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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997 COMMISSION FILE NUMBER 0-025842
EQUALNET HOLDING CORP.
A TEXAS IRS EMPLOYER
CORPORATION NO. 76-0457803
1250 WOOD BRANCH PARK DRIVE
HOUSTON, TEXAS 77079
Telephone Number 281/529-4600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the voting stock (common stock) held by non-affiliates
of registrant as of September 24, 1997 $9,997,000
Number of shares of registrant's common stock outstanding as of September 24,
1997 6,152,000
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of registrant's proxy statement relating to registrant's 1997 annual
meeting of shareholders have been incorporated by reference into Part III
hereof.
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ITEM PAGE
TABLE OF CONTENTS
PART 1
1. BUSINESS...........................................................X
2. PROPERTIES.........................................................X
3. LEGAL PROCEEDINGS..................................................X
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................X
PART II
5. MARKET FOR THE REGISTRANTS'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS .........................................................X
6. SELECTED FINANCIAL DATA............................................X
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..............................X
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................X
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE...........................X
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ................X
11. EXECUTIVE COMPENSATION ............................................X
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT............................................X
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ....................X
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K..........................................X
ALL DEFINED TERMS UNDER RULE 4-10(A) OR REGULATION S-X SHALL HAVE THEIR
STATUTORILY-PRESCRIBED MEANINGS WHEN USED IN THIS REPORT.
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SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended (
the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). All statements other than statements of
historical facts included in this Annual Report on Form 10-K, including without
limitation , statements regarding the Company's financial position, business
strategy, budgets and plans and objectives of management for future operations,
are forward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to have been correct.
Important factors that could cause actual results to differ materially from the
Company's expectations ("Cautionary Statements") are disclosed under "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Cautionary Statements" and elsewhere in this Annual Report on Form
10-K, including, without limitation, in conjunction with the forward-looking
statements in this Annual Report on Form 10-K. All subsequent written and oral
forward-looking statements attributable to the Company, or persons acting on
it's behalf, are expressly qualified in their entirety by the Cautionary
Statements.
PART I
ITEM 1. BUSINESS
GENERAL
EqualNet Holding Corp. ("EqualNet" or the "Company") is a long-distance
telephone company that provides services to approximately 72,000 customers
nationwide. The Company currently utilizes AT&T Corp. ("AT&T") and Sprint
Communications Company, L.P. ("Sprint"), through its contract with The Furst
Group, Inc. ("Furst") a privately-held reseller of long-distance and
telecommunications services, to provide transmission of its customers' traffic.
Sales related to services provided utilizing the AT&T and Sprint networks
accounted for approximately 75% and 14%, respectively, of the Company's revenues
for the year ended June 30, 1997.
EqualNet markets its services primarily to small business customers with
monthly long-distance bills of less than $l,000, and for the year ended June 30,
1997, the monthly long-distance bill of the Company's average customer was
approximately $41. EqualNet is one of the several hundred companies that
comprise the third tier of the long distance market. See "-- Industry Overview
and Competition". The Company uses independent marketing agents and an internal
sales force in selling its services. The Company primarily uses independent
marketing agents to sell the Company's services through telemarketing and direct
sales efforts. Revenues derived from EqualNet's customers introduced to the
Company by independent marketing agents constituted approximately 84% of the
Company's total revenue for the year ended June 30, 1997. Revenues attributable
to EqualNet's customers introduced through the efforts of one independent
marketing agent accounted for 40%, 28% and 23% of the Company's total revenues
for the fiscal years ended June 30, 1995, 1996 and 1997, respectively. The
independent marketing agents receive residual commissions based on billings less
a portion, typically 50%, of bad debt expense attributable to delinquent
accounts.
EqualNet's revenues declined from a peak of $78.4 million in fiscal year
1996 to $46.6 million for the fiscal year ended June 30, 1997. Pre-tax income
(loss) for the fiscal years ended June 30, 1995, 1996 and 1997 was $2.9 million,
($11.1) million and ($12.6) million, respectively. Pro forma net income for the
fiscal year ended June 30, 1995 was $1.8 million, while fiscal years 1996 and
1997 resulted in a net loss of $8.4 million and $15.0 million. EqualNet has
generated its sales volume
<PAGE>
primarily through its network of independent marketing agents actively selling
the Company's products and through the acquisition of customer accounts of other
resellers. The Company's network of independent marketing agents has
historically included more than 100 agents; however, the majority of the
Company's sales have been generated by a smaller number of large agents. The
Company currently receives substantially all of its new orders from four agents.
The Company believes that partnering with a small number of large established
marketing agents will result in a long-term relationship with its agents, and
the orders generated by those agents will lead to a higher quality, more stable
customer base.
INDUSTRY OVERVIEW AND COMPETITION
Since the break-up of AT&T in 1984, annual revenues for the domestic
long-distance market have increased significantly. According to industry data,
AT&T, together with MCI Telecommunications Corporation ("MCI"), Sprint and
WorldCom, Inc. ("WorldCom") constitute what generally is regarded as the first
tier in the long distance market. Large regional long distance companies, some
with national capabilities, such as Frontier Corporation ("Frontier"), Cable &
Wireless Communications, Inc. and LCI International, constitute the second tier
of the industry and, cumulatively, are believed to account for less than 5% of
the market. The remainder of the market share is held by several hundred smaller
companies, known as third-tier carriers.
Many first- and second-tier companies, most notably AT&T, Sprint, WorldCom
(through its WilTel subsidiary) and Frontier (through its Allnet subsidiary),
actively have been providing long-distance products for resale for a number of
years to capture incremental traffic volume. Since 1994, MCI has also adopted an
aggressive stance in providing product for resale.
Long-distance companies can be categorized in different ways. One
distinction is between facilities-based companies and non-facilities-based
companies, or resellers. Facilities-based companies own transmission facilities,
such as fiber optic cable or digital microwave equipment. Profitability for
facilities-based carriers is dependent not only upon their ability to generate
revenues but also upon their ability to manage complex networking and
transmission costs. Substantially all of the first- and second-tier long
distance companies are facilities-based carriers and generally offer service
nationwide. Most facilities-based carriers in the third tier of the market
generally offer their service only in a limited geographic area. Some
facilities-based carriers contract with other facilities-based carriers to
provide transmission where they have geographic gaps in their facilities.
Similarly, non-facilities-based companies, such as the Company, contract with
facilities-based carriers to provide transmission of their customers'
long-distance traffic. Pricing in such contracts is typically either on a fixed
rate lease basis or a call volume basis. Profitability for non-facilities based
carriers is based primarily on their ability to generate and retain sufficient
revenue volume to negotiate attractive pricing with one or more facilities-based
carriers.
A second distinction among long-distance companies is that of switch-based
versus switchless carriers. Switched carriers have one or more switches,
computers that direct telecommunications traffic in accordance with programmed
instructions. All of the facilities-based carriers are switched carriers, as are
many non-facilities-based companies. Switchless carriers depend on one or more
facilities-based carriers to provide both transmission capacity and switch
facilities. In addition, switchless resellers enjoy the benefit of offering
their service on a nationwide basis, assuming that their underlying carrier has
a nationwide network. EqualNet currently is a switchless reseller.
Competition in the long distance industry is based upon pricing, customer
service, network quality and value-added services. The success of a
non-facilities-based carrier such as the Company depends almost entirely upon
the amount of traffic that it can commit to the underlying carrier - the larger
the commitment, the lower the cost of service. Subject to contract restrictions
and customer brand
<PAGE>
loyalty, resellers like EqualNet may competitively bid their traffic among other
national long-distance carriers to gain improvement in the cost of service. The
non-facilities-based carrier devotes its resources entirely to marketing,
operations and customer service, deferring the costs of network maintenance and
management to the underlying carrier.
The relationship between resellers and the major underlying carriers is
predicated primarily upon the pricing strategies of the first-tier companies,
which has resulted historically in higher rates to the small business customer.
Small business customers typically are not able to make the volume commitments
necessary to negotiate reduced rates under individualized contracts. The higher
rates result from the higher cost of credit, collection, billing and customer
service per revenue dollar associated with small billing level long distance
customers. By committing to large volumes of traffic, the reseller is
guaranteeing traffic to the underlying carrier. The underlying carrier is also
relieved of the administrative burden of qualifying and servicing large numbers
of relatively small accounts. The successful reseller efficiently markets the
long-distance product, processes orders, verifies credit and provides customer
service to these large numbers of small accounts.
The Company believes that the rapid evolution of the communications
industry presents an opportunity for consolidation of third-tier companies in
general, and resellers and smaller, facilities based carriers, in particular.
Many of these companies are undercapitalized and may have difficulty providing
their services profitably. The level of competition between carriers based upon
pricing of services has continued to increase, with first tier carriers becoming
extremely aggressive in pricing their products and services. A consolidation of
resellers would decrease the number of companies with whom carriers that provide
resell products, primarily first tier carriers, contract leaving only quality,
well capitalized resellers with whom to deal. The Company believes there are
opportunities for resellers to acquire or participate in either the acquisition
of network facilities of smaller carriers, or to consolidate with other
resellers. These consolidations could, in the Company's opinion, achieve
additional economies in both pricing with underlying carriers and in areas where
customers' long distance calls originate on the acquired network facilities, as
well as in operating costs such as customer service and other back office
support functions. Such economies are not certain and cannot be adequately
predicted. The Company currently is exploring the possibility of either
consolidating with or otherwise acquiring the customer accounts of various
resellers or participating in the acquisition of the network facilities of a
facilities based carrier.
SERVICES AND OPERATIONS
NETBASE CUSTOMER MANAGEMENT SYSTEM
The NetBase system ("NetBase") is the Company's proprietary customer
management and information system. Operations, customer service and marketing
efforts are managed by the system. This system facilitates processing of orders
and information exchange between the Company and its independent marketing
agents. The NetBase system was developed by the Company with outside programming
support.
The responsibilities of the operations department include billing,
"provisioning" or processing orders with the underlying carriers and independent
marketing agent service support. The operations department receives orders from
independent marketing agents and from the sales department of the Company and
then processes the orders for entry into the Company's database. Provisioning of
customer orders also is performed electronically, with rejected or invalid
orders evaluated as to cause, and those rejected are corrected and resubmitted.
Operations personnel interface with the underlying carriers and
<PAGE>
billing companies for processing and procedural matters. Designated operations
personnel also provide all service support for the Company's independent
marketing agents.
CUSTOMER SERVICE
The Company's customer service philosophy is to develop long-term customer
relationships by providing accurate billing information and efficiently
processing customer requests in a timely and accurate manner. In order to
enhance EqualNet's abilities to provide good customer service, the Company
implemented two major changes during fiscal 1997. First, the Company reorganized
its operations and created specialized groups to handle customer requests by the
type of request. The Company believes that this method of processing allows the
employees who are best qualified for interfacing with customers to devote more
of their time in direct contact with customers. Additionally during fiscal 1997,
the Company implemented an internal billing system. The Company believes that
the new billing system will allow for greater flexibility, better accuracy and
improved timeliness in invoicing its customers which it believes will create
higher customer satisfaction.
<PAGE>
PRODUCTS AND SUPPLIERS
AT&T
EqualNet's primary provider of underlying long-distance services is AT&T
for both outbound and inbound services. Under this contract, the Company has
committed to resell a minimum amount in AT&T long distance each year. If
EqualNet does not meet this commitment level in a given year, it has agreed to
pay AT&T penalties that are based on the difference between the committed amount
and the actual amount of the long-distance service the Company sells. The
Company entered into a new agreement with AT&T for which the first cumulative
minimum semi-annual revenue commitment ("MSARC") period ends October 31, 1997.
At June 30, 1997, the Company had not yet reached the completion of the term of
the first MSARC; however, the Company was $477,000 below the cumulative pro rata
monthly commitment. Should the Company continue at similar revenue levels, it
would be in a shortfall at the end of the first MSARC period. Historically, the
Company has been able to negotiate a settlement with the carrier which has
resulted in no penalty being incurred by the Company. No assurances can be made
that the Company will be able to reach a favorable settlement with the carrier
should negotiations cease and the Company fail to meet its current commitment.
If the existing contract with AT&T is terminated, either by the Company or
by AT&T for non-payment, prior to the expiration of the full term without
execution of a new contract, the Company will be liable for the total amount of
the unsatisfied MSARC for the period in which the discontinuance occurs and for
100% of the MSARCs for each semi-annual period remaining in the contract term.
In addition, if the Company does not meet the first MSARC, it will be required
to refund $398,375 in credits previously issued to the Company by AT&T. See Note
6 of the Notes to Consolidated Financial Statements. The contract expires in
April 2000. The Company's current AT&T contract allows the Company to sell both
Distributed Network Service ("DNS"), AT&T's only long-distance product designed
specifically for resale, and Software Defined Network Service ("SDN"), an AT&T
product designed for larger business customers. The combined DNS and SDN
commitment levels increase over the term of the contract.
SPRINT
The Company began purchasing long-distance services effective November 1,
1996, under Furst's contract with Sprint. This long-distance product was
negotiated at a rate less than that of the Company's AT&T contract rate and is
used as EqualNet's private brand economy-priced product. This long distance
product is available to EqualNet's marketing network as an alternative to the
AT&T DNS product. The Company believes that this long-distance product is
complementary to rather than competitive with the DNS and SDN products that it
currently markets. In addition, this product provides a customer with one
invoice for both inbound 800 calls and outbound calls, a feature that is not
currently available with the Company's DNS and SDN products. The Company's
current agreement with Furst does not have a term and may be canceled by either
party at any time. No assurances can be made that the Company will continue to
be able to utilize Sprint through Furst, which could result in an increase in
the cost Sprint charges the Company to provide services. In the event that the
Company is unable to continue to utilize Furst's contract with Sprint or
negotiate a new agreement with Sprint, the Company has the ability to transfer
these customers to its existing AT&T contract or to another carrier and,
accordingly, would not expect a termination of the agreement with Furst to have
a material adverse affect on the Company's results of operations.
<PAGE>
DEBIT CARDS
In November 1996, the Company acquired substantially all of the assets of
Creative Communications International, Inc. ("Creative"), 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
$379,000. The warrant allows the holder to purchase an aggregate of 100,000
shares of Common Stock at a price of $7.50 per share and the warrant expires on
November 1, 2001. Creative offers a variety of point-of-purchase debit cards in
addition to collector's edition debit cards. The Company believes the debit
cards are complementary to its existing calling card and long-distance services
and can be introduced to existing customers as well as utilized as a platform to
reach new customers.
CUSTOMERS AND MARKETING
CUSTOMERS
The Company markets its long-distance services primarily to small business
customers with monthly long-distance bills of less than $l,000. Currently, the
monthly long-distance telephone bills for EqualNet's customers range from under
$5 to $10,000. For the year ended June 30, 1997, the monthly long-distance phone
bill for an average EqualNet customer was approximately $41. The Company does
not have contracts with the majority of its customers, but receives
authorization from new customers in connection with their order for service.
MARKETING
The Company historically has relied on its network of independent
marketing agents to market its long-distance products. Independent marketing
agents are companies that market the Company's long distance products directly
to business customers as authorized agents or sales agents of EqualNet and
receive a continuing commission based on the monthly usage of the customer
accounts that they have brought to the Company. The Company provides its
independent marketing agents with promotional materials and products and offers
training programs by Company employees. The Company solicits independent
marketing agents primarily through telecommunications trade periodicals and
trade shows.
The Company has used in excess of 100 marketing agents to generate the
existing customer base. The Company currently is utilizing approximately four
agents which generate a substantial majority of the orders currently being
received. The Company believes that by reducing the number of active agents and
increasing the orders received from each agent, greater control of the quality
of the customer acquired can be achieved.
In June 1994, the Company established a direct sales force in its Houston
office, currently consisting of three sales representatives. The direct sales
representatives meet in person with prospective customers. The Company
advertises on a limited basis directly to end users of long-distance services in
local markets. The Company also distributes video and printed marketing
materials to prospective users on a selected basis. EqualNet is also evaluating
the development of internal telemarketing operations in addition to considering
opportunities with established independent telemarketing firms.
<PAGE>
TRADEMARKS AND PROPRIETARY RIGHTS
The Company has registered the trademark EQUAL NET(R) with the United
States Patent and trademark Office and has amended that registration for the
trademark EQUALNET(R). The Company has also registered the trademarks NETBASE
PLUS(R), EQUALNOTES(R), TELECONOMY(R), EDGE(R), and EQUALTIMES(R), and
has applications pending to register the trademarks for CREATIVE
COMMUNICATIONS(TM), C2(TM), CALLCASH(TM) AND CALLCASH INTERNATIONAL(TM) in
connection with the Company's debit card offerings, in addition to various
designs of its registered and pending trademarks, as well as its housemark and
logo.
REGULATION
As a non-facilities based provider of long distance telecommunications
services, the Company is subject to many of the same regulatory requirements as
facilities-based interexchange carriers. EqualNet is regulated at the federal
level by the Federal Communications Commission ("FCC") and is required to file
tariffs containing descriptions of its products, rates, terms and conditions of
service. In addition, the Company is required to maintain a certificate, issued
by the FCC, in connection with its international services. The Company updates
its tariffs to reflect any modifications to its existing rates or terms and
conditions of service, as well as to reflect any new products or services
developed for resale by the Company.
The intrastate long distance telecommunications operations of EqualNet are
also subject to various state laws and regulations, including prior
certification, notification or registration requirements. EqualNet generally
must obtain and maintain certificates of public convenience and necessity from
regulatory authorities in most states in which it offers service. In most of
these jurisdictions, the Company must also file and obtain prior regulatory
approval of tariffs for intrastate service. EqualNet can provide intrastate
originating service to customers in the contiguous 48 states, Hawaii, and the
District of Columbia. The Company must update and amend its tariffs when rates
are adjusted or new products or services are added to those already offered by
the Company. See Item 3, "Legal Proceedings".
In February 1996, President Clinton signed Public law 104-104, commonly
referred to as the Telecommunications Act of 1996 (the "Act"). The statutory
changes effected by the Act are generally intended to increase competition and
provide consumers with more choices as to telecommunications providers and
services. The Act is the most comprehensive revision of communications law and
policy in the United States in more than 60 years.
The Act is generally designed, among other things, to stimulate the
development of competition in local exchange markets by permitting the Regional
Bell Operating Companies ("RBOCs") to enter the long distance arena only after
they comply with certain statutory requirements designed to eliminate their
monopolies over local exchange service. The RBOCs are permitted to offer long
distance services immediately in geographical areas other than the areas in
which they currently provide local exchange services. Before providing
interexchange services that originate in any state in its region, an RBOCs must
petition the FCC for permission to provide such services. The FCC must review
such request within 90 days, but cannot approve such request unless (i) such
approval is consistent with the public interest, convenience and necessity, (ii)
the FCC has consulted with the Department of Justice and given such Department's
views substantial weight, (iii) the RBOC has implemented the Telecommunications
Act's checklist of conditions in the regions where permission to provide
interexchange services is sought, and (iv) either the RBOC has entered into a
binding interconnection agreement approved by the state in question with one or
more competing providers of local telephone service to residential and
commercial subscribers (which services are offered either exclusively or
predominately over such
<PAGE>
competitor's own facilities), or the RBOC has received no such requests for
interconnection within the statutorily prescribed time period.
Entry by long distance companies into the markets for local service is
governed by the public utility regulatory authorities of each state in which
such service is to be provided. While state public utility commissions are
responsible for regulating such entry, the Act prohibits state regulations that
could bar such entry.
The Act requires the FCC to promulgate regulations to implement the
requirements of the Act. Since the passage of the Act, the FCC has issued
rulings governing three major areas: (i) interconnection, (ii) universal service
and (iii) access charge reform. In August, 1996, the FCC adopted its rules
governing interconnection. In November, 1996, the Federal-State Joint Board
released its recommended universal service plan. In December, 1996, the FCC
released its Notice of Proposed Rule Making to reform access charge policies and
practices to comport with a competitive or potentially competitive local access
service market. In May 1997, the FCC released its report for proposed universal
service reform to become effective in 1998. This order would expand the
collection of universal service funding from only facilities based interexchange
carriers to all telecommunications carriers, based upon retail revenue. The FCC
has yet to determine the size of the universal service fund and the amount of
the contribution that will be assessed against each telecommunications carrier.
It is not possible to predict all of the effects that the Act or FCC
orders implementing the Act will have either on the Company or the highly
competitive environment in which it operates. The entry of large, well funded
and aggressive competitors into the long distance industry may very well result
in a loss of long distance market share for the Company. On the other hand, the
Act creates new opportunities for entering local markets not previously
available to the Company. It is not certain at this time as to when, to what
extent, and under what circumstances the Company will be able to effectively
market local services as permitted under the Act.
EMPLOYEES
As of June 30, 1997, the Company had approximately 151 employees.
ITEM 2. PROPERTIES
The Company leases approximately 62,500 square feet of general and
administrative office space in Houston, Texas, under leases with unaffiliated
third parties that expire in 2004. The Company's monthly rental obligation for
its facilities is approximately $58,000. The Company believes that its leased
facilities are adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is involved in what it believes to be routine
litigation or other legal proceedings that may be considered as part of the
ordinary course of its business. Currently the Company is involved in litigation
filed in August, 1995 under Cause No. 95-CH-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 Attorneys
General for these states have indicated that they will not separately negotiate
with the Company to attempt to resolve these matters, and that any settlement of
these claims must include a settlement of similar claims being asserted by the
Attorneys General of Arizona, Idaho, Kansas, Michigan, Nevada, New Jersey,
<PAGE>
Tennessee, Texas and Wisconsin. Each of these matters allege that the state
received an excessive number of customer complaints that long-distance service
was switched to the Company without the customer's knowledge or informed
consent, with sanctions being sought under the deceptive trade practices or
consumer protection statutes of these states. While the Company acknowledges
that some customers may not fully understand the technical distinction between
being a customer of one of the Company's underlying carriers and being a
customer of EqualNet with all network processes being handled by those same
underlying carriers, the Company vigorously denies that it has engaged in any
program or pattern of wrongfully switching customers' long-distance service in
violation of state or federal laws. The Company has negotiated in good faith
with these attorneys general as a group to attempt to reach a settlement that
would be in the best interest of the Company, as opposed to defending litigation
in multiple jurisdictions. The state Attorneys General have demanded a
settlement payment in the total amount of $500,000. The Company has accrued a
reserve on its books in the amount of $390,000 in anticipation of the proposed
settlement of these matters, which amount the Company believes should be
sufficient to discharge these claims. The proposed settlement contemplates an
agreement that would allow the Company to make payments of this settlement
amount over an extended period of time. There is no guarantee that the Company
will be able to negotiate a settlement that would allow for payments over a
sufficiently extended period of time so as to allow the Company to fund such
settlement out of future operating revenues, or even that the Company will be
able to negotiate any settlement acceptable to the Company. The Company is not
currently able to pay the amounts being demanded by the various state Attorneys
General to resolve these matters unless such payments are to be made over an
extended period of time. See "Liquidity and Capital Resources".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on The Nasdaq National Market under
the symbol "ENET". The table below sets forth the high and low sales prices of
the Common Stock for the fiscal years 1996 and 1997, as reported by The Nasdaq
Stock Market. The quotations reflect inter-dealer prices, without retail
mark-down or commission and may not represent actual transactions.
FISCAL YEAR ENDED JUNE 30,
PRICE RANGE
--------------------------
HIGH LOW
--------------------------
1996
First Quarter $ 18 3/4 $ 14 3/4
Second Quarter $ 21 $ 6 3/4
Third Quarter $ 10 1/2 $ 5 3/4
Fourth Quarter $ 7 1/4 $ 3
1997
First Quarter $ 4 7/8 $ 1 1/4
Second Quarter $ 3 1/8 $ 1 7/16
Third Quarter $ 2 13/16 $ 1
Fourth Quarter $ 2 3/32 $ 9/16
<PAGE>
On September 24, 1997, the last sales price per share of the Company's
Common Stock, as reported by The Nasdaq Stock Market, was $1 5/8.
On September 24, 1997, the Company's 6,152,000 shares of Common Stock
outstanding were held by approximately 60 shareholders of record.
Holders of Common Stock are entitled to receive such dividends as may be
declared by the Board of Directors of the Company. The Company does not
anticipate that cash dividends will be paid in the foreseeable future. The
Company intends to retain any future earnings to finance the expansion and
continuing development of its business. The declaration and payment in the
future of any cash dividends will be at the election of the Company's Board of
Directors and will depend upon the earnings, capital requirements and financial
position of the Company, existing or future loan covenants, general economic
conditions and other pertinent factors.
<PAGE>
The following table sets forth certain selected consolidated financial
data of the Company for each of the five years ended June 30, 1997, which
information has been derived from the Company's audited consolidated financial
statements. This information should be read in connection with and is qualified
in its entirety by the more detailed information and consolidated financial
statements, including the notes thereto, under Item 8 of this Annual Report on
Form 10-K.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales .......................................... $ 18,950,168 $35,397,331 $ 67,911,405 $ 78,354,858 $ 46,588,496
Cost of sales .................................. 16,441,001 28,801,516 54,655,313 61,807,113 34,481,128
Selling, general and
administrative expenses ...................... 1,811,825 5,297,710 8,936,102 13,719,573 12,453,814
Depreciation and amortization ................. 66,648 271,679 1,355,832 5,933,890 5,999,898
Write down of assets .......................... -- -- -- 6,882,661 4,400,000
------------ ----------- ------------ ------------ ------------
Operating income.....(loss) ................... 630,694 1,026,426 2,964,158 (9,988,379) (10,746,344)
Other income (expense) ......................... (35,361) 742,916 (92,856) (1,088,887) (1,888,889)
------------ ----------- ------------ ------------ ------------
Income (loss) before federal
income taxes and extraordinary
item ......................................... 595,333 1,769,342 2,871,302 (11,077,266) (12,635,233)
Provision (benefit) for federal income
taxes ........................................ -- -- 507,057 (2,659,853) 2,345,311
Net income (loss) .............................. $ 595,333 $ 1,769,342 $ 2,364,245 $ (8,417,413) $(14,980,544)
============ =========== ============ ============ ============
Net loss per share ............................. -- -- -- $(1.40) $(2.46)
====== ======
Pro forma net income(1) ........................ $ 363,153 $ 1,079,299 $ 1,751,494
============ =========== ============
Pro forma net income per share ................. $ 0.09 $ 0.27 0.38
============ ============ ============
Weighted average number of shares(2) ........... 4,000,000 4,000,000 4,618,043 6,017,332 6,096,932
============ =========== ============ ============ ============
Cash dividends per share(3) .................... $ -- $ 0.22 $ 0.61 $ -- $ --
============ =========== ============ ============ ============
Balance Sheet Data:
Cash and equivalents ........................... $ 261,816 $ 194,571 $ 3,526,543 $ 381,849 $ 828,478
Working capital deficiency ..................... (158,007) 230,448 7,772,366 (3,161,437) (4,667,109)
Total assets ................................... 6,012,925 9,044,595 39,315,569 34,595,832 19,162,160
Total long-term debt and capital
leases, net of current portion ................. 84,378 512,914 1,142,640 45,000 --
Total shareholders' equity (deficit) ........... 466,830 1,350,698 20,705,724 12,383,998 (1,688,539)
</TABLE>
- ---------------
(1) From July 1, 1992 to March 7, 1995, the Company had reported for
federal income tax purposes as an S corporation. Accordingly, all
taxable earnings of the Company during that time have been taxed
directly to the shareholders of the Company at their individual tax
rates. A pro forma adjustment to reflect federal and state income
taxes as if the Company were a C corporation is presented for the
respective periods at an estimated effective rate of 39%.
(2) Shares used to compute pro forma net income per share are based upon the
actual weighted-average shares outstanding giving retroactive effect to
the Company's reorganization which occurred March 8, 1995.
(3) Shares used to compute cash dividends per share are based upon 4,000,000
shares outstanding beginning in 1993 and for the remaining periods as a
result of the Reorganization. On March 7, 1995, the Company declared a
final dividend of $0.53 per share to the shareholders of record on such
date. The dividend was paid on March 24, 1995, to the shareholders of
record on March 7, 1995.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION OF EQUALNET
SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND
NOTES THERETO INCLUDED ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K. SPECIAL
NOTE: CERTAIN STATEMENTS SET FORTH BELOW CONSTITUTE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE
EXCHANGE ACT. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS" ON PAGE 2.
OVERVIEW
The Company's long-distance volume was more than 10.6 million monthly
minutes in June 1997. Substantially all of the Company's revenues have been
derived from the sale of long-distance services to small business customers. The
source of these accounts is primarily the Company's network of independent
marketing agents and the acquisition of customer accounts of other resellers.
Many of these agents actively market the Company's long-distance products via
telemarketing.
The Company's primary costs, its costs of sales, are variable and consist
of the underlying "wholesale" cost of long-distance services from its underlying
providers, commissions to independent agents and billing costs. However, in the
opinion of the Company, to the extent that the Company is able to continue to
negotiate more favorable rates from its providers, additional savings may be
achieved in the Company's costs, particularly the costs of long-distance
service. Additionally, with the completion of the Company's internal customer
billing system, the Company believes it will see a reduction in the current cost
of billing as a percentage of revenues as well.
The Company has generated revenue through orders received from independent
marketing agents and by acquiring the customer accounts of several other
resellers. The Company acquires customer accounts from certain of its
independent marketing agents on an individual price per order basis, with some
agents receiving an initial payment to help defer the cost of acquiring the
orders which will be offset by future commissions earned (agent advances) and
others receiving a higher initial payment with no future commission owed
(deferred acquisition costs). This allows the Company to use the agents as a
vehicle to outsource telemarketing activities. Expenditures associated with
individually acquired orders, both advanced and purchased, totaled approximately
$9.8 million and $3.2 million in fiscal years 1996 and 1997, respectively. The
Company expects that future revenue growth will come primarily from the
development of independent marketing agents and additional acquisitions of
customer accounts or businesses.
The Company's selling, general and administrative costs are primarily the
costs of back office operations and customer service. The Company also has
devoted significant resources to the development of the information technology
necessary to support customer service and the network of independent marketing
agents. NetBase is a proprietary software system designed to provide efficient
order provisioning and access to customer account information. The Company's
operations and customer service efforts depend on NetBase, which serves as the
interface between the Company and its independent marketing agents. The Company
plans to continue to develop and enhance this system.
The Company reported for federal income tax purposes as an S corporation
under the Internal Revenue Code of 1986, as amended, until its reorganization in
connection with its initial public offering in March 1995, and was similarly
treated for state income tax purposes under comparable state laws.
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the fiscal periods indicated the
percentages of total sales represented by certain items reflected in the
Company's consolidated statements of income and expenses:
<TABLE>
<CAPTION>
======================================================================================
Percentage of Total Revenues
Fiscal Year Ended June 30,
1993 1994 1995 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Total sales ......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales ....................... 86.8 81.4 80.5 78.9 74.0
----- ----- ----- ----- -----
Gross margin ........................ 13.2 18.6 19.5 21.1 26.0
Selling, general and administrative
expenses .......................... 9.5 14.9 13.1 17.5 26.7
Depreciation and amortization ....... 0.4 0.8 2.0 7.6 12.9
Write down of long term assets ...... -- -- -- 8.8 9.4
----- ----- ----- ----- -----
Operating income (loss) ............. 3.3 2.9 4.4 (12.8) (23.0)
Other income (expense):
Interest income .................. 0.2 0.1 0.7 0.1 0.0
Interest expense ................. (0.4) (0.8) (0.9) (2.2)
Miscellaneous .................... -- 2.4 (0.1) (0.6) (1.9)
----- ----- ----- ----- -----
Income (loss) before federal
income taxes and extraordinary item 3.1 5.0 4.2 (14.2) (27.1)
Provision (benefit) for federal
income taxes ...................... -- -- 0.7 (3.4) 5.0
----- ----- ----- ----- -----
Net income (loss) ................... 3.1% 5.0% 3.5% (10.8)% (32/1)%
===== ===== ===== ===== =====
======================================================================================
</TABLE>
YEAR ENDED JUNE 30, 1997, COMPARED TO YEAR ENDED JUNE 30, 1996
TOTAL SALES. Long-distance sales decreased 40.5%, from $78.4 million in
fiscal 1996 to $46.6 million for the year ended June 30, 1997. The decrease was
due primarily to a decrease in the number of customer accounts and a
corresponding decrease in billable minutes. The decline in revenues in fiscal
year 1997 was the result of an increased rate of attrition on existing customers
and a decline in order activity beginning in the last half of fiscal year 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 a new 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 Netbase 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 agent advances that stimulate order activity as significant as those
experienced prior to January 1996.
TOTAL COST OF SALES. The Company's cost of sales, which are variable,
decreased from $61.8 million in fiscal 1996 to $34.5 million for the year ended
June 30, 1997, a decrease of 44.2%. This decrease was a result of a decrease in
the Company's sales. The Company's cost of long distance (which is a component
of cost of sales) improved as a percentage of sales, decreasing from 63.6% to
55.6% for the years ended June 30, 1996 and 1997, respectively. The improvement
in the percentage is the result of the renegotiation of the company's contracts
with its carriers and from the recognition of a one-time credit from AT&T. The
Company negotiated an 8%
<PAGE>
improvement in the interstate rate it receives from AT&T in May 1996 followed by
an 8% improvement again in November 1996 and another 8% improvement in May 1997.
Additionally, the Company was granted a one-time credit of $1.2 million as part
of the new contract with AT & T, effective May 1, 1997 and a $400,000 backlog of
carrier disputes being processed by the Company and credited by the Company's
carriers in March 1997. The carrier dispute backlog was the result of
difficulties AT&T encountered in processing the Company's disputed long distance
usage which had cumulated over an extended period of time.
Commission expense as a percentage of sales decreased from 6.5% to 5.6%.
Commission expense included a $1.0 million charge and $400,000 charge for fiscal
years 1996 and 1997, respectively, to expense advances to agents that are not
expected to be recovered through future commissions earned by those agents.
Commissions as a percentage of revenues without these charges would be 5.2% and
4.7% for fiscal years 1996 and 1997, respectively. The decrease relates in part
to a payment in the second quarter of fiscal 1996 to a principal agent to reduce
the agent's commission rate by approximately 4%. Of the Company's total sales
during fiscal years 1996 and 1997, 28% and 23%, respectively, were derived from
customers introduced to the Company from this agent. The Company shifted its
sales strategy from that of purchasing customer accounts and bases of customer
accounts, which have very little associated commission expense, to one of
advancing commissions to independent marketing agents for individual customer
accounts. Accordingly, the Company expects commission expense as a percent of
revenue to increase moderately in future periods as a result of the increased
emphasis in obtaining orders utilizing agents with residual commissions on those
orders. This increase in commission expense will be offset by a decrease in
amortization expense of purchased accounts.
Billing expense as a percentage of sales increased from 4.0% to 7.3% for
the fiscal years ending 1996 and 1997, respectively, 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 26.8% of the Company's
revenues for the year ended June 30, 1997. 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 decreased from
4.9% of sales in fiscal year 1996 to 3.7% of sales in fiscal year 1997. The
Company's collection efforts were hindered in fiscal 1996 by the failure of a
new customer management system to produce the necessary information to allow for
the most effective method of collection, resulting in a higher than normal
incident of uncollected accounts.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased 9.2% from $13.7 million for the year ended
June 30, 1996, to $12.5 million for the same period in fiscal 1997. Selling,
general and administrative expenses increased as a percentage of sales from
17.5% to 26.7% for the years ended June 30, 1996 and 1997, respectively. The
decrease in this expense was a result of cost reduction efforts by the Company.
Total staff decreased from an average of 204 temporary and permanent employees
during the year ended June 30, 1996 (183 employees at June 30, 1996) to an
average of 163 temporary and permanent employees in fiscal 1997 (151 at June 30,
1997). Salary related expense decreased $1.5 million from fiscal 1996 to fiscal
1997 as a result of the decrease in personnel. Administrative expense was down
$404,000 for fiscal 1997 compared to fiscal 1996 as the result of decreasing
supplies and office expense by $135,000 and due to a reduction in long-distance
and telephone related expenses by $259,000. The decrease in long-distance and
phone related expenses was related to the acquisition of a new telephone system
in January 1996 which allowed the Company to significantly reduce hold times,
thereby reducing long-distance costs, and due to the decrease in the number of
customers, resulting in fewer calls. Additionally, the Company incurred $246,000
in acquisition related costs in early fiscal 1996 which were not present in
fiscal 1997. These
<PAGE>
savings were offset somewhat by an increase in professional fees, bank fees,
marketing fees, lease expense and the addition of Creative and its related
overhead. The Company incurred approximately $170,000 in additional legal and
professional fees in fiscal 1997 as compared to fiscal 1996. Included in
professional fees are fees paid to third party verification companies which the
Company utilized to verify customer orders. These fees totaled approximately
$151,000 in fiscal 1997 as compared to $1,500 in fiscal 1996. Bank fees
increased as a result of the cost of obtaining an amendment to the Company's
loan agreement while marketing fees increased as the Company conducted an
aggressive campaign related to the placement of long-distance calling cards with
all of its customers. Lease expense increased $422,000 from fiscal 1996 to
fiscal 1997. The Company entered into two significant leases in January 1996 for
a new telephone system and for computer equipment to support the Company's
information system network. Creative resulted in an additional $450,000 in
selling, general and administrative expenses to support its operations, which
were acquired by the Company in fiscal 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
slightly as the company recorded $5.9 million and $6.0 million in expense during
1996 and 1997, respectively. The Company expended very little on capital
equipment during fiscal 1997 and returned to compensating agents through
commissions and advances on commissions.
The Company wrote down assets of approximately $6.9 million and $4.4
million during the years ended June 30, 1996 and 1997, respectively. During
fiscal 1997 the Company recorded a charge to earnings for $4.4 million to reduce
the carrying value of purchased customer accounts to an estimate of future
discounted cash flows from the purchased accounts. Included in the write down in
fiscal 1996 was a similar $4.6 million non-cash charge to reduce the carrying
value of acquired customer bases to the present value of the expected future
cash flows associated with the underlying customer accounts and a $2.2 million
write off of capitalized software development costs associated with the NetBase
Plus system. The write down of deferred acquisition costs was necessitated by a
greater than expected turnover of acquired customer bases which resulted from
difficulties in billing and servicing the underlying customer accounts.
OPERATING LOSS. The operating loss increased 7.6% from $10.0 million for
the year ended June 30, 1996, to $10.7 million for the year ended June 30, 1997.
OTHER INCOME (EXPENSE). Other expense increased from $1.1 million for
fiscal 1996 to $1.9 million for the year ended June 30, 1997. This increase was
primarily attributable to an increase in interest expense of $343,000 from
fiscal 1996 to fiscal 1997 and an increase in miscellaneous expense of $406,000.
The increase in interest expense was the result of the increase in the interest
rate under the Company's bank line of credit and the addition of the note
payable to Furst.. Miscellaneous expense in fiscal 1996 includes a $250,000
accrual for possible penalties, settlement costs and legal expenses associated
with the resolution of pending complaints against the Company by various state
regulatory agencies with regard to customer complaints. Fiscal 1997 includes an
additional $226,000 for settlements reached in certain states during the year
and to increase the accrual related to regulatory complaints in the states with
inquiries still pending. See Item 3, "Legal Proceedings". Miscellaneous expense
also included $135,000 and $195,000 in fiscal 1996 and 1997, respectively, in
losses related to the failed Unified Network Services joint venture, which the
Company entered into in February 1996.
<PAGE>
YEAR ENDED JUNE 30, 1996, COMPARED TO YEAR ENDED JUNE 30, 1995
TOTAL SALES. Long-distance sales increased 15.4%, from $67.9 million in
fiscal 1995 to $78.4 million for the year ended June 30, 1996. The increase
resulted from the significant growth of customer minutes in the third and fourth
quarters of fiscal 1995, which continued into fiscal 1996. Quarterly revenues
peaked in the first quarter of fiscal 1996 at $23.9 million and declined each
quarter thereafter, with fourth quarter revenues totaling $16.2 million in
fiscal 1996. The decline in revenues during fiscal 1996 was more gradual than
the growth in fiscal 1995, resulting in an overall increase when comparing the
two fiscal years. The decline in revenues on a quarterly basis in fiscal year
1996 was the result of an increased rate of attrition on existing customers and
a decline in order activity in the last half of fiscal year 1996.
TOTAL COST OF SALES. The Company's cost of sales, which is variable,
increased from $54.7 million in fiscal 1995 to $61.8 million for the year ended
June 30, 1996, an increase of 13.1%. This increase was a result of an increase
in the Company's sales. The Company's cost of long distance (which is a
component of cost of sales) remained relatively stable as a percentage of sales,
decreasing slightly from 63.7% to 63.6% for the years ended June 30, 1995 and
1996, respectively. Commission expense as a percentage of sales decreased from
11.9% to 6.5%. This decrease in commissions was the result of a change in the
Company's sales strategy from that of advancing commissions to independent
marketing agents for individual customer accounts, to one of purchasing customer
accounts and bases of customer accounts. The purchased bases and accounts have
no associated commission expense. In addition, the Company made a payment in the
second quarter of fiscal 1996 to a principal agent to reduce the agent's
commission rate. Of the Company's total sales during fiscal years 1995 and 1996,
40% and 28%, respectively, were derived from customers introduced to the Company
from this agent. Billing expense as a percentage of sales increased from 3.6% to
4.0%, a result of the average monthly customer bill decreasing from $55 per
month to $50 per month and the increase in the number of delinquent accounts.
Bad debt expense increased from 1.3% of sales in fiscal year 1995 to 4.9% of
sales in fiscal year 1996. A primary factor to the increase in bad debt expense
incurred by the Company was the result of the shift to more purchased orders for
which the Company had full exposure to uncollectible accounts as compared to
commissioned orders for which the agents shared in a substantial portion of the
risk on uncollectible accounts. In addition, the Company's collection efforts
were hindered by the failure of NetBase Plus to produce the necessary
information to allow for the most timely and effective method of collection.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 53.5% from $8.9 million for the year ended
June 30, 1995, to $13.7 million for the same period in fiscal 1996. Selling,
general and administrative expenses increased as a percentage of sales from
13.1% to 17.5% for the years ended June 30, 1995 and 1996, respectively. The
increase in this expense was a result of the substantial growth of the Company
over the last half of fiscal year 1995 and through December 1995. Total staff
increased from an average of 144 temporary and permanent employees during the
year ended June 30, 1995 (220 at June 30, 1995), to an average of 204 temporary
and permanent employees during the year ended June 30, 1996. Staffing peaked in
December 1995 at 283 employees (including temporary employees) and declined to
183 temporary and permanent employees in June 1996. Salary related expense
increased $2.8 million as a result of the increase in personnel. Lease expense
increased from $700,000 in fiscal 1995 to $1.7 million in fiscal 1996. The
Company entered into two sale leaseback transactions, the proceeds from which
totaled $1.4 million during fiscal year 1996. Additionally, the Company leased a
new telephone system and computer equipment to support the Company's information
system network. The Company incurred approximately $500,000 in additional legal,
accounting and professional fees in fiscal 1996 as compared to fiscal 1995 as a
result of the added cost of being a public company for all of fiscal 1996, the
significant level of attempted acquisition
<PAGE>
activity in the first half of fiscal 1996, the joint venture with Metrolink,
Inc. ("Metrolink"), and the renegotiation of the Company's loan agreement with
its principal lender in November 1995 and amendments to that agreement in March
and June 1996.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
338% from $1.4 million for the year ended June 30, 1995, to $5.9 million for the
same period for the year ended June 30, 1996. Amortization expense has increase
substantially because of the purchase of a customer base in June 1995 for $8.4
million and the investment of $8.5 million in fiscal 1996 in individual orders
purchased from independent marketing agents. Depreciation expense has risen over
the same periods as a result of the significant investment in computers needed
to support the Company's growth and as a result of the investment in NetBase
Plus.
The Company wrote down assets during the year ended June 30, 1996, of
approximately $6.9 million. Included in the write down were a $4.6 million
non-cash charge to reduce the carrying value of acquired customer bases to the
present value of the expected future cash flows associated with the underlying
customer accounts and a $2.2 million write off of capitalized software
development costs associated with the NetBase Plus system. The write down of
deferred acquisition costs was necessitated by continued greater than expected
turnover of acquired customer bases which resulted from difficulties in billing
and servicing the underlying customer accounts.
During fiscal 1996, the Company reverted from the NetBase Plus operating
system which was implemented in November 1995, to the Company's original NetBase
operating system. The Company determined that the NetBase Plus system had
inherent design flaws which resulted in inefficient operation and abandoned the
entire system in April 1996. The Company expects the reversion to the original
NetBase to reduce cash outlays that were required to service, maintain and
modify the NetBase Plus system, as well as decrease depreciation expense in the
future by approximately $50,000 per month.
OPERATING INCOME (LOSS). Operating income decreased 437% from $3.0 million
for the year ended June 30, 1995, to an operating loss of $10.0 million for
fiscal 1996.
OTHER INCOME (EXPENSE). Other expense increased from $92,856 for fiscal
1995 to $1.1 million for the year ended June 30, 1996. This increase was
primarily attributable to a decrease in interest income of $443,000 from fiscal
1995 to fiscal 1996 and an increase in miscellaneous expense of $400,000. The
decrease in interest income was the result of the use during fiscal year 1996 of
the excess cash generated through the Company's initial public offering in March
1995. Miscellaneous expense in fiscal 1996 includes a $250,000 accrual for
possible penalties, settlement costs and legal expenses associated with the
resolution of pending complaints against the Company by various state regulatory
agencies with regard to customer complaints. See Item 3, "Legal Proceedings".
Interest expense increased as a result of an increase in the size and
utilization of borrowings under the Company's line of credit during the year
ended June 30, 1996.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company generated pro forma net income of $1.8 million for the year
ended June 30, 1995, and recorded net losses of $8.4 million and $15.0 million
for the years ended June 30, 1996 and 1997, respectively. The Company funded its
operations during the year ended June 30, 1997 through extension of payment
terms from the Companys major suppliers, advances under its revolving credit
facility, from a $3.0 million debt offering and through operating cash flows.
Due to operating losses sustained in the second half of fiscal 1996 and
throughout fiscal 1997 and a declining revenue base, the Company reached its
maximum borrowing capacity under its revolving credit facility. The Company's
borrowing capacity under this credit facility continued to decline as a result
of operating losses, a decline in the revenue base and the exclusion of certain
receivables from the criteria of eligible receivables. An additional source of
liquidity during this time period has been an extension of payment terms from
the Company's major suppliers, although there can be no assurance that any such
extensions will be granted in the future. At current levels of operations and
with a declining borrowing base, the Company must seek additional capital and
continued concessions from its vendors and must continue to reduce expenses to
bring them in line with current levels of revenues.
CASH FLOW FROM OPERATIONS. The Company generated net cash of $309,000 and
$3,974,000 in operating activities in fiscal 1996 and 1997, respectively. Cash
from net losses adjusted for non-cash expenses decreased from a source of $6.0
million in fiscal year 1996 to a use of cash of $1.7 million in 1997. This use
in fiscal 1997 was offset by the change in operating assets and liabilities,
including a $3.6 million change in accounts receivable, a $1.7 million change in
accounts payable and a $2.9 million change in prepaid expenses and other.
Accounts receivable decreased as revenues continued their decline throughout
fiscal 1997 and due to continued improvement in collection activities by the
Company. Accounts payable, particularly the payable to providers of
long-distance, increased as a result of the extended payment terms negotiated by
the Company. The decrease in prepaid expenses and other was primarily the
receipt of a $1.3 million federal tax refund during fiscal 1997. Offsetting
these sources was the use of cash for advances paid to agents for orders,
resulting in the increase in the amounts due from agents, and for the change in
other assets, $552,000 of which were advances to UNS. The Company is involved in
negotiations with the attorneys general for eleven states concerning alleged
consumer protection violations in the marketing of long distance service by the
Company's independent contractor sales agents in those states. The attorneys
general have indicated that they will not separately negotiate with the Comapny
to attempt to resolve these matters. The Company is not currently able to pay
the amounts being demanded by the group of state attorneys general to settle
these matters unless such payments are to be made over an extended period of
time. See Item 3 Legtal Proceedings.
CASH FLOW FROM INVESTING ACTIVITIES. Net cash used in investing activities
decreased significantly from $14.4 million in fiscal 1996 to $344,000 in fiscal
1997. During fiscal year 1995 the Company purchased $8.5 million of customer
accounts. The Company expended $3.4 million for computer equipment and related
software development in 1996. Because of the liquidity concerns the Company
experienced during fiscal 1997 the Company consciously restricted investing
activities. The Company invested $272,000 in property, plant and equipment,
$141,000 of which was for the completion of the in-house billing system which
was placed into service in February 1997. In addition, the Company reverted from
its policy of buying orders from its agents to a strategy of advancing
commissions which, if the advances are recovered by the Company, will provide
the agents with a continuing revenue stream. As such, the Company expended only
$76,000 on purchased orders during fiscal 1997.
FINANCING ACTIVITIES. Financing activities provided $10.9 million to the
Company in fiscal year 1996 and used $3.2 million in fiscal 1997. The Company
increased borrowings under the revolving credit facility during fiscal 1996,
resulting in net proceeds of $9.6 million. However, in fiscal 1997 due to
increased restrictions imposed upon the Company by its primary lender and due to
the declining revenue base, the Company experienced a decline in the borrowing
base available under the line of credit. This resulted in a net reduction in
borrowings under the line in fiscal 1997 of $6.1 million. The Company sought to
offset a portion of the loss of funds under the line of credit and issued
subordinated debt in February 1997 which resulted in $3.0 million in proceeds.
<PAGE>
WORKING CAPITAL AND LONG CASH CYCLE. Customer billings for long-distance
services are generated from detailed call records which are generally available
from the carrier on or about the tenth day of the month following the month of
customer usage. Customer invoices usually are generated within ten days
thereafter and are due by the 34th day following the month of customer usage.
However, the Company historically collects a large portion of receivables after
the scheduled due date, resulting in an average cash cycle of approximately 60
days. Since the Company's underlying carriers historically have been paid within
35 days following the month of usage, delays in receipt of customer payments
have resulted in significant working capital needs. The Company has currently
negotiated extended payment terms with its primary underlying carrier which
extend payment terms on newly generated costs in excess of 60 days. In addition,
the Company has negotiated terms with its current carriers on past due
obligations which allow the Company to satisfy the obligations over the next
four to eight months. Failure to comply with the negotiated terms could result
in the acceleration of the demand for payment and, in the extreme, could result
in the termination of the Company's underlying service. There can be no
assurance that the Company can continue to obtain concessions from its carriers.
Should the Company be unable to meet the currently agreed to terms or, should
the Company be unable to continue to negotiate favorable terms, it would be
required to fund the obligations through its operating cash flow, funds
available under its borrowing arrangement, third party sources of capital and
working capital. If required at this time, such funds would not be available to
satisfy the obligations when due and the carrier could terminate the Company's
underlying service.
SALES TAXES. In early 1994, the Company determined that its treatment and
disbursement of sales taxes was not being properly administered and engaged an
outside tax compliance firm to assist in the resolution of the matter with the
various states and other regulatory and taxing authorities At June 30, 1997, the
Company has accrued $140,000 for resolution of this matter. The improper
treatment of sales taxes arose from the Company's failure to remit the sales tax
due to various taxing authorities on the incremental component of revenue in
excess of the cost of the underlying service (for which taxes were properly
paid). The Company believes that the amount accrued is adequate for the
satisfaction of this tax liability, including any interest payable. The Company
has an installment agreement with the Internal Revenue Service which allows for
the Company to satisfy the amount outstanding in equal payments of $25,000 per
month.
HISTORICAL CAPITAL RESOURCES. To date, the external funds necessary to
fund the Company's capital requirements arising from capital expenditures,
acquisitions and working capital have been provided primarily from bank credit
financing, third party sources of capital and the proceeds from the Company's
initial public offering. Maximum borrowings under the Company's line of credit
increased from $100,000 in 1992 to $7.5 million in 1997. The Company's credit
facility at June 30, 1997 provided for a borrowing base that was dependent upon
the amount and aging of accounts receivable. As of June 30, 1997, the borrowing
base under the credit facility was estimated to be $4.7 million. Under this
facility the interest on the outstanding balance accrued at a rate equal to
prime plus 6% (14.5% at June 30, 1997). The line of credit was secured by the
Company's accounts receivable. As of June 30, 1997, approximately $189,000 of
borrowings were available under the credit facility. The Company replaced the
credit facility under which borrowings at June 30, 1997 were outstanding with a
new arrangement effective June 18, 1997 and which funded July 7, 1997. The new
agreement bases borrowing capacity on a percentage of the Company's outstanding
receivables up to a maximum allowable amount of $8,000,000 and allows for the
lender to cease funding of new receivables without prior written notice at the
lenders option. Interest on the outstanding balance is prime plus 4.5% per
annum. Should the lender cease to provide financing in accordance with its
option, the Company would be forced to seek immediate replacement of the
facility to provide working capital. Current sources of funds from operations
and working capital would be insufficient to provide funds adequate to continue
funding operations. In the event the Company would be unable to find an
immediate replacement of the funds, it would seek an alliance with a strategic
<PAGE>
partner, or in the event no such strategic alliance were accomplished, the
Company would be required to seek protection under United States bankruptcy
laws.
The Company's agreement with AT&T covers the pricing of the services and
establishes minimum semi-annual revenue commitments which must be met to receive
the contractual price and to avoid shortfall penalties. At June 30, 1997, the
Company had not yet reached the completion of the term of the first MSARC;
however, the Company was $477,000 below the cumulative pro rata monthly
commitment. Should the Company continue at similar revenue levels, it would be
in a shortfall at the end of the first MSARC period in October 1997. If the
existing contract with AT&T is terminated, either by the Company or by AT&T for
non-payment, prior to the expiration of the full term without execution of a new
contract, the Company will be liable for the total amount of the unsatisfied
MSARC for the period in which the discontinuance occurs and for 100% of the
MSARCs for each semi-annual period remaining in the contract tariff term. In
addition, should the Company fail to meet the first MSARC, it will be required
to refund $398,000 in credits issued to the Company by AT&T. See note 6 of the
notes to consolidated financial statements. The contract expires in April 2000.
The MSARCs increase over the term of the contract. Historically, the Company has
been able to negotiate a settlement of such shortfalls with the carrier which
has resulted in no penalty being incurred by the Company. No assurances can be
made that the Company will be able to reach similar favorable settlements with
the carrier should it continue to fail to meet its commitment. Should the
Company be unable to reach a favorable settlement with the carrier, it would be
required to fund the resulting penalties through its operating cash flow, funds
available under its existing financing arrangement and working capital. If
required at this time, such funds would not be available to meet the commitments
when due and the carrier could terminate the Company's underlying service.
During fiscal 1997, the Company had moderate expenditures of $272,000 on
capital items. Included in capital expenditures during fiscal 1997 were $141,000
to complete the in-house proprietary billing system and $108,000 on computer
related equipment. The Company has no planned capital expenditure budgeted for
fiscal year 1998; however, should funds be available, the Company intends to
continue to modify and improve NetBase.
The Company has gross deferred tax assets of $8.9 million for which a
valuation allowance of $8.6 million has been established. The deferred tax
assets arise from deductible temporary differences of $15.4 million and a net
operating loss carryforward of $7.5 million. In assessing the need for and
amount of a valuation allowance, the Company considered its inability to
generate taxable income in recent periods, the facts and circumstances which led
to the significant operating loss incurred in the years ended June 30, 1996 and
1997, and projections of future taxable income. 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. The Company has been in a cumulative
loss position at June 30, 1997. The Company does not believe that positive
evidence of the ability to generate future taxable income is sufficient to
counteract the negative evidence, the cumulative losses, and accordingly has
recorded a valuation allowance for the full amount of the deferred tax. The
Company generally can be expected to generate taxable income in excess of book
income as a result of deductible temporary differences related to the allowance
for doubtful accounts and amortization of deferred acquisition costs.
The Company continues to pursue the final steps of its financial
restructuring: an additional financing of between $5.0 million and $11.0 million
in debt or equity and the agreement to additional
<PAGE>
concessions from its carriers for special terms and consideration. In the event
the Company is unsuccessful in achieving any one or a combination of these
objectives sufficient to meet the Company's liquidity needs, it may seek an
alliance with a strategic partner, or in the event no such strategic alliance is
accomplished, the Company may be required to seek protection under United States
bankruptcy laws.
SEASONALITY
The Company's long distance revenue is subject to seasonal variations.
Because most of the Company's revenue is generated by non-residential customers,
the Company traditionally experiences decreases in long-distance usage and
revenue in those periods with holidays. In past years the Company's
long-distance traffic, which is primarily non-residential, has declined slightly
during the quarter ending December 31 due to the November and December holiday
periods.
INFLATION
Inflation has not had a significant impact on the Company's operations to
date.
CAUTIONARY STATEMENTS
IN ADDITION TO THE OTHER INFORMATION IN THIS ANNUAL REPORT ON FORM 10-K, THE
FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY WHEN EVALUATING THE LIKELIHOOD
OF THE COMPANY'S REALIZATION OF EXPECTATIONS WITH RESPECT TO OPERATING RESULTS
AND OTHER MATTERS DESCRIBED IN THIS ANNUAL REPORT ON FORM 10-K. SEE " SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS " ON PAGE 2.
NO ASSURANCE OF ADDITIONAL NECESSARY CAPITAL - The Company continues to pursue
additional financing of between $5.0 million and $11.0 million in debt or
equity. 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 poorly performing traffic, or the
inability to properly manage the existing customer base, 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 Furst, 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
<PAGE>
and Sprint are good and should remain so with continued contract compliance, 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. The Company continues to experience such
delays whenever it sends large numbers of new customer orders to AT&T for
provisioning.
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.
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. The
Company currently has recorded an accrual of $390,000 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, see "Item 3, Legal Proceedings".
<PAGE>
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
all 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. In
addition, if the Company fails to maintain the minimum bid price requirements of
teh NASDAQ Stock Market, the common stock would be subject to delisting
therefrom.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial information required
to be filed under this Item are presented on pages XX through XX of this Annual
Report on Form 10-K, and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item will be set forth in the
Registrant's Proxy Statement relating to the annual meeting of the Registrant's
stockholders scheduled to be held December 2, 1997, under the captions "Election
of Directors" and "Executive Officers and Compensation", and such information is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be set forth in the
Registrant's Proxy Statement relating to the annual meeting of the Registrant's
stockholders scheduled to be held December 2, 1997, under the caption "Executive
Officers and Compensation", and such information is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be set forth in the
Registrant's Proxy Statement relating to the annual meeting of the Registrant's
stockholders scheduled to be held December 2, 1997, under the caption "Security
Ownership of Certain Beneficial Owners and Management", and such information is
incorporated herein by reference.
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be set forth in the
Registrant's Proxy Statement relating to the annual meeting of the Registrant's
stockholders scheduled to be held December 2, 1997 under the caption "Executive
Officers and Compensation", and such information is incorporated herein by
reference.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS INCLUDED IN THIS REPORT:
1. FINANCIAL STATEMENTS PAGE
----
Report of Independent Auditors.......................................... XX
Consolidated Balance Sheets as of June 30, 1996 and 1997................ XX
Consolidated Statements of Operations for the years ended
June 30, 1995, 1996 and 1997 ......................................... XX
Consolidated Statements of Shareholders' Equity (Deficit) for the years
ended June 30, 1995, 1996 and 1997. . . . ........................... XX
Consolidated Statements of Cash Flows for the years ended June 30,
1995, 1996 and 1997 .................................................. XX
Notes to Financial Statements........................................... XX
2. FINANCIAL STATEMENT SCHEDULES
None required.
(b) REPORTS ON FORM 8-K:
None.
(C) EXHIBITS:
Exhibits designated by the symbol * are filed with this Annual Report on
Form 10-K. All exhibits not so designated are incorporated by reference to a
prior filing as indicated.
Exhibits designated by the symbol ** are management contracts or
compensatory plans or arrangements that are required to be filed with this
report pursuant to this Item 14.
The Company undertakes to furnish to any shareholder so requesting a copy of
any of the following exhibits upon payment to the Company of the reasonable
costs incurred by the Company in furnishing any such exhibit.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Articles of Incorporation of the Registrant (incorporated by reference to
Exhibit 3.1 to Amendment No. 1 to the Registrant's Registration Statement
on Form S-1 (Registration No. 33-88742); filed on February 13, 1995).
3.2 Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the
Registrant's Registration Statement on Form S-1 (Registration No.
33-88742); filed on January 24, 1995).
<PAGE>
4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1
to Amendment No. 2 to the Registrant's Registration Statement on Form S-1
(Registration No. 33-88742) filed March 2, 1995).
4.2 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 31, 1997).
10.1 AT&T Billing Service Agreement between EqualNet and AT&T Communications,
Inc., as amended by letter agreement dated October 28, 1994, between
EqualNet and AT&T Corp. (incorporated by reference to Exhibit 10.2 to the
Registrant's Registration Statement on Form S-1 (Registration No.
33-88742) filed on January 24, 1995).
10.2 **Form of Employment Agreement, by and between EqualNet and the persons
listed on the schedule attached thereto (incorporated by reference to
Exhibit 10.3 to Amendment No. 1 to the Registrant's Registration Statement
on Form S-1 (Registration No. 33-88742) filed on February 13, 1995).
10.3 Lease Agreement dated November 21, 1991, by and between EqualNet and DAP
Plaza, Ltd., as amended by Addendum dated January 30, 1992, and Addendum
dated June 17, 1992 (incorporated by reference to Exhibit 10.4 to
Registrant's Registration Statement on Form S-1 (Registration No.
33-88742) filed January 24, 1995).
10.4 Lease Agreement dated February 18, 1993 by and between EqualNet and DAP
Plaza, Ltd. (incorporated by reference to Exhibit 10.5 to Registrant's
Registration Statement on Form S-1 (Registration No. 33-88742) filed
January 24, 1995).
10.5 Lease Agreement dated June 28, 1994, between EqualNet and Caroline
Partners, Ltd., as amended by First Amendment dated August 15, 1994, and
Second Amendment dated September 8, 1994 (incorporated by reference to
Exhibit 10.6 to Registrant's Registration Statement on Form S-1
(Registration No. 33-88742) filed on January 24, 1995).
10.6 **EqualNet Holding Corp. Stock Option and Restricted Stock Plan
(incorporated by reference to Exhibit 10.8 to Annual Report as Form 10-K
for the year ended June 30, 1996, filed October 15, 1996
10.7 EqualNet Corporation 401(k) Plan effective January 1, 1993, as amended by
the First Amendment to the Equal Net Communications, Inc. 401(k) Plan,
dated effective as of July 1, 1993, and First Amendment to the Adoption
Agreement dated effective as of June 2, 1994 (incorporated by reference to
Exhibit 10.8 to Registrant's Registration Statement on Form S-1
(Registration No. 33-88742) filed January 24, 1995).
10.8 Interstate and International Carrier Transport Switch Services Agreement
dated effective August 1, 1994, by and between EqualNet and Sprint
Communications Company, L.P. ("Sprint"), as amended by the Amendment dated
effective August 1, 1994, between EqualNet and Sprint (incorporated by
reference to Exhibit 10.11 to Registrant's Registration Statement on Form
S-1(Registration No. 33-88742) filed January 24, 1995).
<PAGE>
10.9 EqualNet Holding Corp. Employee Stock Purchase Plan (incorporated by
reference to Exhibit 10.15 to Registrant's Annual Report on Form 10-K for
the year ended June 30, 1996, filed October 15, 1996.
10.10 **Promissory Note by Zane D. Russell in favor of EqualNet (incorporated by
reference to Exhibit 10.16 to Registrant's Registration Statement on Form
S-1 (Registration No. 33-88742) filed on January 24, 1995).
10.11 **Promissory Note by Marc R. Smith in favor of EqualNet (incorporated by
reference to Exhibit 10.17 to Registrant's Registration Statement on Form
S-1 (Registration No. 33-88742) filed January 24, 1995).
10.12 **Promissory Note by Byron A. Russell in favor of EqualNet (incorporated
by reference to Exhibit 10.18 to Registrant's Registration Statement on
Form S-1 (Registration No. 33-88742) filed January 24, 1995).
10.13 Loan Agreement dated March 10, 1995, between EqualNet Corporation and
EqualNet Holding Corp. (incorporated by reference to Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the period ended March 31,
1995).
10.14 Security Agreement dated March 10, 1995 by EqualNet Corporation in favor
of EqualNet Holding Corp. (incorporated by reference to Exhibit 10.3 to
the Registrant's Quarterly Report on Form 10-Q for the period ended March
31, 1995).
10.15 Memorandum of Purchase and Sale dated as of June 6, 1995, by and between
EqualNet Corporation and Network Plus, Inc. (incorporated by reference to
Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated June 6,
1995).
10.16 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. (incorporated by reference to
Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q, filed May 15,
1997)
10.17 Warrant for Purchase of Common Stock, issued February 11, 1997.
(incorporated by reference to Exhibit 10.2 to Registrant's Quarterly
Report on Form 10-Q, filed May 15, 1997)
10.18 Security Agreement, dated February 11,1997, among the Company, its
subsidiaries and The Furst Group, Inc., a New Jersey corporation.
(incorporated by reference to Exhibit 10.3 to Registrant's Quarterly
Report on Form 10-Q, filed May 15, 1997)
10.19 Right in the Event of Change of Control, dated February 11, 1997.
(incorporated by reference to Exhibit 10.4 to Registrant's Quarterly
Report on Form 10-Q, filed May 15, 1997)
10.20 *Financing agreement between Receivables Funding Corporation and EqualNet
Holding Corporation, dated June 18, 1997 (certain confidential portions of
this exhibit have been omitted pursuant to a request for confidential
treatment pursuant to Rule 246-2 under the Securities Exchange Act of
1934.
10.21 *Carrier Agreement between AT & T and EqualNet Corporation, dated May 13,
1997 (certain confidential portions of this exhibit have been omitted
pursuant to a request for confidential treatment pursuant to Rule 246-2
under the Securities Exchange Act of 1934.
21.1 *List of Subsidiaries of EqualNet.
23.1 *Consent of Ernst & Young LLP.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors ......................................... XX
Consolidated Balance Sheets as of June 30, 1996 and 1997 ............... XX
Consolidated Statements of Operations for the years ended
June 30, 1995, 1996 and 1997 ......................................... XX
Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended June 30, 1995, 1996 and 1997 ..................... XX
Consolidated Statements of Cash Flows for the years ended
June 30, 1995, 1996 and 1997 ......................................... XX
Notes to Financial Statements .......................................... XX
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
EqualNet Holding Corp.
We have audited the accompanying consolidated balance sheets of EqualNet Holding
Corp. and subsidiaries as of June 30, 1996 and 1997, and the related
consolidated statements of operations, shareholders' equity (deficit), and cash
flows for each of the three years in the period ended June 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. The audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of EqualNet Holding
Corp. and subsidiaries at June 30, 1996 and 1997, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended June 30, 1997, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming EqualNet
Holding Corp. and subsidiaries will continue as a going concern. As more fully
described in Note 2, the Company has incurred recurring operating losses and has
a working capital deficiency. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
As discussed in Note 1, in fiscal 1997 the Company changed its method of
accounting for long-lived assets.
ERNST & YOUNG LLP
Houston, Texas
September 23, 1997
<PAGE>
EQUALNET HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
JUNE 30, JUNE 30,
1996 1997
------------ ------------
ASSETS
Current assets
Cash and equivalents ......................... $ 381,849 $ 828,478
Accounts receivable, net of allowance for
doubtful accounts of $3,284,886 at
June 30,1996 and $1,450,954 at June 30,
1997 ....................................... 14,372,858 9,048,961
Receivable from officers ..................... 28,367 28,367
Due from agents, net of allowances of
$1,000,000 at June 30, 1996 and $0 at
June 30, 1997 .............................. 1,640,808 2,907,922
Prepaid expenses and other ................... 582,052 285,516
Recoverable federal income taxes ............. 1,302,595 --
Deferred tax asset ........................... 696,868 --
------------ ------------
Total current assets ........................... 19,005,397 13,099,244
Property and equipment
Computer equipment ........................... 3,172,950 3,435,121
Office furniture and fixtures ................ 1,204,880 1,209,032
Leasehold improvements ....................... 1,174,510 1,174,777
------------ ------------
5,552,340 5,818,930
Accumulated depreciation and amortization .... (1,864,068) (3,028,768)
------------ ------------
3,688,272 2,790,162
Customer acquisition costs, net of
accumulated amortization of $5,379,338 at
June 30, 1996 and $13,050,667 at June 30,
1997 ......................................... 9,019,774 1,262,939
Deferred tax asset ............................. 1,531,209 --
Other assets ................................... 1,273,240 1,027,507
Goodwill, net of accumulated amortization of
$46,020 ...................................... -- 982,308
------------ ------------
Total assets ................................... $ 34,517,892 $ 19,162,160
============ ============
See accompanying notes.
<PAGE>
EQUALNET HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
JUNE 30, JUNE 30,
1996 1997
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable ............................. $ 2,057,092 $ 1,858,065
Accrued expenses ............................. 879,484 1,398,319
Accrued sales taxes .......................... 912,123 591,182
Brokerage commissions payable ................ 177,891 151,755
Payable to providers of long distance
services ................................... 7,116,916 7,977,531
Current maturities of capital lease
obligations .................................... 90,000 51,000
Notes payable to long distance provider ...... -- 1,183,059
Revolving line of credit ..................... 10,654,245 4,555,442
------------ ------------
Total current liabilities ...................... 21,887,751 17,766,353
Subordinated note payable ...................... -- 2,864,058
Long term obligations under capital leases ..... 45,000 --
Commitments and contingencies
Deferred rent .................................. 201,143 220,288
Shareholders' equity (deficit)
Preferred stock (non-voting), $.01 par
value Authorized shares - 1,000,000 at
June 30, 1996 and 1997 Issued and
outstanding shares - 0 at June 30,
1996 and 1997 .............................. -- --
Common stock, $.01 par value
Authorized shares - 20,000,000 at
June 30, 1996 and 1997 Issued and
outstanding shares - 6,023,750 at
June 30, 1996, and 6,173,750
at June 30, 1997 ........................... 60,237 61,738
Treasury stock at cost: 21,750 shares at
June 30, 1996 and June 30, 1997 ............ (104,881) (104,881)
Additional paid in capital ................... 19,942,428 20,364,333
Stock warrants ............................... -- 368,000
Deferred compensation ........................ (335,836) (245,829)
Retained deficit ............................. (7,177,950) (22,131,900)
------------ ------------
Total shareholders' equity (deficit) ........... 12,383,998 (1,688,539)
------------ ------------
Total liabilities and shareholders' equity
(deficit) ...................................... $ 34,595,832 $ 19,162,160
============ ============
See accompanying notes.
<PAGE>
EQUALNET HOLDING CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30,
--------------------------------------------
1995 1996 1997
------------ ------------ ------------
Sales .......................... $ 67,911,405 $ 78,354,858 $ 46,588,496
Cost of Sales .................. 54,655,313 61,807,113 34,481,128
------------ ------------ ------------
13,256,092 16,547,745 12,107,368
Selling, general and
administrative expenses ...... 8,936,102 3,719,573 2,453,814
Depreciation and amortization .. 1,355,832 5,933,890 5,999,898
Write down of assets ........... -- 6,882,661 4,400,000
------------ ------------ ------------
Operating income (loss) ........ 2,964,158 (9,988,379) (10,746,344)
Other income (expense)
Interest income ................ 498,280 55,546 3,685
Interest expense ............... (526,733) (679,745) (1,022,284)
Other expense .................. (64,403) (464,688) (870,290)
------------ ------------ ------------
(92,856) (1,088,887) (1,888,889)
Income (loss) before federal
income taxes ................... 2,871,302 (11,077,266) (12,635,233)
Provision (benefit) for federal
income taxes ................... 507,057 (2,659,853) 2,345,311
------------ ------------ ------------
Net income (loss) .............. $ 2,364,245 $ (8,417,413) $(14,980,544)
============ ============ ============
Net loss per share ............. $ (1.40) $ (2.46)
============ ============
Unaudited pro forma information
Pro forma adjustment for taxes . (612,751)
Pro forma net income ........... $ 1,751,494
============
Pro forma net income per share . $ 0.38
============
Weighted average number of
shares ......................... 4,618,043 6,017,332 6,096,932
============ ============ ============
See accompanying notes.
<PAGE>
EQUALNET HOLDING CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
EQUALNET EQUALNET EQUALNET ADDITIONAL
CORPORATION HOLDING CORP. HOLDING CORP. PAID-IN
COMMON STOCK COMMON STOCK TREASURY STOCK CAPITAL
----------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1994 $ 2,000 $ - $ - $ 34,907
Shareholder distributions
Net Income ($0.61 per share)
Exchange of stock (2,000 shares of EqualNet
Corporation common stock for 4,000,000 shares
of EqualNet Holding Corp. common stock) (2,000) 40,000 (34,907)
Issuance of stock (1,810,000 shares) 18,100 17,831,690
Issuance of stock (150,111 shares) 1,501 1,534,145
Grant rights to 63,638 shares of stock to key
employees 636 699,364
Amortization of deferred compensation
----------------- ----------------- ---------------- ----------------
Balance, June 30, 1995 - 60,237 - 20,065,199
Forfeiture of 18,182 shares of stock granted to
key employees (77,229) (122,771)
Forfeiture of 3,658 shares of stock granted to key
employees for tax withholdings payable (27,652)
Net Loss ($1.40 per share)
Amortization of deferred compensation
----------------- ----------------- ---------------- ----------------
Balance, June 30, 1996 - 60,237 (104,881) 19,942,428
Net Loss ($1.40 per share)
Common stock and warrants issued in acquisition 1,501 448,499
Stock warrants issued with debt
Amortization of deferred compensation
----------------- ----------------- ---------------- ----------------
Balance, June 30, 1997 $ - $ 61,738 $ (104,881) $20,364,333
================= ================= ================ ================
DEFERRED RETAINED
COMPENSATION WARRANTS EARNINGS TOTAL
---------------- ---------------- ----------------- -----------------
Balance, June 30, 1994 $ - $ - $ 1,313,791 $ 1,350,698
Shareholder distributions (2,435,480) (2,435,480)
Net Income ($0.61 per share) 2,364,245 2,364,245
Exchange of stock (2,000 shares of EqualNet
Corporation common stock for 4,000,000 shares
of EqualNet Holding Corp. common stock) (3,093) -
Issuance of stock (1,810,000 shares) 17,849,790
Issuance of stock (150,111 shares) 1,535,646
Grant rights to 63,638 shares of stock to key
employees (700,000) -
Amortization of deferred compensation 40,825 40,825
---------------- ---------------- ----------------- -----------------
Balance, June 30, 1995 (659,175) - 1,239,463 20,705,724
Forfeiture of 18,182 shares of stock granted to
key employees 200,000 -
Forfeiture of 3,658 shares of stock granted to key
employees for tax withholdings payable (27,652)
Net Loss ($1.40 per share) (8,417,413) (8,417,413)
Amortization of deferred compensation 123,339 123,339
---------------- ---------------- ----------------- -----------------
Balance, June 30, 1996 (335,836) - (7,177,950) 12,383,998
Net Loss ($1.40 per share) (14,980,544) (14,980,544)
Common stock and warrants issued in acquisition 199,000 649,000
Stock warrants issued with debt 169,000 169,000
Amortization of deferred compensation 90,007 90,007
---------------- ---------------- ----------------- -----------------
Balance, June 30, 1997 $ (245,829) $ 368,000 $(22,131,900) $ (1,688,539)
================ ================ ================= =================
</TABLE>
See accompanying notes.
30
<PAGE>
EQUALNET HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30,
-----------------------------------------
1995 1996 1997
------------- ------------- -------------
OPERATING ACTIVITIES
Net income (loss) $2,364,245 $(8,417,413) $(14,980,544)
Adjustments to reconcile net income
(loss) to cash provided by (used in)
operating activities:
Depreciation and amortization 1,355,832 5,933,890 5,999,898
Provision for bad debt 1,033,160 3,820,701 1,450,954
Provision for due from agents - 1,000,000 -
Provision (benefit) for deferred
income taxes (43,986) (3,486,686) 2,228,077
Loss on sale of assets - 1,508 341
Imputed interest on note payable - - 33,058
Compensation expense recognized
for common stock issue 40,825 123,339 90,007
Credit from carrier - - (1,200,000)
Write down of long term assets - 6,882,661 4,400,000
Change in operating assets and
liabilities:
Accounts receivable (15,067,615) 2,839,996 3,596,968
Due from agents - (3,104,424) (1,765,853)
Prepaid expenses and other (14,667) (372,241) 1,467,672
Other assets (268,160) - (479,207)
Accounts payable and accrued
liabilities 9,859,253 (4,989,828) 2,856,222
------------- ------------- -------------
Net cash provided by (used in)
operating activities (741,113) 309,443 3,973,568
INVESTING ACTIVITIES
Acquisition of accounts receivable - (771,894) -
Purchase of property and equipment (3,291,321) (4,404,531) (272,010)
Proceeds from certificates of deposit 300,000 - -
Proceeds from notes receivable 209,245 - -
Proceeds from sale of equipment - 1,010 4,331
Commission rate buydown - (710,347) -
Purchase of customer accounts (10,493,960) (8,468,472) (76,457)
------------- ------------- -------------
Net cash used in investing activities (13,276,036) (14,354,234) (344,136)
FINANCING ACTIVITIES
Proceeds from subordinated note
payable - - 3,000,000
Repayments on long term debt (84,379) - -
Proceeds from revolving line
of credit 57,875,733 88,316,775 45,610,000
Repayments on revolving line
of credit (57,329,188) (78,715,170) (51,708,803)
Proceeds from sale leaseback
transaction - 1,434,144 -
Repayments on capital lease
obligations (63,000) (108,000) (84,000)
Proceeds from issuance of stock 19,385,436 - -
Shareholder distributions (2,435,481) - -
Acquisition of treasury stock - (27,652) -
------------- ------------- -------------
Net cash provided by (used in)
financing activities 17,349,121 10,900,097 (3,182,803)
------------- ------------- -------------
Net increase (decrease) in
cash and equivalents 3,331,972 (3,144,694) 446,629
Cash and equivalents,
beginning of year 194,571 3,526,543 381,849
============= ============= =============
Cash and equivalents, end of year $3,526,543 $ 381,849 $ 828,478
============= ============= =============
See accompanying notes.
31
<PAGE>
EQUALNET HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
EqualNet Communications, Inc. was incorporated in Texas on July 18, 1990. On
November 28, 1994, the company changed its name from EqualNet Communications,
Inc. to EqualNet Corporation. Prior to its initial public offering of common
stock, the company formed EqualNet Holding Corp. (the Company) as a newly
organized holding company. Subsequent to the reorganization, EqualNet
Corporation became a wholly owned subsidiary of the Company. (See also Note 12.)
The Company is a national long-distance telephone company contracting
primarily with AT&T Corp. ("AT&T") and Sprint Communications Company, L.P.
("Sprint"), through its contract with The Furst Group, a privately held reseller
of long-distance and other telecommunications services, (collectively the
"Carriers") to provide switching and long-haul transmissions of its traffic. The
Carriers bill the Company at contractual rates for the combined usage of the
Company's nationwide base of customers utilizing their network. The Company
bills its customers individually at rates established by the Company utilizing
the Company's own billing system.
A significant amount of the Company's business is acquired through
independent marketing agents. Substantially all of the agreements with these
independent marketing agents provide for the Company to charge a percentage, as
specified by the agreement, of overdue receivables (typically defined as
accounts delinquent in the payment of charges for more than 120 days after the
invoice date) on accounts placed by the independent marketing agents against
commissions otherwise payable to these independent marketing agents. In the
event the Company later collects on any account which was previously declared a
bad debt, the Company credits back to the independent marketing agent the amount
of commission previously deducted. Bad debt expenses charged against the agent
commissions due were $1,729,419, $2,536,883 and $30,156 in 1995, 1996, and 1997,
respectively. Customers placed by one independent marketing agent accounted for
approximately 40%, 28% and 23% of sales in 1995, 1996 and 1997, respectively.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of EqualNet
Holding Corp. and all majority-owned subsidiaries. All significant intercompany
transactions have been eliminated. The Company's investments in associated
companies owned 20% or more (but not in excess of 50%) are accounted for using
the equity method.
PROPERTY AND EQUIPMENT
Computer equipment, office furniture and fixtures, and leasehold improvements
are carried at cost, less accumulated depreciation and amortization.
Depreciation and amortization are provided for by the straight-line method over
the estimated useful lives of the depreciable assets which range from four to
ten years. Leasehold improvements are amortized over the shorter of their useful
lives or the term of the lease.
CUSTOMER ACQUISITION COSTS
Customer acquisition costs represent the direct costs of an acquired billing
base of customer accounts and orders bought on an individual basis from certain
agents or telemarketers. These costs are amortized by applying the Company's
attrition rate associated with the acquired customers each month against the
unamortized balance of the previous month (declining balance method) over a
five-year period, switching to the straight-line method when the straight-line
method results in greater amortization. The Company's monthly attrition rate
used to amortize deferred acquisition costs was 3.0% for fiscal year 1995.
During fiscal year 1996, the attrition rate used to amortize customer
acquisition costs was 3% through March 31, 1996 and 5% thereafter. The attrition
rate used during fiscal year 1997 was 9%. The attrition rates used by the
Company in amortizing customer acquisition costs is an estimate
32
<PAGE>
of the attrition rate of the acquired customer bases, and actual attrition may
differ from the estimates used. The Company evaluates the attrition rate of the
acquired customer base each quarter and then adjusts the attrition rate as
necessary. The Company periodically evaluates the unamortized balance of
customer acquisition costs to determine whether there has been any impairment by
comparing the undiscounted future cash flows of the acquired customer base to
the net book value of the associated customer base. If it appears that an
impairment has been incurred, management will write the unamortized balance down
to its fair value.
During the years ended June 30, 1996 and 1997, the Company wrote off $4.6
million and $4.4 million of customer acquisition costs as a result of higher
than expected attrition associated with those accounts.
PREPAID COMMISSIONS
During the year ended June 30, 1996, the Company modified the agreement with
one of its principal agents to reduce the commission rate the Company pays to
the agent on existing customers in exchange for $1.2 million from the Company.
The Company paid $710,000 in cash, with the remainder from the transaction being
utilized to offset advances due from the agent to the Company. The prepaid
commissions are amortized by applying the Company's attrition rate associated
with the underlying customers each month against the unamortized balance of the
previous month (declining balance method) over a three-year period, switching to
the straight-line method when the straight-line method results in greater
amortization.
CASH AND CASH EQUIVALENTS
Highly liquid investments with a maturity of three months or less are
considered cash equivalents.
GOODWILL
Goodwill represents the excess cost over the net assets of an acquired
business and is being amortized on a straight line basis over ten years.
REVENUE RECOGNITION
Revenue is recognized in the month in which the Company's customers complete
the telephone call.
INCOME TAXES
The Company accounts for deferred income taxes using the liability method.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk are accounts receivable. The Company continuously evaluates the
credit worthiness of its customers' financial conditions and generally does not
require collateral. The Company's allowance for doubtful accounts is based on
current market conditions and management's expectations. Write-offs of accounts
receivable, net of recoveries, were $79,431, $2.46 million and $3.61 million for
the years 1995, 1996, and 1997, respectively.
33
<PAGE>
EARNINGS PER SHARE
Earnings per share is computed by dividing net income for the period by the
weighted-average number of shares of common stock and dilutive common stock
equivalents outstanding for the period.
PRO FORMA EARNINGS PER SHARE
Pro forma earnings per share is based on pro forma earnings after giving
effect to a pro forma tax adjustment (See Note 3) applicable to common shares
and the average number of shares of common stock equivalents (stock grants)
outstanding.
TREASURY STOCK
Treasury stock is accounted for using the cost method. During 1996 two
employees terminated their employment with the Company which resulted in the
forfeiture of 18,182 shares which had been granted to them contingent upon
future service (See Note 13). As a result, $77,229 in deferred compensation is
recorded as the cost of these treasury shares. The cost of the treasury shares
was determined by the closing price per share of common stock on the date of
forfeiture which ranged from $3.84 to $5.88 per share. In addition, upon the
vesting of stock grants by certain employees, the employees elected to reduce
the number of shares received to satisfy federal income tax withholding
liabilities to be paid by the Company on the employee's behalf. The Company
received 3,568 treasury shares required to satisfy the liability based on the
market value of the exchanged shares on the date of the exchange, resulting in a
total increase in treasury stock of $27,652.
ACCOUNTING FOR EMPLOYEE STOCK BASED COMPENSATION
The Company accounts for employee stock based compensation in accordance with
APB Opinion 25 and expects to continue doing so.
NEW ACCOUNTING PRONOUNCEMENT
The FASB issued Statement No. 125, ACCOUNTING FOR TRANSFERS AND SERVICING OF
FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES, which requires an entity to
recognize the financial and servicing assets it controls and the liabilities it
has incurred and to derecognize financial assets when control has been
surrendered in accordance with the criteria provided in the Statement. The
Company will apply the new rules prospectively to transactions beginning in the
first quarter of fiscal 1998. Based on the current circumstances, the Company
believes the application of the new rules will not have a material impact on the
financial statements.
RECLASSIFICATION
Certain balances from the year ending June 30, 1996 have been reclassified to
be consistent with June 30, 1997 classifications.
2. LIQUIDITY AND WORKING CAPITAL DEFICIT
For the years ended June 30, 1996 and 1997 the Company reported pre-tax
losses of $11.1 million and $12.6 million, respectively. Declining revenues
beginning in the second quarter of fiscal year 1996 were attributable to a
number of internal and external factors. With the rapid growth of the Company,
provisioning time -- the time it takes the Company's primary underlying
long-distance carrier to activate new customers -- rose sharply, from
approximately 20 days to approximately 45 days. In addition, NetBase, the
Company's customer management system, was not equipped to handle the rapid
growth, leading to delays in providing the Company's customers with accurate
bills on a timely basis. This problem was compounded when the Company converted
to the NetBase Plus operating system ("NetBase Plus"), a new customer management
information system. After implementation, NetBase Plus was determined to have
inherent design flaws which resulted in further billing and provisioning
problems and the entire system was subsequently abandoned. These conditions
caused customer attrition rates to increase and, although the number of new
customers placed on the Company's service was increasing, actual revenues were
declining due to the
34
<PAGE>
higher than expected loss of existing customers. The problems with the customer
management systems also lead to difficulties in assimilating and managing a
substantial acquired customer base. The inability of the Company to successfully
transfer the acquired base into NetBase resulted in difficulties in billing and
servicing the customer accounts and a greater than expected migration of the
base to other long-distance providers. The higher than expected attrition on the
acquired customer base and other purchased customers resulted in the impairment
of the carrying value of the customer bases and the Company recorded a $4.6
million and $4.4 million charge to earnings to reduce the unamortized balance to
its fair value during fiscal year 1996 and fiscal year 1997, respectively.
During fiscal year 1996, the Company also wrote off approximately $2.2 million
in capitalized software development costs associated with the NetBase Plus
system. The difficulties in billing and provisioning accounts along with the
shift by the Company to more purchased orders on which the Company had full
exposure to uncollectible accounts as compared to commissioned orders whereby
the agents shared in a substantial portion of the risk on uncollectible accounts
resulted in a substantial increase in bad debt expense. The Company's collection
efforts were also hindered by the failure of NetBase Plus to produce some of the
necessary information to allow for the most effective method of collection. The
Company therefore recorded an additional charge to uncollectible receivables of
$2.6 million in the third quarter of fiscal year 1996. Selling, general and
administrative costs also increased substantially in 1996 as compared to 1995.
The historical rapid growth and management's expectations resulted in a
structure designed for continued growth with an increase in staffing, equipment
and office space. The unanticipated decline in revenues obscured by the lack of
accurate and timely management information due to the problems with NetBase Plus
resulted in an inefficient cost structure. In addition, substantial professional
fees were incurred as the Company aggressively pursued acquisition targets in
early fiscal 1996, and other professional fees incureased due to cost associated
with being a public company, and costs associated with the negotiation of
amendments to the line of credit and the raising of additional capital.
By December 31, 1995, the remaining funds from the initial public offering
had been expended, and, due to the operating losses sustained in the second half
of fiscal 1996 and all of fiscal 1997 and the declining revenue base, the
Company reached its maximum borrowing capacity under its revolving line of
credit facility. Additional sources of liquidity during this time period have
been an extension of payment terms from the Company's major suppliers, although
there can be no assurance that any such extensions will be granted in the
future. The Company also funded its operations during the year ended June 30,
1997 through advances under its revolving credit facility, a $3.0 million
infusion of capital from The Furst Group, Inc. ("Furst"), a privately held
reseller of long-distance and other telecommunications services, and through
operating cash flows. The Company's borrowing capacity under its credit facility
continued to decline as a result of operating losses, a decline in the revenue
base and the exclusion of certain receivables from the criteria of eligible
receivables. At current levels of operations and with a declining borrowing
base, the Company must seek additional capital and continued concessions from
its vendors and must continue to reduce expenses to bring them in line with
current levels of revenues.
At June 30, 1997 the Company was in default on certain loan covenants of
its credit agreement. The Company replaced the credit facility under which
borrowings at June 30, 1997 were outstanding with a new arrangement effective
July 7, 1997. The new agreement (see Note 4) bases borrowing capacity on a
percentage of the Company's outstanding receivables. The borrowings under the
new line were sufficient to retire the previous credit agreement and provide
some working capital; however, the amount available under the new agreement does
not generate sufficient capital to satisfy the Company's current liquidity
needs.
35
<PAGE>
3. PRO FORMA INFORMATION (UNAUDITED)
As described in Note 5, the Company in 1992 elected to be treated as an S
corporation for federal income tax purposes. Prior to its initial public
offering, as discussed in Note 12, the Company terminated its status as an S
corporation. The pro forma tax provision has been calculated as if the Company's
taxable results were taxable as a C corporation under the Internal Revenue Code
for the period ended March 7, 1995, calculated in conformity with Financial
Accounting Standards Board Statement No. 109, "Accounting for Income Taxes" (FAS
109) at an effective tax rate of 39%. Under the provisions of FAS 109, deferred
tax assets or liabilities are recorded for the estimated future tax effects
attributable to temporary differences between the bases of assets and
liabilities recorded for financial and tax reporting purposes. Assuming the
change in its tax status occurred July 1, 1992, the Company would have recorded
additional income tax expense of $612,751 in 1995.
4. DEBT
At June 30, 1997, the Company had a $7,500,000 revolving line of credit with
a bank which expired July 1, 1997. Interest on the outstanding balance was prime
plus 6% (14.5% at June 30, 1997). The maximum borrowings under the revolving
line of credit were subject to borrowing base limitations as defined in the
agreement. There was $189,365 available to be borrowed against the line of
credit at June 30, 1997. The line of credit was secured by the accounts
receivable of the Company. The revolving line of credit required the Company to
meet certain restrictive covenants including tangible net worth and debt to
equity requirements. The Company was not in compliance with the covenants at
June 30, 1997. Additionally, the agreement limited the Company's ability to make
dividend payments.
The Company replaced the revolving line of credit under which borrowings at
June 30, 1997 were outstanding with a new arrangement effective June 18, 1997
and which funded July 7, 1997. The new agreement is essentially a receivable
facturing arrangement which bases borrowing capacity on a percentage of the
Company's outstanding receivables up to a maximum allowable amount of $8,000,000
and allows for the lender to cease funding of new receivables without prior
written notice at the lenders option. Interest on the outstanding balance is
prime plus 4.5% per annum.
Effective February 3, 1997, the Company executed an agreement with Furst,
pursuant to which Furst 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 Furst, 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 and Michael L. Hlinak to serve as Executive
Officers 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 expire on December 31, 1999. In connection with this transaction, the
Company began purchasing telecommunications services, effective November 1,
1996, under Furst's contract with Sprint Communications Company, L.P. at costs
less than what the Company had been paying.
At June 30, 1996, the Company had a $12,500,000 revolving line of credit with
a bank which would have expired December 1, 1997. Interest on the outstanding
balance was prime plus 3% (11.25% at June 30, 1996). The maximum borrowings
under the revolving line of credit were subject to borrowing base limitations as
defined in the agreement. The line of credit was secured by the
accounts receivable of the Company. The revolving line of credit required the
Company to meet certain restrictive covenants including tangible net worth and
debt to equity requirements.
36
<PAGE>
Interest paid by the Company during the years ended June 30, 1995, 1996 and
1997, totaled $526,723, $573,721, and $946,665, respectively.
5. FEDERAL INCOME TAXES
From inception to June 30, 1992, the Company was organized as a C corporation
for federal income tax purposes. Effective July 1, 1992, the Company elected S
corporation status and operated as such through March 7, 1995. Accordingly, all
federal income tax liabilities related to income generated by the Company during
that time were borne by the individual shareholders, and no provision for
federal income taxes was recorded by the Company. As a result of the S
corporation election, the deferred federal income tax account as of June 30,
1992, was reclassified to additional paid-in capital during fiscal year 1993.
Prior to its initial public offering, as discussed in Note 10, the Company
terminated its S corporation status. A separate presentation in the accompanying
consolidated statements of income shows a provision for income taxes and net
income for the period ending March 7, 1995 as if all of the Company's operations
had been subject to income taxes for the entire period, and assuming an
effective tax rate of 39%.
The following disclosures relate to balances and activity for the fiscal
years ending June 30, 1996 and 1997.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
June 30, June 30,
1996 1997
----------- -----------
Deferred tax liabilities:
Cash to accrual differences ................. $ (392,500) $ (196,250)
Other, net .................................. (45,172) (62,256)
----------- -----------
Total deferred tax liabilities ................... (437,672) (258,506)
Deferred tax assets:
Amortization of deferred acquisition costs .. 2,425,065 4,769,258
Bad debt allowance .......................... 1,274,536 562,970
Accrued liabilities ......................... 172,134 390,534
Net operating loss carryforward ............. 236,803 2,922,038
Other ....................................... 104,910 258,641
----------- -----------
Total deferred tax assets ........................ 4,213,448 8,903,441
Valuation allowance .............................. (1,547,699) (8,644,935)
----------- -----------
Net deferred tax assets .......................... $ 2,228,077 $ 0
=========== ===========
The Company recorded a valuation allowance amounting to the entire net deferred
tax asset balance at June 30, 1997 due to recent operating losses which give
rise to uncertainty as to whether the deferred tax asset is realizable.
The Company has a net operating loss carryforward of $7.5 million which is
available to offset future taxable income through the year 2012. Any future
capital contribution which results in a change in control may restrict the
Company's ability to utilize the net operating loss carry forwards.
37
<PAGE>
The differences between income taxes computed at the federal statutory income
tax rate and the provision for income taxes for the years ended June 30, 1996
and 1997 are as follows:
1996 1997
----------- -----------
Income tax benefit computed at the federal
statutory rate ............................... $(3,766,270) $(4,295,979)
State income tax benefit ....................... (443,841) (518,532)
Valuation allowance ............................ 1,547,699 7,097,236
Other .......................................... 2,559 62,586
----------- -----------
Provision (benefit) for federal income taxes ... $(2,659,853) $ 2,345,311
=========== ===========
The provision (benefit) for income taxes for the years ended June 30, 1996
and 1997 consisted of the following:
1996 1997
----------- ----------
Current:
Federal ....................................... $ (476,612) $ 29,275
State ......................................... 850 87,959
----------- ----------
(475,762) 117,234
Deferred:
Federal ....................................... (1,914,217) 1,952,439
State ......................................... (269,874) 275,638
----------- ----------
(2,184,091) 2,228,077
----------- ----------
Provision (benefit) for federal income taxes ..... $(2,659,853) $2,345,311
=========== ==========
Taxes paid during the fiscal years ended June 30, 1995, 1996 and 1997 totaled
$22,595, $1,355,296 and $87,959, respectively.
6. COMMITMENTS AND CONTINGENCIES
COMMITMENTS WITH PROVIDERS
At June 30, 1997 the Company had an agreement with AT&T which expires in
April 2000. At expiration or any time prior, the Company can negotiate with AT&T
for the renewal of all material aspects of the present agreement with AT&T. In
the event that this is not possible, the Company may be able to negotiate
equally beneficial terms with other major telecommunications companies. Should
neither of these alternatives be possible, there could be materially adverse
implications for the Company's financial position and operations. Management's
experience has been to renegotiate the multi-year agreement every six months,
and management believes the Company will be able to continue to renegotiate the
agreement.
The agreement covers the pricing of the services and establishes minimum
semi-annual revenue commitments ("MSARCs") which must be met to receive the
contractual price and to avoid shortfall penalties. The commitment with AT&T is
segregated into components differentiated by the type of traffic. At June 30,
1997, the Company had not yet reached the completion of the term of the first
MSARC; however, the Company was $476,540 below the cumulative pro rata monthly
commitment. Should the Company continue at similar revenue levels, it would be
in a shortfall at the end of the first MSARC period in October 1997.
Historically, the Company has been able to negotiate a settlement with the
carrier which has resulted in no penalty being incurred by the Company and no
amount has been accrued in the financial statements. No assurances can be made
that the Company will be able to reach similar favorable settlements with the
carrier should it continue to fail to meet its commitment.
Total future minimum usage commitments to AT&T at June 30, 1997 are as
follows:
YEAR ENDING JUNE 30,
--------------------
1998 $18,666,666
1999 20,000,000
2000 16,666,667
--------------
$55,333,333
38
<PAGE>
If the contract with AT&T is terminated prior to the expiration of the full
term, either by the Company or by AT&T for non-payment, the Company will be
liable for the total amount of the unsatisfied MSARC for the period in which the
discontinuance occurs and for 100% of the MSARCs for each semi-annual period
remaining in the contract tariff term. In addition, if the Company does not meet
the first MSARC, it will be required to refund $398,375 in credits issued the
Company by AT&T.
REGULATORY APPROVAL
The Company's intrastate long-distance telecommunications operations are
subject to various state laws and regulations, including prior certification,
notification or registration requirements. The Company must generally obtain and
maintain certificates of public convenience and necessity from regulatory
authorities in most states in which it offers service. The Company is presently
responding to consumer protection inquiries from eleven states. The inquiries do
not state specific damage amounts and the potential liability, if any, is not
determinable. Management believes these inquiries will be resolved
satisfactorily, although settlement offers may be made or accepted in instances
in which it is determined to be cost effective. As of June 30, 1997, the Company
had recorded an accrual of $390,000 for such estimated settlements. No
assurances can be made however, that the inquiries can be settled for amounts
within the current amount accrued or that additional states will not begin
inquiries or that the current accrual will be sufficient to provide for existing
or future settlements. Failure to resolve inquiries satisfactorily or reach a
settlement with the regulatory agencies could, in the extreme, result in the
inability of the Company to provide long distance service in the jurisdiction
requiring regulatory certification. Any failure to maintain proper certification
could have a material adverse effect on the Company's business.
CAPITAL LEASES
During 1995, the Company entered into long-term lease agreements for the
purchase of equipment and furniture. The leases were capitalized and the related
obligations were recorded in the accompanying financial statements based on the
present value of future minimum lease payments. The gross balance of assets
included in property and equipment at June 30, 1996 and 1997 is $306,000.
Accumulated depreciation associated with these assets at June 30, 1996 and 1997
was $172,000, and $255,000 respectively. Depreciation on these assets is
included in depreciation and amortization expense. Future minimum lease payments
related to capital lease obligations are as follows:
Year ended June 30, 1998 .................................... 53,678
--------
Total minimum lease payments ................................ 53,678
Less amounts representing interest (9.4% to 17.0% rate) ..... (2,678)
--------
Present value of future minimum lease payments .............. 51,000
Less current maturities of capital lease
obligations ............................................... 51,000
--------
Long-term obligations under capital leases .................. $ 0
========
OPERATING LEASES
The Company leases certain equipment and office space under operating leases
that expire over the next nine years. Rental expense under operating leases was
$695,166, $1,715,636, and $2,137,857 in 1995, 1996 and 1997, respectively.
Future minimum lease payments under noncancelable operating leases are as
follows:
YEAR ENDED JUNE 30,
--------------------
1998 1,960,554
1999 1,297,899
2000 692,932
2001 662,550
2002 662,550
Thereafter 1,719,004
----------
$6,995,489
==========
39
<PAGE>
The Company has entered into several agreements for the sale and leaseback of
certain computer equipment and office furniture. The Company has purchase and
lease renewal options at projected future fair market values under the
agreements. The leases are classified as operating leases in accordance with the
FASB Statement No. 13 - "Accounting for Leases". The leases have thirty-six
month terms and the future minimum lease payments are included in the table
above. Lease payments on these transactions average $477,000 annually.
7. WRITE DOWN OF ASSETS
The Company wrote down assets during the year ended June 30, 1996 and
1997, totaling $6.9 million and $4.8 million, respectively. Included in the
write downs were $4.6 million and $4.4 million non-cash charges in fiscal 1996
and 1997, respectively, to reduce the carrying value of acquired customer bases
(customer acquisition costs) to the present value of the expected future cash
flows associated with the underlying customer accounts and a $2.2 million
non-cash charge in fiscal 1996 to eliminate capitalized software development
costs associated with the NetBase Plus system. The write down of deferred
acquisition costs was necessitated by continued greater than expected turnover
of acquired customer bases which resulted from difficulties in billing and
servicing the Company's customer accounts.
In 1995 the Company began development of a new customer management
information system, the NetBase Plus operating system ("NetBase Plus"). In the
second quarter of fiscal year 1996, the Company implemented NetBase Plus. After
implementation, NetBase Plus was determined to have inherent design flaws which
resulted in inefficient operation and the entire system was subsequently
abandoned. The Company reverted from NetBase Plus to an improved form of
NetBase, the Company's original customer management information system, in April
1996. As a result, the Company wrote off approximately $2.2 million in
capitalized software development costs associated with the NetBase Plus system
in fiscal year 1996.
8. 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 $379,328. Total purchase
consideration was $1 million. 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. Substantially all of the purchase price was
recorded as goodwill and is being amortized over ten years using the straight
line method of amortization. The acquisition was accounted for as a purchase and
the operations of Creative Communications, Inc. is included in the operations of
the Company from the date of acquisition. The pro forma effect of the
acquisition on the prior and current year is not material.
9. EMPLOYMENT AGREEMENT
The Company has employment agreements with its president and chief operating
officer. The agreements include certain conditions of employment including a
covenant not to compete should they terminate employment with the Company.
10. SAVINGS PLAN
The Company sponsors a 401(k) Plan (the "Plan") which became effective
January 1, 1993. The Plan is open to all employees over the age of 21. To become
eligible, an employee must have been employed on the effective date or must
complete six consecutive months of employment. The Plan gives the Company the
option to determine the amount they will contribute each year. The Company
currently matches 50% of the first 6% contributed by the participants.
Contributions were made to the Plan in the amount of $46,217, $81,597 and
$63,061 for the years ended June 30, 1995, 1996 and 1997, respectively.
40
<PAGE>
11. RELATED PARTY TRANSACTIONS
During the year ended June 30, 1996, the Company entered into a joint venture
with MetroLink, Inc., an Illinois Corporation ("MetroLink"), the purpose of
which was to market and sell wholesale long-distance services to the Company and
other long-distance resellers. The joint venture, Unified Network Services, LLC
("UNS"), is owned 49% by EqualNet Wholesale Services, Inc., a Delaware
Corporation and wholly owned subsidiary of the Company, 25% by MetroLink, 25% by
MediaNet, Inc., an Illinois Corporation and wholly owned subsidiary of
MetroLink, and 1% by EqualNet Corporation. The Company utilized the services of
UNS during fiscal years 1996 and 1997 to provide wholesale long-distance for
resale and had accounts payable, net of advances, to UNS at June 30, 1996 and
1997 of $24,757 and $644,301, respectively.
The Company utilizes the marketing services of a marketing company managed
and directed by the brother-in-law of one of the principal shareholders of the
Company. The Company paid commissions to the marketing company of $152,687,
$75,388 and $6,223 in 1995, 1996, and 1997, respectively. Advances due the
Company from the marketing company were $64,735, $43,015 and $0 at June 30,
1995, 1996 and 1997, respectively.
12. INITIAL PUBLIC OFFERING
The Company completed an initial public offering of 1,960,000 shares of its
common stock (the Offering) in March 1995. The Company used a portion of the net
proceeds from the Offering to repay amounts outstanding under the Company's
principal credit facility, pay various accounts payable and accrued expenses,
fund a dividend payable to its existing shareholders, fund acquisitions of
customer accounts and of other resellers, and for working capital and general
corporate purposes.
In April 1995, the underwriters exercised an over-allotment option and
purchased 150,111 shares of Common Stock from the Company at the original issue
price of $11 per share less the underwriting discount of $0.77 per share. Net
proceeds to the Company totaled $1,535,646.
Prior to the Offering, the Company terminated its S-Corporation status and
formed EqualNet Holding Corp. as a newly organized holding company. Each
shareholder of EqualNet Corporation contributed each share of common stock in
EqualNet Corporation to the Company in exchange for 2,000 shares of common stock
in the Company. Subsequent to the reorganization, EqualNet Corporation became a
wholly owned subsidiary of the Company. The authorized capital stock of the
Company consists of 20 million shares of Common Stock and 1,000,000 shares of
Preferred Stock.
13. STOCK PURCHASE PLAN AND STOCK OPTION PLANS STOCK PURCHASE PLAN
During 1995, the Company adopted the EqualNet Holding Corp. Employee Stock
Purchase Plan (the Stock Purchase Plan) in which substantially all employees are
eligible to participate. The Stock Purchase Plan provides eligible employees of
the Company and its subsidiaries an opportunity to purchase shares of Common
Stock through after-tax payroll deductions. The Company will match contributions
in an amount equal to 15% of each participant's contribution. The Stock Purchase
Plan is administered by an independent administrator which purchases shares of
Common Stock on the open market with the amounts contributed by the participants
and the matching contributions made by the Company. The Stock Purchase Plan was
implemented during fiscal year 1996 and the Company contributed $4,653 and
$13,704 on behalf of employees toward the purchase of Company stock during the
years ended June 30, 1996 and 1997, respectively.
STOCK OPTION AND RESTRICTED STOCK PLAN
During 1995, the Company adopted the EqualNet Holding Corp. Stock Option and
Restricted Stock Plan (the 1995 Plan). The 1995 Plan is designed to provide
certain full-time key employees, including officers and directors of the
Company, with additional incentives to promote the success of the Company's
business and to enhance the ability to attract and retain the services of
qualified persons. The 1995 Plan is administered by a committee of no less than
two persons (the Committee) appointed by the Board of Directors. Committee
members cannot be employees of the Company and must not have been eligible to
participate under the 1995 Plan for a period of at
41
<PAGE>
least one year prior to being appointed to the committee. Under the 1995 Plan,
the Committee may grant restricted stock awards or options to purchase up to an
aggregate of 800,000 shares of Common Stock. The exercise price of an option
granted pursuant to the 1995 Plan is determined by the Committee on the date the
option is granted. In the case of a grant to an employee who owns ten percent or
more of the outstanding shares of Common Stock (a 10% Shareholder), the exercise
price of each option under the 1995 Plan may not be less than 110% of the fair
market value of the Common Stock on the date of the grant. No option may be
granted under the 1995 Plan for a period of more than ten years. In the case of
a 10% Shareholder, no option may be granted for a period of more than five
years. Options under the 1995 Plan are considered non-incentive stock options
when the aggregate fair market value of the stock with respect to which the
options are exercisable for the first time by the option holder in any calendar
year, under the 1995 Plan or any other incentive stock option plan of the
Company, exceeds $100,000. Under the 1995 Plan, the Committee may issue shares
of restricted stock to employees for no payment by the employee or for a payment
below the fair market value on the date of grant. The restricted stock is
subject to certain restrictions described in the 1995 Plan, with no restrictions
continuing for more than five years from the date of the award. The 1995 Plan
may be amended by the Board of Directors without any requirement of shareholder
approval, except as required by Rule 16b-3 under the Securities Exchange Act of
1934 and the incentive option rules of the Internal Revenue Code of 1986. The
Company granted restricted stock awards for 63,638 shares of Common Stock having
an aggregate fair market value, based on the per share price of the Common Stock
at the measurement date, March 14, 1995, of $700,000 to certain key employees,
none of whom is a director or executive officer of the Company. These employees
will not be required to make any payment for these restricted stock awards,
which vest over five years in 20% increments. Restrictions on transfer and
forfeiture provisions upon termination of employment will apply to the
restricted stock covered by the awards for a period of five years, after which
time the restrictions will lapse and the stock will be owned by the employees
free of further restrictions under the 1995 Plan. Two employees terminated
employment during fiscal year 1996 resulting in the forfeiture of restricted
stock awards totaling 18,182 shares of Common Stock. These shares were held in
treasury at June 30, 1997.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
The shareholders approved on November 28, 1995, the adoption of the Non-Employee
Director Stock Option Plan (the "Director Option Plan"). The Director Option
Plan is designed to attract and retain the services of experienced and
knowledgeable non-employee directors of the Company and to provide an incentive
for such directors to increase their proprietary interest in the Company and in
the Company's long-term success and progress. The Director Option Plan is
administered by the Board of Directors and an aggregate of 250,000 shares of
Common Stock have been authorized and reserved for issuance to non-employee
directors. The aggregate number of shares of Common Stock for which options may
be granted under the Director Option Plan may be adjusted based on certain
anti-dilution provisions contained in the Director Option Plan. On the date of
election, any new non-employee director will be granted an option to purchase
5,000 shares of Common Stock at the fair market value of such stock on the date
that the option is granted. Each stock option granted to a non-employee director
will have a ten-year term, one-third of which will become vested and exercisable
on the first, second and third anniversary of the date of grant, assuming
continued service on the Board of Directors. On the date following each annual
meeting of shareholders, each current non-employee director will be granted an
option to purchase 1,000 shares of Common Stock at the fair market value of such
stock on the date of grant with such annual grants becoming exercisable on the
six month anniversary of the date of grant. All options granted under the
Director Option Plan are non-qualified stock options and may not be repriced. No
awards may be granted under the Director Option Plan after May 8, 2005, or such
earlier date as determined by the Board of Directors. The Director Option Plan
may be amended by the Board of Directors without any requirement of shareholder
approval, except as required by Rule 16b-3 under the Securities Exchange Act of
1934 and the incentive stock option provisions of the Internal Revenue Code of
1986, and except that no amendment may be made more than once every six months
that would change the amount, price or timing of grants under the Director
Option Plan.
42
<PAGE>
There are currently two non-employee directors eligible to participate in the
Director Option Plan. Options to purchase 5,000 shares of common stock awarded
May 9, 1995 with an exercise price of $14 3/4, 1,000 shares of common stock
awarded November 29, 1995, with an exercise price of $17 7/8 per share, 5,000
options to purchase shares of common stock awarded November 30, 1995, with an
exercise price of $18 1/2 per share and options to purchase 2,000 shares of
common stock awarded November 27, 1996 with an exercise price of $2 3/16 are
still outstanding at June 30, 1997.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options is
greater than or equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required
by Statement 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that Statement. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for fiscal 1996 and 1997: risk-free interest rate of 6%; no dividend
yield; volatility factors of the expected market price of the Company's common
stock of 2.3; and a weighted-average expected life of the option of 10 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
1996 1997
------------ -------------
Pro forma net income (loss) ($8,417,413) ($15,583,461)
Pro forma earnings (loss) per share ($1.40) ($2.56)
A summary of the Company's stock option activity, and related information for
the years ended June 30 follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------------ --------------------- -----------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding-
beginning of
year - - 10,000 $14.75 11,000 $16.74
Granted 10,000 $14.75 7,000 18.32 538,000 3.31
Exercised - - - - - -
Forfeited - - (6,000) 15.27 (23,000) 3.87
---------- ---------- -----------
Outstanding-
end of year 10,000 $14.75 11,000 $16.74 526,000 3.57
========== ========== ===========
Exercisable at
end of year - - 2,667 $15.92 3,333 $16.63
Weighted-Average
fair value of
options granted
during the year 14.75 $18.32 $2.73
</TABLE>
Exercise prices for options outstanding under the Stock Option and Restricted
Stock Option Plan (513,000 shares) as of June 30, 1997 ranged from $2.19 to
$4.25. The weighted-average remaining contractual life of those options is 9
years.
<PAGE>
14. INTERIM FINANCIAL DATA (UNAUDITED)
Selected quarterly financial results for the years 1996 and 1997 are
summarized below (in thousands):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
1996
Revenues .................... $ 23,920 $ 19,047 $19,212 $16,176
Gross margin ................ 5,708 5,448 787 4,604
Net income (loss) ........... 881 (2,002) (6,430) (866)
Net income (loss) per share(1) $ 0.15 ($ 0.33) ($ 1.07) ($ 0.14)
1997
Revenues .................... $ 13,315 $ 12,090 $ 10,662 $ 10,521
Gross margin ................ 3,027 2,445 2,818 3,817
Net loss .................... (1,558) (7,151) (1,940) (4,332)
Net loss per share .......... $ (0.26) $ (1.18) $ (0.32) $ (0.70)
The quarter ending December 31, 1996, includes a $4.4 million write down of
deferred acquisition costs (See Note 7). The quarter ending March 31, 1996,
includes a $3.6 million charge to the provision for uncollectible accounts, a
$1.0 million write down of deferred acquisition costs, a $2.2 million write off
of capitalized software development costs associated with the NetBase Plus
system (See Note 7) and $700,000 of other charges which included accruals for
estimated settlements related to disputed carrier charges, long-distance
commitment shortfalls and consumer complaints filed with state agencies.
- ------------
(1) Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share in 1996
does not equal the total computed for the year due to stock transactions
which occurred during the year.
43
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized
EQUALNET HOLDING CORP.
(Registrant)
By: /s/ MICHAEL L. HLINAK
Michael L. Hlinak,
Executive Vice President
and Chief Financial Officer
Dated: September 29, 1997
In accordance with the Securities and Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant and in the
capacities and on the dated indicated:
Signature Title Date
--------- ----- ----
/s/ ZANE D. RUSSELL Chairman of the Board,
Zane D. Russell Chief Executive Officer and September 29, 1997
Director
/s/ MICHAEL L. HLINAK Executive Vice President,
Michael L. Hlinak Chief Operating Officer, Chief September 29, 1997
Financial Officer and Director
/s/ WALTER V. KLEMP Director September 29, 1997
Walter V. Klemp
/s/ TERRY PARKER Director September 29, 1997
Terry Parker
44
EXHIBIT 10.20
RECEIVABLES SALE AGREEMENT
Dated as of June 18, 1997
by and between
EQUALNET CORPORATION,
as Seller, and
RECEIVABLES FUNDING CORPORATION
as Purchaser and Master Servicer
<PAGE>
RECEIVABLES SALE AGREEMENT (the "Agreement"), dated as of June 18,
1997, by and between EQUALNET CORPORATION, a Delaware corporation, as Seller and
Subservicer, and RECEIVABLES FUNDING CORPORATION, a Delaware corporation, as
Purchaser and Master Servicer.
WITNESSETH:
WHEREAS, the Seller desires to sell certain of its telecommunication
receivables and the Purchaser is a corporation formed for the purpose of
purchasing certain telecommunication receivables from time to time;
WHEREAS, the Purchaser shall act in its capacity as the Master Servicer
to perform certain servicing, administrative and collection functions in respect
of the receivables purchased by the Purchaser under this Agreement (the
"Purchased Receivables");
WHEREAS, the Purchaser and the Master Servicer desire that the
Subservicer be appointed to perform certain servicing, administrative and
collection functions in respect of the Purchased Receivables; and
WHEREAS, the Seller has been requested and is willing to act as the
Subservicer.
NOW, THEREFORE, the parties agree as follows:
ARTICLE I - DEFINITIONS
Section 1.1. CERTAIN DEFINED TERMS. The terms used in this Agreement
shall have the respective meanings set forth on Exhibit A.
Section 1.2. OTHER TERMS. All accounting terms not specifically defined
in this Agreement shall be construed in accordance with generally accepted
accounting principles. All terms used in Article 9 of the UCC, and not
specifically defined in this Agreement, are used in this Agreement as defined in
such Article 9.
ARTICLE II - PURCHASE AND SALE; ESTABLISHMENT OF ACCOUNTS
Section 2.1. OFFER TO SELL. Seller shall offer to sell, transfer,
assign and set over to Purchaser those Eligible Receivables set forth on a list
of such Eligible Receivables which shall be delivered by the Seller to the
Purchaser no later than three (3) Business Days prior to each Purchase Date.
Section 2.2. PURCHASE OF RECEIVABLES. Upon receipt of the list of
Eligible Receivables pursuant to Section 2.1, the Master Servicer, in its sole
discretion, will confirm which of the Eligible Receivables offered by Seller
that the Purchaser will Purchase. The Purchase of such Receivables shall occur
upon payment of the Purchase Price. Upon Purchase of the Receivables, Seller
will have sold, transferred, assigned, set over and conveyed to Purchaser, all
of Seller's right, title and interest in and to the Purchased Receivables. The
Seller shall not take any action inconsistent with such ownership and shall not
claim any ownership in any Purchased Receivable. The Seller shall indicate in
its Records that ownership interest in any Purchased Receivable is held by the
Purchaser. In addition, the Seller shall respond to any inquiries with respect
to ownership of a Purchased Receivable by stating that it is no longer the owner
of such Purchased Receivable and that ownership of such Purchased Receivable is
held by the Purchaser. Documents relating to the Purchased Receivables shall be
held in trust by the Seller and the Subservicer, for the benefit of the
Purchaser as the owner of the Purchased Receivables, and possession of any
Required Information relating to the Purchased Receivables so retained is for
the sole purpose of facilitating the servicing of the Purchased Receivables.
Such retention and possession is at the will of the Purchaser and in a custodial
capacity for the benefit of the Purchaser only.
Section 2.3. PURCHASE PRICE AND PAYMENT. The Purchase Price for
Receivables purchased on any Purchase Date shall be an amount equal to the
aggregate Net Values of such Purchased Receivables. The Purchase Price to be
paid
<PAGE>
on such Purchase Date shall be reduced by (a) the Program Fees as of such
Purchase Date, (b) the amount, if any, by which the Seller Credit Reserve
Account (net of withdrawals required hereunder) is less than the Specified
Credit Reserve Balance as of such Purchase Date, (c) any Rejected Receivable
Amount, (c) any Defaulted Receivable Amount, and (e) other amounts due the
Purchaser in accordance with this Agreement.
Section 2.4. ESTABLISHMENT OF ACCOUNTS; CONVEYANCE OF INTERESTS
THEREIN; INVESTMENTS. (a) A Lockbox Account(s) will be established or assigned,
as the case may be, for the benefit of the Purchaser into which all Collections
from Payors with respect to Receivables shall be deposited. The Lockbox
Account(s) will be maintained at the expense of the Seller. The Seller agrees to
deposit all Collections it receives with respect to Receivables in said Lockbox
Account(s) and will instruct all Payors to make all payments on Receivables to
said Lockbox Account(s). Such direction shall be provided to each Payor in a
timely manner mutually agreed upon by the Seller and Purchaser.
(b) The Purchaser has established and shall maintain the "Collection
Account" (the "Collection Account") and the "Seller Credit Reserve Account" (the
"Seller Credit Reserve Account").
(c) The Seller does hereby sell, transfer, assign, set over and convey
to the Purchaser all right, title and interest of the Seller in and to all
amounts deposited, from time to time, in the Lockbox Account(s), the Collection
Account and the Seller Credit Reserve Account. The Purchaser agrees to return in
a timely manner to Seller any payments or amounts received in the Collection
Account other than Collections with respect to Purchased Receivables subject to
(i) that the Purchaser has reasonably sufficient information to properly
identify the underlying Receivable to which such Collection(s) should be applied
and (ii) the satisfaction of any amounts due and owing the Purchaser in
accordance with Section 5.3 of this Agreement. Any Collections relating to
Receivables held by the Seller or the Subservicer pending deposit to the Lockbox
Account(s) as provided in this Agreement, shall be held in trust for the benefit
of the Purchaser until such amounts are deposited into the Lockbox Account(s) or
such other accounts established by the Seller and placed under the sole
direction and control of the Purchaser. All Collections in respect of Purchased
Receivables received by the Seller and not deposited directly by the Payor in
the Lockbox Account(s) shall be remitted to the Lockbox Account(s) or other such
account(s) established by the Seller and which shall be assigned to and under
the sole discretion of the Purchaser on the day of receipt or the following
Business Day if the day of receipt is not a Business Day, and if such
Collections are not remitted on a timely basis, in addition to its other
remedies hereunder, the Purchaser shall be entitled to receive a late charge
(which shall be in addition to the Program Fee) equal to 12% per annum or the
maximum rate legally permitted if less than such rate, calculated as of the
first Business Day of such delinquency.
Section 2.5. GRANT OF SECURITY INTEREST. It is the intention of the
parties to this Agreement that each payment of the Purchase Price by the
Purchaser to the Seller for Purchased Receivables to be made under this
Agreement shall constitute part of the purchase and sale of such Purchased
Receivables and not a loan. In the event, however, that a court of competent
jurisdiction were to hold that the transaction evidenced by this Agreement
constitutes a loan and not a purchase and sale, it is the intention of the
parties that this Agreement shall constitute a security agreement under the UCC
and any other applicable law, and that the Seller shall be deemed to have
granted to the Purchaser a first priority perfected security interest in all of
the Seller's right, title and interest in, to and under the Purchased
Receivables; all payments of principal of or interest on such Purchased
Receivables; all amounts on deposit from time to time in the Lockbox Account(s),
the Collection Account and the Seller Credit Reserve Account; all other rights
relating to and payments made under this Agreement, and all proceeds of any of
the foregoing.
Section 2.6. FURTHER ACTION EVIDENCING PURCHASES. The Seller agrees
that, from time to time, at its expense, it will promptly execute and deliver
all further instruments and documents, and take all further action, that may be
necessary or appropriate, or that the Purchaser may reasonably request, in order
to perfect, protect or more fully evidence the transfer of ownership of the
Purchased Receivables or to enable the Purchaser to exercise or enforce any of
its rights hereunder.
ARTICLE III - CONDITIONS OF PURCHASES
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Section 3.1. CONDITIONS PRECEDENT TO ALL PURCHASES. Each Purchase from
the Seller by the Purchaser shall be subject to the conditions precedent that:
(a) No Event of Seller Default has occurred and the Seller is in
compliance with each of its covenants and representations set forth in Sections
4.1 and 4.2 of this Agreement;
(b) The Seller shall have delivered to the Purchaser a complete copy of
each of the then current Carrier Agreements, Clearinghouse Agreements and
Billing and Collection Agreements and any amendment or modification of such
agreements;
(c) The Seller shall have delivered to the Purchaser a copy of each
written notice delivered by or received by either the Carrier, Billing and
Collection Agent, Clearinghouse Agent or the Seller with respect to any Carrier
Agreements, Clearinghouse Agreements and/or the Billing and Collection
Agreements; and
(d) The Termination Date shall not have occurred.
ARTICLE IV - REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE SELLER
Section 4.1. REPRESENTATIONS, WARRANTIES AND COVENANTS AS TO THE
SELLER. The Seller represents and warrants to the Purchaser and Master Servicer,
as of the date of this Agreement and on each subsequent Purchase Date, as
follows:
(a) The Seller is a corporation duly organized, validly existing and in
good standing under the laws of its state of incorporation and is duly qualified
to do business and is in good standing in each jurisdiction in which it is doing
business (as of the date hereof such representation is subject to that set forth
on Schedule 6 attached hereto) and has the power and authority to own and convey
all of its properties and assets and to execute and deliver this Agreement and
the Related Documents and to perform the transactions contemplated thereby; and
each is the legal, valid and binding obligation of the Seller enforceable
against the Seller in accordance with its terms;
(b) The execution, delivery and performance by the Seller of this
Agreement and the Related Documents and the transactions contemplated thereby
(i) have been duly authorized by all necessary corporate or other action on the
part of the Seller, (ii) do not contravene or cause the Seller to be in default
under (A) any contractual restriction contained in any loan or other agreement
or instrument binding on or affecting the Seller or its property; or (B) any
law, rule, regulation, order, writ, judgment, award, injunction, or decree
applicable to, binding on or affecting the Seller or its property and (iii) does
not result in or require the creation of any adverse claim upon or with respect
to any of the property of the Seller (other than in favor of the Purchaser as
contemplated hereunder);
(c) Other than as set forth on Schedule 4 attached hereto, there is no
court order, judgment, writ, pending or threatened action, suit or proceeding,
of a material nature against or affecting the Seller, its officers or directors,
or the property of the Seller, in any court or tribunal, or before any
arbitrator of any kind or before or by any Governmental Authority (i) asserting
the invalidity of this Agreement or any of the Related Documents, (ii) seeking
to prevent the sale and assignment of any Receivable or the consummation of any
of the transactions contemplated thereby, (iii) seeking any determination or
ruling that might materially and adversely affect the Seller, this Agreement,
the Related Documents, the Receivables, the Contracts or any LOA, or (iv)
asserting a claim for payment of money in excess of $50,000;
(d) The primary business of the Seller is the provision of
telecommunication services and/or equipment. All license numbers issued to the
Seller by any Governmental Authority are set forth on Schedule 1 and the Seller
has complied in all material respects with all applicable laws, rules,
regulations, orders and related Contracts and all restrictions contained in any
agreement or instrument binding on or affecting the Seller, and has and
maintains all permits, licenses, certifications, authorizations, registrations,
approvals and consents of Governmental Authorities or any other party materially
necessary for the business of the Seller and each of its Subsidiaries;
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(e) The Seller (i) has filed on a timely basis all tax returns
(federal, state, and local) required to be filed and has paid or made adequate
provisions for the payment of all taxes, assessments, and other governmental
charges due from the Seller, which, if not paid in such manner could have a
material adverse affect on the results or operations or the financial condition
of the Seller or its ability to comply with the terms and conditions of this
Agreement; (ii) has furnished to the Purchaser copies of its financial
statements for the nine month period ended March 31, 1997, prepared internally
by the Seller, which fairly present the financial condition of the Seller, all
in accordance with generally accepted accounting principles consistently
applied; (iii) since March 31, 1997 there has been no material adverse change in
any such condition, business or operations other than that disclosed to the
Purchaser by the Seller prior to the date of this Agreement; and (iv) the Seller
has delivered to the Purchaser within 45 days after the end of each subsequent
three month period the financial statements, including balance sheet and income
statement prepared in accordance with generally accepted accounting principles,
of the Seller as of the end of such three month period, certified by an officer
of the Seller;
(f) All information furnished by or on behalf of the Seller to the
Master Servicer or the Purchaser in connection with this Agreement is true and
complete in all material respects and does not omit to state a material fact and
the sales of Purchased Receivables under this Agreement are made by the Seller
for reasonably equivalent value and without intent to hinder, delay or defraud
present or future creditors of the Seller;
(g) The Lockbox Account(s) is/are the only lockbox account(s) to which
Payors have been or will be instructed to direct Receivable proceeds and each
Payor of an Eligible Receivable has been directed upon its receipt of the notice
attached hereto as Exhibit B, which such notice is to provided to each Payor in
a timely manner, to remit all payments with respect to such Receivable for
deposit in the Lockbox Account(s);
(h) The principal place of business and chief executive office of the
Seller are located at the address of the Seller set forth under its signature
below and there are not now, and during the past four months there have not
been, any other locations where the Seller is located (as that term is used in
the UCC) or keeps Records except as set forth on Schedule 2 attached hereto;
(i) The legal name of the Seller is as set forth at the beginning of
this Agreement. During the past six years, the Seller changed its name from
Equal Net Communications, Inc. to EqualNet Corporation, and during such period,
and during such period, the Seller did not use, nor does the Seller now use any
tradenames, fictitious names, assumed names or "doing business as" names other
than those appearing on Schedule 2 of this Agreement;
(j) The Seller has not done anything to impede or interfere with the
collection by the Purchaser of the Purchased Receivables and shall not waive or
otherwise permit or agree to any deviation from the terms or conditions of any
Purchased Receivable or any related Carrier Agreement, Clearinghouse Agreement,
Billing and Collection Agreement, Contract or LOA without first providing the
Purchaser with thirty days written notice thereof except where such amendment or
waiver would not have a material adverse effect upon either the validity or
ability of the Subservicer to collect amounts due and owing with respect to
Purchased Receivables; and
(k) For federal income tax reporting and accounting purposes, the
Seller will treat the sale of each Purchased Receivable pursuant to this
Agreement as a sale of, or absolute assignment of its full right, title and
ownership interest in such Purchased Receivable to the Purchaser to the extent
such treatment does not conflict with either GAAP or the Internal Revenue Code
of 1986, as amended from time to time (the "Code"), to the extent that such
treatment does not conflict with either GAAP or the Code.
Section 4.2. REPRESENTATIONS AND WARRANTIES OF THE SELLER AS TO
PURCHASED RECEIVABLES. With respect to each Purchased Receivable sold pursuant
to this Agreement the Seller represents and warrants, as of the date hereof and
on each subsequent Purchase Date, as follows:
(a) Such Receivable (i) consists of all the Required Information; (ii)
is the liability of an Eligible Payor and (iii) was created by the provision or
sale of telecommunication services or equipment by the Seller in the ordinary
course
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of its business; (iv) has a Purchase Date no later than 90 days from its Billing
Date, is not a Purchased Receivable which, as of any Determination Date, payment
by the Payor of such Receivable has been received and is not duplicative of any
other Receivable; and (v) is owned by the Seller free and clear of any adverse
claim, and the Seller has the right to sell, assign and transfer the same and
interests therein as contemplated under this Agreement and no consent other than
those secured and delivered to the Purchaser on or prior to the Closing Date
from any Governmental Authority, the Payor, a Carrier, the Billing and
Collection Agent, the Clearinghouse Agent or any other Person shall be required
to effect the sale of any Purchased Receivables;
(b) The Eligible Receivable Amount set forth in the applicable Required
Information of such Receivable is payable in United States Dollars and is not in
excess of $25,000 with respect to any one individual Payor of any Payor Class
other than an Eligible Receivable payable under a Billing and Collection
Agreement as set forth on the attached Schedule 3, and is net of any adjustments
or other modifications contemplated by any Carrier Agreement, Clearinghouse
Agreement, Billing and Collection Agreement or otherwise and neither the
Receivable nor the related Carrier Agreement, Clearinghouse Agreement, Billing
and Collection Agreement or Contract has or will be compromised, adjusted,
extended, satisfied, subordinated, rescinded, set-off or modified by the Seller,
the Payor, the Carrier, the Clearinghouse Agent or the Billing and Collection
Agent other than routine credits and adjustments made in the ordinary course of
providing customer service to customer accounts, and is not nor will be subject
to compromise, adjustment, termination or modification, whether arising out of
transactions concerning the Contract, any Carrier Agreement, Clearinghouse
Agreement, Billing and Collection Agreement or otherwise; and
(c) There are no procedures or investigations pending or threatened
before any Governmental Authority (i) asserting the invalidity of such
Receivable, Carrier Agreement, Clearinghouse Agreement, Billing and Collection
Agreement, LOA or such Contract, (ii) asserting the bankruptcy or insolvency of
the related Payor, (iii) seeking the payment of such Receivable or payment and
performance of the related Carrier Agreement, Clearinghouse Agreement, Billing
and Collection Agreement, or such other Contract, (iv) seeking any determination
or ruling that might materially and adversely affect the validity or
enforceability of such Receivable or the related Carrier Agreement,
Clearinghouse Agreement, Billing and Collection Agreement, or such other
Contract or LOA.
Section 4.3. NEGATIVE COVENANTS OF THE SELLER. The Seller shall not,
without the written consent of the Purchaser and the Master Servicer, which such
consent will not be unreasonably withheld:
(a) Sell, assign or otherwise dispose of, or create or suffer to exist
any adverse claim or lien upon any Receivable, related Contract, the Lockbox
Account(s), the Collection Account, or any other account in which any
Collections of any Receivable are deposited, or assign any right to receive
income in respect of any Receivable;
(b) Submit or permit to be submitted to Payors any invoice for
telecommunication services or equipment rendered by or on behalf of Seller which
contains a "pay to" address other than the Lockbox Account(s);
(c) Make any change to (i) the location of its chief executive office
or the location of the office where Records are kept or (ii) its corporate name
or use any tradenames, fictitious names, assumed names or "doing business as"
names; or
(d) Enter into or execute any Clearinghouse Agreement or Billing and
Collection Agreement (other than those listed on Exhibit 3 hereof) or any
amendment or modification thereof, unless such amendment or modification would
not have a material adverse effect upon either the validity or ability of the
Subservicer to collect amounts due and owing with respect to Purchased
Receivables.
Section 4.4. REPURCHASE OBLIGATIONS. Upon discovery by any party to
this Agreement of a breach of any representation or warranty in this Article IV
which materially and adversely affects the value of a Purchased Receivable or
the interests of the Purchaser therein (herein a "Rejected Receivable"), the
party discovering such breach shall give prompt written notice to the other
parties to this Agreement. Thereafter, on the next Purchase Date, the Net Value
of the Rejected Receivables shall be deducted from the amount otherwise payable
to the Seller pursuant to Section 2.3. In the
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event that the full Net Value of such Rejected Receivables is not deposited in
the Collection Account pursuant to the foregoing sentence, the Purchaser shall
deduct any such deficiency from the Excess Collection Amount and/or make demand
upon the Seller to pay any such deficiency to the Purchaser for deposit to the
Collection Account.
ARTICLE V - ACCOUNTS ADMINISTRATION
Section 5.1. COLLECTION ACCOUNT. The Purchaser and the Master Servicer
acknowledge that certain amounts deposited in the Collection Account may relate
to Receivables other than Purchased Receivables and that such amounts continue
to be owned by the Seller. All such amounts shall be administered in accordance
with Section 5.3.
Section 5.2. DETERMINATIONS OF THE MASTER SERVICER. On each
Determination Date, the Master Servicer will determine:
(a) the Net Value of all Purchased Receivables which have become
Rejected Receivables since the prior Purchase Date (the "Rejected Receivable
Amount");
(b) the amount of Collections up to the Purchase Price of all Purchased
Receivables received since the prior Determination Date (the "Paid Receivables
Amount");
(c) the Net Value of all Purchased Receivables which have become
Defaulted Receivables since the prior Purchase Date (the "Defaulted Receivable
Amount");
(d) the aggregate amount deposited in the Collection Account in excess
of the Purchase Price of each Purchased Receivable since the prior Determination
Date (the "Excess Collection Amount"); and
(e) the Net Value of all Purchased Receivables less the Rejected
Receivable Amount and the Defaulted Receivable Amount as of the current
Determination Date.
The Master Servicer's determinations of the foregoing amounts shall be presumed
correct unless later determined to be in error, in which case the party alleging
such error must provide the other party with written notification thereof, and
any mutually agreed upon and verified variance in such determination shall be
corrected in a timely manner. The Master Servicer shall notify the Purchaser of
such determinations.
Section 5.3. DISTRIBUTIONS FROM ACCOUNTS. (a) No later than 11:00 a.m.
on each Determination Date, following the determinations set forth in Section
5.2, the Master Servicer will withdraw from the accounts the following amounts:
(i) the Paid Receivables Amount and the Rejected Receivable
Amount plus any outstanding Rejected Receivable Amount applicable to any prior
period from the Collection Account and deposit such amount in the Purchase
Account;
(ii) the Defaulted Receivable Amount from the Seller Credit
Reserve Account and deposit such amount in the Purchase Account; and
(iii) the Excess Collection Amount and deposit such amount in
the Seller Credit Reserve Account to the extent that the Seller Credit Reserve
Account is less than the Specified Credit Reserve Balance.
(b) Until the Termination Date, on each Purchase Date the Master
Servicer shall pay to the Purchaser by withdrawal from the Collection Account
all amounts due and owing the Purchaser in accordance with Sections 2.3, 4.4,
5.4, 8.1 and 9.4 and pay the balance, if any, to the Seller by check or wire
transfer; PROVIDED, HOWEVER, with respect to Receivables processed or cleared
pursuant to any Carrier Agreement, Clearinghouse Agreement or Billing and
Collection
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Agreement, if applicable, any Excess Collection Amount shall be retained by the
Purchaser until such time that the billing cycle (or batch) to which such Excess
Collection Amount applies is deemed closed by the Purchaser which, absent the
occurrence of an Event of Default, will occur no later than the Purchase Date
following such determination.
Section 5.4. ALLOCATION OF MONEYS FOLLOWING TERMINATION DATE. Following
the Termination Date and the Purchaser's receipt of the Termination Fee, if
applicable, from the Seller, the Master Servicer shall withdraw an amount equal
to the Program Fee, to the extent owed, Rejected Receivable Amount and any
deficiency in the Specified Credit Reserve Account balance from the Collection
Account on each Purchase Date and deposit it in the Purchase Account. To the
extent that such funds do not equal the Program Fee and Rejected Receivable
Amount, the Seller shall deposit any such deficiency in the Purchase Account
within five Business Days following demand therefor. After withdrawing such
amounts, if any, owed to Purchaser, Purchaser shall forward to Seller in a
timely manner the balance of any funds held by Purchaser which the right, title
and interest therein belongs to Seller. Distribution of monies collected
subsequent to the Termination Date will continue in a manner consistent with
that described in Section 5.3.
ARTICLE VI - APPOINTMENT OF THE SUBSERVICER
Section 6.1. APPOINTMENT OF THE SUBSERVICER. The Master Servicer and
the Purchaser hereby appoint the Seller and the Seller hereby accepts such
appointment to act as Subservicer under this Agreement. The Subservicer shall
service the Purchased Receivables and enforce the Purchaser's respective rights
and interests in and under each Purchased Receivable and each related Contract
or LOA; and shall take, or cause to be taken, all such actions as may be
necessary or advisable to service, administer and collect each Purchased
Receivable all in accordance with (i) customary and prudent servicing procedures
for telecommunication receivables of a similar type, and (ii) all applicable
laws, rules and regulations; and shall serve in such capacity until the
termination of its responsibilities pursuant to Section 6.4 or 7.1. The
Subservicer may, with the prior consent of the Purchaser, which consent shall
not be unreasonably withheld and which shall be considered delivered upon
execution of this Agreement with respect to USBI, ESBI, Claremont, Centillion,
ACUS, Millikan & Michael and Pinnacle Financial, subcontract with a subservicer
for billing, collection, servicing or administration of the Receivables. Any
termination or resignation of the Subservicer under this Agreement shall not
affect any claims that the Purchaser may have against the Subservicer for events
or actions taken or not taken by the Subservicer arising prior to any such
termination or resignation.
Section 6.2. DUTIES AND OBLIGATIONS OF THE SUBSERVICER. (a) The
Subservicer shall at any time permit the Purchaser or any of its representatives
to visit the offices of the Subservicer and examine and make copies of all
Servicing Records;
(b) The Subservicer shall notify the Purchaser of any action, suit,
proceeding, dispute, offset, deduction, defense or counterclaim, other than
routine matters which are processed and resolved by the Subservicer in less than
thirty days, that is or may be asserted by any Person with respect to any
Purchased Receivable.
(c) The Purchaser shall not have any obligation or liability with
respect to any Purchased Receivables or related Contracts, nor shall it be
obligated to perform any of the obligations of the Subservicer hereunder.
Section 6.3. SUBSERVICING EXPENSES. The Subservicer shall be required
to pay for all expenses incurred by the Subservicer in connection with its
activities hereunder (including any payments to accountants, counsel or any
other Person) and shall not be entitled to any payment or reimbursement
therefor.
Section 6.4. SUBSERVICER NOT TO RESIGN. The Subservicer shall not
resign from the duties and responsibilities hereunder except upon determination
that (a) the performance of its duties hereunder has become impermissible under
applicable law and (b) there is no reasonable action which the Subservicer could
take to make the performance of its duties hereunder permissible under
applicable law evidenced as to clause (a) above by an opinion of counsel to such
effect delivered to the Purchaser.
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Section 6.5. AUTHORIZATION OF THE MASTER SERVICER. The Seller hereby
authorizes the Master Servicer (including any successors thereto) to take any
and all reasonable steps in its name and on its behalf necessary or desirable in
the determination of the Master Servicer to collect all amounts due under any
and all Purchased Receivables, process all Collections, commence proceedings
with respect to enforcing payment of such Purchased Receivables and the related
Contracts, and adjusting, settling or compromising the account or payment
thereof. The Seller shall furnish the Master Servicer (and any successors
thereto) with any powers of attorney and other documents necessary or
appropriate to enable the Master Servicer to carry out its servicing and
administrative duties under this Agreement, and shall cooperate with the Master
Servicer to the fullest extent in order to ensure the collectibility of the
Purchased Receivables.
ARTICLE VII - EVENTS OF SELLER DEFAULT
Section 7.1. EVENTS OF SELLER DEFAULT. If any of the following events
(each, an "Event of Seller Default") shall occur and be continuing:
(a) The Seller (either as Seller or Subservicer) shall materially fail
to perform or observe any term, covenant or agreement contained in this
Agreement which remains uncured for 5 Business Days following notice from the
Purchaser with respect thereto, provided, however, the failure of the Purchaser
to provide such notice shall not in any way be considered a waiver of any right
or remedy available to the Purchaser under this Agreement;
(b) An Insolvency Event shall have occurred; however, if such
Insolvency Event is initiated by third parties against the Seller, Seller shall
not be in default unless Seller fails or refuses to have such third party action
dismissed within sixty days of service of process on Seller seeking such relief;
(c) There is a material breach of any of the representations and
warranties of the Seller as stated in Sections 4.1 or 4.2 that has remained
uncured for a period of 30 days;
(d) Any Governmental Authority shall file notice of a lien with regard
to any of the assets of the Seller or with regard to the Seller which remains
undischarged for a period of 30 days;
(e) As of the first day of any month, the aggregate Net Value of
Purchased Receivables which became Defaulted Receivables or Rejected Receivables
during the prior three-month period shall exceed 5.0% of the average aggregate
Net Values of all Purchased Receivables then owned by the Purchaser at the end
of each of such three months;
(f) This Agreement shall for any reason cease to evidence the transfer
to the Purchaser (or its assignees or transferees) of the legal and equitable
title to, and ownership of, the Purchased Receivables;
(g) The termination of any Clearinghouse Agreement, if applicable,
and/or any Carrier Agreement or Billing and Collection Agreement for any reason
whatsoever absent the consummation of a substitute Clearinghouse Agreement,
Carrier Agreement and/or Billing and Collections Agreement, as the case may be,
within ten Business Days of the termination thereof;
(h) The amount deposited hereunder (net of withdrawals required
hereunder) in the Seller Credit Reserve Account has remained at less than the
Specified Credit Reserve Balance for fourteen consecutive days; or
(i) A Termination Event shall have occurred;
then and in any such event, the Master Servicer may, by notice to the Seller and
the Purchaser declare that an Event of Seller Default shall have occurred and,
the Termination Date shall forthwith occur, without demand, protest or further
notice of any kind, and the Purchaser shall make no further Purchases from the
Seller. The Purchaser and the Master
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Servicer shall have, in addition to all other rights and remedies under this
Agreement, all other rights and remedies provided under the UCC and other
applicable law, which rights shall be cumulative.
ARTICLE VIII - INDEMNIFICATION AND SECURITY INTEREST
Section 8.1. INDEMNITIES BY THE SELLER. (a) Without limiting any other
rights that the Purchaser, the Master Servicer, or any director, officer,
employee or agent of either such party (each an "Indemnified Party") may have
under this Agreement or under applicable law, the Seller hereby agrees to
indemnify each Indemnified Party from and against any and all claims, losses,
liabilities, obligations, damages, penalties, actions, judgments, suits, and
related costs and expenses of any nature whatsoever, including reasonable
attorneys' fees and disbursements (all of the foregoing being collectively
referred to as "Indemnified Amounts") which may be imposed on, incurred by or
asserted against an Indemnified Party in any way arising out of or relating to
this Agreement or the ownership of the Purchased Receivables or in respect of
any Receivable or any Contract, excluding, however, Indemnified Amounts to the
extent resulting from gross negligence or willful misconduct on the part of such
Indemnified Party.
(b) Any Indemnified Amounts subject to the indemnification provisions
of this Section shall be paid to the Indemnified Party within five Business Days
following demand therefor, which such demand shall set forth satisfactory
evidence of a right of indemnification and the corresponding amount at issue,
together with interest at the lesser of 12% per annum or the highest rate
permitted by law from the date of demand for such Indemnified Amount.
Section 8.2 SECURITY INTEREST. The Seller hereby grants to the
Purchaser a first priority perfected security interest in the Seller's Customer
Base, including but not limited to, all past, present and future customer
contracts, lists, agreements, LOA's (other than as set forth on Schedule 5
attached hereto as to such LOA's only) or arrangements relating thereto; all of
the Seller's right, title and interest in, to and under all of the Seller's
Receivables not sold to the Purchaser hereunder, including all rights to
payments under any related Contracts, contract rights, instruments, documents,
chattel paper, general intangibles, LOA's or other agreements with all Payors
and all the Collections, Records and proceeds thereof; any other obligations or
rights of Seller to receive any payments in money or kind; all cash or non-cash
proceeds of the foregoing; all of the right, title and interest of the Seller in
and with respect to the goods, services or other property which gave rise to or
which secure any of the foregoing as security for the timely payment and
performance of any and all obligations the Seller or the Subservicer may owe the
Purchaser under Sections 2.4, 4.4, 5.2, 7.1(a) and (b), and 8.1, but excluding
recourse for unpaid Purchased Receivables. This Section 8.2 shall constitute a
security agreement under the UCC and any other applicable law and the Purchaser
shall have the rights and remedies of a secured party thereunder. Such security
interest shall be further evidenced by Seller's execution of appropriate UCC-1
financing statements prepared by and acceptable to the Purchaser, and such other
further assurances that may be reasonably requested by the Purchaser from time
to time.
ARTICLE IX - MISCELLANEOUS
Section 9.1. NOTICES, ETC. All notices, shall be in writing and mailed
or telecommunicated, or delivered as to each party hereto, at its address set
forth under its name on the signature pages hereof or at such other address as
shall be designated by such party in a written notice to the other parties
hereto. All such notices and communications shall not be effective until
received by the party to whom such notice or communication is addressed.
Section 9.2. REMEDIES. No failure or delay on the part of the Purchaser
or the Master Servicer to exercise any right hereunder shall operate as a waiver
or partial waiver thereof. The remedies herein provided are cumulative and not
exclusive of any remedies provided by law.
Section 9.3. BINDING EFFECT; ASSIGNABILITY. This Agreement shall be
binding upon and inure to the benefit of the Seller, the Subservicer, the
Purchaser, the Master Servicer and their respective successors and permitted
assigns.
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Neither the Seller nor the Subservicer may assign any of their rights and
obligations hereunder or any interest herein without the prior written consent
of the Purchaser and the Master Servicer. The Purchaser may, at any time,
without the consent of the Seller or the Subservicer, assign any of its rights
and obligations hereunder or interest herein to any Person. Without limiting the
generality of the foregoing, the Seller acknowledges that the Purchaser has
assigned its rights hereunder for the benefit of third parties. The Seller does
hereby further agree to execute and deliver to the Purchaser all documents and
amendments presented to the Seller by the Purchaser in order to effectuate the
assignment by the Purchaser in furtherance of this Section 9.3 consistent with
the terms and provisions of this Agreement. This Agreement shall create and
constitute the continuing obligations of the parties hereto in accordance with
its terms, and shall remain in full force and effect until its termination;
PROVIDED, that the rights and remedies with respect to any breach of any
representation and warranty made by the Seller or the Master Servicer pursuant
to Article IV and the indemnification and payment provisions of Article VIII
shall be continuing and shall survive any termination of this Agreement.
Section 9.4. COSTS, EXPENSES AND TAXES. (a) In addition to the rights
of indemnification under Article VIII, the Seller agrees to pay upon demand, all
reasonable costs and expenses in connection with the administration (including
periodic auditing, modification and amendment) of this Agreement, and the other
documents to be delivered hereunder, including, without limitation: (i) the
reasonable fees and out-of-pocket expenses of counsel for the Purchaser or the
Master Servicer with respect to (A) advising the Purchaser as to its rights and
remedies under this Agreement or (B) the enforcement (whether through
negotiations, legal proceedings or otherwise) of this Agreement or the other
documents to be delivered hereunder; (ii) any and all accrued Program Fee and
amounts related thereto not yet paid to the Purchaser; and (iii) any and all
stamp, sales, excise and other taxes and fees payable or determined to be
payable in connection with the execution, delivery, filing or recording of this
Agreement or the other agreements and documents to be delivered hereunder, and
agrees to indemnify and save each Indemnified Party from and against any and all
liabilities with respect to or resulting from any delay in paying or omission to
pay such taxes and fees.
(b) If the Seller or the Subservicer fails to pay any Lockbox
Account(s) fees or other charges or debits related to such accounts, to pay or
perform any agreement or obligation contained under this Agreement, the
Purchaser may, or may direct the Master Servicer to pay or perform, or cause
payment or performance of, such agreement or obligation, and the expenses of the
Purchaser or the Master Servicer incurred in connection therewith shall be
payable by the party which has failed to so perform.
Section 9.5. AMENDMENTS; WAIVERS; CONSENTS. No modification, amendment
or waiver of, or with respect to, any provision of this Agreement or the Related
Documents, shall be effective unless it shall be in writing and signed by each
of the parties hereto. This Agreement, the Related Documents and the documents
referred to therein embody the entire agreement among the Seller, the
Subservicer, the Purchaser and the Master Servicer, and supersede all prior
agreements and understandings relating to the subject hereof, whether written or
oral.
Section 9.6. GOVERNING LAW; CONSENT TO JURISDICTION; WAIVER OF JURY
TRIAL. (a) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE INTERNAL LAWS (AS OPPOSED TO CONFLICT OF LAWS PROVISIONS) OF THE STATE OF
OHIO, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE INTERESTS OF
THE PURCHASER IN THE PURCHASED RECEIVABLES OR REMEDIES HEREUNDER OR THEREUNDER,
IN RESPECT THEREOF, ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE
STATE OF OHIO.
(b) THE SELLER AND THE SUBSERVICER HEREBY SUBMIT TO THE EXCLUSIVE
JURISDICTION OF THE COURTS OF THE STATE OF OHIO AND THE UNITED STATES DISTRICT
COURT LOCATED IN THE SOUTHERN DISTRICT OF OHIO, AND EACH WAIVES PERSONAL SERVICE
OF ANY AND ALL PROCESS UPON IT AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE
MADE BY REGISTERED MAIL DIRECTED TO THE ADDRESS SET FORTH ON THE SIGNATURE PAGE
HEREOF AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED FIVE DAYS AFTER THE
SAME SHALL HAVE BEEN DEPOSITED IN THE U.S. MAILS, POSTAGE PREPAID. THE SELLER
AND THE SUBSERVICER EACH HEREBY WAIVES ANY OBJECTION BASED ON FORUM NON
CONVENIENS, AND ANY OBJECTION TO VENUE OF ANY ACTION
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INSTITUTED HEREUNDER AND CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE
RELIEF AS IS DEEMED APPROPRIATE BY THE COURT. NOTHING IN THIS SECTION SHALL
AFFECT THE RIGHT OF THE PURCHASER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER
PERMITTED BY LAW OR AFFECT THE RIGHT OF THE PURCHASER TO BRING ANY ACTION OR
PROCEEDING AGAINST THE SELLER OR ITS PROPERTY, OR THE SUBSERVICER OR ITS
PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION. THE SELLER AND THE SUBSERVICER
EACH HEREBY AGREE THAT THE EXCLUSIVE AND APPROPRIATE FORUMS FOR ANY DISPUTE
HEREUNDER ARE THE COURTS OF THE STATE OF OHIO AND THE UNITED STATES DISTRICT
COURT LOCATED IN THE SOUTHERN DISTRICT OF OHIO AND AGREE NOT TO INSTITUTE ANY
ACTION IN ANY OTHER FORUM.
(c) THE SELLER, AND THE SUBSERVICER EACH HEREBY WAIVES ANY RIGHT TO
HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT,
TORT, OR OTHERWISE ARISING OUT OF, CONNECTED WITH, RELATED TO, OR IN CONNECTION
WITH THIS AGREEMENT. INSTEAD, ANY DISPUTE RESOLVED IN COURT WILL BE RESOLVED IN
A BENCH TRIAL WITHOUT A JURY.
Section 9.7. EXECUTION IN COUNTERPARTS; SEVERABILITY. This Agreement
may be executed in any number of counterparts, each of which when so executed
shall be deemed to be an original and all of which when taken together shall
constitute one and the same agreement. In case any provision in or obligation
under this Agreement shall be invalid, illegal or unenforceable in any
jurisdiction, the validity, legality and enforceability of the remaining
provisions or obligations, or of such provision or obligation in any other
jurisdiction, shall not in any way be affected or impaired thereby.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
EQUALNET CORPORATION, as Seller and as Subservicer
By: __________________________
Name: Michael Hlinak
Title: Vice President / Chief Operating Officer
Address at which the chief executive office is located:
Address: 1250 Wood Branch Park Drive
Houston, Texas 77079
Attention: Carl Schmidt, C.F.O.
Phone number: (281) 529-4646
Telecopier number: (281) 529-4650
ADDITIONAL LOCATIONS AT WHICH THE SELLER DOES
BUSINESS AND MAINTAINS RECORDS:
_______________________________________________
_______________________________________________
ADDITIONAL NAMES UNDER WHICH SELLER DOES BUSINESS:
Equal Net Communications
EqualNet Communications
Creative Communications
Creative Communications International
Agency Services
US Business Alliance
Digital Network Services
RECEIVABLES FUNDING CORPORATION
By: __________________________
Name: Mark D. Quinlan
Title: Vice President
Address: 130 East Chestnut Street
Suite 400
Columbus, OH 43215
Attention: Mark Quinlan
Phone number: (614) 229-7979
Telecopier number: (614) 229-7980
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SCHEDULE 1
SELLER'S LICENSE NUMBERS
NAME OF SELLER LICENSE NUMBERS
EqualNet Corporation FCC Account No. 0760315215
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SCHEDULE 2
LIST OF NAMES UNDER WHICH SELLER IS DOING BUSINESS
AND ADDRESSES AT WHICH SELLER IS DOING BUSINESS
NAMES UNDER WHICH SELLER IS ADDRESSES AT WHICH
DOING BUSINESS AND PAYEE NAMES SELLER IS DOING BUSINESS
EqualNet Corporation 1250 Wood Branch Park Drive
Houston, Texas 77079
Creative Communications (Harris County)
Creative Communications International
Agency Services
Equal Net Communications
EqualNet Communications
US Business Alliance
Digital Network Services
Agency Services
Equal WATS
EqualNet
United WATS
ACMI
Enhanced Wats
Tele Consortium
Comtel
UWI
Network Plus
NPI
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SCHEDULE 3
BILLING AND COLLECTION AGREEMENTS
BILLING AND COLLECTION AGREEMENT DATE
-------------------------------- ----
2-1
<PAGE>
SCHEDULE 4
LITIGATION DISCLOSURE
2-1
<PAGE>
SCHEDULE 5
2-1
<PAGE>
SCHEDULE 6
2-1
<PAGE>
EXHIBIT A
DEFINITIONS
"BASE RATE" means, as of any Purchase Date, a percentage equal to the
Provident Bank prime lending rate plus 4.5% per annum.
"BILLED AMOUNT" means, with respect to any Receivable the amount billed
or to be billed to the related Payor with respect thereto prior to the
application of any Gross Liquidation Rate.
"BILLING AND COLLECTION AGENT" means the party performing billing and
collection services for and on behalf of the Seller pursuant to the terms of a
Billing and Collection Agreement.
"BILLING AND COLLECTION AGREEMENT" means any written agreement whereby
a party is obligated to provide end-user billing and collection services with
respect to the Seller's accounts.
"BILLING DATE" means the date on which the invoice with respect to a
Receivable was submitted to the related Payor which shall be not more than 45
days from the date on which telecommunication services were provided to the end
user of such services.
"BUSINESS DAY" means any day of the year other than a Saturday, Sunday
or any day on which banks are required, or authorized, by law to close in the
State of Ohio.
"CARRIER" means a provider of telecommunication services which such
services are resold by the Seller.
"CARRIER AGREEMENT" means any written agreement, contract or
arrangement whereby a Carrier is obligated to provide certain services to the
Seller.
"CLEARINGHOUSE AGENT" means the party performing services for and on
behalf of the Seller pursuant to the terms and provisions of a Clearinghouse
Agreement.
"CLEARINGHOUSE AGREEMENT" means any written agreement, contract or
arrangement whereby a party is obligated to perform certain services for the
Seller, including, without limitation, processing certain information provided
by the Seller to the Clearinghouse Agent and remitting such processed
information to one or more Billing and Collection Agents for billing and
collection of Seller's accounts.
"CLOSING DATE" means June 18, 1997.
"COLLECTION ACCOUNT" means the account established pursuant to Section
2.4(b).
"COLLECTIONS" means, with respect to any Receivable, all cash
collections and other cash proceeds of such Receivable.
"CONTRACT" means an agreement (or agreements) pursuant to, or under
which, a Payor shall be obligated to pay for telecommunication services rendered
by the Seller from time to time.
"CUSTOMER BASE" means all of the Seller's past, present and future
customer contracts, agreements, LOA's or other arrangements, any customer list
relating thereto and any information regarding prospective customers and
contracts, agreements, LOA's or other arrangements and all of the goodwill and
other intangible assets associated with any of the foregoing.
"DEFAULTED RECEIVABLE" means a Receivable as to which, on any
Determination Date (a) any part of the Net Value thereof remains unpaid for more
than 90 days from the Billing Date for such Receivable; or (b) the Payor thereof
has taken any action, or suffered any event to occur, of the type described in
Section 7.1(b); or (c) the Master
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Servicer otherwise deems any part of the Net Value thereof to be uncollectible
for reasons other than a breach of a representation or warranty under Article IV
hereof.
"DEFAULTED RECEIVABLE AMOUNT" has the meaning specified in Section
5.2(c).
"DETERMINATION DATE" means the Business Day preceding the Purchase Date
of each week.
"ELIGIBLE PAYOR" means a Payor which is (a) (i) a corporation,
partnership or any other statutory organization organized under the laws of any
jurisdiction in the United States and having its principal office in the United
States; (ii) an individual or sole proprietorship which is a resident of any
jurisdiction in the United States; (iii) a Clearinghouse Agent; or (iv) a
Billing and Collection Agent; (b) not an Affiliate of any of the parties hereto;
(c) has executed and delivered to the Seller either (i) a Contract, (ii) an LOA,
(iii) a Clearinghouse Agreement or (iv) a Billing and Collection Agreement; and
(d) not subject to bankruptcy or insolvency proceedings at the time of sale of
the Receivables to be purchased.
"ELIGIBLE RECEIVABLE" means, at any time, a Receivable as to which the
representations and warranties of Section 4.2 are materially true and correct in
all respects at the time of Purchase.
"ELIGIBLE RECEIVABLE AMOUNT" means, with respect to any Eligible
Receivable, an amount equal to its Billed Amount after giving effect to the
Gross Liquidation Rate associated with the Payor Class with respect to such
Eligible Receivable.
"EVENT OF SELLER DEFAULT" has the meaning specified in Section 7.1.
"EXCESS COLLECTION AMOUNT" has the meaning specified in Section 5.2(d).
"GOVERNMENTAL AUTHORITY" means the United States of America, Federal,
any state, local or other political subdivision thereof and any entity
exercising executive, legislative, judicial, regulatory or administrative
functions thereof or pertaining thereto.
"GROSS LIQUIDATION RATE" means a factor, conclusively determined by the
Master Servicer from time to time, with respect to a designated Payor Class
based on (i) the Seller's historical experience with respect to Collections for
such Payor Class, (ii) the terms and provisions of any Billing and Collection
Agreement and (iii) the terms and provisions of any Clearinghouse Agreement,
determined on the basis of actual Collections which are expected to be received
on a Receivable within 90 days of its Billing Date.
"INSOLVENCY EVENT" means the occurrence of an event whereby the Seller
makes a general assignment for the benefit of creditors; or where any proceeding
is instituted by or against the Seller seeking to adjudicate it a bankrupt or
insolvent, or which seeks the liquidation, winding up, reorganization,
arrangement, adjustment, protection, relief, or composition of the Seller or any
of its Debts under any law relating to bankruptcy, insolvency or reorganization
or relief of debtors, or seeking the entry of an order for relief or the
appointment of a receiver, custodian or other similar official for it or for any
substantial part of its property.
"LOA" means a letter of agency, or other authorization, obtained by the
Seller from each Payor designating the Seller as its long distance
telecommunications provider and otherwise of a type or in a form acceptable
under applicable laws.
"LOCKBOX ACCOUNT(S)" means the account established pursuant to Section
2.4(a).
"MASTER SERVICER" means Receivables Funding Corporation, a Delaware
corporation, or any Person designated as the successor Master Servicer, and its
successors and assigns, from time to time.
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"NET VALUE" of any Receivable at any time means an amount (not less
than zero) equal to (a)(i) the Eligible Receivable Amount multiplied by (ii)
.90; minus (b) all Collections received with respect thereto; PROVIDED, that if
the Master Servicer makes a determination that all payments by the Payor with
respect to such Receivable have been made, the Net Value shall be zero.
"PAID RECEIVABLES AMOUNT" has the meaning specified in Section 5.2(b).
"PAYOR" means, the Person obligated to make payments in respect of any
Receivables.
"PAYOR CLASS" means, with respect to any Payor, one of the following:
(a) Clearinghouse Agent; (b) Billing and Collection Agent; (c) statutory
organization; or (d) individuals and sole proprietorships.
"PERSON" means an individual, partnership, corporation (including a
business trust), joint stock company, trust, voluntary association, joint
venture, a government or any agency or political subdivision thereof, or any
other entity of whatever nature.
"PRIOR NET VALUE AMOUNT" has the meaning specified in Section 5.2(a).
"PROGRAM FEE" means (a) as of each Purchase Date, an amount equal to
(i) 7/360 of the annualized Base Rate multiplied by (ii) the then current Net
Value of all Purchased Receivables including (A) Rejected Receivables and (B)
those Receivables to be purchased on such Purchase Date.
"PURCHASE" means a purchase by the Purchaser of Eligible Receivables
from the Seller pursuant to Section 2.2.
"PURCHASE ACCOUNT" means the account of the Purchaser titled "Purchase
Account."
"PURCHASE COMMITMENT" means an amount not to exceed $8,000,000 with an
initial maximum funding of up to $6,000,000. Maximum monthly increases
thereafter shall not exceed $350,000 above the prior month's highest outstanding
aggregate Net Value of Purchased Receivables, or other such amounts to which
Seller and Purchaser may otherwise agree in writing. Subject to the prior
written approval by the Purchaser and payment by the Seller of all applicable
fees as agreed by and between the Seller and Purchaser, the Seller may request,
in writing, an incremental increase in the Purchase Commitment in an amount
equal to $3,000,000 during the period commencing six months from the Closing
Date through a period nine months from such Closing Date; and an additional
$4,000,000 during the period commencing ten months from the Closing Date through
the one year anniversary of the Closing Date.
"PURCHASE DATE" means the Closing Date and thereafter, Wednesday of
each week or the next succeeding Business Day if such day is not a Business Day,
or such other date that the Seller and Purchaser may mutually agree.
"PURCHASE PRICE" has the meaning specified in Section 2.3.
"PURCHASED RECEIVABLE" means any Receivable which has been purchased by
the Purchaser hereunder including a Rejected Receivable prior to its repurchase.
"PURCHASER" means Receivables Funding Corporation, a Delaware
corporation, together with its successors and assigns.
"RECEIVABLE" means (a) an account receivable arising from the provision
or sale of telecommunication services for a single monthly usage period (and any
services or sales ancillary thereto) by the Seller including the right to
payment of any interest or finance charges and other obligations of such Payor
with respect thereto; (b) all security interests or liens and property subject
thereto from time to time purporting to secure payment by the Payor; (c) all
rights,
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remedies, guarantees, indemnities and warranties and proceeds thereof, proceeds
of insurance policies, UCC financing statements and other agreements or
arrangements of whatever character from time to time supporting or securing
payment of such Receivable including, but not limited to, any Billing and
Collection Agreement and any Clearinghouse Agreement; and (d) all Collections,
Records and proceeds with respect to any of the foregoing. In the instance of a
Receivable with respect to which the Payor is a Billing and Collection Agent
pursuant to a Billing and Collection Agreement, the amount owed to the Seller by
the Billing and Collection Agent is the "Receivable" which is eligible for
Purchase by the Purchaser and not the amount owing to, or collected by, the
Billing and Collection Agent from the end user of telecommunication services
provided by the Seller.
"RECORDS" means all Contracts, LOA's and other documents, books,
records and other information (including, without limitation, computer programs,
tapes, disks, punch cards, data processing software and related property and
rights) prepared and maintained by the Seller, the Subservicer or Additional
Subservicer with respect to Receivables (including Purchased Receivables) and
the related Payors.
"REJECTED RECEIVABLE AMOUNT" has the meaning specified in Section
5.2(e).
"REJECTED RECEIVABLE" has the meaning specified in Section 4.4.
"RELATED DOCUMENTS" means all documents required to be delivered
thereunder and under this Agreement.
"REQUIRED INFORMATION" means, with respect to a Receivable, (a) the
Payor, (b) the Eligible Receivable Amount, (c) the Billing Date, (d) the Payor
telephone number and (e) the Payor account number, if applicable.
"SELLER" means EqualNet Corporation, a Delaware corporation, together
with its successors and assigns.
"SELLER CREDIT RESERVE ACCOUNT" means the account established pursuant
to Section 2.4(c).
"SERVICING RECORDS" means all documents, books, records and other
information (including, without limitation, computer programs, tapes, disks,
punch cards, data processing software and related property and rights) prepared
and maintained by the Subservicer, Additional Subservicer or the Master Servicer
with respect to the Purchased Receivables and the related Payors.
"SPECIFIED CREDIT RESERVE BALANCE" means, as of any Purchase Date, an
amount equal to 5.00% of the Net Value of Purchased Receivables including (a)
Rejected Receivables (net of recoveries) and (b) those Receivables to be
purchased on such Purchase Date.
"SUBSERVICER" means the Seller, or any Person designated as Subservicer
hereunder.
"TERMINATION DATE" means the earlier of (a) June 18, 1998; (b) a
Termination Event; (c) the occurrence of an Event of Seller Default as set forth
in Section 7.1 of this Agreement; or (d) ninety days following the Seller's
delivery of a written notice to the Purchaser setting forth Seller's desire to
terminate this Agreement and the payment of the Termination Fee with respect
thereto.
"TERMINATION EVENT" means the occurrence of an event under any loan
agreement, indenture or governing document following which the funding of the
Purchaser to be utilized in purchasing Receivables hereunder may be terminated.
"TERMINATION FEE" means an amount to be paid by the Seller to the
Purchaser equal to 2.5% of the Purchase Commitment in the event of an occurrence
of an Event of Seller Default resulting in the termination of this Agreement; or
in the event the Seller desires to terminate this Agreement, whereby such
termination shall be effective only in the event that (a) the Seller has
provided the Purchaser prior written notice thereof; and (b) the Seller has paid
to
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Purchaser and Purchaser has received from Seller an amount equal to (i) 2.5% of
the Purchase Commitment if such notice of termination is provided to the
Purchaser not less than 30 days prior to the expiration of the six month period
following the Closing Date; and (ii) 2.0% of the Purchase Commitment if such
notice of termination is provided to the Purchaser during the period commencing
with the seventh month from the Closing Date and ending on the one year
anniversary from the Closing Date.
"UCC" means the Uniform Commercial Code as from time to time in effect
in the state of the location of the Seller's chief executive office.
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EXHIBIT B
FORM OF NOTICE TO PAYORS - [LEC PAYORS]
[SELLER LETTERHEAD]
[NAME AND ADDRESS OF PAYOR]
Dear ________:
[SELLER] (the "Seller") has entered into an agreement with Receivables
Funding Corporation ("RFC") under which certain telecommunication receivables,
including the right to payment of any interest, finance charges or late fees
with respect thereto, originated by the Seller ("Receivables") have been and
will be sold, from time to time, to RFC or affiliates of RFC. RFC or such
affiliates may, in turn, from time to time, pledge and or assign such
Receivables to such other third parties as RFC deems necessary. It is
contemplated that the Receivables will continue to be serviced by the Seller.
RFC has established a lockbox (the "Lockbox") for collection of the
Receivables. Accordingly, you are hereby instructed to remit all payments on
Receivables to:
Provident Bank-Lockbox Account ([NAME OF SELLER]) # ____________.
PROVIDENT BANK
10 WEST BROAD STREET
COLUMBUS, OHIO 43215
Payment of such Receivables in this manner will operate to discharge
your obligation with respect thereto (to the extent of such payment), whether or
not ownership has been transferred to RFC. Any prior notice of an assignment of
any interest in the Seller's Receivables previously delivered to you is hereby
superseded by this notice and all prior notices of such assignment are hereby
revoked. This notice shall be considered irrevocable absent written notice
otherwise received by you from RFC. Thank you for your cooperation.
Very truly yours,
[SELLER]
________________________________
By:
Its:
AGREED TO AND ACKNOWLEDGED BY
ON THIS ____ DAY OF ___________, 19___:
[LEC]
By:_________________________________
Name:
Title:
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EXHIBIT B
[SELLER LETTERHEAD]
FORM OF NOTICE TO PAYORS - [INDIVIDUAL PAYORS]
[NAME AND ADDRESS OF PAYOR]
Dear ________:
Because of our continued growth and in an effort to better serve our
valued customers, we have entered into a funding arrangement with Receivables
Funding Corporation ("RFC"). One result of this relationship is that your
payments will be received and posted in a more timely manner. Payments should
[for resellers with existing lockboxes] continue to be forwarded to the same
address which is as follows or [for resellers establishing new lockboxes] be
forwarded to the following new address:
[bank name]-Lockbox Account ([NAME OF SELLER]) # ____________.
[BANK NAME]
[BANK ADDRESS]
[BANK ABA #]
Your payments will continue to be serviced by [name of Seller], and all
inquiries regarding your service, billing invoices and payments should continue
to be directed to [name of seller]'s Customer Service Department at [phone
number]. This change is effective immediately and may not be further amended or
modified without the written consent of RFC.
Thank you for your cooperation and we look forward to continuing to
satisfy your telecommunication needs.
Sincerely,
[SELLER]
__________________________________
By:
Its:
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EXHIBIT C
FORM OF CORPORATE CERTIFICATE
FOR THE SELLER
I hereby certify that I am a duly elected [OFFICER] of [SELLER] (in its
capacity as Seller, the "Seller") with all requisite knowledge of the matters
set forth below, and further certify as follows:
1. There has been no change of the Seller's legal name,
identity or corporate structure within the six month period preceding
the execution date hereof.
2. No proceedings looking toward merger, liquidation,
dissolution or bankruptcy of the Seller are pending or contemplated.
3. There is no litigation pending, or to my knowledge,
threatened, which, if determined adversely to the Seller, would
adversely affect the execution, delivery or enforceability of the
Receivables Sale Agreement (the "Sale Agreement"), dated as of [date of
Sale Agreement] by and among the Seller and Receivables Funding
Corporation ("RFC") as Purchaser (the "Purchaser") and as Master
Servicer (the "Master Servicer"), or the sale or servicing of the
Receivables as provided therein.
4. With respect to the Sale Agreement, the Seller has complied
with all the agreements by which it is bound and has satisfied all the
conditions on its part to be performed or satisfied prior to the
Closing Date.
5. No Event of Seller Default or other event of default in the
performance of any of the Seller's covenants or agreements under the
Sale Agreement has occurred and is continuing, nor has an event
occurred which with the passage of time or notice or both would become
such an Event of Seller Default.
6. The Seller is not a party to, or governed by, any contract,
indenture, mortgage, loan agreement, note, lease, deed of trust or
other instrument which restricts the Seller's ability to sell or
service telecommunication receivables or consummate any of the
transactions contemplated by the Sale Agreement.
7. For tax and reporting purposes, the Seller will treat the
transfer to the Purchaser of the Seller's interests in the Receivables
as a sale.
8. The transfer to the Purchaser of the Seller's interests in
the Receivables will be made (a) in good faith and without intent to
hinder, delay, or defraud present or future creditors, and (b) in
exchange for reasonably equivalent value and fair consideration.
9. On the date hereof, the Seller (a) was paying its Debts, if
any, as they matured; (b) neither intended to incur, nor believed that
it would incur, Debts beyond its ability to pay as they mature; and (c)
after giving effect to the transfer to the Purchaser of the Seller's
interests in the Receivables, will have an adequate amount of capital
to conduct its business and anticipates no difficulty in continuing to
do so for the foreseeable future.
10. The Seller has and maintains all material permits,
licenses (including any applicable and necessary license, permit or
certification from the Federal Communication Commission),
authorizations, registrations, approvals and consents of Governmental
Authorities necessary for (a) the activities and business of the Seller
and each of its Subsidiaries as currently conducted, (b) the ownership,
use, operation and maintenance by each of them of its respective
properties, facilities and assets, and (c) the performance by the
Seller of the Agreement.
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11. Without limiting the generality of the foregoing
paragraph: (a) each Contract of the Seller and each Subsidiary is in
full force and effect and has not been amended or otherwise modified,
rescinded or revoked or assigned, and (b) no condition exists or event
has occurred which, in itself or with the giving of notice or lapse of
time or both, would result in the suspension, revocation, impairment,
forfeiture, and non-renewal thereof.
12. Other than those UCC financing statements to be filed by
the Purchaser, no UCC financing statements, federal or state tax liens
or judgments with respect to the Purchased Receivables and all other
Receivables generated by the Seller have been filed nor shall be filed
from and after the date and time of the UCC search results provided by
the Seller in accordance with the conditions precedent set forth in the
Sale Agreement.
13. The undersigned have held the respective office(s) set
forth opposite their name from [begin date offices held] through the
date hereof, and the signature set forth opposite their name is their
genuine signature:
NAME OFFICE SIGNATURE
____________________ _____________________ _____________________
____________________ _____________________ _____________________
____________________ _____________________ _____________________
____________________ _____________________ _____________________
14. The Seller is a corporation duly organized and validly
existing under the laws of the State of [state incorporated] validly
acting by and through its Board of Directors. Other than the Articles
of Incorporation filed on [date articles filed] and annexed to the
Certificate of the Secretary of State of the State of [state seller
incorporated], a true, correct and complete copy of which is attached
hereto as Exhibit A and which are in effect on the date hereof, there
has been no amendment or other document filed with said Secretary of
State with respect to the Seller and no such amendment or other
document has been authorized.
15. The Seller is in good standing (including the payment of
all franchise taxes and the filing of required reports) under the laws
of the State of [state seller incorp.] and is duly qualified to do
business in the State(s) of [states qualified]. A certificate of good
standing issued by the Secretary of State of [states qualified] is
attached hereto as Exhibit B.
16. Attached hereto as Exhibit C is a true, correct and
complete copy of the Bylaws of the Seller, which Bylaws have not been
amended, modified or rescinded since their adoption on [date bylaws
adopted]; no such amendment, modification or rescission is contemplated
and said Bylaws continue in force on the date hereof.
17. Attached hereto as Exhibit D is a true, correct and
complete copy of resolutions (the "Resolutions") duly authorized and
adopted by the Board of Directors of the Seller pertaining to the RFC
Receivables Program; said Resolutions were duly adopted by the
unanimous written consent of the Board of Directors without a meeting
in accordance with the Articles of Incorporation and Bylaws of the
Seller and have not been amended, modified, annulled or revoked and are
in full force and effect; and the instruments referred to
C-2
<PAGE>
in said Resolutions to which the Seller is a party were executed
pursuant thereto and in compliance therewith by the duly authorized
officer of the Seller.
All capitalized terms used herein that are not otherwise
defined shall have the respective meanings ascribed thereto in the Sale
Agreement.
IN WITNESS WHEREOF, I have hereunto signed my name and affixed
the seal of the Seller this ___ day of _______, 199_.
By _____________________________
Name:
Title:
C-3
<PAGE>
EXHIBIT D
TO CORPORATE CERTIFICATE
CERTIFIED COPY OF RESOLUTION
WHEREAS, the Board of Directors of SellerName, a corporation organized
and existing under the laws of the State of StateSellerIncorporated, duly and
regularly adopted by unanimous written consent without a meeting the following
resolution and the same has not been rescinded or modified:
RESOLVED, that the OfficerTitlesonGenCert of this corporation be and
they are hereby authorized on behalf of and in the name of this corporation to
enter into and perform that certain "Receivables Sale Agreement" or
modifications, amendments, or supplements thereof or thereto with Receivables
Funding Corporation (the "Purchaser"), a corporation organized and existing
under the laws of the State of Delaware, relating to the sale, assignment,
transfer, conveyance and/or the creation of a security interest in SellerName's
Receivables, Seller Credit Reserve Account and Collection Account as defined in
said "Receivables Sale Agreement", and to execute and deliver said "Receivables
Sale Agreement" and any other documents to be executed and delivered in relation
to, or pursuant to said "Receivables Sale Agreement"; and said officers are
hereby further authorized at any time to sell, assign, transfer, convey and/or
create a security interest in such Receivables and related Seller Credit Reserve
Account and Collection Account on such terms and conditions and in such form as
may be acceptable to the Purchaser; and said officers are authorized to execute
and deliver all such instruments and documents and to do all such things as may
be required to complete any such transactions; and all acts and things of the
nature herein referred to, heretofore and hereafter done by the said officers or
any of them, are hereby approved, ratified, and confirmed.
RESOLVED FURTHER, that the authority conferred upon said officers by
this resolution shall remain in full force until written notice of revocation
thereof shall have been received by the Purchaser and a copy of this resolution
certified by NameofPresident, President, and NameofSecretary, Secretary, with
the seal of this corporation affixed, is delivered to the Purchaser.
We, NameofPresident and NameofSecretary, hereby certify that we are the
President and Secretary, respectively, of SellerName; and that the foregoing
resolution was duly and regularly adopted by the unanimous written consent of
said Board of Directors.
IN WITNESS WHEREOF, we have hereunto signed our names as
NameofPresident, President, and NameofSecretary, Secretary, and affixed the seal
of said corporation as of SaleSubservAgmtDate.
Seller Name
__________________________ _______________________________
Name of President Name of Secretary
PRESIDENT SECRETARY
D-1
<PAGE>
EXHIBIT D
FORM OF OPINION OF COUNSEL FOR THE SELLER
[CLOSING DATE]
Receivables Funding Corporation
130 E. Chestnut Street
Columbus, Ohio 43215
RE: RECEIVABLES FUNDING CORPORATION - RECEIVABLES SALE AGREEMENT
Gentlemen and Ladies:
We have acted as legal counsel to _____________________________ (the
"Seller") in connection with the transactions contemplated by that certain
Receivables Sale Agreement (the "Sale Agreement"), dated as of ________________,
199___, by and among the Seller, a(n) ___________ corporation, and Receivables
Funding Corporation, a Delaware corporation, as Purchaser ("Purchaser") and as
Master Servicer ("Master Servicer"). All references herein to the Seller shall
refer to the Seller in its capacity as both Seller and Subservicer under the
Sale Agreement. This opinion is being delivered at the Seller's request.
Capitalized terms used and not otherwise defined herein shall have the
meanings ascribed thereto in the Sale Agreement.
In this connection, we have examined the following:
i) An executed copy of the Sale Agreement and all exhibits and
attachments thereto;
ii) Copies of the UCC-1 financing statements executed by the
Seller as assignor/debtor and naming the Purchaser as
assignee/secured party relating to the Purchased Receivables
and all other Receivables generated by the Seller (the
"Financing Statements"), copies of which are attached hereto
as Annex 1;
iii) The results of the searches (the "Searches") conducted by the
Secretary of State of ______________________1 [AND THE COUNTY
RECORDER, ________ COUNTY, _________, AS OF _____________, ]2,
certified by such filing offices on Form UCC-11, as to
financing statements on Form UCC-1 on file with such offices
and naming the Seller as a "debtor" as of such date, copies of
which are attached hereto as Annex 2A;
iv) [ADD IF APPLICABLE] [EXECUTED COPIES OF APPROPRIATE RELEASES
OF ALL OUTSTANDING FINANCING STATEMENTS RELATING TO SECURITY
INTERESTS IN ACCOUNTS OF THE SELLER IN FAVOR OF THIRD PARTIES
WHICH ARE REFLECTED ON THE SEARCHES AND WHICH SHALL BE
RELEASED AT CLOSING] (the "Releases") copies of which are
attached hereto as Annex 2B; and
v) Such other documents, records and papers as we have deemed
necessary and relevant as a basis for this opinion.
- ----------
(1) All references to "State of __________" in this form of opinion
mean the state of the present location of the Seller.
(2) UCC searches certified on form UCC-11 by the appropriate government
officials should be dated within ten (10) days of the closing of the
transaction.
D-2
<PAGE>
The Sale Agreement and the Lockbox Account(s) Agreement are hereinafter
collectively referred to as the "Sale Agreement".
As to various questions of fact material to our opinions set forth
below we have relied upon certificates of officers of the Seller, copies of
which are attached hereto as Annex 3. Nothing has come to our attention in the
course of our representation of the Seller which leads us to believe that the
representations set forth in any of the foregoing certificates are inaccurate or
incomplete in any material respect.
In connection with the opinions set forth below we have assumed, with
your agreement, that each party to the Sale Agreement other than the Seller has
executed and delivered such Sale Agreement and has the corporate power and
authority to enter into and perform its obligations thereunder, and that the
execution, delivery and performance of the Sale Agreement by each party thereto
other than the Seller will not breach, contravene, conflict with, or constitute
a violation of any provision of the articles of incorporation or bylaws or other
organizational documents of such party, any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to which such party is bound or
to which any of its property or assets is subject, or constitute a violation of
any law, statute, rule, regulation, order, writ, judgment, award, injunction or
decree of any Governmental Authority as to any such party.
In connection with the opinions set forth below which deal with the
perfection and priority of security interests, we have assumed that no financing
statements relating to Seller, the Receivables or the Purchased Receivables have
been misindexed or misfiled in the appropriate filing offices covered by the
Searches.
We have also assumed that all documents submitted to us as originals
are complete and authentic, that all copies of documents submitted to us conform
in all respects to the originals thereof, including all amendments or
modifications thereto; and that all signatures of parties, other than those of
the Seller and its authorized officers, to the respective documents are genuine.
We have also assumed that all documents or copies thereof examined by us have
been or will be duly, validly and properly authorized, executed, acknowledged
and delivered by all parties thereto other than the Seller.
As you have agreed, for purposes solely of ascertaining the existence
of security interests perfected by the filing of UCC financing statements, we
have limited our investigation to an examination of the Searches, which indicate
that there are no filed financing statements naming the Seller as debtor and
relating to the Seller's Receivables [,OTHER THAN THOSE WHICH WILL BE TERMINATED
BY THE FILING OF THE RELEASES].
For purposes of the opinion expressed in the first sentence of
Paragraph 4 below, we have assumed, with your consent, that the description of
"Purchased Receivables" set forth in the Sale Agreement accurately and
completely describes all of the Seller's Purchased Receivables being transferred
to the Purchaser pursuant to the Sale Agreement and the description of
"Receivable" set forth in the Sale Agreement accurately and completely describes
all of the Seller's Receivables generated by the Seller historically and from
time to time.
For purposes of the opinions expressed in Paragraphs 5 and 6 below,
with your agreement we have assumed that all transfers of Purchased Receivables
will have occurred in accordance with the terms and conditions set forth in the
Sale Agreement.
In addition to the foregoing, in rendering the opinions set forth
herein we have acted only as attorneys licensed to practice in the State of
____________ and do not hold ourselves out as being knowledgeable as to the laws
of any other jurisdiction. We therefore express no opinions as to the effect of
any laws other than federal laws of the United States of America and the laws of
the State of ________________. In this regard, we note that [- if the Seller is
located in a state other than Ohio -] the Sale Agreement is governed by the laws
of the State of Ohio. We have assumed, for purposes of issuing this letter, that
insofar as the laws of any such other jurisdiction are applicable to the matters
set forth
D-2
<PAGE>
below, such laws (including applicable conflict of laws provisions) are
identical to and will be interpreted in all respects in the same manner as the
laws of the State of ______________.
On the basis of the foregoing and subject to the limitations,
qualifications and exceptions set forth above, we are of the opinion as of the
date hereof that:
1. The Seller is a corporation duly organized and validly existing
under the laws of the State of _______________, is in good standing under the
laws of the State of [STATE OF ORGANIZATION] and is duly qualified to do
business, and is in good standing in each jurisdiction in which it maintains an
office and has the corporate power and authority to own, lease and operate its
properties and to conduct its business as now conducted. The Seller has made all
filings with, and has obtained all necessary or appropriate licenses and
approvals from federal and State of ______________ Governmental Authorities,
which such licenses and approvals are in full force and effect as of the date
hereof, that are necessary to permit the Seller to own, lease and operate its
properties, to lawfully generate telecommunication receivables and to lawfully
conduct its business as presently conducted, and to consummate the transactions
contemplated by the Sale Agreement.
2. The Seller has the corporate power and authority to execute, deliver
and perform the Sale Agreement. The execution, delivery and performance of the
Sale Agreement has been duly authorized by all necessary corporate action of the
Seller and such Sale Agreement constitutes a legal, valid and binding obligation
of Seller, enforceable against the Seller in accordance with its terms.
3. The execution and delivery of, and the performance of the
Purchaser's obligations under, the Sale Agreement does not and will not (a)
violate any provision of the Seller's articles of incorporation or bylaws, (b)
violate any statute, law, ordinance, rule or regulation of the United States of
America or the State of binding on the Seller, (c) violate any orders,
judgments, writs or decrees known to us to which the Seller is subject in any
respect, or (d) violate or create a breach or default under any loan agreement,
indenture, note, evidence of indebtedness, mortgage, financing agreement, bond,
debenture or similar agreement or instrument relating to obligations of the
Seller for borrowed money or for the deferred purchase price of property or
services payable more than one year from the date of incurrence thereof or on
demand or relating to obligations of the Seller under capital leases which is
presently in effect and known to us and to which the Seller is a party of its
property is subject.
4. The Purchased Receivables and Receivables constitute "accounts" and
"general intangibles" within the meaning of the UCC. The Seller is "located" in
the State of ______________ for purposes of Section 9-103(3)(b) of the UCC such
that the laws (including the conflict of law rules) of the State of ____________
govern the perfection of security interests in accounts and general intangibles
of the Seller and the sale of accounts by the Seller. The grant of a first
priority security interest in the Receivables, other than Purchased Receivables,
is perfected by the filing of appropriate UCC financing statements in the
appropriate UCC filing offices identified in paragraph 5(i) below. The transfers
of the Purchased Receivables are "true sales" of the Purchased Receivables to
the Purchaser. In the event, however, that a court of competent jurisdiction
were to hold that such transaction constitutes a loan and not a purchase and
sale, then the Sale Agreement creates a first priority perfected valid security
interest in the Receivables and Purchased Receivables in favor of the Purchaser.
5. If transfers of the Purchased Receivables from the Seller to the
Purchaser pursuant to the Sale Agreement constitute a "true sale" of the
Purchased Receivables to the Purchaser, the execution and delivery of the Sale
Agreement and
(i) upon the proper filing of the Financing Statements in the UCC
filing offices of the Secretary of State of _______________,
[and in the UCC filing offices of the County Recorder of
______________ County,] and
D-3
<PAGE>
(ii) the delivery to the Payors of such Purchased Receivables of
the notices in the form of the notices on Exhibit B to the
Sale Agreement (assuming no such prior notice has been
delivered to any such Payor by any person claiming an interest
in the Purchased Receivables, and we hereby advise you that we
have no knowledge that the Seller has previously made any such
assignment thereof or granted any such lien or encumbrance
thereupon);
are effective under the laws of the [STATE OR LOCATION OF SELLER] to vest title
thereto in the Purchaser, and all necessary steps have been taken under the laws
of the State of [LOCATION OF SELLER] to protect the Purchaser's ownership
interest in the Purchased Receivables now existing, and hereafter created,
against creditors of, or subsequent Purchasers from, the Seller, provided that
(x) if the transfers of the Purchased Receivables are deemed to be
subject to Article 9 of the UCC, or previously filed financing
statements, priority may be subject to financing statements
effective as a result of Section 9-401(2) of the UCC, or
(y) if the Purchased Receivables are deemed to be interests or
claims "in or under any policy of insurance" under ss.9-104(g)
of the UCC [IN ENGLISH RULE STATES: PRIOR NOTICES TO PAYORS OF
SUCH POLICIES ARE REQUIRED] [IN AMERICAN RULE STATES: PRIOR
SALES OF SUCH PURCHASED RECEIVABLES].(3)
The filing of the Financing Statements in the filing offices identified in
paragraph 5(i) above are the only filings required to be made in the State of
__________ to evidence, provide notice to third parties with respect to, or
otherwise perfect the Purchaser's ownership interest in the Purchased
Receivables and the Purchaser's security interest in all Receivables other than
Purchased Receivables under any applicable law of the State of _____________. No
other filings, either in the filing offices identified in paragraph 5(i) or in
any other filing offices in the State of ____________, are required or are
advisable to be made to evidence, provide notice to third parties with respect
to, or otherwise perfect such interests, or to establish the priority of the
Purchaser's interest with respect to such Purchased Receivables.
6. If the transfers of the Purchased Receivables from the Seller to the
Purchaser pursuant to the Sale Agreement does not constitute a "true sale" of
the Purchased Receivables to the Purchaser, the Sale Agreement creates a valid
security interest in favor of the Purchaser in the Purchased Receivables from
time to time transferred to the Purchaser pursuant to the Sale Agreement, which
security interest will constitute
(i) upon the proper filing of the Financing Statements in the UCC
filing offices of the Secretary of State of _______________,
[and in the UCC filing offices of the County Recorder of
______________ County,] and
(ii) upon the delivery to the Payors of such Purchased Receivables
of the notices in the form of the notices on Exhibit B to the
Sale Agreement (assuming that no such prior notice has been
delivered to any such Payor by any person claiming an interest
in the Purchased Receivables and we hereby advise you that we
have no knowledge that the Seller has previously delivered any
prior notice);
- ----------
(3) As to assignments of accounts and intangibles, if the UCC is not
applicable because of Section 9-104, most jurisdictions follow either
the so-called "American rule" (which in general provides that the
transfer of an interest therein is made effective by a written
assignment, with priority being granted to the assignment which is
first in time) or the so-called "English rule" (which in general
provides that the transfer of an interest therein is only effective if
notice is given to the payor). Counsel should choose one approach or
the other in completing paragraph 5(y) or, if the law in the
jurisdiction is unsettled, counsel may include both as exceptions
(i.e., by indicating in paragraph 5(y) "prior notices to payors of such
policies or prior sales of such Purchased Receivables").
D-4
<PAGE>
a security interest (perfected under the UCC and under other appropriate law to
the extent applicable) in the Seller's right, title and interest in and to the
Purchased Receivables and the proceeds thereof now existing, and hereafter
created, prior and senior to all other liens, provided that:
(x) if the granting of a security interest in the Purchased
Receivables is deemed to be subject to Article 9 of the UCC or
previously filed financing statements, priority may be subject
to financing statements effective as a result of Section
9-401(2) of the UCC, or
(y) if the Purchased Receivables are deemed to be interests or
claims "in or under any policy of insurance" under ss.9-104(g)
of the UCC [IN ENGLISH RULE STATES: PRIOR NOTICES TO PAYORS OF
SUCH POLICIES] [IN AMERICAN RULE STATES: PRIOR SALES OF SUCH
PURCHASED RECEIVABLES].
The filing of the Financing Statements in the filing offices identified in
paragraph 6(i) above are the only filings required to be made in the State of
______________ to evidence, provide notice to third parties with respect to, or
otherwise perfect the Purchaser's security interest in the Purchased Receivables
under any applicable law of the State of _____________. No other filings, either
in the filing offices identified in paragraph 6(i) or in any other filing
offices in the State of ______________, are required or are advisable to be made
to evidence, provide notice to third parties with respect to, or otherwise
perfect such interests, or to establish the priority of the Purchaser's interest
with respect to such Purchased Receivables.
7. A State of ____________ court and a federal court sitting in the
State of _____________________ would give effect to the choice of law provisions
of the Sale Agreement, except that such court may apply State of _______________
law to (a) certain remedial and procedural rights, (b) matters of public policy,
(c) matters pertaining to the perfection and priority of security interests, and
(d) matters as to which Ohio law cannot be proven to such court to be
sufficiently authoritative or certain for such court to rely on it.
8. No consent of, or other action by, and no notice to or filing with,
or licensing by any federal or State of ________ Governmental Authority or any
other party (except for those consents required under Section ______ of the Sale
Agreement which have been provided by the Seller to the Purchaser) is required
for the due execution, delivery and performance by the Seller of the Sale
Agreement or any other agreement, document or instrument to be delivered
thereunder or for the perfection of or the exercise by the Seller, the Purchaser
or the Master Servicer of any of their rights or remedies thereunder. The
transactions contemplated by the Sale Agreement will not cause the Purchaser to
be subjected to any obligation to pay any transfer tax to any Governmental
Authority in the State of _________________, including without limitation any
transfer, sales, use, added value, documentary stamp or other similar transfer
tax other than [DESCRIBE ANY SUCH TAXES WHICH ARE APPLICABLE].
9. To the best of our knowledge, there are no actions or proceedings
against or affecting the Seller or any of its assets, pending or threatened,
before any Governmental Authority (including, without limitation, any federal or
state court of competent jurisdiction) (i) which seek to affect the
enforceability of the Sale Agreement or the transactions contemplated thereby,
or (ii) which, if determined adversely, would materially and adversely affect
the ability of the Seller to perform its obligations under the Sale Agreement.
Our opinions set forth herein are subject to the following
qualifications and exceptions:
(a) The effect of certain laws governing bankruptcy,
reorganization, fraudulent conveyance, moratorium and
insolvency and relating to or affecting the enforcement of
creditors' rights generally, including, but not limited to,
the right to take or retain personal property encumbered by
the Sale Agreement and the Financing Statements;
D-5
<PAGE>
(b) The application of general principles of equity (regardless of
whether considered in a proceeding in equity or at law);
(c) Standards of commercial reasonableness and good faith;
(d) In the case of proceeds, perfection of security interests is
limited to the extent set forth in Section 9-306 of the UCC;
(e) Continuation of perfection in any proceeds which are subject
to a security interest or in any after acquired property may,
if such proceeds or after acquired property consist of
property of a type in which a perfected security interest
cannot be obtained by filing a financing statement, require
additional compliance with applicable provisions of the UCC
and we express no opinion as to the perfection, priority an
effectiveness of any security interest in any proceeds of the
Purchased Receivables initially subject to the security
interest or after acquired property to the extent that
perfection, priority or effectiveness depends upon additional
compliance with the UCC. Any change (from one state to another
state) in the location of the Seller's place of business or
chief executive offices to a location outside of the State of
____________, or any change in the name, identity or corporate
structure of the Seller that would make a filed financing
statement seriously misleading, may result in the lapse of
perfection of the security interest to the extent that
perfection is dependent on filing unless new and appropriate
financing statements are filed in a timely manner; and
(f) In the case of collateral (as such term is defined in Article
9 of the UCC) in which a debtor (as such term is defined in
Article 9 of the UCC) has no present rights, a security
interest will be created therein only when the debtor acquires
rights to such collateral.
Our opinions expressed herein are limited to those matters expressly
set forth herein, and no opinion may be implied or inferred beyond the matters
expressly stated herein. Further, the opinions expressed herein are being
rendered solely in connection with the consummation of the transactions
contemplated by the Sale Agreement to which Seller is a party, and may not be
relied upon for any other purpose.
Our opinions are rendered only as of the date hereof and we assume no
obligation to update or supplement this opinion to reflect any facts or
circumstances that may hereafter occur or to reflect the applicability of any
laws that may affect the transactions contemplated by the Sale Agreement after
the date hereof.
In addition to the foregoing, this letter may not be distributed to,
furnished to or relied upon by any person without the express written consent of
this firm, provided, however, that any assignee of the Purchaser pursuant to the
Sale Agreement may likewise rely upon this opinion as if named as an addressee
herein.
Very truly yours,
D-6
<PAGE>
ANNEX 1
TO OPINION OF
COUNSEL FOR
THE SELLER
1-1
<PAGE>
ANNEX 2A
TO OPINION OF
COUNSEL FOR
THE SELLER
2A-1
<PAGE>
ANNEX 2B
TO OPINION OF
COUNSEL FOR
THE SELLER
2B-1
<PAGE>
ANNEX 3
TO OPINION OF
COUNSEL FOR
THE SELLER
3-1
<PAGE>
CLOSING CHECKLIST
1. Receivables Sale Agreement
2. Notice to Payors
3. Corporate Certificate of the Seller together with exhibits:
Exhibit A - Certified Articles of Incorporation
Exhibit B - Certificate of Good Standing
Exhibit C - Bylaws
Exhibit D - Certified Copy of Resolutions
4. Original time-stamped UCC-1 Financing Statements naming Seller as debtor
and Receivables Funding Corporation as secured party filed in Ohio and in
Seller's local jurisdictions
5. A copy of the Articles of Incorporation of the Seller CERTIFIED BY THE
SECRETARY OF STATE OF THE STATE in which Seller is incorporated and dated
no more than 10 days prior to the Closing Date
6. Good Standing Certificate for the Seller dated no more than 10 days prior
to the Closing Date issued by the Secretary of State of the State in which
Seller is incorporated and each State in which Seller is qualified to do
business.
7. UCC Search Results CERTIFIED BY THE RESPECTIVE FILING OFFICE showing
searches of applicable federal and state court and agency documents, lien
records and tax liens dated no more than 10 days prior to the Closing Date
8. Copies of filed UCC-3 Releases, if necessary
9. Copies of all date stamped and/or certified Public Service Commission
Orders or other evidence of regulatory approval from each state in which
the Seller has filed such Orders or where such regulatory approval is
required
10. Legal opinion of Seller's counsel
<PAGE>
RECEIVABLES
FUNDING
CORPORATION
EQUALNET CORPORATION
CLOSING
BINDER
PURCELL & SCOTT
<PAGE>
RECEIVABLES FUNDING CORPORATION
EQUALNET CORPORATION
CLOSING BINDER
PURCELL & SCOTT
<PAGE>
CLOSING DATE: June 18, 1997
CLOSING BINDER
RECEIVABLES FUNDING CORPORATION
TELECOMMUNICATIONS RECEIVABLES FUNDING PROGRAM
PARTIES
-------
SELLER: EQUALNET CORPORATION
PURCHASER AND
MASTER SERVICER: RECEIVABLES FUNDING CORPORATION
<PAGE>
EQUALNET CORPORATION
CLOSING BINDER INDEX
TAB
Receivables Sale Agreement................................................. 1
Lockbox Agreement.......................................................... 2
Notice to Payors........................................................... 3
Corporate Certificate...................................................... 4
Exhibit A - Certificate of Incorporation
Exhibit B - Certificate of Good Standing
Exhibit C - Bylaws
Exhibit D - Certified Copy of Resolutions
UCC-1 Financing Statements................................................. 5
UCC-11 Certified Search Results............................................ 6
UCC-3 Releases............................................................. 7
Escrow Agreement........................................................... 8
Opinion of Seller's Counsel................................................ 9
<PAGE>
9 POST-CLOSING CHECKLIST
RECEIVABLES FUNDING CORPORATION
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------- -----------------
DESCRIPTION OF TASK COMPLETE
- ---------------------------------------------------------------------------------------- -----------------
- ---------------------------------------------------------------------------------------- -----------------
<S> <C>
1. Check each and every page, making sure such documents are signed
and dated correctly by all parties.
======================================================================================== =================
2. Make sure all documents have the correct exhibits attached to each
and labeled accordingly.
======================================================================================== =================
3. Place the proper return sticker on the UCC-3 forms to ensure that
same will be sent to the offices of Purcell & Scott when prepared by
outside party.
======================================================================================== =================
4. Prepare Closing Binder by inserting Cover Sheets Front & Side for
Closing Binder, Prepare Closing Binder Index.
======================================================================================== =================
5. Make sure documents are behind the right exhibit tab numbers.
======================================================================================== =================
6. Prepare Closing Binder Distribution List (Seller, Seller's Legal Counsel).
======================================================================================== =================
7. Prepare a copy of entire closing binder, making sure all copies
are legible, especially the UCC-1 financing statements.
======================================================================================== =================
8. Prepare transmittal and distribute Closing Binders to the respective parties.
======================================================================================== =================
9. Attend closing party at Shawn Trell's choice of Watering Holes.
- ---------------------------------------------------------------------------------------- -----------------
</TABLE>
EXHIBIT 10.21
CARRIER AGREEMENT
BETWEEN AT&T
AND
EQUALNET CORPORATION
<PAGE>
TABLE OF CONTENTS
Section 0 Signature Page
Section 1 General Terms and Conditions
Section 2 Eligibility of Customer
Section 3 Responsibilities of Customer
Section 4 Responsibilities of AT&T
Section 5 Services and Service Descriptions
Section 6 Service Rates, Terms and Conditions
Section 7 International Usage Rates
<PAGE>
SECTION 0: SIGNATURE PAGE
THIS CARRIER AGREEMENT ("Agreement") is made and entered into by and
between AT&T Corp., a corporation organized and existing under the laws of the
State of New York and having an office at 295 North Maple Avenue, Basking Ridge,
New Jersey 07920 ("AT&T") and EqualNet Corporation, having an office at 1250
Wood Branch Park Drive, Houston, Texas 77079 ("Customer"). The terms and
conditions herein constitute an offer by Customer as of the date of Customer's
signature below which may be accepted only by AT&T's signature below. This
Agreement shall become effective when signed by both parties ("Effective Date").
AT&T and Customer, acting through their duly authorized
representatives, hereby agree to the terms set forth in Sections 1 through 6 of
this Agreement as attached hereto.
CUSTOMER AT&T CORP.
By:_____________________________ By:_______________________________
________________________________ __________________________________
Printed or Typed Name Printed or Typed Name
________________________________ __________________________________
Title Title
________________________________ __________________________________
Date Date
<PAGE>
SECTION 1: GENERAL TERMS AND CONDITIONS
1.A. ASSIGNMENT. Customer may not assign this Agreement in whole or in part
without the prior written consent of AT&T, which shall not be unreasonably
withheld. AT&T may, in its discretion, condition its consent to such assignment
upon the posting of an appropriate deposit by the assignee pursuant to Paragraph
4.D. of this Agreement. AT&T reserves the right to deny or revoke its consent to
such assignment at any time if the assignee proves unwilling or unable to meet
the eligibility requirements of this Agreement, in which event the Customer
shall remain or again become responsible for performance of all terms of this
Agreement. This provision shall not affect the Customer's right to resell
Service. Further, any resale or assignment shall not release the original
Customer from its obligations under this Agreement.
1.B. COMBINATION WITH OTHER SERVICES OR OFFERS. This AT&T Carrier Agreement may
not be used in conjunction with any other AT&T Carrier Agreement, AT&T Contract
Tariff, or promotions for any AT&T Services.
1.C. INDEPENDENT PARTIES. The relationship established by this Agreement shall
in no way constitute AT&T (or its agents or employees) as a partner, agent or
fiduciary of Customer. The relationship established by this Agreement shall in
no way constitute the Customer (or their agents or employees) as a partner,
agent or fiduciary of AT&T. The provision of Service described in this Agreement
does not establish any joint undertaking, joint venture, or fiduciary
relationship between AT&T and Customer.
1.D. ACKNOWLEDGMENT OF RIGHT TO COMPETE. Customer acknowledges and understands
that it remains at all times solely responsible for the success and profits of
its business, and that AT&T makes no promises, warranties or representations
regarding the Customer's business success or prospects of business success in
connection with the provision of service pursuant to this Agreement. Customer
acknowledges and understands that AT&T will continue to market AT&T services
directly to the public and that such marketing may from time to time bring AT&T
into direct or indirect competition with Customer, and that AT&T may also market
its services to competitors of Customer. Customer acknowledges and understands
that nothing in this Agreement diminishes or restricts in any way the rights of
AT&T to engage in competition with Customer or to market its services to
competitors of Customer.
1.E. USE OF PROPRIETARY INFORMATION. In the event that either Customer or AT&T,
in the course of performance of their obligations to each other under this
Agreement, obtains or receives proprietary information from the other, it agrees
to use such information only for the purpose of complying with its obligations
under this Agreement and not to use such information for its own marketing
purposes. Customer acknowledges that AT&T may use for its own marketing purposes
any and all information that it obtains from sources other than Customer,
including but not limited to information that AT&T may have regarding Customer's
End-Users as a result of the past or present sale or provision by AT&T of
telecomunications services or equipment to said End-Users.
<PAGE>
1.F. FORCE MAJEURE. Neither party nor its affiliates, subsidiaries,
subcontractors, or parent corporation shall be liable in any way for delay,
failure in performance, loss or damage due to any of the following: fire,
strike, embargo, explosion, power blackout, earthquake, volcanic action, floor,
war, water, the elements, labor disputes, civil or military authority, acts of
God, acts of the public enemy, inability to secure raw materials, inability to
secure products, acts or omissions of carriers, or other causes beyond its
reasonable control, whether or not similar to the foregoing.
1.G. SEVERABILITY. If any portion of this Agreement shall be found to be invalid
or unenforceable, such portion shall be void and of no effect, but the remainder
of the Agreement shall continue in full force and effect unless the Agreement
fails of its essential purpose without the voided portion.
1.H. NOTICES. All notices, identifications, formal requests or other formal
communications required or desired to be given in connection with this
Agreement, shall be in writing and shall be effective when delivered in person,
when received if made by registered or certified mail (return receipt requested)
or by overnight delivery, or the day of transmission, if made by facsimile
before 3:00 p.m. on a business day, or the business day after transmission if
made by facsimile after 3:00 p.m., unless the parties otherwise agree in
writing. Notice shall be addressed to the following:
If to AT&T: Thomas Lysinger
General Manager
300 Atrium Drive
Somerset, New Jersey 08873
Facsimile: (908) 805-6093
If to Customer: Zane Russell
President and CEO
1250 Wood Branch Park Drive
Houston, Texas 77079
Facsimile: (281) 529-4650
1.I. MODIFICATION AND WAIVER. This Agreement may be modified only by a writing
signed by both parties. The failure of a party to enforce any right under this
Agreement at any particular point in time shall not constitute a continuing
waiver of any such right with respect to the remaining term of this Agreement,
or the waiver of any other right under this Agreement.
1.J. COMPLIANCE WITH LAWS. Each party is responsible for its own compliance with
all laws and regulations affecting its business, including but not limited to
the collection and remittance of all taxes and other levies imposed by law.
<PAGE>
1.K. CHOICE OF LAW. The domestic law of the State of New York, except its
conflict-of-laws rules, shall govern the construction, interpretation, and
performance of this Agreement.
1.L. CONFIDENTIALITY. The Terms, conditions, and rates contained in this
Agreement are confidential, and shall remain so unless and until it shall be
determined by AT&T that the Communications Act of 1934 (or any subsequent
legislation) and the regulations promulgated thereunder require the filing of
this Agreement with the Federal Communications Commission ("Commission"), or
unless the Commission orders the filing of this Agreement pursuant to authority
granted to the Commission by law or regulation. In such event, AT&T shall file
the Agreement within thirty days of its execution, or upon such determination
that filing is required, or upon being ordered by the Commission to do so
(whichever is later); provided, that AT&T nonetheless shall keep the identity of
Customer confidential unless required by law, regulation or the Commission to
disclose such identity. Absent such a filing requirement, neither party shall
disclose the terms or conditions of this Agreement to any third party, nor issue
any public statements relating to this Agreement without the written consent of
the other party, unless such disclosure or statement is reasonably believed by
the party to be compelled by governmental authority. A disclosing party shall
furnish reasonable prior notice to the other party before making the statement
or disclosure unless prohibited by law from doing so.
1.M. DISPUTE RESOLUTION. If a dispute arises out of or relates to this
Agreement, or its breach, the parties agree to submit the dispute to a sole
mediator selected by the parties or, at any time at the option of a party, to
mediation by the American Arbitration Association ("AAA"), to be held in New
York, New York. If not resolved by mediation, it shall be referred t a sole
arbitrator selected by the parties within thirty (30) days of the mediation or,
in the absence of such selection, to AAA arbitration which shall be held in
Dallas, Texas. The arbitration shall be governed by the United States
Arbitration Act and judgment on the award may be entered in any court having
jurisdiction. The arbitrator may not limit, expand or otherwise modify the terms
of this Agreement. The parties, their representatives, other participants and
the mediator and arbitrator shall hold the existence, content and results of
mediation and arbitration in confidence.
1.N. USE OF SERVICES PROVIDED FOR RESALE OR SHARED USE
1.N.1. When the services provided under this Carrier Agreement are
resold or shared, the Customer may advise its End User that a portion of the
Customer's service is provided by AT&T. However, the Customer shall not publish
or use any advertising, sales promotions, press releases or other publicity
matters which use AT&T's corporate or trade names, logos, trademarks, service
marks, trade dress, or other symbols that serve to identify and distinguish AT&T
from its competitors (or which use confusingly similar corporate or other trade
names, logos, trademarks, service marks, trade dress or other symbols), and the
Customer may not conduct business under AT&T's corporate or trade names, logos,
trademarks, service marks, trade dress, of other symbols that service to
<PAGE>
identify and distinguish AT&T from its competitors (or under any confusingly
similar corporate or trade names, logos, trademarks, service marks, trade dress
or other symbols), except to the limited extent as is permissible under contract
or applicable law. Customer shall comply with AT&T's "Naming Guidelines", as
they may be reasonably amended by AT&T from time to time on notice to Customer.
1.N.2. If AT&T finds that the Customer, in connection with its resale
of the Services Provided under this Carrier Agreement, is using AT&T's corporate
or tradenames, logos, trademarks, service marks, trade dress or other symbols
that serve to identify and distinguish AT&T from its competitors, in a manner
inconsistent with the provisions of Section 1.N.1, AT&T may provide written
notice of such inconsistent use to the Customer. If the Customer fails, within
30 days after the receipt of such notice, to substantiate to AT&T that such
inconsistent use has ended or has been corrected, the discounts specified in
Section 6.D and the credits specified in Sections 6.E.1, 6.E.2, 6.E.4,6.E.6, and
6.E.7 (the "Affected Discounts and Credits") will not apply from the 30th day
after the receipt of such notice until such time as the Customer substantiates
to AT&T that the inconsistent use has ended and has been corrected. Any such
suspension of the Affected Discounts and Credits shall not relieve the Customer
from its obligations to comply with any other conditions contained in this
Carrier Agreement, including the Minimum Revenue Commitments. If it is finally
determined by adjudication (or, if agreed by AT&T and the Customer, by
arbitration) that AT&T's initial finding of an inconsistent use was in error,
then the Customer shall receive a credit equal to the amount of the Affected
Discounts and Credits that were not applied as a result of AT&T's initial
finding, and AT&T's initial finding will have no further effect.
1.N.3 The Customer shall take such steps as are reasonably possible to
ensure that no Intermediate Reseller takes any action that, if done directly by
Customer, would violate Section 1.N.1. If an Intermediated Reseller does take
such action, the Customer shall take such steps as are reasonably possible to
cause the inconsistent use by such Intermediate Reseller to be ended and
corrected, to AT&T's reasonable satisfaction.
1.N.4 If AT&T finds that the Customer has failed to take such action as
is required pursuant to Section 1.N.3, AT&T may provide written notice of such
failure to the Customer. If the Customer fails, within 30 days after the receipt
of such notice, to substantiate to AT&T that the inconsistent use by the other
Carrier has ended and has been corrected or the Customer has taken the steps
required under the preceding paragraph, the Affected Discounts and Credits will
not apply from the 30th day after the receipt of such notice until such time a
Customer substantiates to AT&T that the inconsistent use has ended and has been
corrected. Any such suspension of the Affected Discounts and Credits shall not
relieve the Customer from its obligations to comply with any other conditions
contained in this Carrier Agreement including the Minimum Revenue Commitments.
If it is finally determined by adjudication (or, if agreed by AT&T and the
Customer, by arbitration) that AT&T's initial finding of a failure by Customer
to take required steps was in error, then the Customer shall receive a credit
<PAGE>
equal to the amount of the Affected Discounts and Credits that were not applied
as a result of AT&T's initial finding, and AT&T's initial finding will have no
further effect.
1.O. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of the
parties with respect to the subject matter hereof and supersedes all prior
written or oral agreements, proposals or understandings, except that a letter
from AT&T to EqualNet dated on or prior to the Effective Date of this Agreement
does reflect the understanding of the parties with respect to circumstances
under which a deposit will not be required.
1.P. DEFINITIONS. As used in this Agreement, the definitions set forth in AT&T
Tariff F.C.C. Nos. 1, 2, 9, 11 and 14 shall apply except to the extent that they
are modified or supplemented as follows:
1.P.1 TARIFFS: As used in this Agreement, the term "tariffs"
"Applicable Tariffs", or any variation thereof shall mean AT&T Tariff F.C.C.
Nos. 1, 2, 9, 11 and 14, as amended from time to time, as well as the documents
of general application that replace such tariffs upon their cancellation.
1.P.2. END-USERS: Those persons or entities to which Customer or an
Intermediate Reseller provides service utilizing the service provided to
Customer by AT&T pursuant to this Agreement.
1.P.3. INTERMEDIATE RESELLER: All resellers and other intermediaries in
the sales chain between CUSTOMER (including its employees, agents and
independently contracted sales representatives) and an End User.
1.P.4. DISPUTE: Any controversy or claim between the parties under this
Agreement or which relates directly or indirectly to this Agreement or the
services provided hereunder, whether based on contract, product liability,
statute, tort (including negligence or strict liability) or other legal or
equitable theory, whenever brought, between the parties or any of their
employees or agents.
1.P.5. DIRECT DIAL STATION CALL: That service where the person
originating the call dials the telephone number desired, completes the call
without the assistance of an operator, and the call is billed to the originating
number.
1.P.6. IXC SWITCH: An IXC is a telecommunications switch with the
following characteristics: (a) it is owned and operated by the Customer, (b) it
has the capability to be capability to be used for the transmission of calls
that are routed by a Local Exchange Carrier to the IXC Switch using Feature
Group D accent; (C) it is capable of interconnecting circuits or transferring
calling between circuits; (d) it has a maximum capacity of a least 100,000
access lines; and (e) it is used by Customer to provide service to End users as
a common carrier.
<PAGE>
1.Q. SIX MONTH REVIEW. In November, AT&T and CUSTOMER will engage in a contract
price review, which will include good faith negotiations as to whether any
changes should be made in rates and fees for intrastate, interstate, inbound and
non-qualified usage.
SECTION 2: REQUIREMENTS AND CERTIFICATION OF ELIGIBILITY
2.A. ELIGIBILITY. The rates, terms and conditions herein are expressly
conditioned upon the Customer's meeting the following eligibility requirements.
Customer is an interexchange telecommunications common carrier which certifies
as follows:
2.A.1. Customer has obtained the required operating authority in all
states in which it conducts business, as well as all authority required
by the FCC for resale of telecommunications services, including but not
limited to authority required pursuant to Section 214 of the
Communications Act of 1934, 47 U.S.C. ___ 214.
2.A.2. Customer complies and will continue to comply at all times with
all federal and state laws and regulations applicable to the sale and
provision of service to its customers, including but not limited to
those laws and regulations applicable to the authorization and proof of
authorization necessary to convert an End-Users former service t
Customer's service as the End-User's Primary Interexchange Carrier.
2.A.3. Customer will utilize the Service offered hereunder only for
lawful purposes, including but not limited to resale of the Service or
components thereof. In the event that Customer resells the Service
provided hereunder, it will comply with the provisions of this Agreement
regarding the use of AT&T's trade names, trademarks and service marks,
and will ensure that its Intermediate Resellers do not engage in any
activity in connection with the resale of the Service provided under
this Agreement that, if done by CUSTOMER, would violate such provisions.
2.B. TERMINATION FOR LACK OF ELIGIBILITY. If at any time during the term of this
Agreement Customer fails to comply with any requirement for eligibility
contained in Paragraphs 2.A.1 through 2.A.3., above, such failure shall
constitute a material breach of this Agreement which shall entitle AT&T to
terminate this Agreement and the Service provided hereunder by proving notice of
termination, if Customer fails to cure such breach within thirty (30) days after
AT&T provided notice of such breach. In the event of such termination, Customer
shall indemnify, defend and hold harmlss AT&T from any and all complaints,
causes or action or other claims brought against AT&T by any of End Users due to
said termination.
2.C. DEFAULT. If at any time during the term of this Agreement, receivership,
insolvency, reorganization, dissolution, liquidation, or other proceedings (not
including a proceeding under the federal Bankruptcy Code) shall be instituted by
or against either party or all or any substantial part of its property under an
applicable law of the United
<PAGE>
States or any state thereof, and such proceedings shall not have been stayed or
dismissed within ninety (90) days from service of process upon such party, then
the non-defaulting party shall have the right to terminate this Agreement.
Customer acknowledges that AT&T is a "utility" for purposes of Section 366 of
the Bankruptcy Code, and that AT&T will be entitled to adequate assurance of
payment as provided in that Section in the event that Customer becomes the
subject of a petition filed under the Bankruptcy Code. Notwithstanding the
provisions of the first sentence of this Section, AT&T's right to terminate this
Agreement in the event that Customer becomes the subject of a proceeding under
the federal Bankruptcy Code will be governed by Section 366 of Bankruptcy Code.
<PAGE>
SECTION 3: RESPONSIBILITIES OF AT&T
3.A. Provision of Service. Subject to its Correspondent Agreements with foreign
carriers and regulation by Federal and state authorities, AT&T shall provide
Service in accordance with its standard practices and procedures for the
operation of its network. Service shall be available 24 hours per day, seven
days per week. AT&T is responsible for the provision of Service from station to
station, but is not responsible for the quality of transmission or signaling on
the Customer's side of the interface at a Customer's premises. Service is
furnished subject to the availability of the service components required.
3.B. Installation. Upon execution of this Agreement AT&T shall establish a due
date for commencement of installation of Service and confirm said date with the
Customer (CISD). A Customer may delay said due date for commencement of
installation when the Customer's written requrest for said delay is received by
AT&T at least five (5) business days prior to said due date, provided that the
delay of said due date shall not exceed 30 cumulative calendar days. AT&T will
make every reasonable effort to commence installation of Service by the due
date, but Customer acknowledtes that in some cases a delay in commencement of
installation may be unavoidable. If commencement of installation is delayed for
more than 45 days beyond the due date, and such delay is not requested or caused
in whole or in part by the Customer, the Customer may cancel its order for
Service pursuant to this Agreement and shall not thereby be considered to have
breached this Agreement, such cancellation shall be Customer's sole remedy for
such delay.
3.C. Maintenance. AT&T shall maintain Service in conformity with its standard
network operating procedures.
3.D. Limitation of Liability. AT&T (including its subsidiaries, affiliate,
predecessor, successors and assigns) makes no warranties, express or implied,
and specifically disclaims any warranty of merchantability or fitness for a
particular purpose with respect to services or products provided pursuant to
this Agreement. AT&T's liability for service interruptions for any service
provided pursuant to this Agreement shall not exceed an amount equal to a
pro-rated portion of the recurring charges provided for under this Agreement for
the service affected for the period(s) during which said service was affected.
This limitation of liability shall apply regardless of the form of action,
whether in contract, tor, warranty, strict liability, or negligence (including
without limitation active and passive negligence). In no event shall AT&T be
liable for consequential, special or indirect damages or lost profits sustained
by reason of its performance of this Agreement, or for any failure, breakdown,
or interruption of service, whatever shall be the cause, or however long it
shall last, and regardless of whether anyone has been advised of the possbility
of such damages. AT&T shall have no liability for damages caused (1) by
Customer's failure to perform its reponsibilities under this Agreement, or (2)
by the acts of third parties (including without limitation Customer's users or
end users). AT&T does not guarantee or make any warranty with respect to the
service
<PAGE>
provided pursuant to this Agreement when used in an explosive atmosphere. This
Agreement does not create any claim or right of action, nor is it intended to
confer any benefit on any third party, including but no tlimited to any user or
end-user of Customer. The limitations of liability set forth in this Agreement
shall survive failure of an exclusive remedy.
3.E. Service, Channels or Equipment of Other. AT&T is not liable fo rdamages
associated with service, channels, or equipment that it does not furnish. At&T
does not provide Customer equpment.
3.F. No Patent or Software License. No license under patents or software
copyrights (other than the limited license to use) is granted by AT&T or shall
be implied or arise by estoppel, with respect to Service offered under this
Agreement.
3.G. Periodic Review. Beginning in the sixth month of the Term of this
Agreement, and evry six months thereafter, AT&T will review with CUSTOMER the
status of CUSTOMER's revenue/voluem commitments, changes in its actual available
traffic, and the pricing of the services provided under this Agreement. If AT&T
and the CUSTOMER agree that revisions to this Agreement would be advantageous to
both parties, then AT&T and CUSTOMER will cooperate in efforts to develop a
mutually agreeable alternative proposal that will satisfy the concern of both
parties and comply with all applicable legal and regulatory requirements. By way
of example and not limitation, such alternative proposal may include changes in
rates, nonrecurring charge, revenue and/or volume commitments, discounts, the
term and other provisions. This provision shall not apply to a change resulting
from a decision by CUSTOMER to transfer portions of its traffic or projected
growth to carriers other than AT&T. This provision does not constitute a waiver
of any charges, including shortfall charges, incurred by the CUSTOMER prior to
the time any amendment to this Agreement is made.
SECTION 4: RESPONSIBILITIES OF CUSTOMER
4.A. PLACEMENT OF ORDERS AND COMPLIANCE WITH REGULATIONS. Customer is
responsible for placing any necessary orders and for assuring that it, its Users
and its End-Users comply with the provisions of this Agreement and with all
applicable federal and state laws and regulations.
4.B. BILLING; RESPONSIBILITY FOR PAYMENT. Customer is liable for all amounts due
to AT&T hereunder, subject to the following. AT&T will provide to Customer a
single monthly bill for each of the Services provided under this Agreement, or
at AT&T's
<PAGE>
option a single monthly bill for all of the Services provided under this
Agreement. Said bill or bills (including call detail records) will be provided
on magnetic tape or such other electronic media as the parties agree in writing,
and will be sent to one Customer location designated by the Customer. Except as
provided in the Payment Plan set forth in a separate, contemporaneous Settlement
Agreement between the parties, payment of charges is due upon presentation of a
bill (including call detail records). Payment shall be considered past due if
not made within thirty (30) days after the date of the bill on which the charges
first appear. Customer shall be solely responsible for rendering of bills to and
collection of charges from its end-users. Failure of Customer to bill and
collect charges from its end-users shall not excuse in whole or in part
Customer's responsibilities to AT&T under this Agreement, including but not
limited to the responsibility to render to AT&T timely payment of charges.
Customer shall reimburse AT&T for reasonable attorneys fees (in the event of a
collection arbitration or litigation) and any other costs associated with
collecting delinquent payments from Customer. At AT&T's option, interest charges
may be added to any undisputed adjudged past due amounts at the rate of one and
one-half per cent (1 1/2%) per month, unless such interest rate exceeds the
maximum allowed by applicable law, in which case interest shall be at the
maximum lawful rate. The failure of Customer to make timely payment of charges
pursuant to this paragraph shall constitute a material breach of this Agreement
by Customer which shall entitle AT&T to terminate this Agreement and the service
provided hereunder upon five days written notice to Customer.
Notwithstanding the foregoing, AT&T may continue to issue bills to Customer's
End Users for 800 Services until October 31, 1997. Beginning July 1, 1997, the
bills will not include AT&T brand identification.
4.C. INTERFACING AND COMMUNICATING WITH END-USERS. Interfacing and communicating
with End-Users shall be the sole responsibility of Customer with respect to any
use that Customer may make of the service provided pursuant to this Agreement to
in turn provide service to other persons or entities. Such interfacing and
communicating shall include without limitation installation of service,
termination of service, placing of orders, billing and billing inquiries,
reporting of service outages and problems, collection of charges and handling
and resolution of all disputes.
4.D. DEPOSITS. AT&T may require the Customer, prior to or during the provision
of service pursuant to this Agreement, to tender a deposit in an amount to be
determined by AT&T in its reasonable discretion to be held by AT&T as a
guarantee for the payment of charges (including but not limited to shortfall
charges attributable to Customer's failure to comply with any revenue or volume
commitment or any monitoring condition in this Agreement or under a prior
serving arrangement); provided, that such deposit shall not exceed the greater
of four million five hundred thousand dollars ($4,500,000) or three times the
average monthly charges (after discount) for the six months preceding the
calculation of the deposit amount. To determine the financial responsibility of
Customer and/or the specific amount of any deposit required, AT&T may rely upon
commercially reasonable factors to assess and manage the risk of non-payment,
including but not limited to payment history for telecommunications service
(including such service purchased from AT&T), number of years in business,
bankruptcy or insolvency history, current AT&T account treatment status,
financial statement analysis, and commercial credit bureau rating. It shall be
Customer's responsibility to provide to AT&T upon request such information as is
necessary for AT&T to determine the financial responsibility of Customer,
including but not
<PAGE>
limited too Customer's tax returns, audited or unaudited financial statements
and loan applications. AT&T will enter into a reasonable non-disclosure
agreement to protect the confidentiality of such information. A deposit does not
relieve Customer of the responsibility for the prompt payment of bills on
presentation or the due date appearing on the face of the bills. In lieu of a
cash deposit, AT&T will accept Bank Letters of Credit and Surety Bonds which
have been approved by AT&T. Interest will be paid to a Customer for the period
that a cash deposit is held by AT&T. The interest rate used will be simple
interest at the rate of six percent annually unless a different rate has been
established by the appropriate legal authority in the state where the Service
offering is located. The failure of Customer to post a deposit as required by
AT&T pursuant to this paragraph shall constitute a material breach of this
Agreement by Customer which shall entitle AT&T to terminate this Agreement and
the service provided hereunder upon four (4) business days written notice to
Customer. When the service for which the deposit has been required is
discontinued, the deposit will be applied to the final bill and any credit
balance will be refunded to the Customer with applicable interest accrued.
4.E. CUSTOMER'S USE OF SERVICE. Customer may use the services provided pursuant
to this Agreement for any lawful purpose consistent with the transmission and
switching parameters of the telecommunications network, and may resell its use
(or the use of any part thereof) to a third party in the normal course of the
Customer's business, subject to the following:
4.E.1 ABUSE. The abuse of Service is prohibited. The following
activities constitute abuse:
4.E.1.A. Using Service to make calls that might reasonably be
expected to frighten, abuse, torment, or harass another, or
4.E.1.B. Using Service in such a way that it interferes
unreasonably with the use of Service or AT&T's network by
others.
EXHIBIT 21.1
EQUALNET HOLDING CORP. - A TEXAS CORPORATION
Has the following two (2) subsidiaries:
EqualNet Corporation - a Delaware corporation
TeleSource, Inc. - a Texas corporation
EqualNet Corporation has one subsidiary, EqualNet Wholesale Services, Inc., a
Delaware corporation.
EXHIBIT 21.1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 333-23427, Form S-3 No. 333-32049) of EqualNet Holding Corp. and
in the related Prospectus and in the Registration Statements (Form S-8 No.
33-97200) pertaining to the Employee Stock Option and the Restricted Stock Plan
of EqualNet Holding Corp., (Form S-8 No. 333-04485) pertaining to the EqualNet
Holding Corp. Employee Stock Purchase Plan, (Form S-8 No. 333-04483) pertaining
to the EqualNet Holding Corp. 1995 Non-Employee Director Stock Option Plan of
our report dated September 25, 1997, with respect to the consolidated financial
statements of EqualNet Holding Corp. included in the Annual Report (Form 10-K)
for the year ended June 30, 1997.
ERNST & YOUNG LLP
Houston, Texas
September 29, 1997
EXHIBIT 23.1
