in connection therewith and in connection with the related distribution,
which shall include, without limitation, the following costs and expenses: (i)
printing and engraving costs; (ii) transfer agent's and registrar's fees; (iii)
legal and accounting fees and expenses (provided that such expenses shall
include only
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one counsel for all selling Warrant Stockholders); (iv) registration and filing
fees with the Commission and any other regulatory or self-regulatory agencies or
bodies; and (v) reasonable costs of investigation of matters subject to
disclosure in the Registration Statement, including the fees and appraisers or
other experts. Notwithstanding the foregoing, and subject to subsection 5(g)(i)
below, in connection with any registration effected hereunder, a Warrant
Stockholder shall bear all of his own expenses, including, without limitation,
any underwriting commissions or discounts in respect of the sale of its Warrant
Stock and the legal fees of its own counsel.
(g) In connection with any Registration Statement filed hereunder in
which the Holder participates as a selling stockholder, the following provisions
as to indemnification shall apply:
(i) The Company shall indemnify and hold harmless the Warrant
Stockholders against any losses, claims, damages or liabilities to which he may
become subject under the Securities Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in the Registration Statement, any preliminary
prospectus, the prospectus or any amendment or supplement thereto, or arise out
of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they are made, not
misleading; and the Company will reimburse any legal or other expenses
reasonably incurred by the Warrant Stockholders in connection with investigating
or defending any such loss, claim, damage, liability, action or proceeding;
provided, however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage, liability, action or proceeding arises
out of or is based upon any untrue statement or alleged untrue statement, or
upon any omission or alleged omission, of any material fact contained in the
Registration Statement, any preliminary prospectus, the prospectus or any such
amendment or supplement, to the extent that such fact was included or omitted in
reliance upon and in conformity with information furnished to the Company by or
through such Warrant Stockholder specifically for use in the preparation
thereof. This indemnity will be in addition to any liability which the Company
may otherwise have.
(ii) A Warrant Stockholder will indemnify and hold harmless
the Company, each of its directors, each of its officers who has signed the
Registration Statement and each person, if any, who controls the Company, within
the meaning of the Securities Act or otherwise, against any losses, claims,
damages or liabilities to which it may become subject under the Securities Act
or otherwise insofar as such losses, claims, damages or liabilities (or actions
or proceedings in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any preliminary prospectus, the prospectus or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they are made, not misleading; and a Warrant
Stockholder will reimburse any legal or
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other expenses reasonably incurred by the Company or any such director, officer
or controlling person in connection with investigating or defending any such
loss, claim, damage, liability, action or proceeding; provided, however, that
the Holder will be liable in each case under this subsection 5(g)(ii) to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in the Registration
Statement, any preliminary prospectus, the prospectus or any such amendment or
supplement in reliance upon and in conformity with information furnished to the
Company by or through such Warrant Stockholder specifically for use in the
preparation thereof. This indemnity will be in addition to any liability which
the Warrant Stockholder may otherwise have.
(iii) Promptly after receipt by an indemnified party pursuant
to the foregoing provisions of notice of the commencement of any action or
proceeding, such indemnified party will, if a claim in respect thereof is to be
made against an indemnifying party hereunder, notify the indemnifying party of
the commencement thereof, provided that the omission to so notify the
indemnifying party will not relieve the indemnifying party from any liability
which it may have to any indemnified party under this Agreement or otherwise
unless such failure results in material prejudice to the indemnifying party. In
case any such action or proceeding is brought against any indemnified party, and
such party notifies an indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein and, to the extent
that it may wish, to assume the defense thereof with counsel reasonably
satisfactory to such indemnified party, and after notice from the indemnifying
party to such indemnified party or its election so to assume the defense
thereof, the indemnifying party will not be liable to such indemnified party
hereunder for any legal or other expense subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation; provided, however, that if an indemnified party
determines in good faith that it has existing or potential claims against, or
other conflicts with, the indemnifying party, the indemnifying party may not
assume the defense of such indemnified party but shall remain liable for the
separate legal and other expenses of such indemnified party incurred in
connection therewith. An indemnifying party shall not be liable for any
settlement of any action or claim affected without its written consent thereto.
Section 6. TRANSFER, EXCHANGE OR REPLACEMENT OF WARRANT, ETC.
(a) Subject to compliance with the transfer restrictions set forth
herein and in the Agreement, the Holder may surrender this Warrant at the office
of the Company determined in accordance with Section 7 hereof for transfer or
exchange. Within a reasonable time after notice to the Company from a Holder of
its intention to make such transfer or exchange and without expense (other than
applicable transfer taxes, if any) to such Holder, the Company shall issue in
exchange therefor another Warrant or Warrants containing the same provisions and
in the aggregate for the same number of shares of Common Stock as the Warrant so
surrendered. Subject to the restrictions on transfer set forth in the Agreement,
each new Warrant shall be registered in the name of such person or entity as the
Holder of the surrendered Warrant may designate. Warrants issued upon any
transfer or exchange shall be only in authorized
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denominations, which shall be for 1,000 shares of Common Stock and amounts in
excess thereof.
(b) Upon receipt of evidence satisfactory to the Company of the
loss, theft, mutilation or destruction of this Warrant, and in the case of any
such loss, theft, or destruction upon delivery of any indemnity agreement of the
Holder as shall be reasonably satisfactory to the Company, or in the case of
such mutilation upon surrender and cancellation of this Warrant, the Company
will issue at the expense of the Company in lieu thereof a new Warrant of like
tenor for the same number of shares of Common Stock.
Section 7. NOTICES
(a) Any notice hereunder shall be given to the Company in writing
and such notice and any payment by the Holder of this Warrant hereunder shall be
deemed duly given or made only upon receipt thereof at the Company's office at
EqualNet Plaza, 1250 Wood Branch Park Drive, Houston, TX 77079-1212 or at such
other address as the Company may designate by notice to the Holder. A copy of
the notice shall be given to Fulbright & Jaworski L.L.P., 1301 McKinney, Suite
5100, Houston, Texas 77010-3095, to the attention of Robert F. Gray, Jr.
(b) Any notice or other communication to the Holder of this Warrant
or to a Warrant Stockholder upon exercise of this Warrant shall be in writing
and such notice shall be deemed duly given or made only upon receipt thereof at
the address specified herein or such other address as the Holder or a Warrant
Stockholder may designate by notice to the Company.
Section 8. WAIVER.
Neither this Warrant nor any term thereof may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which enforcement of the change, waiver, discharge or
termination is sought.
Section 9. FRACTIONAL SHARES.
Nothing contained herein shall obligate the Company to issue
fractional shares of its securities. Any exercise of this Warrant shall be for
the purpose of whole shares only. If any fraction of a share of stock would be,
except for this provision, issuable on the exercise of this Warrant, the Company
may at its option purchase such fraction for an amount equal in cash to the
Current Price Per Share of such fraction.
Section 10. GOVERNING LAW.
THIS WARRANT SHALL BE GOVERNED BY, AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK,
WITHOUT REGARD TO ITS CHOICE OF LAW RULES.
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Section 11. SUCCESSORS AND ASSIGNS.
All of the provisions of this Warrant shall be binding upon the
Company and its successors and assigns.
Section 12. NO RIGHTS AS STOCKHOLDER; LIMITATION OF LIABILITY.
This Warrant shall not entitle the Holder hereof to any of the
rights of a stockholder of the Company. No provision hereof, in the absence of
affirmative action by the Holder hereof to purchase shares of Warrant Stock, and
no mere enumeration herein of the rights or privileges of the Holder hereof,
shall give rise to any liability of such Holder for the Warrant Price or as a
stockholder of the Company, whether such liability is asserted by the Company or
by creditors of the Company.
Section 13. DEFINITIONS.
As used herein, unless the context otherwise requires, the following
terms have the following respective meanings:
COMMISSION: the Securities and Exchange Commission or any other
Federal agency at the time administering the Securities Act.
COMMON STOCK: the class of stock designated as Common Stock, par
value $.01 per share, of the Company on the date of this Agreement. For purposes
of Section 2 only, Common Stock shall also include any capital stock with voting
rights of the Company.
CONVERTIBLE SECURITIES: any evidences of indebtedness, shares of
stock (other than Common Stock) or other securities directly or indirectly
convertible into or exchangeable for Common Stock.
CURRENT PRICE PER SHARE: the Current Trading Price Per Share or, if
no Current Trading Price Per Share is available, Fair Market Value.
CURRENT TRADING PRICE PER SHARE: the "Current Trading Price Per
Share" of any security, including the Common Stock (a "Security"), on any date
shall be deemed to be the average of the daily closing prices (as such term is
hereinafter defined) per share of such Security for the 20 consecutive Trading
Days (as such term is hereinafter defined) immediately prior to such date. The
"closing price" for each day shall be the last sale price, regular way, or, in
case no such sale takes place on such day, the average of the closing bid and
asked prices, regular way, in either case as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which the Security is listed or
admitted to trading or, if the Security is not listed or admitted to trading on
any national securities exchange but is included in the Nasdaq Stock Market, the
last quoted price or, if not so
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quoted, the average of the high bid and low asked prices, in the
over-the-counter market, as reported by the National Association of Securities
Dealers, Inc. Automated Quotations System or such other system then in use. The
term "Trading Day" shall mean a day on which the principal national securities
exchange on which the Security is listed or admitted to trading is open for the
transaction of business or, if the Security is not listed or admitted to trading
on any national securities exchange, a Business Day. The term "Business Day"
shall mean any day other than a Saturday, a Sunday, or a day on which The New
York Stock Exchange is closed.
EXCLUDED SECURITIES: the 1,050,000 shares of Common Stock reserved
for issuance pursuant to the EqualNet Holding Corp. Employee Stock Option and
Restricted Stock Plan and the EqualNet Holding Corp. Non-Employee Director Stock
Plan and any additional shares of Common Stock issuable pursuant to any
antidilution provisions thereof; the warrants to purchase not more than
1,000,000 shares of Common Stock issuable to certain agents of the Company
pursuant to agent agreements substantially in the form delivered to the Holder
prior to the date of the Agreement; the 100,000 shares of Common Stock issuable
to Creative Communications, Inc. pursuant to a warrant dated November 12, 1996,
and not more than 150,000 shares of Common Stock that the Company may issue in
future periods for purposes of management incentive compensation to officers and
employees.
FAIR MARKET VALUE: the amount a willing buyer under no compulsion to
buy and in possession of all relevant information would pay a willing seller
under no compulsion to sell.
HOLDER: the person or entity in whose name this Warrant is
registered.
HOLDERS: the persons or entities in whose name this Warrant and
other Warrants are registered.
OPTIONS: rights, options or warrants to subscribe for, purchase or
otherwise acquire either Common Stock or Convertible Securities.
OTHER SECURITIES: any stock (other than Common Stock) and other
securities of the Company or any other person (corporate or otherwise) which the
holders of the Warrants at any time shall be entitled to receive, or shall have
received, upon the exercise of the Warrants, in lieu of or in addition to Common
Stock, or which at any time shall be issuable or shall have been issued in
exchange for or in replacement of Common Stock or Other Securities pursuant to
Section 2 or otherwise.
SECURITIES ACT: the Securities Act of 1933, as amended.
WARRANT STOCKHOLDERS: the persons or entities in whose names Warrant
Stock is registered unless such shares have been sold pursuant to a Registration
Statement filed pursuant to Section 5 hereof or pursuant to Rule 144 under the
Securities Act.
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IN WITNESS WHEREOF, EQUALNET HOLDING CORP. has caused this
Warrant to be signed in its corporate name by its President as of the day and
year above written.
EQUALNET HOLDING CORP.
By /s/ ZANE RUSSELL
President
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ASSIGNMENT
(To be Executed by the Holder if such Holder Desires to
Transfer the Within Warrant)
FOR VALUE RECEIVED the undersigned hereby sells, assigns and transfers
unto
--------------------------
(Name)
--------------------------
(Address)
the right to purchase ____ shares of Common Stock, covered by the within Warrant
and does hereby irrevocably constitute and appoint ________________ Attorney to
make such transfer on the books of the Company maintained for the purpose, with
full power of substitution.
Signature__________________
Dated: , 19__
NOTICE
The signature of the foregoing Assignment must correspond to the
name as written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever.
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<PAGE>
SUBSCRIPTION FORM
(TO BE EXECUTED UPON EXERCISE PURSUANT TO SECTION 1(B)(I), (II) OR (III))
TO: EQUALNET HOLDING CORP.
1. The undersigned Holder of the attached original, executed Warrant to
purchase Common Stock of EqualNet Holding Corp., a Texas corporation (the
"COMPANY"), hereby elects to exercise its purchase right under such Warrant with
respect to _________ shares of Warrant Stock.
2. The undersigned Holder elects to pay the aggregate exercise price for
such Warrant Shares in the following manner:
_____ by delivery of Notes or Refinancing Notes in a principal
amount plus unpaid accrued interest of $__________;
_____ by lawful money of the United States or the enclosed bank
cashier's check or certified check to the order of the
Company in the amount of
$________;
_____ by wire transfer of United States funds to the account of
the Company in the amount of $____________, which transfer
has been made before or simultaneously with the delivery of
this Subscription Form pursuant to the instructions of the
Company; or
_____ by the combination of the foregoing indicated above or on
the attached sheet.
3. Please issue a stock certificate or certificates representing the
appropriate number of shares of Warrant Stock in the name of the undersigned as
is specified below:
Name:
Address:
Tax Identification No.:
HOLDER:
By:
Its:
Date:
NOTE: The signature of the Warrant Holder must conform in all respects to the
name of the Warrant Holder as specified on the face of the Warrant, without
alteration, enlargement or any change whatsoever.
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<PAGE>
CASHLESS EXERCISE FORM
(TO BE EXECUTED UPON EXERCISE OF WARRANT
PURSUANT TO SECTION 1(C))
TO: EQUALNET HOLDING CORP.
1. The undersigned Holder of the attached original, executed Warrant to
purchase Common Stock of EqualNet Holding Corp., a Texas corporation (the
"Company"), hereby irrevocably elects to make a Cashless Exercise, as provided
for in Section 1(c) of such Warrant, with respect to _______ shares of Warrant
Stock, as defined in the Warrant.
2. Please issue a stock certificate or certificates representing the
appropriate number of shares of Common Stock issuable upon such Cashless
Exercise in the name of the undersigned as is specified below:
Name:
Address:
Tax Identification No.:
HOLDER:
By:
Its:
Date:
NOTE: The signature of the Warrant Holder must conform in all respects to the
name of the Warrant Holder as specified on the face of the Warrant, without
alteration, enlargement or any change whatsoever.
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EXHIBIT 10.3
SECURITY AGREEMENT
SECURITY AGREEMENT (this "AGREEMENT"), dated as of February
11, 1997, by and between EqualNet Holding Corp., a Texas corporation (the
"Company"), having an office at EqualNet Plaza, 1250 Wood Branch Park Drive,
Houston, Texas 77079-1212, its subsidiaries, EqualNet Corporation, a Delaware
corporation ("E Sub"), TeleSource, Inc., a Texas corporation ("TeleSource"), and
EqualNet Wholesale Services, Inc., a Delaware corporation ("WHOLESALE," and
together with E Sub and TeleSource, the "SUBSIDIARIES" and the Subsidiaries
together with the Company, the "EQUALNET COMPANIES"), and The Furst Group, Inc.,
a New Jersey corporation (the "Purchaser"), having an office at 459 Oakshade
Road, Shamong, New Jersey 08088.
PRELIMINARY STATEMENT
The EqualNet Companies have entered into a Note and Warrant
Purchase Agreement, dated as of February 3, 1997 (the "NOTE AGREEMENT";
capitalized terms defined in the Note Agreement and not otherwise defined herein
being used herein as therein defined), with the Purchaser. It is a condition to
the Purchaser's obligation to purchase the Notes, Refinancing Notes and Warrants
under the Note Agreement that this Security Agreement be executed and delivered.
NOW, THEREFORE, in consideration of the premises and intending
to be legally bound hereby, the parties hereto agree as follows:
1. GRANT OF SECURITY INTEREST. Each EqualNet Company hereby
pledges, hypothecates, transfers, grants and assigns to the Purchaser, and
agrees that the Purchaser shall have, a security interest in and lien on the
following:
(a) all of the accounts and general intangibles, whether now
owned or hereafter created arising or acquired, of such EqualNet
Company or in which EqualNet Company now or hereafter has any interest,
and all guarantees thereof and all security now or hereafter held by
such EqualNet Company for the payment or satisfaction thereof; and
(b) all proceeds of the foregoing and proceeds of other
proceeds; and
(c) without limiting the generality of (a) or (b) above, all
customer lists, letters of authorization, letters of agency,
verification tapes and other supporting documentation and books and
records relative to (a) or (b) above.
All of the foregoing being referred to herein as the "Collateral." The terms
"accounts," "general intangible" and "proceeds" as used herein shall have the
meanings specified from time to time in the Uniform Commercial Code as in effect
in the State of New York (the "UCC").
2. OBLIGATIONS SECURED. The Collateral secures the payment in
full, when due, of any and all indebtedness (including but not limited to
network usage and non-usage charges and other trade indebtedness) and other
obligations of such EqualNet Company to the Purchaser, whether now existing or
hereafter incurred or arising, of every kind and description, direct or
indirect, primary or secondary, including, without limitation, indebtedness and
other obligations arising out of the Note Agreement, the Notes, the Refinancing
Notes, the Warrants, this Agreement, or any supplement thereto or hereto, in
each case as the same may be increased or reduced from time to time, and whether
or not evidenced by any note or other instrument, including without limitation
any and all sums from time to time advanced by the Purchaser in payment of
taxes, assessments and other public charges and expenses, or to satisfy prior
encumbrances, or for the payment of which such EqualNet Company otherwise is
obligated and which, if not paid, might encumber any property of such EqualNet
Company, it being understood and agreed, nevertheless, that the Purchaser shall
not have any obligation to make any such advance (all of the indebtedness and
other obligations described in this Section 2 being herein sometimes referred to
collectively as the "OBLIGATIONS SECURED"). Payments of all amounts owed
hereunder by any of the EqualNet Companies to Purchaser shall be made and
delivered to Secured Party, or its agent, in the State of New York, by wire
transfer of immediately available funds. Secured Party shall deliver to the
EqualNet Companies written wire transfer instructions with respect to the
foregoing.
3. REPRESENTATIONS AND WARRANTIES. The EqualNet Companies
jointly and severally represent and to the Purchaser that:
(a) None of the EqualNet Companies have changed their name
in the last year;
(b) The location of the chief executive office of each of
the EqualNet Companies is the office whose address is set forth above;
and
(c) Except as set forth in a notice delivered to the
Purchaser, none of the presently existing Collateral arises out of a
contract with the United States or any department, agency or
instrumentality thereof.
So long as any Obligations Secured remain unpaid or the EqualNet Companies shall
be entitled to borrow under the Note Agreement, the EqualNet Companies shall be
deemed to represent and warrant continuously to the Purchaser all of the
<PAGE>
representations and warranties set forth in this Section 3.
4. MAINTENANCE OF COLLATERAL AND TITLE THERETO. The EqualNet
Companies jointly and severally represent, warrant and covenant to and with the
Purchaser that they have or will acquire and maintain absolute and exclusive
title to each and every item of the Collateral, free and clear of all liens,
claims, security interests and other encumbrances (except oniy security
interests in favor of the Purchaser and except for those liens and security
interests granted pursuant to the Credit Agreement dated as of November 30, 1995
(as amended through the date hereof (the "CREDIT AGREEMENT") among the Company
and each of the lenders who is or may become from time to time a party thereto
and Comerica Bank-Texas, as agent). The EqualNet Companies will jointly and
severally warrant and defend unto the Purchaser and its successors and assigns
title to all of the Collateral purported to be owned by them against the claims
and demands of all persons whomsoever except the liens granted pursuant to the
Credit Agreement. The EqualNet Companies shall pay any and all taxes,
assessments and other public accounts and charges of every kind and nature which
may be levied upon or assessed against any part of the Collateral. The EqualNet
Companies shall not permit any liens, claims, security interests or other
encumbrances (except only security interests in favor of the Purchaser and
except for those liens and security interests granted pursuant to the Credit
Agreement) to attach to any part of the Collateral, nor permit any part of the
Collateral to be levied upon under any legal process. Without the prior written
consent of the Purchaser, the EqualNet Companies shall not amend or terminate
any contract or other document or instrument constituting part of the
Collateral, except for routine transactions in the ordinary course of business.
Except in the ordinary course of business consistent with past practice, the
EqualNet Companies shall not do or permit to be done anything which might impair
the value of any item of the Collateral owned by them or the security intended
to be afforded hereby.
5. COLLECTION OF ACCOUNTS.
(a) The EqualNet Companies will cause all moneys, checks,
notes, drafts and other payments relating to or constituting proceeds
of accounts of the EqualNet Companies upon which the Purchaser has a
first priority security interest to be forwarded to a U.S. Postal
Service box ("Lockbox") specified by Purchaser for deposit in an
account ("COLLATERAL ACCOUNT") of the EqualNet Companies under the
control of Purchaser as may be specified in an agreement among the
Company, the Purchaser and the institution where such Collateral
Account is located. The EqualNet Companies will advise each account
debtor to address all remittances with respect to amounts payable on
account of any accounts to the specified Lockbox and all invoices
relating to any such accounts to indicate that payment is to be made
via the specified Lockbox.
(b) The EqualNet Companies and the Purchaser shall cause
all collected balances in the Collateral Account to be:
(i) paid to the Purchaser or other holders of the
Refinancing Notes to the extent of any amount due and payable
pursuant to Section 2.3(a) of the Note Agreement, and
(ii) with respect to the balance, so long as no Event
of Default under the Notes or the Refinancing Notes has
occurred and is continuing, transferred to a deposit account
of the EqualNet Companies as instructed by the EqualNet
Companies from time to time.
(c) Any monies, checks, notes, drafts or other payments
referred to in paragraph (a) of this Section 5 which, notwithstanding
the terms of such paragraph, are received by or on behalf of the
EqualNet Companies, will be held in trust and transferred as promptly
as possible, in the exact form received, together with any necessary
endorsements for deposit in the Collateral Account.
6. VERIFICATION AND NOTIFICATION. The Purchaser shall have
the right at any time and from to time,
(a) in the name of any of the EqualNet Companies or in the
name of the Purchaser to verify the validity, amount or any other
matter relating to any accounts by mail, telephone, telegraph or
otherwise, and
(b) to notify the account debtors under any accounts of the
assignment of such accounts to the Purchaser and to direct such account
debtor to make payment of all amounts due or to become due thereunder
directly to the Purchaser upon such notification and after the
occurrence of an Event of Default, to enforce collection of any such
accounts, and to adjust, settle or compromise the amount or payment
thereof, in the same manner and to the same extent as the EqualNet
Companies might have done.
7 DELIVERY OF INSTRUMENTS. In the event any Account becomes
evidenced by a promissory note, trade acceptance or any other instrument for the
payment of money, the EqualNet Companies will immediately thereafter deliver
such instrument to the Purchaser, appropriately endorsed to the Purchaser.
8. INSPECTION. The Purchaser (by any of its officers,
employees or agents) shall have the right at any time or times to inspect all
files relating to the Collateral to discuss the EqualNet Companies' affairs and
finances, insofar as the same are reasonably related to the rights of the
Purchaser hereunder or under any of the Documents, with any Person to verify the
amount, quantity, value and condition of, or any other matter relating to, any
of the Collateral and, in this connectidn, to review, audit and make extracts
from all records and files related to any of the Collateral.
9. SCHEDULE OF ACCOUNTS. At the request of the Purchaser,
the EqualNet Companies shall deliver the Purchaser on or before the 15th day of
each month a schedule of their accounts receivable which
(a) shall be as of the end of the immediately preceding
month,
(b) shall be reconciled to the Borrowing Base Certificate,
if any, as of the end of such month,
(c) shall set forth a detailed aged trial balance of all its
then existing Accounts, specifying the names, addresses and balance due
for each account debtor obligated on an Account so listed, and
(d) shall set forth a detailed report of balances due from
each account debtor, specifying the names and addresses of each
account debtor.
10. POWER OF ATTORNEY. Each EqualNet Company hereby appoints
the Purchaser as its attorney, power
(a) as long as an Event of Default has occurred and is
continuing, to endorse the name of such EqualNet Company on any checks,
notes, acceptances, money orders, drafts or other forms of payment or
security that may come into the Purchaser's possession, and
(b) to sign the name of such EqualNet Company on any notices
of assignment, financing statements and other public records relating
to the perfection or priority of the security interest or verification
of accounts and on notices to or from customers.
11. GOVERNMENT ACCOUNTS. If any account arises out of a
contract with the United States or any department, agency or instrumentality
thereof, the EqualNet Companies shall immediately notify the Purchaser thereof
in writing and execute any instruments and take any steps required by the
Purchaser in order that the security interest hereunder in the applicable
EqualNet Company's contract right under such contract and in all accounts
arising thereunder and in the proceeds thereof shall be perfected under the
provisions of the Federal Assignment of Claims Act.
12. CHANGE IN NAME OR CHIEF EXECUTIVE OFFICE. The EqualNet
Companies shall notily the Purchaser in writing 30 days prior to any change in
the name of an EqualNet Company or any change in the location of its chief
executive office.
13. RIGHTS AND REMEDIES UPON DEFAULT. Upon the occurrence and
during the continuation of any Event of Default under the Notes or the
Refinancing Notes, the Lender shall have, in addition to all other rights and
remedies provided by law, all of the rights and remedies of a secured creditor
under the UCC.
14. WAIVERS AND OTHER AGREEMENTS. Each EqualNet Company to the
extent of its interest in the Collateral hereby waives and releases any and all
right to require the Purchaser to collect any of the Obligations Secured from
any specific item or items of the Collateral or from any other collateral
security under any theory of marshaling of assets or otherwise, and each
EqualNet Company specifically authorizes the Purchaser to apply any item or
items of the Collateral in which any EqualNet Company may have any interest
against any portion of the Obligations Secured in such manner as the Purchaser
may determine in the Purchaser's exclusive discretion. Purchaser is hereby
authorized by the EqualNet Companies without any liability to the Purchaser, in
its exclusive discretion and without notice to or demand upon any of the
EqualNet Companies and without otherwise affecting any of the EqualNet
Companies' obligations hereunder, from time to time to take and hold other
collateral (in addition to or other than the Collateral itself) for the payment
of the Obligations Secured or any part thereof, and to accept and hold any
endorsement or guaranty of payment of the Obligations Secured or any part
thereof and to release or substitute any endorser or guarantor or any other
person granting security for or in any other way obligated upon the Obligations
Secured or any part thereof
15. FURTHER ASSURANCES, ETC. With respect to the Collateral,
each EqualNet Company agrees to do, file, record, make, execute and deliver all
such acts, deeds, things, notices and instruments as may be necessary or
desirable in the opinion of the Purchaser in order to vest more fully in and
assure to the Purchaser the liens on and security interests in the Collateral
created hereby or intended so to be and the enforcement and realization of the
benefits of, all of the rights, remedies and powers of the Purchaser hereunder
relating to the Collateral. The Purchaser shall not have any obligation to take
any steps, and each EqualNet Company shall in each case duly take all steps,
necessary to perfect and otherwise preserve against all other parties the rights
of such EqualNet Company and those of the Purchaser in the Collateral and each
and every item thereof.
16. TRANSFER OF INTEREST. Any or all of the rights, benefits
and advantages of the Purchaser under this Agreement or any of the other
Documents, and the right to receive payment of the principal of and premium, if
any, and interest on the Notes and Refinancing Notes as and when due and payable
by the EqualNet Companies may be assigned by the Purchaser and reassigned by any
assignee at any time and from time to time.
17. EXPENSES. The EqualNet Companies shall pay all costs of
filing of any financing, continuation or termination statements or security
agreements with respect to the Collateral deemed by the Purchaser to be
necessary or advisable in order to perfect and protect the liens and security
interests hereby created in favor of the Purchaser or intended so to be. Each
EqualNet Company agrees that the Collateral secures, and further agrees to pay
on demand, all reasonable expenses (including but not limited to reasonable
attorneys' fees and other costs for legal services, costs of insurance and
payments of taxes or other charges) of or incidental to the custody, care, sale
or collection of or realization on any of the Collateral or in any way relating
to the enforcement or protection of the rights of the Purchaser hereunder or
under the other Documents.
18. SEVERABILITY. The invalidity or unenforceability of any
provision hereof shall in no way the validity or enforceability of any other
provision.
19. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK,
WITHOUT REGARD TO ITS CHOICE OF LAW RULES.
20. HEADINGS. Article and Section headings in this Agreement
are included herein for of reference only and shall not constitute a part of
this Agreement for any other purpose.
21. COUNTERPARTS. This Agreement may be executed in any number
of counterparts, all of which together shall constitute one and the same
instrument, and either of the parties hereto may execute this by signing any
such counterpart.
22. INTERCREDITOR AGREEMENT. This Agreement and the security
interest granted hereby are to the terms of the Intercreditor Agreement.
23. BINDING EFFECT. This Agreement shall be binding upon and
enure to the benefit of the and their respective successors and assigns.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their proper corporate officers thereunto duly
authorized as of the day and year first above written.
EQUALNET COMPANIES:
EQUALNET HOLDING CORP.
By:[SIG ILLEGIBLE]
President
EQUALNET CORPORATION
By:[SIG ILLEGIBLE]
President
TELESOURCE, INC.
By:[SIG ILLEGIBLE]
President
EQUALNET WHOLESALE SERVICES, INC.
By:[SIG ILLEGIBLE]
President
PURCHASER:
THE FURST GROUP, INC.
By:[SIG ILLEGIBLE]
Executive Vice President
8
EXHIBIT 10.4
RIGHT IN THE EVENT OF A CHANGE OF CONTROL
THIS RIGHT IN THE EVENT OF A CHANGE OF CONTROL (this "RIGHT
AGREEMENT") is issued to The Furst Group, Inc., a New Jersey corporation
("TFG"), by EqualNet Holding Corp., a Texas corporation ("EQUALNET"), as of
February 11, 1997.
WHEREAS, TFG has previously provided and continues to provide
(pending and subject to execution of a written agreement between TFG and the
Company) to EqualNet and its subsidiaries (collectively, the "COMPANY")
telecommunications services through the Sprint Corp. network at TFG's cost;
WHEREAS, EqualNet acknowledges that such provision has substantial
value to the Company and provides risk without compensation to TFG; and
WHEREAS, TFG and EqualNet have entered into a non-binding letter of
intent to pursue a combination of TFG and EqualNet and to pursue jointly a
telecommunications services arrangement with AT&T Corp. at more favorable rates
than currently realized by the Company;
NOW THEREFORE, for good and valuable consideration, the parties,
intending to be legally bound, hereby agree as follows:
1. CERTAIN DEFINED TERMS.
"COMMON STOCK" means common stock, par value $.01 per share, of
EqualNet as presently constituted and any stock or other securities issued in
addition to or in substitution therefor upon any reclassification or
recapitalization.
"EQUALNET TRANSACTION" means the consummation of any event or series
of events that results in (1) EqualNet's consolidation with, or merger with or
into, any other Person (other than TFG, any shareholder of TFG or any affiliate
of TFG) if in connection with such consolidation or merger, all or part of the
Common Stock shall be changed into or exchanged for stock or other securities of
any other Person or cash or any other property or (2) EqualNet selling or
otherwise transferring (or one or more of its Subsidiaries selling or otherwise
transferring) to a Person or Persons (other than TFG, any shareholder of TFG or
any affiliate of TFG), in one transaction or a series of related transactions,
assets that constitute 50% or more of the assets of the Company or assets that
provide or previously provided 50% or more of the consolidated revenues of the
Company received in connection with the provision of telecommunications
services.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
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"FAIR MARKET VALUE" means the fair market value of the property in
question. In calculating the Fair Market Value, no discount shall be made for
lack of control, lack of an active trading market, or any restrictions on
transferability. Fair Market Value initially shall be determined in good faith
by the Board of Directors of EqualNet, provided however, that if TFG objects to
any determination of Fair Market Value made by such Board, the Fair Market Value
shall be determined by an investment banking firm of national repute selected by
TFG from a list of five such investment banking firms which shall be submitted
to TFG by EqualNet within five business days after EqualNet has received notice
that Fair Market Value shall be so determined, or, if EqualNet fails to furnish
such a list, an investment banking firm selected by TFG in its sole discretion.
"PERSON" means any individual, firm, corporation, partnership or
other entity.
"RIGHT" is defined in Section 1.
"RIGHT PAYMENT" means an amount equal to 11.5% of the Fair Market
Value of the Transaction Consideration, such amount to be paid in cash or, at
the option of EqualNet, in the same proportion of cash, securities or other
property paid to any holders of Common Stock, EqualNet or its Subsidiaries, as
the case may be.
"RIGHT PERIOD" means two years from the date hereof.
"SUBSIDIARY" has the meaning ascribed to such term in Rule 12b-2 of
the General Rules and Regulations under the Exchange Act.
"TFG TELECOMMUNICATION BUSINESS" means TFG's contractual rights and
obligations with its underlying long-distance telecommunications services
providers.
"TFG TERMINATION EVENT" means (1) the acquisition by any Person or
"group" of beneficial ownership (as such terms are used in Section 13(d) of the
Exchange Act) of shares of capital stock of TFG representing 50% or more of the
total voting power of all capital stock of TFG issued and outstanding, (2) TFG's
consolidation with, or merger with or into, any Person (other than an affiliate
of TFG) if in connection with such consolidation or merger, all or part of the
capital stock of TFG shall be converted into or exchanged for stock or other
securities of any other Person or cash or any other property, or (3) the failure
of TFG or any of its current shareholders or any group of its current
shareholders or members of their respective families to own at least a 50%
interest in the TFG Telecommunication Business, provided that if TFG and
EqualNet have jointly entered into a contract for long-distance services
ultimately provided by AT&T Corp. prior to such failure, at the time of such
failure, EqualNet shall elect by written notice to TFG either not to treat such
failure as a TFG Termination Event or to pay to TFG a surcharge equal to 7% of
each month's above the network and non-network usage fees charged by the
underlying carrier for any and all carrier services for EqualNet traffic either
provided under TFG contracts or in joint contracts for such services with TFG.
Notwithstanding the
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provisions hereof, if an event that would, but for this sentence, constitute a
TFG Termination Event occurs, and during the Right Period the same Person or
group that engaged in such Event, or such Person or group's successors or
affiliates, completes an EqualNet Transaction with EqualNet, such event shall
not constitute a TFG Termination Event.
"TRANSACTION CONSIDERATION" means: (1) in the case of clause (1) of
the definition of EqualNet Transaction, the amount delivered and/or deliverable
to the holder of one share of Common Stock multiplied by the number of shares of
Common Stock outstanding and (2) in the case of clause (2) of the definition of
EqualNet Transaction, the amount received by EqualNet or its Subsidiaries in
consideration for such assets.
2. GRANT OF RIGHT. EqualNet hereby grants to TFG the right ("RIGHT")
to receive, and agrees to make, the Right Payment upon the consummation of an
EqualNet Transaction.
3. TERM OF RIGHT. The Right terminates immediately upon the earliest
to occur of (1) the expiration of the Right Period, (2) the date on which
EqualNet acquires all the issued and outstanding capital stock of TFG or all or
substantially of the assets of the telecommunications business of TFG, and (3) a
TFG Termination Event.
4. EQUALNET COVENANT. EqualNet shall not consummate, nor shall it
permit any of its Subsidiaries to consummate an EqualNet Transaction with any
Person or Persons, unless such Person or Persons agree to assume EqualNet's
obligations under this Right Agreement to make the Right Payment to TFG upon
consummation of such EqualNet Transaction.
5. REPRESENTATIONS AND WARRANTIES OF EQUALNET. EqualNet hereby
represents and warrants to TFG that this Right has been duly authorized
(including, without limitation, by approval of its board of directors) and
executed by it and constitutes its valid and legally binding obligation,
enforceable in accordance with its terms.
6. GOVERNING LAW; ETC.. THIS RIGHT AGREEMENT SHALL BE GOVERNED BY,
AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK
WITHOUT REFERENCE TO ITS CHOICE OF LAW RULES. All payments and deliveries of
securities or other property required or permitted hereunder shall be made and
delivered by EqualNet to TFG's agent in New York City, New York, in accordance
with written instructions delivered by TFG to EqualNet. With respect to any
suit, action or proceeding related to this Right Agreement, each of the parties
hereto hereby irrevocably consents and submits to the exclusive jurisdiction of
the United States District Court located in the Borough of Manhattan in New York
City, New York, if a basis for federal court jurisdiction is present, and,
otherwise, of the state courts of the State of New York; provided that
notwithstanding the foregoing, TFG may bring any suit action or proceeding
arising out of or relating to this Right Agreement in the courts of any place
where TFG can establish jurisdiction
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over EqualNet. Each of the parties hereto irrevocably consents to service of
process out of the aforementioned courts and waives any objection which it may
now or hereafter have to the laying of venue of any action or proceeding arising
out of or in connection with this Right Agreement brought in the aforementioned
courts and hereby further irrevocably waives and agrees not to plead or claim in
such courts that any such action or proceeding brought in such courts has been
brought in an inconvenient forum.
7. NO TRANSFERABILITY. This Right Agreement, the Right and the Right
Payment are not transferrable by TFG except that TGF's rights hereunder may be
treansferred, in whole or in part, to the current shareholders of Furst and
their respective families.
8. COUNTERPARTS. This Right Agreement may be executed in any number
of counterparts, all of which taken together shall constitute one and the same
instrument, and either of the parties hereto may execute this Right by signing
any such counterpart.
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IN WITNESS WHEREOF, the parties hereto, intending to be legally
bound, have caused this Agreement to be executed by their respective duly
authorized officers, as of the date first above written.
EQUALNET HOLDING CORP.
By:SIG. ILLEGIBLE
President
THE FURST GROUP, INC.
By:SIG. ILLEGIBLE
Executive Vice President
5
EXHIBIT 10.5
FOURTH AMENDMENT TO
CREDIT AGREEMENT
THIS FOURTH AMENDMENT TO CREDIT AGREEMENT (this "AMENDMENT") is made and
entered into as of February 3, 1997, 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) delete certain definitions and add
others, (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, (f) modify certain financial
covenants, and (g) 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 and as of the dates set forth opposite such Lender's name
on the signature pages hereof.
2. APPLICABLE BORROWING BASE PERCENTAGE AMENDED. The definition of
Applicable Borrowing Base Percentage contained in Section 1.1 of the Credit
Agreement is hereby amended in its entirety to be and read as follows:
"APPLICABLE BORROWING BASE PERCENTAGE shall mean on any date of
determination (a) occurring prior to March 1, 1997, 72.5% or (b) occurring
on or after March 1, 1997,
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69% LESS 1% per month for each calendar month which has commenced after
March 31, 1997 as of such date of determination."
3. 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 and/or the Furst Security Documents; (e) it is
evidenced by an invoice submitted to the account debtor in a 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 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
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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."
4. MATURITY DATE AMENDED. The definition of Maturity Date contained in
Section 1.1 of the Credit Agreement is hereby amended in its entirety to be and
read as follows:
"MATURITY DATE shall mean the maturity of the Notes, July 1, 1997, as the
same may hereafter be accelerated pursuant to the provisions of any of the
Loan Documents."
5. 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
(A) the lesser of (i) the aggregate of the Commitments or (ii) the
Borrowing Base, MINUS (B) from and after February 6, 1997, the lesser of
(i) $500,000 or (ii) the total amount of the unpaid balance of assessment
shown on the Notice of Federal Tax Lien (the "Houston Notice of Federal
Tax Lien") filed against Equal Net Communications, Inc., bearing Serial
Number 749722134 recorded with the County Clerk of Harris County, Houston,
Texas as Document No. 511 52-3591, as the same may be amended from time to
time."
6. PERMITTED LIENS AMENDED. The definition of Permitted Liens contained in
Section 1.1 of the Credit Agreement is hereby amended in its entirety to be and
read as follows:
"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 provided that no
notice of federal tax lien is filed against the Borrower or any of its
Subsidiaries in connection with any such Liens other than the Houston
Notice of Tax Lien and and PROVIDED, FURTHER, that the Houston Notice of
Tax Lien shall not be a Permitted Lien after February 24, 1997, so that if
the Houston Notice of Tax Lien has not been terminated on or prior to such
date, the same shall violate Section 8.2 of this Agreement and constitute
an Event of Default under Section 9.1(e) and (k) of this Agreement; (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
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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."
7. 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:
"SECURITY AGREEMENTS shall mean, collectively, (i) the Security Agreement
dated as of the Effective Date executed by the Borrower and the Agent
covering the Borrower's Accounts, Inventory and General Intangibles and
securing the Obligations, (ii) the Security Agreement dated as of the
Effective Date executed by the Current Guarantors and the Agent covering
their respective Accounts, Inventory and General Intangibles and securing
the Obligations arising under their respective Guaranties, (iii) the
Additional Security Agreement dated as of June 20, 1996 executed by
EqualNet Wholesale Services, Inc. ("WHOLESALE"), a Delaware corporation,
covering the Accounts, Inventory and General Intangibles of Wholesale, as
security for such Person's obligations under the Guaranties, and (iv) any
and all other 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."
8. DEFINITIONS ADDED. Section 1.1 of the Credit Agreement is hereby
amended by adding thereto the following definitions:
"AT&T shall mean AT&T Corp. or any Affiliate thereof."
"AT&T PAYMENT SCHEDULE shall mean that certain payment schedule delivered
by AT&T under its letter to EqualNet Corporation dated January 21, 1997,
establishing payment terms in favor of EqualNet Corporation."
"FURST shall mean The Furst Group, Inc., a New Jersey corporation."
"FURST CHARGE-OFF shall have the meaning set forth in Section 10 of the
Fourth Amendment to this Agreement."
"FURST NOTES shall mean those certain convertible subordinated promissory
notes in the original aggregate principal sum of $3,000,000 executed by
Borrower and the Current Guarantors, as co-makers, payable to the order of
Furst, dated as of February 3, 1997, with a final stated maturity of
December 31, 1998, unless earlier converted into common stock of the
Borrower."
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"FURST PURCHASE AGREEMENT shall mean the Note and Warrant Purchase
Agreement among the Borrower, the Current Guarantors and Furst dated as of
February 3, 1997."
"FURST SECURITY DOCUMENTS shall mean that certain Security Agreement dated
as of February 3, 1997, from the Borrower and the Current Guarantors, in
favor of Furst, securing the payment and performance of the Furst Note."
"HOUSTON NOTICE OF FEDERAL TAX LIEN shall have the meaning set forth in
Section 5 of the Fourth Amendment to this Agreement."
"INTERCREDITOR AND SUBORDINATION AGREEMENT shall mean the InterCreditor
and Subordination Agreement dated February 3, 1997, among the Borrower,
the Current Guarantors, the Lenders and Furst."
"WRITE-OFF shall have the meaning set forth in Section 10 of the Fourth
Amendment to this Agreement."
9. INTEREST RATES AMENDED.
(a) The definition of Base Rate contained in the Interest Rate Annex
is hereby amended in its entirety to be and read as follows:
"BASE RATE means for any day a rate per annum (rounded upwards to the
nearest 1/16 of 1%) equal to the lesser of (a) the greater of (1) the
Prime Rate for that day and (2) the Federal Funds Rate for that day plus
1/2 of 1%, in each case, PLUS the Applicable Margin for such day or (b)
the Ceiling Rate. If for any reason the Agent shall have determined (which
determination shall be conclusive and binding, absent manifest error) that
it is unable to ascertain the Federal Funds Rate for any reason,
including, without limitation, the inability or failure of the Agent to
obtain sufficient quotations in accordance with the terms hereof, the Base
Rate shall, until the circumstances giving rise to such inability no
longer exist, be the lesser of (y) the Prime Rate plus the Applicable
Margin or (z) the Ceiling Rate."
(b) The Interest Rate Annex is hereby amended to add thereto a
definition of "Applicable Margin", which shall be and read as follows:
"APPLICABLE MARGIN means a rate per annum equal to (a) for any day
occurring on or after June 1, 1996 through and including February 28,
1997, three percent (3%), (b) for any day occurring on or after March 1,
1997 through and including March 31, 1997, four percent (4%), (c) for any
day occurring on or after April 1, 1997 through and including April 30,
1997, five percent (5%), and (d) for any day occurring on May 1, 1997 and
at any time thereafter, six percent (6%)."
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10. LETTER OF CREDIT FACILITY AMENDED. Section 2.2(b) of the Credit
Agreement is hereby amended to provide that any and all Letters of Credit issued
by the Issuer (including any currently issued and outstanding) 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.
11. FINANCIAL STATEMENTS AND INFORMATION. Section 7.2 of the Credit
Agreement is hereby amended by eliminating the word "and" immediately preceding
clause (f) thereof, by changing the period at the end thereof to a semi-colon
and by inserting thereafter the following new clause (g) to be and read as
follows:
"(g) immediately upon the receipt of any notice from AT&T asserting any
right to, terminate providing services to the Borrower or any of its
Subsidiaries (or their respective customers as a whole), a written notice
signed by the President or the principal financial officer of the Borrower
specifying the nature thereof, and what action the Borrower is taking or
proposing to take with respect thereto, and, when known, any action taken
by AT&T with respect thereto."
12. FINANCIAL TESTS AMENDED. Section 7.3 of the Credit Agreement is hereby
amended in its entirety to be and read as set forth below. The charts headed
"With Write-Off" in clauses (a) and (b) below and in Section 9.1(a) of the
Credit Agreement (as amended hereby), are applicable in the event, and only in
the event, that the Borrower, upon the advice of its independent public
accountants, implements, effective as of December 31, 1996, a non-cash write-off
of no less than $4,750,000 and no more than $5,000,000 of acquisition costs (the
"WRITE-OFF"). In the event that the Borrower, upon the advice of its independent
public accountants, implements a non-cash charge to earnings of no more than
$2,000,000 because of events contemplated by the Furst Notes and/or the Furst
Purchase Agreement (the "FURST CHARGE-OFF"), the Furst Charge-Off shall be
excluded for purposes of the financial tests in this Section 7.3.
"7.3 FINANCIAL TESTS. Have and maintain on a consolidated basis (in each
case treating the Indebtedness evidenced by the Furst Note as equity):
"(a) MINIMUM TANGIBLE NET WORTH; MAINTAIN DEBT TO TANGIBLE NET WORTH
RATIO. Prior to February, 1997 maintain Tangible Net Worth and for
February, 1997, and thereafter, maintain a ratio of Indebtedness
(including all Obligations) to Tangible Net Worth of not more than the
amounts indicated in the chart below for the periods indicated:
WITHOUT WRITE-OFF WITH WRITE-OFF
- ----------------------------------------- ----------------------------------
FOR THE MONTH OF AMOUNT FOR THE MONTH OF AMOUNT
- --------------------------- ----------- -------------------- -----------
December 1996 $ 0.00 December 1996 ($ 500,000)
January 1997 ($ 250,000) January 1997 ($1,000,000)
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WITHOUT WRITE-OFF WITH WRITE-OFF
- ----------------------------------------- ----------------------------------
FOR THE MONTH OF AMOUNT FOR THE MONTH OF AMOUNT
- --------------------------- ----------- -------------------- -----------
February 1997 7.50 February 1997 10.00
March 1997 9.25 March 1997 13.25
April 1997 3.55 April 1997 4.20
May 1997 4.10 May 1997 5.10
June 1997 4.75 June 1997 6.40
"(b) MAINTAIN DEBT TO NET WORTH RATIO. A ratio of Indebtedness
(including all Obligations) to Net Worth of not more than the amounts
indicated in the chart below for the periods indicated:
WITHOUT WRITE-OFF WITH WRITE-OFF
- ----------------------------------------- ----------------------------------
FOR THE MONTH OF AMOUNT FOR THE MONTH OF AMOUNT
- --------------------------- ----------- -------------------- -----------
December 1996 2.50 December 1996 15.50
January 1997 2.75 January 1997 6.25
February 1997 1.90 February 1997 5.50
March 1997 2.10 March 1997 6.75
April 1997 1.50 April 1997 3.15
May 1997 1.70 May 1997 3.80
June 1997 1.90 June 1997 4.75
"(c) MAINTAIN CURRENT RATIO. A Current Ratio of not less than 1.10
to 1.00 at all times; PROVIDED, HOWEVER, such ratio may not be less than
0.90 to 1.00 for the months of December, 1996 and January, 1997. For
purposes of calculating the Current Ratio, the Obligations shall not be
included as Current Liabilities.
13. ACCOUNTS AUDITS REQUIREMENTS AMENDED. Section 7.14 of the Credit
Agreement is hereby amended in its entirety to be and read as follows:
"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 four times during any fiscal year) an audit
of the Accounts of the Borrower and its Subsidiaries. Such audits shall be
at the expense of the Borrower. The Borrower further covenants and agrees
that it will cooperate, and will cause its
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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."
14. REDEMPTION, DIVIDENDS AND DISTRIBUTIONS. Section 8.5 of the Credit
Agreement is hereby amended in its entirety to be and read as follows:
"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; PROVIDED, HOWEVER, that
nothing in this Section shall prohibit Borrower from (i) accepting shares
of its stock as payment of the purchase price of shares of Common Stock
with respect to which options granted under the EqualNet Holding Corp.
Employee Stock Option and Restricted Stock Plan ("Stock Plan") are
exercised, (ii) acquiring shares of Common Stock that have been awarded to
employees ("Restricted Stock") pursuant to the Stock Plan but which have
been forfeited by such employees pursuant to the terms of the Stock Plan,
(iii) acquiring shares of Restricted Stock to meet Borrower's tax
withholding obligation under the United States Internal Revenue Code of
1986, as amended, upon vesting of such Restricted Stock or (iv)
contributing an amount to the EqualNet Holding Corp. Employee Stock
Purchase Plan in an amount equal to 15% of each employee participant's
payroll deduction up to a maximum of $750 for each employee participant
per calendar year."
15. 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 pre-tax loss (determined in accordance with GAAP but
excluding the Furst Charge- Off) from operations for the periods indicated
below in excess of the amounts indicated:
WITHOUT WRITE-OFF WITH WRITE-OFF
- ----------------------------------------- --------------------------------------
FOR THE MONTH OF MAXIMUM LOSS FOR THE MONTH OF MAXIMUM LOSS
- ---------------------------- ---------- ------------------------- ----------
December 1996 $ 950,000 December 1996 $ 800,000*
January 1997 $ 860,000 January 1997 $ 860,000
February 1997 $ 830,000 February 1997 $ 710,000
March 1997 $ 820,000 March 1997 $ 780,000
April 1997 $ 860,000 April 1997 $ 795,000
May 1997 $1,030,000 May 1997 $ 850,000
8
<PAGE>
FOR THE MONTH OF MAXIMUM LOSS FOR THE MONTH OF MAXIMUM LOSS
- ---------------------------- ---------- ------------------------- ----------
June 1997 $1,040,000 June 1997 $ 845,000
* In the event that the Write-Off is implemented, this amount will be
increased by the amount of the Write-Off.
16. AT&T DEFAULT ADDED. The Credit Agreement is hereby amended to add
thereto a new Section 9.1(p) which shall be and read as follows:
"(p) AT&T DEFAULT - AT&T shall be entitled to terminate providing services
to the Borrower or any of its Subsidiaries (or their respective customers
as a whole) pursuant to any Carrier Agreement, Contract Tariff or other
agreement now or hereafter in effect and any notice has been given and the
passage of any time required as a condition to such termination has
occurred."
17. FURST DEFAULT ADDED. The Credit Agreement is hereby amended to add
thereto a new Section 9.1(q) which shall be and read as follows:
"(p) FURST DEFAULT - any default or event of default shall occur under any
of the Furst Note, the Furst Purchase Agreement or the InterCreditor and
Subordination Agreement.
18. ASSIGNMENT CLAUSES AMENDED. Section 11.6(b) of the Credit Agreement is
hereby amended in its entirety to be and read as follows:
"(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) 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 must 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 F 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
9
<PAGE>
to the contrary, any Lender may at any time assign all or any portion of
its rights under this Agreement and the 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."
19. ASSIGNMENT AND ACCEPTANCE AMENDED. The Credit Agreement is hereby
amended by deleting therefrom Exhibit F (erroneously referred to as "Exhibit G"
in the Credit Agreement) to the Credit Agreement and substituting therefor a new
Exhibit F, which shall be in the form set forth on EXHIBIT A attached hereto and
incorporated herein by reference for all purposes.
20. WAIVER OF CERTAIN DEFAULTS. The Agent and the Lenders hereby waive the
occurrence of any Default or Event of Default which has occurred through
February 3, 1997 (but not thereafter) and of which the Agent and the Lenders
have received written notice from the Borrower.
21. RESTRUCTURE FEES. In consideration, among other consideration, for the
Agent and the Lenders 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 $25,000, 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. In addition, Section
2.4 of the Credit Agreement is hereby amended to add thereto a new Subsection
"(c)" which shall be and read as follows:
"(c) In the event that all outstanding Letters of Credit, all Letter of
Credit Liabilities, all Loans, all Dominion of Funds Loans and all
Commitments have not been irrevocably fully terminated, paid and satisfied
(or back-up letters of credit delivered, in the case of outstanding
Letters of Credit, in form and substance, and issued by a Person,
acceptable to the Agent in its sole discretion) prior to May 1, 1997, the
Borrower shall pay to the Agent for the account of each Lender a
restructure fee in the aggregate amount of $25,000."
22. 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.
23. 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) evidence of the satisfaction of the conditions set forth in that
certain Forbearance Agreement dated as of January 31, 1997, among
the Borrower, the Agent and the Lenders;
(b) 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)
10
<PAGE>
as of the date hereof, authorizing the execution, delivery and
performance of this Amendment, and such other related documents and
information as the Lenders may request;
(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) a copy of the AT&T Payment Schedule;
(e) an original copy of the InterCreditor and Subordination Agreement
and the Furst Purchase Agreement;
(f) a Certificate of the Secretary or Assistant Secretary of Furst as to
the corporate resolutions of such Person authorizing the execution
of said InterCreditor and Subordination Agreement and as to the
incumbency of the Person executing said InterCreditor and
Subordination Agreement on behalf of Furst;
(g) an opinion letter of legal counsel to Furst in favor of the Agent
and the Lenders;
(h) a listing and aging of accounts receivable of the Borrower and the
Guarantors as of the date of this Amendment;
(i) a Notice of Entire Agreement executed by the Company and each of the
Guarantors as of the date hereof;
(j) the Lenders' restructuring fee in the amount of $25,000; and
(k) evidence of the payment of any and all reasonable 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).
24. 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.
25. EXPENSES; INDEMNIFICATION. TO THE EXTENT NOT PROHIBITED BY APPLICABLE
LAW, BORROWER WILL PAY ALL REASONABLE 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,
11
<PAGE>
DOCUMENTATION, RECORDING, CLOSING, RENEWAL, REVISION, MODIFICATION, INCREASE,
REVIEW OR RESTRUCTURING OF THIS AMENDMENT.
26. 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.
27. 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.
28. LIFTING OF AUTOMATIC STAY. In the event that the Borrower, any
Guarantor or any other person or entity now or hereafter primary or secondarily
obligated to pay all or any part of the Obligations is the subject of any
insolvency, bankruptcy, receivership, dissolution, reorganization or similar
proceeding, federal or state, voluntary or involuntary, under any present or
future law or act, the Agent and the Lenders are entitled to the automatic and
absolute lifting of any automatic stay as to the enforcement of their respective
remedies under the Loan Documents against the security for such indebtedness,
including specifically the stay imposed by Section 362 of the United States
Federal Bankruptcy Code, as amended. The Borrower and the Guarantors (by joinder
in the execution of this Amendment) hereby consent to the immediate lifting of
any such automatic stay, and will not contest any motion by the Agent or any
Lender to lift such stay.
12
<PAGE>
29. 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 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.
30. 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
13
<PAGE>
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.
31. WAIVER OF JURY TRIAL. THE BORROWER, THE GUARANTORS AND THE AGENT AND
THE LENDERS HEREBY IRREVOCABLY WAIVE THE RIGHT TO TRIAL BY JURY WITH RESPECT TO
ANY AND ALL ACTIONS OR PROCEEDINGS AT ANY TIME IN WHICH BORROWER AND THE LENDERS
ARE PARTIES ARISING OUT OF THIS AGREEMENT.
14
<PAGE>
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/ MICHAEL L. HLINAK
Name: Michael L. Hlinak
Title: C.O.O.
15
<PAGE>
COMERICA BANK-TEXAS, a Texas banking
association, as Agent and as a Lender
By: /s/ JOSEPH W. SULLIVAN
Name: Joseph W. Sullivan
Title: Senior Vice President
Commitment prior to March 1, 1997:
$5,760,000
Commitment on and after March 1, 1997:
$5,400,000
16
<PAGE>
WELLS FARGO BANK (TEXAS),
N. A., a national banking association
By: /s/ ROGER FRUENDT
Name: Roger Fruendt
Title: Vice President
Commitment prior to March 1, 1997:
$2,240,000
Commitment on and after March 1, 1997:
$2,100,000
17
<PAGE>
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
EQUALNET WHOLESALE SERVICES, INC.
By: /s/ ZANE RUSSELL
Name: Zane Russell
Title: President
18
<PAGE>
EXHIBIT A TO FOURTH AMENDMENT TO CREDIT AGREEMENT
- --------------------------------------------------------------------------------
ASSIGNMENT AND ACCEPTANCE
Dated: __________________ , 199___
Reference is made to the Credit Agreement dated as of November 30, 1995
(as restated, amended, modified, supplemented and in effect from time to time,
the "CREDIT AGREEMENT"), among EqualNet Holding Corp., an Texas corporation (the
"BORROWER"), the Lenders named therein, and Comerica Bank-Texas, as Agent (the
"AGENT"). Capitalized terms used herein and not otherwise defined shall have the
meanings assigned to such terms in the Credit Agreement. This Assignment and
Acceptance, between the Assignor (as defined and set forth on SCHEDULE I hereto
and made a part hereof) and the Assignee (as defined and set forth on SCHEDULE I
hereto and made a part hereof) is dated as of the Effective Date (as set forth
on SCHEDULE I hereto and made a part hereof).
1. The Assignor hereby irrevocably sells and assigns to the Assignee
without recourse to the Assignor, and the Assignee hereby irrevocably purchases
and assumes from the Assignor without recourse to the Assignor, as of the
Effective Date, an undivided interest (the "ASSIGNED INTEREST") in and to all
the Assignor's rights and obligations under the Credit Agreement respecting the
credit facility contained in the Credit Agreement as are set forth on SCHEDULE I
(the "ASSIGNED FACILITY"), in a principal amount for the Assigned Facility as
set forth on SCHEDULE I.
2. The Assignor (i) makes no representation or warranty and assumes no
responsibility with respect to any statements, warranties or representations
made in or in connection with the Credit Agreement or any other Loan Document or
the execution, legality, validity, enforceability, genuineness, sufficiency or
value of the Credit Agreement, any other Loan Document or any other instrument
or document furnished pursuant thereto, other than that it is the legal and
beneficial owner of the interest being assigned by it hereunder and that such
interest is free and clear of any adverse claim; (ii) makes no representation or
warranty and assumes no responsibility with respect to the financial condition
of the Borrower or its Subsidiaries or the performance or observance by the
Borrower or its Subsidiaries of any of its respective obligations under the
Credit Agreement, any other Loan Document or any other instrument or document
furnished pursuant thereto; and (iii) attaches the Note held by it evidencing
the Assigned Facility, and requests that the Agent exchange such Note for a new
Note payable to the Assignor (if the Assignor has retained any interest in the
Assigned Facility) and a new Note payable to the Assignee in the respective
amounts which reflect the assignment being made hereby (and after giving effect
to any other assignments which have become effective on the Effective Date).
EXHIBIT F
to Credit Agreement
Page 1
<PAGE>
3. The Assignee (i) represents and warrants that it is legally authorized
to enter into this Assignment and Acceptance; (ii) confirms that it has received
a copy of the Credit Agreement, together with copies of the financial statements
referred to in SECTION 6.2 thereof, or if later, the most recent financial
statements delivered pursuant to SECTION 7.2 thereof, and such other documents
and information as it has deemed appropriate to make its own credit analysis;
(iii) agrees that it will, independently and without reliance upon the Agent,
the 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 the Credit Agree ment; (iv) appoints and
authorizes the Agent to take such action as agent on its behalf and to exercise
such powers under the Credit Agreement as are delegated to the Agent by the
terms thereof, together with such powers as are reasonably incidental thereto;
(v) agrees that it will be bound by the provisions of the Credit Agreement and
will perform in accordance with its terms all the obligations which by the terms
of the Credit Agreement are required to be performed by it as a Lender; (vi) if
the Assignee is organized under the laws of a jurisdiction outside the United
States, attaches the forms prescribed by the Internal Revenue Service of the
United States certifying as to the Assignee's exemption from United States
withholding taxes with respect to all payments to be made to the Assignee under
the Credit Agreement or such other documents as are necessary to indicate that
all such payments are subject to such tax at a rate reduced by an applicable tax
treaty, and (vii) has supplied the information requested on the administrative
questionnaire submitted by the Agent.
4. Following the execution of this Assignment and Acceptance, it will be
delivered to the Agent for acceptance by it and the Borrower and recording by
the Agent pursuant to SECTION 11.6 of the Credit Agreement, effective as of the
Effective Date (which Effective Date shall, unless otherwise agreed to by the
Agent, be at least five Business Days after the execution of this Assignment and
Acceptance).
5. Upon such acceptance and recording, from and after the Effective Date,
the Agent shall make all payments in respect of the Assigned Interest (including
payments of principal, interest, fees and other amounts) to the Assignee,
whether such amounts have accrued prior to the Effective Date or accrue
subsequent to the Effective Date. The Assignor and Assignee shall make all
appropriate adjustments in payments for periods prior to the Effective Date by
the Agent or with respect to the making of this assignment directly between
themselves.
6. From and after the Effective Date, (i) the Assignee shall be a party to
the Credit Agreement and, to the extent provided in this Assignment and
Acceptance, have the rights and obligations of a Lender thereunder, and (ii) the
Assignor shall, to the extent provided in this Assignment and Acceptance,
relinquish its rights and be released from its obligations under the Credit
Agreement.
EXHIBIT F
to Credit Agreement
Page 2
<PAGE>
7. THIS ASSIGNMENT AND ACCEPTANCE SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS.
IN WITNESS WHEREOF, the parties hereto have caused this Assignment
and Acceptance to be executed by their respective duly authorized officers on
Schedule I hereto.
EXHIBIT F
to Credit Agreement
Page 3
<PAGE>
SCHEDULE I TO ASSIGNMENT AND ACCEPTANCE
Legal Name of Assignor: ____________________________________________________
Legal Name of Assignee: ____________________________________________________
Effective Date of Assignment: __________________, 199___
Percentage Assigned of Each
Facility (to at least 8
Principal decimals) (Shown as a
Amount (or, percentage of aggregate
with respect original principal amount
to Letters [or, with respect to Letters
Assigned of Credit, face Credit, face amount]
Facilities Amount) Assigned of All Lenders)
---------- ---------------- ---------------
Loans: $______________ ______%
Letter of Credit
participation interests $______________ ______%
Total $______________
Accepted:
COMERICA BANK-TEXAS, as Agent ________________________________
as Assignor
By: _________________________ By: _________________________
Name: _______________________ Name: _______________________
Title: ______________________ Title: ______________________
EXHIBIT F
to Credit Agreement
Page 1
<PAGE>
EQUALNET HOLDING CORP., _____________________________
an Texas corporation as Assignee
By: _________________________ By: _________________________
Name: _______________________ Name: _______________________
Title: ______________________ Title: ______________________
EXHIBIT F
to Credit Agreement
Page 2
EXHIBIT 10.6
INTERCREDITOR AND SUBORDINATION AGREEMENT
This INTERCREDITOR AND SUBORDINATION AGREEMENT dated as of February 3,
1997 (this "AGREEMENT"), is among EQUALNET HOLDING CORP., a Texas corporation
("BORROWER"), each of the lenders parties hereto (individually, a "LENDER" and,
collectively, the "LENDERS"), COMERICA BANK -TEXAS, a Texas banking association,
as agent for the Lenders (in such capacity, together with its successors in such
capacity, the "AGENT"), and THE FURST GROUP, INC., a New Jersey corporation
("FURST").
R E C I T A L S:
WHEREAS, the Lenders and Borrower are parties to a $25,000,000 Loan
Facility Credit Agreement dated as of November 30, 1995 (as amended to date,
including the Fourth Amendment thereto dated as of even date herewith, the
"CREDIT AGREEMENT") pursuant to which, among other things, the Lenders have made
certain Loans to Borrower (the "BANK LOANS"); and
WHEREAS, terms defined in the Credit Agreement, and not otherwise defined
herein, are used herein with their meanings so defined; and
WHEREAS, the Loans and the other obligations of Borrower to the Lenders
under the Credit Agreement are secured by a first lien on substantially all of
Borrower's tangible and intangible real, personal or mixed Property now or
hereafter subject to the Security Documents, including all of the Collateral
described in the Credit Agreement (the "BANK LIENS"); and
WHEREAS, it is proposed that Borrower and the Current Guarantors enter
into a Note and Warrant Purchase Agreement of even date herewith (the "PURCHASE
AGREEMENT") with Furst pursuant to which Furst will purchase for an aggregate
purchase price of $3,000,000 certain notes (the "FURST NOTES") issued by
Borrower and the Current Guarantors, as co-makers, having an aggregate principal
amount of $3,000,000, bearing interest at 10% per annum, maturing December 31,
1998, and with detachable, transferable warrants ("WARRANTS") to purchase
1,500,000 shares of common stock of Borrower at an exercise price of $2.00 per
share attached thereto; and
WHEREAS, pursuant to the Purchase Agreement it is proposed that Borrower
grant to Furst a junior security interest in Borrower's Accounts and General
Intangibles, whether now owned or hereafter acquired by Borrower (the "JUNIOR
LIENS") to secure the Indebtedness of Borrower to Furst under the Purchase
Agreement and the Furst Notes (the "FURST INDEBTEDNESS"); and
WHEREAS, Section 8.1 of the Credit Agreement prohibits the Furst
Indebtedness unless it is subordinated to the prior payment in full of the
Obligations owed to the Lenders upon terms and conditions approved in writing by
the Agent and the Majority Lenders; and
WHEREAS, Section 8.2 of the Credit Agreement prohibits the creation of the
Junior Liens; and
-1-
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WHEREAS, the Lenders are willing to permit Borrower to issue the Furst
Notes and Warrants and to create the Junior Liens on the condition that Borrower
and Furst enter into this Agreement providing for, among other things:
(i) Subordination of the Furst Indebtedness and the Junior Liens to the
Senior Indebtedness (hereinafter defined) and the Bank Liens, respectively;
(ii) The possible repayment by Borrower of a portion or all of the Bank
Loans with funds provided by Furst;
(iii) The relationship between Furst and the Lenders in the event that
Furst does so provide funds to pay a portion of the Bank Loans and a requirement
that Furst continue making revolving loans to Borrower after the acquisition of
a portion of the Bank Loans on the terms set forth in the Purchase Agreement;
and
(iv) The respective collateral positions of the Lenders and Furst after
acquisition by Furst of a portion of the Bank Loans;
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and adequacy of which is hereby
acknowledged, the parties hereto hereby agree as follows:
1. CERTAIN DEFINITIONS: In addition to the terms defined in the Credit
Agreement and/or otherwise defined herein, the following terms shall have the
following meanings (all definitions that are defined or referred to in this
Agreement in the singular have the same meanings when used in the plural and
VICE VERSA):
"COMPANY" shall mean Borrower and each of its Subsidiaries.
"FURST" shall mean The Furst Group, Inc., a New Jersey corporation,
each of its Subsidiaries, if any, and any successor, assignee or transferee of
any of the Furst Indebtedness.
"JUNIOR SECURITIES" means any capital stock of Borrower (including
rights, warrants and options to acquire capital stock of Borrower) and
Indebtedness of Borrower that is fully subordinated in right of payment to the
Senior Indebtedness to the same extent as the Furst Indebtedness, does not
exceed the Furst Indebtedness and has no scheduled installment of principal due,
by redemption, sinking fund payment or otherwise, on or prior to the stated
maturity of the Furst Notes.
"LEC" shall mean any local exchange carrier providing billing
services on behalf of the Company through one or more local clearing houses.
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"SENIOR INDEBTEDNESS" shall mean all obligations of the Company to
pay the principal of and interest (including all interest accruing subsequent to
the commencement of any bankruptcy or similar proceeding, whether or not a claim
for post-petition interest is allowable as a claim in any such proceeding),
professional fees, expenses and other charges payable on or in connection with
any Obligations of the Company under the Credit Agreement, the Guaranties and
each of the other Loan Documents referred to in the Credit Agreement, whether
outstanding on the date of this Agreement or thereafter created, incurred,
assumed, guaranteed or in effect guaranteed by the Company.
"SPRINT" shall mean Sprint Corp., a Delaware corporation, and its
affiliates and their respective successors and assigns.
2. CONSENT TO THE PURCHASE AGREEMENT, FURST NOTES, WARRANTS AND JUNIOR
LIENS. The Agent and the Lenders: (i) consent to the Purchase Agreement, the
Furst Notes, the Warrants and the Junior Liens, subject to the terms and
conditions of this Agreement; and (ii) subject as aforesaid, acknowledge that
the existence of the Purchase Agreement, the Furst Notes, the Warrants and the
Junior Liens does not and will not constitute an Event of Default under the
Credit Agreement.
3. SUBORDINATION OF THE FURST NOTES AND JUNIOR LIENS.
(a) FURST INDEBTEDNESS AND JUNIOR LIEN SUBORDINATED TO SENIOR
INDEBTEDNESS. The Furst Indebtedness and Junior Liens will at all times, up to
(but not after, except as provided in (i) below) the consummation of the
Purchase Event and the related payment to the Lenders referred to in Section 4
below (such period, the "SUBORDINATION PERIOD"), whether before, after or during
the pendency of any proceeding under any state or federal bankruptcy,
reorganization, arrangement, insolvency, readjustment of debt, dissolution,
liquidation or receivership law ("BANKRUPTCY PROCEEDING"), be junior, subject
and subordinate to the Senior Indebtedness and the Bank Liens, regardless of the
order of incurrence, filing or creation thereof as herein provided.
(b) NO PAYMENT ON FURST INDEBTEDNESS DURING SUBORDINATION PERIOD.
(i) No payment may be made by the Company on account of the
principal of, premium, if any, or interest on the Furst Indebtedness or to
acquire any of the Furst Indebtedness for cash or property (other than in
Junior Securities, including by exercising the Warrants in exchange for
Furst Indebtedness in accordance with the terms and conditions of the
Purchase Agreement as in effect on the date hereof, but not otherwise) (i)
upon the maturity of any Senior Indebtedness of the Company by lapse of
time, acceleration (unless waived) or otherwise, unless and until all
principal of, premium, if any, and interest on such Senior Indebtedness
are first paid in full (or such payment is duly provided for), or (ii) in
the event of default in the payment of any principal of, premium, if any,
or interest on any Senior Indebtedness of the Company when it becomes due
and payable, whether at maturity or at a date fixed for prepayment or by
declaration or otherwise (a "PAYMENT DEFAULT"), unless and until such
Payment Default has been cured or waived or otherwise has ceased to exist.
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(ii) Upon (A) the happening of an event of default (other than
a Payment Default) that permits, or would permit with the passage of time
or the giving of notice, or both, the holders of Senior Indebtedness or
their representative the right to accelerate its maturity (a "NON-PAYMENT
DEFAULT"), and (B) written notice of such Non-Payment Default given to the
Company and Furst by the holders of Senior Indebtedness or their
representative (a "PAYMENT NOTICE"), then, unless and until such
Non-Payment Default has been cured or waived or otherwise has ceased to
exist, no payment (by set-off or otherwise) may be made by or on behalf of
the Company on account of the principal of, premium, if any, or interest
on the Furst Indebtedness, or to acquire or repurchase any of the Furst
Indebtedness for cash or property, in any such case other than payments
made with Junior Securities or by conversion of the Warrants as aforesaid.
Notwithstanding the foregoing, unless (A) the Senior Indebtedness in
respect of which such Non-Payment Default exists has been declared due and
payable in its entirety within 270 days after the Payment Notice is
delivered as set forth above (the "PAYMENT BLOCKAGE PERIOD"), and (ii)
such declaration has not been rescinded or waived, at the end of the
Payment Blockage Period, the Company shall be required to pay all sums not
paid to Furst during the Payment Blockage Period due to the foregoing
prohibitions and to resume all other payments as and when due on the Furst
Indebtedness. Not more than one Payment Notice may be given in any 365-day
period, irrespective of the number of defaults with respect to Senior
Indebtedness during such period.
(iii) In furtherance of the provisions of this Section 3, in
the event that, notwithstanding the foregoing provisions of this Section
3, any payment or distribution of assets of the Company (other than Junior
Securities or common stock of Borrower issued in exchange for the
Warrants) shall be received by Furst in respect of the Furst Indebtedness
at a time when such payment or distribution is prohibited by the
provisions of this Section 3, then such payment or distribution shall be
received and held in trust by Furst for the benefit of the holders of
Senior Indebtedness of the Company, and shall be paid or delivered by
Furst to the holders of Senior Indebtedness of the Company remaining
unpaid or unprovided for or their representative or representatives,
ratably according to the aggregate amounts remaining unpaid on account of
the Senior Indebtedness of the Company held or represented by each, for
application to the payment of all Senior Indebtedness of the Company in
full after giving effect to any concurrent payment and distribution to the
holders of such Senior Indebtedness.
(c) FURST INDEBTEDNESS SUBORDINATED TO PRIOR PAYMENT OF ALL SENIOR
INDEBTEDNESS ON DISSOLUTION, LIQUIDATION OR REORGANIZATION.
Upon any distribution of assets of the Company upon any dissolution,
winding up, total or partial liquidation or reorganization of the Company,
whether voluntary or involuntary, in bankruptcy, insolvency, receivership or a
similar proceeding or upon assignment for the benefit of creditors or any
marshaling of assets or liabilities:
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(i) the holders of all Senior Indebtedness of the Company
shall first be entitled to receive payments in full (or have such payment
duly provided for) before Furst is entitled to receive any payment on
account of the principal of, premium, if any, or interest on the Furst
Indebtedness (other than Junior Securities);
(ii) any payment or distribution of assets of the Company of
any kind or character, whether in cash, property or securities (other than
Junior Securities) to which Furst would be entitled (by set off or
otherwise), except for the provisions of this Section 3, shall be paid by
the liquidating trustee or agent or other Person making such payment or
distribution directly to the holders of Senior Indebtedness of the Company
or their representative to the extent necessary to make payment in full of
all such Senior Indebtedness remaining unpaid, after giving effect to any
concurrent payment or distribution to the holders of such Senior
Indebtedness; and
(iii) in the event that, notwithstanding the foregoing, any
payment or distribution of assets of the Company of any kind or character,
whether in cash, property or securities (other than Junior Securities),
shall be received by Furst on account of the principal of or interest on
the Furst Indebtedness before all Senior Indebtedness of the Company is
paid in full, such payment or distribution shall be received and held in
trust by Furst for the benefit of the holders of such Senior Indebtedness,
or their representative, ratably according to the respective amounts of
such Senior Indebtedness held or represented by each, to the extent
necessary to make payment as provided herein of all such Senior
Indebtedness remaining unpaid after giving effect to all concurrent
payments and distributions and all provisions therefor to or for the
holders of such Senior Indebtedness.
(d) FURST TO BE SUBROGATED TO RIGHTS OF HOLDERS OF SENIOR
INDEBTEDNESS.
Subject to the payment in full of all Senior Indebtedness of the
Company as provided herein, Furst shall be subrogated to the rights of the
holders of Senior Indebtedness to receive payments or distributions of assets of
the Company applicable to the Senior Indebtedness until all amounts owing on the
Furst Indebtedness shall be paid in full, and for the purpose of such
subrogation no such payments or distributions to the holders of Senior
Indebtedness by the Company, or by or on behalf of Furst by virtue of this
Section 3, which otherwise would have been made to Furst shall, as between the
Company and Furst, be deemed to be payment by the Company on account of Senior
Indebtedness, it being understood that the provisions of this Section 3 are and
are intended solely for the purpose of defining the relative rights of Furst, on
the one hand, and the holders of Senior Indebtedness, on the other hand.
If any payment or distribution to which Furst would otherwise have
been entitled but for the provisions of this Section 3 shall have been applied,
pursuant to the provisions of this Section 3, to the payment of amounts payable
under Senior Indebtedness of the Company, then Furst shall be entitled to
receive from the holders of such Senior Indebtedness any payments or
distributions
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received by such holders of Senior Indebtedness in excess of the amount
sufficient to pay all amounts payable under or in respect of such Senior
Indebtedness in full.
(e) OBLIGATIONS OF THE COMPANY UNCONDITIONAL.
Nothing contained in this Section 3 or elsewhere in this Agreement
is intended to or shall impair as between the Company and Furst, the obligation
of the Company, which is absolute and unconditional, to pay to Furst the
principal of, premium, if any, and interest on the Furst Indebtedness as and
when the same shall become due and payable in accordance with its terms, or is
intended to or shall affect the relative rights of Furst and creditors of the
Company other than the holders of the Senior Indebtedness, nor shall anything
herein or therein prevent Furst from exercising all remedies otherwise permitted
by applicable law upon default under the Furst Indebtedness, subject to the
rights, if any, under this Section 3, of the holders of Senior Indebtedness in
respect of cash, property or securities of the Company received upon the
exercise of any such remedy. Notwithstanding anything to the contrary in this
Section 3 or elsewhere in this Agreement, upon any distribution of assets of the
Company referred to in this Section 3, Furst shall be entitled to rely upon any
order or decree made by any court of competent jurisdiction in which such
dissolution, winding up, liquidation or reorganization proceedings are pending,
or a certificate of the liquidating trustee or agent or other Person making any
distribution to Furst for the purpose of ascertaining the Persons entitled to
participate in such distribution, the holders of the Senior Indebtedness and
other Indebtedness of the Company, the amount thereof or payable thereon, the
amount or amounts paid or distributed thereon and all other facts pertinent
thereto or to this Section 3 so long as such court has been apprised of the
provisions of, or the order, decree or certificate makes reference to, the
provisions of this Section 3.
(f) FURST ENTITLED TO ASSUME PAYMENTS NOT PROHIBITED IN ABSENCE OF
NOTICE.
Furst shall not at any time be charged with knowledge of the
existence of any facts which would prohibit the making of any payment to Furst
unless and until Furst shall have received, no later than one Business Day prior
to such payment, written notice thereof from the Company or from one or more
holders of Senior Indebtedness or from any representative thereof and, prior to
the receipt of any such written notice, Furst shall be entitled in all respects
conclusively to assume that no such fact exists.
(g) SUBORDINATION RIGHTS NOT IMPAIRED BY ACTS OR OMISSIONS OF THE
COMPANY OR HOLDERS OF SENIOR INDEBTEDNESS.
No right of any present or future holders of any Senior Indebtedness
to enforce subordination provisions contained in this Section 3 shall at any
time in any way be prejudiced or impaired by any act or failure to act on the
part of the Company or by any act or failure to act, in good faith, by any such
holder, or by any noncompliance by the Company with the terms of this Agreement,
regardless of any knowledge thereof which any such holder may have or be
otherwise charged with. The holders of Senior Indebtedness may extend, renew,
modify or amend the terms
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of the Senior Indebtedness or any security therefor and release, sell or
exchange such security and otherwise deal freely with the Company, all without
affecting the liabilities and obligations of Furst.
(h) SECTION 3 NOT TO PREVENT EVENTS OF DEFAULT.
The failure to make a payment on account of principal of, premium,
if any, or interest on the Furst Indebtedness by reason of any provision of this
Section 3 shall not be construed as preventing the occurrence of a default or an
event of default under the Furst Indebtedness or in any way prevent Furst from
exercising any right thereunder other than the right to receive payment on the
Furst Indebtedness.
(i) SUBORDINATION OF JUNIOR LIENS TO BANK LIENS. Furst does hereby
expressly subordinate and make second, junior and inferior any and all liens,
rights, powers, titles and interests of Furst under, pursuant to or by virtue of
the Junior Liens to all liens, rights, titles and interests of the Lenders
under, pursuant to or by virtue of the Bank Liens, and Furst agrees that all
liens, rights, titles and interests of the Lenders shall be unconditionally
first, prior and superior to any and all liens, rights, powers, titles and
interests of Furst under, pursuant to or by virtue of the Junior Liens
regardless of the order of filing or other form of perfection of the Bank Liens
and the Junior Liens. Furst further agrees that any and all liens, rights,
titles and interests of Furst under, pursuant to or by virtue of the Junior
Liens shall be and remain expressly subject and subordinate to any renewal,
extension, refinancing, consolidation, modification or supplement of the liens,
rights, titles and interests of the Bank Liens, as well as any and all increases
thereof. Notwithstanding the foregoing, from and after a Purchase Event
(hereinafter defined), Furst's Lien on the Sprint and LEC Receivables
(hereinafter defined), but no other Collateral other than the Sprint and LEC
Receivables, shall no longer be subordinate to the Bank Liens and from and after
the effectiveness of a Purchase Event, the Lenders shall no longer have a Lien
on or against the Sprint and LEC Receivables. From and after a Purchase Event,
Furst shall continue to have a second, junior and inferior Lien as provided
above on all of the Collateral other than the Sprint and LEC Receivables.
4. PURCHASE EVENT. Subject to any restrictions on the right of Furst so to
do set forth in the Purchase Agreement, Furst shall have the right at any time
after the date hereof and prior to the occurrence of a Bankruptcy Proceeding in
respect of Borrower or any of its Subsidiaries, upon 10 days prior written
notice to the Lenders and Borrower, to pre-pay on behalf of the Borrower
effective as of the last business day of the month (the "EFFECTIVE DATE") during
which such 10th day occurs a portion of the Bank Loans outstanding at such time
in an amount (the "PURCHASED PORTION") equal to 87.5% of the Eligible Accounts
of Borrower and its Subsidiaries arising with regard to services provided
through Sprint and/or billed through an LEC (a "PURCHASE EVENT") provided that:
(a) The amount of the Purchased Portion shall initially be based
upon the Borrowing Base Certificate delivered (or Borrowing Base determined by
the Agent in the absence of a current Borrowing Base Certificate) during the
month of the Effective Date, such amount to be adjusted (upwards or downwards
with an appropriate additional prepayment to be made by the Borrower - funded by
Furst - or refunded by the Lenders - and repaid by the Borrower to Furst)
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based upon the Borrowing Base as of the Effective Date as reported in the
Borrowing Base Certificate delivered (or Borrowing Base determined by the Agent)
with respect to the Borrowing Base as of the Effective Date in accordance with
Section 7.2 of the Credit Agreement;
(b) The Refinancing Note evidencing the pre-payment made by Furst on
behalf of the Borrower and the Furst Notes (collectively, the "FURST LOAN") will
be secured by a first lien on the Accounts and General Intangibles associated
with services provided by the Company through Sprint and/or billed through an
LEC (the "SPRINT AND LEC RECEIVABLES"), and by a Junior Lien on Borrower's other
Accounts and General Intangibles;
(c) The portion of the Bank Loans not prepaid by Furst will continue
to be secured by the Bank Lien on all of the Collateral other than the Sprint
and LEC Receivables;
(d) Each of Borrower, its Subsidiaries, Furst, the Agent and the
Lenders will execute and deliver any documents (including, without limitation,
changes to Dominion of Funds Loan Documents to transfer control over the
lockboxes and accounts used to collect the Sprint and LEC Receivables to Furst)
reasonably required to establish and/or confirm such order of priority of Liens
on Borrower's assets;
(e) The commitment of the Lenders to make Bank Loans will be reduced
by an amount equal to the Purchased Portion pursuant to an amendment to the
Credit Agreement in form and substance satisfactory to the Lenders in their
absolute discretion;
(f) Furst will be obligated to continue making revolving loans to
Borrower in respect of the Sprint and LEC Receivables pursuant to the Purchase
Agreement as in effect on the date hereof; and
(g) Upon consummation of the Purchase Event and payment on the
Effective Date of the purchase price to the Lenders equal to 100% of the
Purchased Portion and interest accrued thereon through the date of purchase
(subject to adjustment as provided in (a) above), the Subordination Period and
the subordination provisions of Section 3 hereof (other than subordination of
the Junior Liens to the Bank Liens in respect of all Collateral other than the
Sprint and LEC Receivables) shall terminate and no longer exist.
5. STANDSTILL PERIOD; PURCHASE OF REMAINDER OF THE BANK LOANS. For a
period of 45 days after the Purchase Event, neither Furst nor the Lenders will
declare a default under the Furst Loan or the Bank Loans, respectively, or cease
making revolving credit loans to Borrower in accordance with the Purchase
Agreement and the Credit Agreement, respectively, except for a Default or an
Event of Default under the respective loan documentation first arising after the
Purchase Event by reason of a payment default, a Bankruptcy Proceeding filed by
Borrower or any of its Subsidiaries, the violation of any negative covenant set
forth in Section 8 of the Credit Agreement or a violation of Section 7 of the
Credit Agreement other than a default in respect of Sections 7.3 or 7.9 of the
Credit Agreement. At any time prior to the expiration of such 45-day period,
Furst may acquire
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the Bank Loans and the rights of the Lenders under the Credit Agreement in
exchange for payment to the Banks in immediately available funds of the total
amount of the Obligations then outstanding, such transfer of Bank Loans to be
without recourse to the Lenders or the Agent and without representation or
warranty of any name or nature from the Lenders or the Agent to Furst. After
such 45-day period (or upon purchase by Furst as provided in the preceding
sentence), each of the Lenders and Furst (or Furst, in the event of such
purchase) will be free to exercise their remedies under the Loan Documents (in
the case of the Lenders) and the Furst Notes, Purchase Agreement and any other
documentation evidencing the Furst Loan (in the case of Furst) without
consulting with or being required to seek the consent of the other party.
6. MIGRATION. From and after a Purchase Event, Borrower and Furst agree
that they will take no affirmative action to cause or encourage any customer of
Borrower or its Subsidiaries that currently uses AT&T services provided and
billed through the Company to switch services from AT&T or take any affirmative
action to switch billing for such services through an LEC; PROVIDED, HOWEVER,
that Furst may continue to solicit customers for its services in the ordinary
course of Furst's business consistent with its usual and customary past business
practices.
7. NOTICE OF INTENT TO SELL THE BANK LOANS.
(a) The Agent will give Furst 10 days' advance notice of the Lenders
seeking actively to transfer all or any part of their interests in the Bank
Loans (other than to the other Lender) to a Person or Persons other than one of
the Lenders (and if a specific transferee has been identified and does not
object to such disclosure, shall advise Furst of the identity of such transferee
provided that Furst shall not communicate with any such transferee with respect
to such proposed transfer) and shall permit Furst to acquire all or such part of
the Bank Loans and the rights of the Lenders under the Credit Agreement at any
time within such 10-day period in exchange for payment to the Lenders in
immediately available funds of the total amount of the Obligations or such
portion thereof then outstanding, such transfer of Bank Loans to be without
recourse to the Lenders or the Agent and without representation or warranty of
any name or nature from the Lenders or the Agent to Furst; PROVIDED, that (i)
the Agent will represent to Furst in such notice that it has identified at least
one proposed transferee that has indicated an interest to acquire all or a part
of the Bank Loans and who the Agent believes in the exercise of its reasonable
commercial judgment is capable of acquiring all or such part of the Bank Loans;
(ii) for a period of 30 days from the date hereof the Agent will not give such
notice (and will not make any such transfer) with respect to, or to, a
transferee (a "RESTRICTED TRANSFEREE") which is NOT a bank, a savings and loan
association, an insurance company, an investment company or fund or another
financial institution; and (iii) if any such transfer is to be made through a
broker and the transferee is not identified by the broker, it will be assumed
that such transferee is a Restricted Transferee; and PROVIDED, FURTHER, HOWEVER,
that if within such 10-day period Furst: (i) notifies the Lenders that it
intends to acquire the Bank Loans but requires additional time to make
arrangements therefor; and (ii) pays to the Agent for the benefit of the Lenders
a nonrefundable deposit equal to 5% of the Lenders' commitment to make Bank
Loans then in effect, Furst shall have up to an additional 15 days from the date
of such notice and payment to complete the acquisition of the Bank Loans as
aforesaid. In the event that Furst fails to complete the
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acquisition within such 15-day period, the Lenders may retain such 5% deposit as
liquidated damages. If Furst fails to acquire the Bank Loans in response to such
notice of intent to transfer, then the Lenders shall have sixty days from the
date of such notice within which to complete a transfer of the Bank Loans;
PROVIDED, HOWEVER, that if within such 60-day period the Lenders identify a
transferee different than the transferee referred to in the Agent's notice
giving rise to such 60-day period, and such transferee is a Restricted
Transferee (or presumed so to be in the case of a brokered transaction with an
unidentified transferee), the Agent will be required to give Furst a new 10
days' advance notice and all of the provisions of the first sentence of this
Section 7(a) shall apply to a transfer to such Restricted Transferee, including,
without limitation, the right of Furst to extend such new 10-day period for up
to 15 additional days by paying to the Lenders a nonrefundable 5% deposit. If
such transfer is not completed within such 60-day period, the provisions of this
Section 7 shall apply to any subsequent transfer.
(b) In the event that the Lenders transfer all or any portion of their
interests in the Bank Loans and the Bank Liens in accordance with this Section 7
to Persons other than Furst, Furst and such Persons will be required as a
condition to such transfer to execute and deliver any documents reasonably
required to establish and/or confirm the order of priority of the Furst
Indebtedness and the Senior Indebtedness acquired by such Persons and the order
of priority of the Bank Liens and the Junior Liens as the same exists
immediately prior to such transfer and Furst's rights under this Section 7 shall
not apply to the Bank Loans or the portion thereof acquired by the transferee;
PROVIDED, HOWEVER, that Furst's rights under Section 4 hereof shall survive such
transfer.
8. NO OTHER DEFAULT. Borrower hereby warrants and represents to the Agent,
the Lenders and Furst that no Default or Event of Default has occurred and is
continuing which has not been disclosed in writing to the Agent, the Lenders and
Furst.
9. CONDITIONS. No part of this Agreement shall become effective until
Borrower and Furst, as appropriate, shall have delivered (or shall have caused
to be delivered) to the Agent each of the following, in Proper Form:
(a) the Fourth Amendment to the Credit Agreement;
(b) certificates of the Secretary or any Assistant Secretary of
Borrower, each of the Guarantors and Furst with respect to the charter documents
of such parties, as to the incumbencies and signatures of their officers and as
to actions taken to authorize the execution, delivery and performance of this
Agreement;
(c) certificates issued by the appropriate governmental authorities
from the States of Delaware, New Jersey and Texas as to the existence, good
standing and qualification to do business of Borrower, the Guarantors and Furst;
(d) a Borrowing Base Certificate and each document or agreement
required by the Forbearance Agreement dated as of January 31, 1997, among
Borrower and the Lenders;
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(e) opinions of counsel for each of Borrower and Furst with respect
to such matters as the Agent may reasonably require, including, in the case of
Furst's counsel, the matters represented by Furst in Section 12 hereof;
(f) the Lenders' restructuring fee in the amount of $25,000;
(g) evidence of the payment of any and all legal fees and expenses
incurred by the Agent and the Lenders in connection with this Agreement
(including, without limitation, the negotiation and preparation of this
Agreement and the related Loan Documents); and
(h) documentation establishing a deposit account into which the
proceeds of the Furst Notes and Warrants (and no other funds at any time) will
be deposited (and evidence of such deposit), which account and proceeds (but no
other accounts or funds of Borrower or any of its Subsidiaries) shall NOT be
subject to offset or setoff by the Agent or the Lenders or the creation of any
restriction on Borrower's access thereto.
10. EXPENSES; INDEMNIFICATION. Borrower will pay all costs and expenses
and reimburse the Agent and the 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, restructuring or enforcement of this Agreement.
11. LIEN CONTINUATION. The Liens are hereby ratified and confirmed as
securing and continuing to secure the payment of the Obligations existing on the
date hereof as if they 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. 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.
12. FURST'S REPRESENTATIONS AND WARRANTIES. Furst represents and warrants
to the Agent and the Lenders that:
(a) Furst is a corporation duly organized, validly existing and in
good standing under the laws of the State of New Jersey;
(b) Furst has the corporate power and authority to own its
properties and assets and to carry out its business as now being conducted and
is qualified to do business and in good standing in each state where the nature
of its assets or business requires it to be so qualified;
(c) Furst has the corporate power and authority to execute and
perform this Agreement in accordance with its terms, and to do all other things
required of it hereunder;
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(d) the execution, delivery and performance of this Agreement, (i)
have been duly authorized by all requisite corporate action by Furst, (ii) do
not require registration with or consent or approval of, or other action by, any
federal, state or other governmental authority or regulatory body, or, if such
registration, consent or approval is required, the same has been obtained and
disclosed in writing to the Agent or will be completed or obtained concurrently
with the execution and delivery of this Agreement, (iii) will not violate any
provision of law, any order of any court or other agency of government, the
organization documents of Furst, any provision of any indenture, agreement or
other instrument to which Furst is a party, or by which it or any of its
properties or assets are bound, (iv) will not be in conflict with, result in a
breach of or constitute (with or without notice or passage of time) a default
under any such indenture, agreement or other instrument, and (v) will not result
in the creation or imposition of any lien, charge or encumbrance of any nature
whatsoever upon any of the properties or assets of any Person except as
contemplated hereby;
(e) this Agreement is the valid and binding obligation of Furst,
enforceable in accordance with its terms except for bankruptcy laws and
equitable principles affecting the enforcement of creditors' rights generally.
(f) No part of the Furst Indebtedness or any instrument evidencing
or securing the same has been heretofore transferred or assigned, and Furst will
not transfer or assign any part of the Furst Indebtedness nor any instrument
evidencing the same while the Obligations remain unpaid; provided, however,
Furst may transfer its interest in the Furst Notes, the Refinancing Notes and/or
the Warrants to any of its Affiliates; provided, further, however, that any such
transfer will not relieve Furst from any of its obligations to make revolving
loans to Borrower after a Purchase Event as required by the Purchase Agreement
as in effect on the date hereof. Any instrument evidencing the Furst
Indebtedness will contain provisions referring specifically to this Agreement.
13. MISCELLANEOUS.
(a) In the event of a breach by any party hereto of any of the
provision of this Agreement, or in the event any representation or warranty
contained herein or furnished to the Lenders by any party hereto shall prove to
have been false when made, the Lenders shall have all rights provided to it
under law or equity, including without limitation the right to sue the breaching
party or parties to recover damages suffered by the Lenders as a result of such
breach, and the right to obtain injunctive relief.
(b) Furst and Borrower shall give, execute and deliver any notice,
statement, instrument, document, agreement or other papers, and shall permit the
Lenders, upon request, to make any notation or endorsement upon any promissory
note or other instrument or documents evidencing or securing the Furst
Indebtedness, that may be necessary or desirable, or that the Agent or the
Lenders may reasonably request, in order to create, preserve or validate the
rights of the Agent or the Lenders hereunder, to enable the Agent or the Lenders
to exercise or enforce its rights hereunder, or otherwise to effect the purposes
of this Agreement.
-12-
<PAGE>
(c) This Agreement may be modified or amended only by a written
consent signed by each party hereto except that any modification or amendment to
Sections 3, 4, 5 or 7 hereof shall not require the consent of Borrower. The
provisions of the Purchase Agreement obligating Furst to continue making
revolving loans to Borrower may not be amended, altered, waived or otherwise
modified without the prior written consent of the Lenders; PROVIDED, HOWEVER,
that in the event that the Lenders and Borrower amend the Credit Agreement after
the date hereof in any manner that affects the obligations of the Lenders to
make Loans to Borrower, Furst and Borrower may amend such provisions of the
Purchase Agreement in the same manner and proportionally to the same extent
(e.g. if the Lenders reduce their advance rate by 20%, Furst may reduce its
advance rate by 20%).
(d) Furst and Borrower agree that, if at any time all or any part of
any payment previously applied by the Agent or the Lenders to the Obligations is
or must be returned by the Agent or the Lenders - or recovered from the Agent or
the Lenders - for any reason (including the order of any bankruptcy court), this
Agreement shall automatically be reinstated to the same effect, as if the prior
application had not been made, and, in addition, Borrower hereby agrees to
indemnify the Agent and the Lenders against, and to save and hold the Agent and
the Lenders harmless from any required return by the Agent or the Lenders - or
recovery from the Agent or the Lenders - of any such payments because of its
being deemed preferential under applicable bankruptcy, receivership or
insolvency laws, or for any other reason.
(e) Furst acknowledges that it has received a copy and is familiar
with the terms of and conditions of the Credit Agreement and the other Loan
Documents.
(f) Any notice, request or other communication required or permitted
to be given hereunder shall be given in writing by delivery against receipt for
it, by depositing it with an overnight delivery service or by depositing it in a
receptacle maintained by the United States Postal Service, postage prepaid,
registered or certified mail, return receipt requested, addressed to the
respective parties at the following addresses (and if so given, shall be deemed
given when mailed:
If to Furst: The Furst Group, Inc.
459 Oakshade Road
Shamong, New Jersey 08088
Attention: Jeffrey L. Bockol
with a copy to: Morgan, Lewis & Bockius, LLP
2000 One Logan Square
Philadelphia, Pennsylvania 19103
Attention: Peter Sartorius
-13-
<PAGE>
If to Borrower: EqualNet Holding Corp.
1250 Wood Branch Park Drive
Houston, Texas 77079-1212
Attention: Michael Hlinak
with a copy to: Fulbright & Jaworski L.L.P.
1301 McKinney, Suite 5100
Houston, Texas 77010
Attention: Joshua P. Agrons
If to Agent or the Lenders: Comerica Bank - Texas
1508 W. Mockingbird Lane
Dallas, Texas 75265-0282
Attention: Joseph W. Sullivan
with a copy to: Munsch Hardt Kopf Harr & Dinan, P.C.
4000 Fountain Place
1445 Ross Avenue
Dallas, Texas 75202
Attention: Robert P. Nash
Borrower's address for notice may be changed at any time and from time to time,
but only after thirty days' advance written notice to the other parties and
shall be the most recent such address furnished in writing by Borrower to the
other parties. Furst and the Agent and the Lenders' respective addresses for
notice may be changed at any time and from time to time, but only after ten
days' advance written notice to Borrower and the other creditor and each such
party's address for notice shall be the most recent such address furnished in
writing by such party to Borrower and the other creditor. Actual notice, however
and from whomever given or received, shall always be effective when received.
(g) If any provision of this Agreement is held to be illegal,
invalid or unenforceable under present or future laws, the legality, validity
and enforceability of the remaining provisions of this Agreement shall not be
affected thereby, and this Agreement shall be liberally construed so as to carry
out the intent of the parties to it.
(h) This Agreement (i) shall be binding upon the parties hereto and
their respective successors and assigns; and (ii) may be executed in several
counterparts, and by the parties hereto on separate counterparts and each
counterpart when so executed and delivered shall constitute an original
Agreement, and all such separate counterparts shall constitute but one and the
same Agreement.
(i) This Agreement is performable in Dallas County, Texas, which
shall be a proper place of venue for suit on or in respect of this Agreement.
Furst and Borrower each
-14-
<PAGE>
irrevocably agrees that any legal proceeding in respect of this Agreement shall
be brought in the district courts of Dallas County, Texas or the United States
District Court for the Northern District of Texas, Dallas Division
(collectively, the "SPECIFIED COURTS"). Furst and Borrower each hereby
irrevocably submits to the nonexclusive jurisdiction of the state and federal
courts of the State of Texas. Furst and Borrower each hereby irrevocably 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 or relating to this Agreement brought in any Specified Court, and hereby
further irrevocably waives any claims that any such suit, action or proceeding
brought in any such court has been brought in an inconvenient forum. Furst and
Borrower each further irrevocably consents to the service of process out of any
of the Specified Courts in any such suit, action or proceeding by the mailing of
copies thereof by certified mail, return receipt requested, postage prepaid, to
Furst or Borrower, as the case may be, at its address as provided in this
Agreement or as otherwise provided by Texas law. Nothing herein shall affect the
right of the Agent or the Lenders to commence legal proceedings or otherwise
proceed against Furst or Borrower, as the case may be, in any jurisdiction or to
serve process in any manner permitted by applicable law. Furst and Borrower each
agree that a final judgment in any such action or proceeding shall be conclusive
and may be enforced in other jurisdictions by suit on the judgment or in any
other manner provided by law. THIS AGREEMENT 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.
14. RELEASE. EACH OF BORROWER AND GUARANTORS, BY THEIR JOINDER HEREIN,
HEREBY RELEASES, DISCHARGES AND ACQUITS FOREVER THE AGENT AND THE LENDERS AND
THEIR RESPECTIVE 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 AGREEMENT CONSTITUTES A WRITTEN 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.
-15-
<PAGE>
EXECUTED as of the date first above written.
BORROWER:
EQUALNET HOLDING CORP.,
a Texas corporation
By: /s/ MICHAEL L. HLINAK
Name: Michael L. Hlinak
Title: COO
AGENT AND LENDER:
COMERICA BANK - TEXAS,
a Texas banking corporation
By: /s/ JOSEPH W. SULLIVAN
Name: Joseph W. Sullivan
Title: Senior Vice President
LENDER:
WELLS FARGO (TEXAS), N.A.,
a Texas banking corporation
By: /s/ ROGER FRUENDT
Name: Roger Fruendt
Title: Vice President
FURST:
THE FURST GROUP, INC.,
a New Jersey corporation
By: /s/ JEFFREY L. BOCKOL
Name: Jeffrey L. Bockol
Title: Executive Vice President
-16-
<PAGE>
GUARANTORS' CONSENTS
Guarantors hereby join in this Agreement to evidence Guarantors' consent to
execution by Borrower and the Agent and the Lenders of this Agreement, to
confirm that the Guaranties apply and shall continue to apply to the Credit
Agreement, and the other Loan Documents and to acknowledge that without such
consent and confirmation, the Agent and the Lenders would not execute this
Agreement.
EXECUTED effective as of the date first set forth above.
EQUALNET CORPORATION,
a Delaware corporation
By: /s/ ZANE RUSSELL
Name: Zane Russell
Title: CEO
TELESOURCE, INC.,
a Texas corporation
By: /s/ MARK VAN EMAN
Name: Mark Van Eman
Title: President
EQUALNET WHOLESALE SERVICES, INC.
By: /s/ ZANE RUSSELL
Name: Zane Russell
Title: CEO
-17-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF EQUALNET HOLDING CORP. AT MARCH
31, 1997 AND FOR THE NINE MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 1667568
<SECURITIES> 0
<RECEIVABLES> 10546077
<ALLOWANCES> 1439825
<INVENTORY> 0
<CURRENT-ASSETS> 15070593
<PP&E> 5643185
<DEPRECIATION> 3281204
<TOTAL-ASSETS> 24379875
<CURRENT-LIABILITIES> 18695607
<BONDS> 0
0
0
<COMMON> 61738
<OTHER-SE> 2558816
<TOTAL-LIABILITY-AND-EQUITY> 24379875
<SALES> 36067019
<TOTAL-REVENUES> 36067019
<CGS> 27777251
<TOTAL-COSTS> 27777251
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1448033
<INTEREST-EXPENSE> 719010
<INCOME-PRETAX> (11451795)
<INCOME-TAX> (802,845)
<INCOME-CONTINUING> (10648950)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10648950)
<EPS-PRIMARY> (1.75)
<EPS-DILUTED> (1.75)
</TABLE>
