UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1997
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from __________, 19__ to __________ , 19__ .
Commission File Number: 0-25482
EQUALNET HOLDING CORP.
(Exact Name of Registrant as Specified in its Charter)
TEXAS 76-0457803
(State of Other Jurisdiction of (I.R.S. Employer Identi-fication Number)
Incorporation or Organization)
1250 WOOD BRANCH PARK DRIVE
HOUSTON, TEXAS 77079
Address of Principal Executive Offices, Including Zip Code
(281) 529-4600
(Registrant's Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
There were 6,287,724 shares of the Registrant's $.01 par value common stock
outstanding as of November 13, 1997.
1
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
EQUALNET HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1997 1997
-------- ------------
(NOTE) (UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and equivalents ............................... $ 828,478 $ 786,437
Accounts receivable, net of allowance
for doubtful accounts of $1,450,954 at June 30,
1997 and $511,438 at September 30, 1997 ......... 9,048,961 7,337,583
Receivable from officers ........................... 28,367 28,367
Due from agents .................................... 2,907,922 2,340,527
Prepaid expenses and other ......................... 285,516 292,247
------------ ------------
Total current assets ................................... 13,099,244 10,785,161
Property and equipment
Computer equipment ................................. 3,435,121 3,485,541
Office furniture and fixtures ...................... 1,209,032 1,209,032
Leasehold improvements ............................. 1,174,777 1,174,777
------------ ------------
5,818,930 5,869,350
Accumulated depreciation and
amortization ....................................... (3,028,768) (3,369,998)
------------ ------------
2,790,162 2,499,352
Customer acquisition costs, net of
accumulated amortization of $13,050,667
at June 30, 1997 and $13,627,745 at
September 30, 1997 ................................. 1,262,939 982,673
Other assets ........................................... 1,027,507 982,261
Goodwill, net of accumulated amortization of $46,020 at
June 30, 1997 and $ 69,030 at September 30, 1997..... 982,308 959,298
------------ ------------
Total assets ........................................... $ 19,162,160 $ 16,208,745
============ ============
</TABLE>
Note: The balance sheet at June 30, 1997 has been derived from the audited
financial statements at that date.
2
<PAGE>
EQUALNET HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1997 1997
------------ ------------
(NOTE) (UNAUDITED)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable ................................ $ 1,858,065 $ 2,063,136
Accrued expenses ................................ 1,398,319 1,579,341
Accrued sales taxes ............................. 591,182 489,952
Brokerage commissions payable ................... 151,755 114,105
Payable to providers of long distance servi ..... 7,977,531 7,657,008
Current maturities of capital lease obligation .. 51,000 30,000
Notes payable to long distance provider ......... 1,183,059 1,183,059
Revolving line of credit ........................ 4,555,442
Contractual obligations with regard to receivable
sales agreement ................................ -- 3,418,647
------------ ------------
Total current liabilities ........................... 17,766,353 16,535,248
Subordinated note payable ........................... 2,864,058 2,886,261
Deferred rent ....................................... 220,288 200,170
Shareholders' equity (deficit)
Preferred stock (non-voting),$.01 par value
1,000,000 shares authorized and 0 shares
issued and outstanding ........................ -- --
Common stock, $.01 par value, 20,000,000
shares authorized and 6,173,750 shares
issued and outstanding at June 30, 1997
and 6,682,718 at September 30, 1997 ............ 61,738 66,828
Treasury stock at cost, 21,750 shares at
June 30, 1997 and 394,994 at September 30, ..... (104,881) (804,881)
Additional paid in capital ...................... 20,390,927 21,435,837
Stock warrants .................................. 368,000 368,000
Deferred compensation ........................... (245,829) (223,327)
Accumulated deficit ............................. (22,158,494) (24,255,391)
------------ ------------
Total shareholders' deficit ......................... (1,688,539) (3,412,934)
------------ ------------
Total liabilities and shareholders' deficit ......... $ 19,162,160 $ 16,208,745
============ ============
</TABLE>
Note: The balance sheet at June 30, 1997 has been derived from the audited
financial statements at that date.
3
<PAGE>
EQUALNET HOLDING CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1996 1997
------------ -----------
<S> <C> <C>
Revenues .......................... $ 13,314,899 $ 8,327,219
Cost of Revenues .................. 10,287,564 6,264,718
------------ -----------
3,027,335 2,062,501
Selling, general and administrative
expenses ...................... 3,177,697 2,667,606
Depreciation and amortization ..... 1,850,148 1,112,200
------------ -----------
Operating loss .................... (2,000,510) (1,717,305)
Other income (expense)
Interest income ............... 32 1,130
Interest expense .............. (270,277) (353,385)
Miscellaneous ................. (90,563) (27,337)
------------ -----------
(360,808) (379,592)
Loss before federal income
taxes ......................... (2,361,318) (2,096,897)
Benefit for federal income taxes .. (802,845) --
------------ -----------
Net loss .......................... $ (1,558,473) $(2,096,897)
============ ===========
Net loss per share ................ $ (0.26) $ (0.33)
============ ===========
Weighted average number of
shares ........................ 6,002,000 6,368,864
============ ===========
</TABLE>
See accompanying notes.
4
<PAGE>
EQUALNET HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1996 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ........................................... $(1,558,473) $(2,096,897)
Adjustments to reconcile net income to
cash provided by operating activities
Depreciation and amortization ................. 1,850,148 1,112,200
Provision for bad debt ........................ 671,344 387,025
Equity in loss on investment .................. 75,704 --
Benefit for deferred income taxes ............. (802,845) --
Change in deferred rent ....................... -- (20,118)
Loss on sale of assets ........................ 341 --
Compensation expense recognized
for common stock issue ...................... 22,500 22,502
Change in operating assets and
liabilities:
Accounts receivable ........................ 1,452,599 1,324,353
Due from agents ............................ (814,698) 405,737
Prepaid expenses and other ................. 870,582 (62,758)
Other assets ............................... (162,025) (17,951)
Accounts payable and accrued liabilities ... 1,114,244 (73,310)
----------- -----------
Net cash provided by operating activities .......... 2,719,421 980,783
INVESTING ACTIVITIES
Purchase of property and equipment ................. (16,964) (50,420)
Purchase of customer accounts ...................... (15,061) (186,812)
Proceeds from sale of equipment .................... 800 --
----------- -----------
Net cash used in investing activities .............. (31,225) (237,232)
FINANCING ACTIVITIES
Proceeds from subordinated note payable ............ -- 22,203
Net repayments on revolving line of credit ......... (2,744,360) (4,555,442)
Net proceeds on contractual obligations with regard
to receivable sales agreement ..................... -- 3,418,647
Repayments on capital lease obligations ............ (21,000) (21,000)
Proceeds from issuance of stock .................... -- 350,000
----------- -----------
Net cash used in financing activities .............. (2,765,360) (785,592)
----------- -----------
Net decrease in cash ............................... (77,164) (42,041)
Cash, beginning of period .......................... 381,849 828,478
----------- -----------
Cash, end of period ................................ $ 304,685 $ 786,437
=========== ===========
</TABLE>
5
<PAGE>
EQUALNET HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - MANAGEMENT'S REPRESENTATION
The consolidated financial statements included herein have been
prepared by the management of EqualNet Holding Corp. (the "Company")
without audit. Certain information and note disclosures normally
included in consolidated financial statements prepared in accordance
with generally accepted accounting principles have been omitted. In
the opinion of the management of the Company, all adjustments
considered necessary for fair presentation of the consolidated
financial statements have been included and were of a normal recurring
nature, and the accompanying consolidated financial statements present
fairly the financial position of the Company as of September 30, 1997,
and the results of operation and cash flows for the three months ended
September 30, 1996 and 1997.
It is suggested that these consolidated financial statements be read
in conjunction with the consolidated financial statements and notes
for the three years ended June 30, 1997, included in the Company's
Annual Report on Form 10-K for the year ended June 30, 1997, as
amended, which was filed with the Securities and Exchange Commission.
The interim results are not necessarily indicative of the results for
a full year.
NOTE 2 - INCOME TAXES
The Company 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 recorded no income tax benefit
for the period ended September 30, 1997.
NOTE 3 - DEBT REFINANCING
At June 30, 1997 the Company had a $7.5 million revolving line of
credit with a bank which expired July 1, 1997. Interest on the
outstanding balance was prime plus 6%. The agreement required the
company to meet certain restrictive covenants including tangible net
worth and debt to equity ratios. At June 30, 1997 the Company was not
in compliance with these covenants.
The Company replaced the revolving line of credit with a new
receivables sale agreement with Receivables Funding Corporation
("RFC") effective June 18, 1997. The new agreement funded on July 7,
1997. The new agreement provides for accounts receivable purchase
commitments of up to $8,000,000 for the purchase of the Company's
receivables from customers that meet specified eligibility
requirements. Funding is based on a percentage of the Company's
outstanding receivables and allows for the RFC to cease funding of
new receivables without prior written consent at the RFC's option.
The program fee applied to the outstanding balance of net purchased
receivables is prime plus 4.5% (13% at September 30, 1997)
NOTE 4 - STOCK SUBSCRIPTION AGREEMENT AND PROMISSORY NOTE
On July 1, 1997 the Company entered into a stock subscription
agreement and received a secured promissory note with a third party
investor. Under the terms of the agreement the Company issued 508,968
shares of common stock to the investor for an aggregate purchase price
of $1,050,000. The investor paid for the stock by issuing a promissory
note to the Company for $1,050,000. The stock issued to the investor
was pledged as collateral for the note.
The investor made two payments under the note totaling $350,000. The
remaining scheduled payments were not made, constituting an event of
default by the investor. The Company therefore reacquired 373,244 of
the 508,968 shares that were purchased by this investor pursuant to
the terms of the note. These shares are included on the Balance Sheet
as Treasury Shares under the cost method.
NOTE 5 - LIQUIDITY AND CAPITAL RESOURCES
On September 25, 1997, the Company announced that it was in
discussions with The Willis Group, LLC, a privately held investment
partnership ("The Willis Group"), and other third parties relating to
a possible transaction or series of transactions in which the Company
might ultimately acquire certain assets of a switch-based provider of
telecommunications services. The Company simultaneously announced that
its negotiations regarding its previously announced merger with
another telecommunications company had been terminated. On September
24, 1997, a plan presented by The Willis Group to purchase the
switch-based assets of Total National Telecommunications, an operating
subsidiary of Total World Telecommunications which is currently in
Chapter 7 protection of the United States Bankruptcy Code, was
approved by the bankruptcy court administering that case. The Willis
Group and other parties are considering contributing these
switch-based assets and cash to the Company in exchange for issuance
by the company of approximately $5 to $10 million in a combination of
stock and convertible debt. Upon successful completion of these
transactions, the Company would become a switch- based provider of
long distance telecommunications services. The transaction is
conditioned upon, among other things, the approval of the Company's
stockholders. While the Company believes that these proposed
transactions can recapitalize the Company, there can be no assurance
such transaction will occur. In the event the proposed
recapitalization does not occur, the Company will continue to pursue
other options including seeking additional capital and/or an alliance
with a strategic partner. In the event no strategic alliance is
accomplished, the Company may be required to seek protection under
United States bankruptcy laws.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
The Company's intrastate long-distance telecommunications operations
are subject to various state laws and regulations, including prior
certification, notification or registration requirements. The Company
must generally obtain and maintain certificates of public convenience
and necessity from regulatory authorities in most states in which it
offers service. The Company has responded to formal consumer
protection inquiries from eleven states. The inquiries do not state
specific damage amounts, and the potential liability, if any, is not
determinable. The Company believes these inquiries will be resolved
satisfactorily, although settlement offers may be made or accepted in
instances in which it is determined to be cost effective. At the year
ended June 30, 1997, the Company had recorded an accrual of $390,000
for such estimated settlements. No additional accruals were made
during the quarter ended September 30, 1997. No assurances can be made
however, that the inquiries can be settled for amounts within that
currently accrued, that additional states will not begin inquiries or
that the current accruals will be sufficient to provide for existing
or future settlements. Failure to resolve inquiries satisfactorily or
reach a settlement with the regulatory agencies could, in the extreme,
result in the inability of the Company to provide long-distance
service in the jurisdiction requiring regulatory certification. Any
failure to maintain proper certification could have a material adverse
effect on the Company's business.
NOTE 7 - SUBSEQUENT EVENTS
On October 1, 1997, the Company issued a $1,000,000 convertible
secured note to The Willis Group. The note matures on April 1, 1998
and bears interest at the rate of 12% per annum. The note is
convertible into shares of the Company's common stock. The rate of
conversion is based upon the trading price of the Company's common
stock at the time the note is converted. At November 10, 1997 the note
was convertible into an approximate aggregate of 1,000,000 shares of
the Company's common stock. In addition to the note, The Willis Group
was issued warrants to purchase 200,000 shares of the Company's stock
at $1.00 per share.
On October 7, 1997, the Nasdaq Stock Market, Inc. ("Nasdaq") notified
the Company that the Company was not in compliance with Nasdaq's
tangible net assets requirements. Nasdaq informed the Company that
failure to comply with this requirement could result in the removal of
the Company's stock from trading on the Nasdaq National Market,
although trading in the Company's stock could continue on the
Overthe-Counter Bulletin Board of the National Association of
Securities Dealers (the "OTC"). Nasdaq also requested additional
information regarding the Company's plan to achieve compliance with
Nasdaq National Market listing requirements.
The Company believes that successful completion of the proposed
transactions with The Willis Group and other parties (see Note 5)
could result in the recapitalization of the Company and compliance
with Nasdaq National Market listing requirements. There can be no
assurance, however, that such transaction will occur. On October 20,
1997 the Company presented the details of the proposed transaction to
Nasdaq. On November 7, 1997 Nasdaq responded that it will not continue
listing the Company's stock on the Nasdaq National Market due to the
uncertainty that the proposed transactions with The Willis Group and
other parties will take place. The Company has requested a hearing on
the matter with Nasdaq.
If the Company can not comply with Nasdaq's continued listing
requirements then the Company's common stock would no longer trade on
the Nasdaq National Market. Instead, the Company's common stock would
trade on the OTC, which will have an adverse effect on the liquidity
of the Company's stock.
On October 24, 1997 the Company amended its Carrier Agreement with
AT&T. The amendment provides for the modification of the volume
commitment under the first two minimum semi-annual revenue commitments
("MSARC") and the modification of certain monitoring conditions of the
MSARC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of operations and financial condition of the Company
should be read in conjunction with the Financial Statements and Notes thereto
included elsewhere in this Quarterly Report on Form 10-Q. Special Note: Certain
statements set forth below constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended. See "Special Note Regarding
Forward-Looking Statements" and "Cautionary Statements".
RESULTS OF OPERATIONS
Sales for the three months ended September 30, 1997 decreased 37.5% to $8.3
million compared with sales of $13.3 million for the same period of the prior
year. Gross margin decreased to $2.1 million compared to $3.0 million for the
same period of the prior year. The net loss for the three months ended September
30, 1997 was $2.1 million and included no tax benefit. The net loss for the
corresponding period in the previous year was $1.6 million and included a tax
benefit of $802,000 (an effective rate of 34.0%).
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:
Three Three
Months Months
Ended Ended
9/30/96 9/30/97
Total revenues ........ 100.0% 100.0%
Cost of revenues ...... 77.3% 75.2%
----- -----
Gross margin .......... 22.7% 24.8%
Selling, general and
administrative expenses 23.9% 32.0%
Depreciation and
amortization .......... 13.9% 13.4%
----- -----
Operating income
(loss) ................ (15.1%) (20.6%)
Other income (expense)
Interest income ..... 0.0% 0.0%
Interest expense .... (2.0%) (4.2%)
Miscellaneous ....... (0.7%) (0.3%)
----- -----
(2.7%) (4.5%)
Income before federal
income taxes .......... (17.8%) (25.1%)
Provision for federal
income taxes .......... (6.0%) 0.0%
----- -----
Net Income ............ (11.8%) (25.1%)
===== =====
10
<PAGE>
SALES
The Company experienced a decrease in sales in the three months ended
September 30, 1997 of 37.5% to $8.3 million compared to $13.3 million for the
comparable period of the prior year. The decrease was due primarily to a
decrease in the number of customer accounts and a corresponding decrease in
billable minutes. Total billable minutes for the quarter ended September 30,
1997 decreased 30.6% to 29.5 million minutes from 42.5 million minutes for
the same period of the prior year.
The decline in revenues and billable minutes was the result of the continued
rate of attrition for existing customers and a continuing decline in order
activity. The Company's continuing liquidity problems during this time frame
have not allowed for the funding of order activity as significant as that in
the same period of the prior year.
COST OF SALES
The cost of sales for the three months ended September 30, 1997 decreased
39.1% to $6.3 million compared to $10.3 million for the comparable period of
the prior year. The decrease was primarily attributable to a decrease in
sales. Cost of sales as a percentage of sales decreased to 75.2% for the
three months ended September 30, 1997 from 77.3% for the corresponding period
in the previous year. The primary cause of the decrease was the reduction in
the Company's cost of long distance from its primary underlying carrier.
The Company's cost of long-distance (which is a component of cost of sales)
decreased as a percentage of sales to 54.5% from 63.2% for the three months
ended September 30, 1997 and 1996, respectively. The decrease in the
percentage in the first quarter of fiscal 1997 is the result of the Company
reducing its cost of long distance by negotiating more favorable rates with
providers.
Commission expense as a percent of sales increased to 7.4% for the first
quarter of fiscal 1998, compared to 3.5% for the first quarter of fiscal
1997. This increase reflects the Company's return to acquiring new customers
utilizing advances and residual commissions rather than through purchased
orders.
Billing expense as a percentage of sales increased to 8.4% for the three
months ended September 30, 1997 compared to 5.6% for the same period in the
previous year. This is a result of the Company continuing to shift customers
to billing through Local Exchange Carriers ("LECs"). Billings through the
LECs represented 45.7% and 11.5% of the Company's revenues for the three
months ended September 30, 1997 and 1996, respectively. The cost of billing
through LECs is generally greater than billing customers through independent
billing companies. However, the Company also believes that LEC billing will
result in reduced bad debt expense and 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.
11
<PAGE>
Bad debt expense as a percentage of sales for the three months ended
September 30, 1997 was 4.6% of sales as compared to 5.0% for the three
months ended September 30, 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased 16.1% to $2.7 million
for the three months ended September 30,1997, from $3.2 million for the same
period of the prior year. Selling, general and administrative expenses
increased as a percentage of sales to 32.0% for the three months ended
September 30,1997 from 23.9% for the same period of the prior year. The
increase in selling, general and administrative expenses as a percentage of
sales relates primarily to the substantial decrease in revenues and the
corresponding loss of back office economies of scale.
Salary expense decreased $405,000 for the quarter ended September 30,1997
compared to the same quarter of the previous year. Staffing reductions were
the primary cause for the decrease in salary expense. Staffing decreased from
173 employees at September 30, 1996 to 115 employees at September 30, 1997.
The remaining decrease in comparing the three month results is due to overall
cost reduction efforts.
During the comparative three month periods departmental direct expenses
increased $10,000 and administrative costs have decreased by $98,000. Lease
expense over the comparative periods decreased approximately $17,000.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased 39.9% to $1.1 million for the quarter
ended September 30, 1997 as compared to $1.9 million for the same period in
the previous year. The decrease is the result of the write off of significant
purchases of customer accounts during the 1997 fiscal year. Purchased
accounts are amortized utilizing a declining balance method. The write offs
resulted in significant reductions in quarterly amortization expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $981,000 in cash flow from operations for the three
months ended September 30, 1997, compared to $2.7 million for the same period
of the prior year. Cash flow from operations was generated primarily through
the increase of the payables to providers and other vendors and the decrease
in net accounts receivable due to aggressive collection of accounts
receivable.
Cash used in investing activities totaled $237,000 for the three months ended
September 30, 1997, compared to $31,000 for the same period of the previous
year. The primary use of cash for investing activities during the period
ended September 30, 1997 was for the
12
<PAGE>
purchase of fixed assets including additional computer hardware and software
related to the Company's billing system and advances to agents.
Net cash used in financing activities was $786,000 for the three months ended
September 30, 1997. The majority of this amount was used to repay borrowings
under the Company's line of credit. The Company's declining revenue base, and
the resulting reduction in receivables, have resulted in a significant
decrease in funds available under the Company's receivables funding
arrangement. The use of cash was offset by $350,000 in proceeds received from
the issuance of stock to a private investment group.
On September 25, 1997, the Company announced that it was in discussions with
The Willis Group, LLC, a privately held investment partnership, and other
third parties relating to a possible transaction or series of transactions in
which the Company might ultimately acquire certain assets of a switch-based
provider of telecommunications services and that its previously announced
merger with another telecommunications company had been terminated. On
September 24, 1997, a plan presented by The Willis Group to purchase the
switch-based assets of Total National Telecommunications, an operating
subsidiary of Total World Telecommunications which is currently in Chapter 7
protection of the United States Bankruptcy Code, was approved by the
bankruptcy court administering the case. As part of these discussions, The
Willis Group and other parties are considering an equity contribution to the
Company for approximately $5 to $10 million in a combination of stock and
convertible debt. Upon successful completion of these transactions, which are
subject to execution of definitive agreements and shareholder approval, the
Company would become a switch-based provider of long distance
telecommunications services. While the Company believes that the potential
transaction with The Willis Group can recapitalize the Company, there is
currently no assurance such transaction will occur. In the event the proposed
recapitalization does not occur, the Company will continue to pursue other
options including seeking additional capital and/or an alliance with a
strategic partner. In the event no strategic alliance is accomplished, the
Company may be required to seek protection under United States bankruptcy
laws.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company is involved in what it believes to be
routine litigation or other legal proceedings that may be considered as
part of the ordinary course of its business. Currently the Company is
involved in litigation filed in August, 1995 under Cause No. 95-CH-0142
in the Circuit Court of the Seventh Judicial Circuit of Sangamon
County, Illinois brought by the Illinois Attorney General under that
state's Consumer Fraud and Deceptive Business Practices Act, seeking
injunctive relief, attorneys fees and civil penalties in the amount of
$50,000 for each violation of that Act. The Company is also involved in
litigation filed in February, 1996 under Cause No. IJ96-1153 in the
Chancery Court of Pulansky County, Arkansas, 1st Division, brought by
the Arkansas Attorney General under that state's Deceptive Trade
Practices Act seeking injunctive relief, attorneys fees, restitution to
consumers and civil penalties in the amount of $10,000 for each
violation of the Act. The 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, 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.
14
<PAGE>
ITEM 2. CHANGES IN SECURITIES
On July 1, 1997, the Company sold 508,968 shares (the "Securities") of
the Company's common stock, par value $.01 per share, to Lexus
Commercial Enterprises, Ltd. (the "Purchaser") for $2.063 per share,
for an aggregate purchase price of $1,050,000 (the "Purchase Price").
The Purchase Price was paid by a secured promissory note made payable
to the order of the Company in an aggregate principal amount of the
Purchase Price (the "Note"). The Note was secured by a pledge of the
Securities and bore interest at an annual rate equal to 8%. After
certain installments on the Note were not paid, the Company exercised
its rights as a secured creditor under the Note and reacquired 373,244
of the Securities.
The Company believes that the offering and sale of the Securities is
exempt from registration under section 4(2) of the Securities Act of
1933 (the "Act") and under Regulation D and S promulgated thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS:
This Quarterly Report on Form 10-Q includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act of
1933, as amended, 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 report, including
without limitation, statements regarding the Company's financial
position, business strategy, products, products under development,
markets, budgets and plans and objectives of management for future
operations, are forward-looking statements. Although the Company
believes that the expectation of 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 "Cautionary Statements" and elsewhere
in this Report, including, without limitation, in conjunction with the
forward-looking statements included in this Report. All subsequent
written and oral forward-looking statements attributable
to the Company, or persons on its behalf, are expressly qualified in
their entirety by the Cautionary Statements.
CAUTIONARY STATEMENTS:
See "Special Note Regarding Forward-Looking Statements".
NO ASSURANCE OF ADDITIONAL NECESSARY CAPITAL - The Company continues to
pursue additional financing of between $3 million and $10 million in
debt or equity. If the Company is unsuccessful in achieving this
objective 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.
POTENTIAL DELISTING - On October 7, 1997 the Nasdaq notified the
Company that the Company was not in compliance with the Nasdaq's
tangible net assets requirements. On November 7, 1997 Nasdaq notified
the Company that it will not continue listing the Company's stock on
the Nasdaq National Market.
The Company has requested a formal hearing on the matter with Nasdaq;
however, there can be no assurance that the Company's common stock will
continue to be listed on the Nasdaq National Market. If it is not so
listed, the Company would apply to have the Company's common stock
qualify for trading on the Over-the-Counter market. There can be no
assurance that a market for the Company's common stock would continue.
ATTRITION RATES - In the event that the Company experiences attrition
rates in excess of those anticipated either as a result of increased
provisioning times by its underlying carrier, the purchase of poor
performing traffic, or the inability to properly manage the existing
customer base due to difficulties with the NetBase system, additional
charges that affect earnings may be incurred.
DEPENDENCE ON INDEPENDENT MARKETING AGENTS - The Company has a small
internal sales force and obtains a significant majority of its new
customers from independent marketing agents ("Agents"). The Company's
near-term ability to expand its business depends upon whether it can
continue to maintain favorable relationships with existing Agents and
recruit and establish new relationships with additional Agents. No
assurances can be made as to the willingness of the existing Agents to
continue to provide new orders to the Company or as to the Company's
ability to attract and establish relationships with new Agents.
DEPENDENCE ON AT&T AND OTHER FACILITIES-BASED CARRIERS - The Company
does not own transmission facilities and currently depends primarily
upon AT&T and, to a lesser extent, upon Sprint, through its contract
with The Furst Group, to provide the telecommunications services that
it resells to its customers and the detailed information upon which it
bases its customer billings. The Company's
16
<PAGE>
near-term ability to expand its business depends upon whether it can
continue to maintain favorable relationships with these carriers.
Although the Company believes that its relationships with these
carriers are good and should remain so with continued contract
compliance, the termination of the Company's current contract with AT&T
or the loss of the telecommunications services that the Company
receives from AT&T or Sprint (through the Furst Group) could have a
material adverse effect on the Company's results of operations and
financial condition.
CARRIER COMMITMENTS - The Company has significant commitments with its
primary carrier to resell long-distance services. The Company's
contract with its carrier contains clauses that could materially and
adversely impact the Company should the Company incur a shortfall in
meeting its commitments. Although the Company has from time to time
failed to meet its commitment levels under a particular contract and in
each case has been able to negotiate a settlement with the carrier
which resulted in no penalty being incurred by the Company, there can
be no assurances that the Company will be able to reach similar
favorable settlements with its carriers in the event that the Company
should fail to meet its future commitments.
In recent years, AT&T, MCI Communications Corporation ("MCI") and
Sprint have consistently followed one another in pricing their
long-distance products. If MCI and Sprint were to lower their rates for
long-distance service and AT&T did not adopt a similar price reduction,
adverse customer reaction could affect the Company's ability to meet
its commitments under the AT&T contract which could have a material
adverse affect on the Company's financial position and results of
operations.
RELATIONSHIPS WITH STATE REGULATORY AGENCIES - The Company's intrastate
long-distance telecommunications operations are subject to various
state laws and regulations, including prior certification, notification
or registration requirements. The Company must generally obtain and
maintain certificates of public convenience and necessity from
regulatory authorities in most states in which it offers service. The
Company is presently responding to consumer protection inquiries from
eleven states. The Company believes these inquiries will be resolved
satisfactorily, although settlement offers may be made or accepted in
instances in which it is determined to be cost effective. During the
year ended June 30, 1997, the Company had an accrual of $390,000 for
such estimated settlements. No additional accruals were made for the
period ended September 30, 1997. 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.
17
<PAGE>
VOLATILITY OF SECURITIES PRICES - Historically, the market price of the
Common Stock has been highly volatile. During the period January 1,
1996 to September 30, 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
10.1 Subscription Agreement, dated as of July 1, 1997 among
the Company and Lexus Commercial Enterprises, Ltd.
10.2 Secured Promissory Note, dated as of July 1, 1997,
made by Lexus Commercial Enterprises, Ltd.
In favor of the Company.
27.1 Financial Data Schedule
b. Reports on Form 8-K
The Company filed a Current Report on Form 8-K on July 10,
1997, reporting under items 5, 7, and 9. The Company filed
a Current Report on Form 8-K on July 22, 1997 reporting
under items 5 and 7.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EQUALNET HOLDING CORP.
Date November 14, 1997 /s/ MICHAEL L. HLINAK
Michael L. Hlinak,
Executive Vice President
and Chief Financial Officer
(duly authorized officer and
principal financial officer)
EXHIBIT 10.1
EQUALNET HOLDING CORP.
LEXUS COMMERCIAL ENTERPRISES, LTD.
SUBSCRIPTION AGREEMENT
DATED AS OF JULY 1, 1997
<PAGE>
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OF THE UNITED STATES OF AMERICA (THE "ACT")
OR THE SECURITIES LAWS OF CERTAIN STATES OF THE UNITED STATES OF AMERICA AND ARE
BEING OFFERED AND SOLD IN RELIANCE ON THE REGULATION S EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF SAID ACT AND SUCH LAWS. THE SECURITIES MAY NOT BE
TRANSFERRED OR RESOLD EXCEPT AS PREMITTED THEREIN OR UNDER SAID ACT AND SUCH
LAWS PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. THE SECURITIES HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY
STATE SECURITIES COMMISSION OR OTHER REGULATORY AUTHORITY OF THE UNITED STATES
OF AMERICA. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THE SECURITIES MAY NOT BE OFFERED OR SOLD IN THE UNITED STATES OR TO U.S.
PERSONS (AS SUCH TERM IS DEFINED IN SECTION 902(O) OF REGULATION S PROMULGATED
UNDER THE ACT) (OTHER THAN DISTRIBUTORS) UNLESS THE SECURITIES ARE REGISTERED
UNDER THE ACT OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE ACT IS
AVAILABLE.
NO ACTION HAS BEEN OR WILL BE TAKEN IN ANY JURISDICTION BY THE COMPANY OR
BY ANY PRIVATE PLACEMENT AGENT THAT WOULD PERMIT A SALE OF THE SECURITIES IN ANY
JURISDICTION WHERE ACTION FOR THAT PURPOSE IS REQUIRED. NO OFFER OR SALE OF THE
SECURITIES MAY BE MADE IN ANY JURISDICTION EXCEPT UNDER CIRCUMSTANCES THAT WILL
RESULT IN COMPLIANCE WITH THE APPLICABLE LAWS THEREOF.
<PAGE>
SUBSCRIPTION AGREEMENT
This Subscription Agreement dated as of July 1, 1997, is between Lexus
Commercial Enterprises, Ltd. ("Purchaser") and EqualNet Holding Corp., a Texas
corporation (the "Company"). Purchaser and the Company agree as follows:
1. AUTHORIZATION AND PURCHASE OF STOCK
The Company will authorize the issuance and sale of 508,968 shares (the
"Securities") of the Company's common stock, par value $.01 per share (the
"Common Stock") to purchaser for $2.063 per share, for an aggregate purchase
price of $1,050,000 (the "Purchase Price"). The Purchase Price shall be paid by
a secured promissory note made payable to the order of the Company in an
aggregate principal amount of the Purchase Price in the form attached hereto as
Exhibit A (the "Note"). The Note will be secured by a pledge of the Securities.
2. SALE AND PURCHASE OF SECURITIES
2.1 Subject to the terms and conditions of this Agreement, the Company
will issue and sell to Purchaser and Purchaser will purchase from the Company,
at the Closing provided for in Section 3, the Securities, in exchange for the
Note, duly executed and delivered. A single certificate (the "Certificate")
representing the Securities shall be issued to Purchaser, which certificate
shall be pledged to the Company, together with an executed stock power undated
and endorsed in blank (the "Stock Power").
2.2 This pledge of the Securities shall be released in accordance with the
provisions of the Note.
3. CLOSING
The sale and purchase of the Securities shall occur at a closing held on
July 1, 1997, or on such other business day (as defined herein) thereafter as
may be agreed upon by the Company and Purchaser (the "Closing"). At the Closing
the Purchaser will deliver to the Company the Note and the Stock Power. The
Company will issue and deliver the Certificate to Purchaser, but will retain
possession of the Certificate as collateral for the Note.
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Purchaser that (i) the Company is a
corporation validly existing and in good standing under the laws of the state of
Texas and (ii) the Company has the corporate power ad authority to own or hold
under lease the properties it purports to own or hold under lease, to transact
the business it transacts and proposes to transact, to execute and deliver this
Agreement and the Securities and to perform the provisions hereof.
5. REPRESENTATIONS OF THE PURCHASER
Purchaser represents to the Company as follows:
A. The offer to purchase the Securities was made to Purchaser outside of
the United States, and at the time this Agreement was prepared and executed,
Purchaser was outside of the United States.
B. Purchaser is not a "U.S. Person" (as such term is defined in Section
902 of Regulation S) promulgated under the Act.
C. Purchaser is purchasing the Securities for its own account for
investment and not purchasing the Securities for the account or benefit of a
U.S. Person, and not with a view to, or for sale in connection with, any
distribution thereof, nor with any present intention of selling or distributing
any of the Securities, and Purchaser has no obligation, indebtedness or
commitment providing for the disposition thereof.
D. Each distributor participating in the offering of the Securities, if
any, will agree in writing that all offers and sales of the Securities prior to
the expiration of a period commencing on the date of this transaction and ending
one year thereafter shall be made pursuant to registration under the Act or an
exemption from such registration.
E. All offers and sales of the Securities acquired hereby prior to the
expiration of a period commencing on the Closing Date of this transaction and
ending one year thereafter shall be made pursuant to registration under the Act
or an exemption from such registration.
F. All offering documents received by Purchaser include statements to the
effect that the Securities have not been registered under the Act and that the
Securities may not be offered or sold in the United States or to U.S. Persons
(other than distributors) unless the shares are registered under the Act or an
exemption from the registration requirements of the Act is available.
G. No representations or warranties have been made to Purchaser by the
Company, or any its officers, employees or agents.
H. Purchaser is familiar with and understands the terms and conditions
contained in Regulation S.
I. There have been no "directed selling efforts" (as such term is defined
in Section 902 of Regulation S) relating to Purchaser, and Purchaser is not
engaged in a distribution of the Securities.
J. Purchaser has full power and authority to enter into and to perform its
obligations under this Agreement. The execution, delivery and performance by
Purchaser of this Agreement have been duly authorized by all necessary action on
its part, and this Agreement has been duly executed and delivered by Purchaser.
K. Purchaser understands that its investment in the Securities and the
Company involves substantial risks. Purchaser has independently examined and
investigated the Company in making its decision to invest in the Company and the
Securities. Purchaser or its representatives have made inquiry deemed by
Purchaser to be satisfactory concerning the Company, its business and services,
its officers and its personnel. The officers, directors, shareholders, employees
and agents of the Company have made available to Purchaser any and all
information it has requested in connection with this investment. The officers of
the Company have answered to Purchaser's satisfaction all inquiries made by it
in connection with this investment. In making this investment, Purchaser has
relied solely upon information made available to it by the Company, and not upon
information supplied by any other person. In making its decision to invest in
the Securities, Purchaser has relied solely upon the advice of its own legal
counsel with respect to the form and terms of this Agreement and related
documents and the status and legal and business effect of such instruments and
agreements in connection with its own personal circumstances and applicable law.
Purchaser has substantial knowledge and experience in financial and business
matters such that it is capable of evaluating the merits and risks of an
investment in the Company, and Purchaser is able to bear the economic risk of
that investment.
L. Purchaser is an "accredited investor" as defined in Rule 501(a) under
the Act.
M. Purchaser has retained no finder or broker in connection with the
transactions contemplated by this Agreement and will indemnify and save the
Company harmless from and against any and all claims, liabilities or obligations
with respect to brokerage or finder's fees or commissions, or consulting fees in
connection with the transactions contemplated by this Agreement asserted by any
person on the basis of any statement or representation alleged to have been made
by such indemnifying party.
6. RESTRICTIONS ON TRANSFER
The parties hereto agree that the Certificate shall have an endorsement of
a legend in substantially the following form:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE ACT OF 1933, AS
AMENDED, OF THE UNITED STATES OF AMERICA (THE "ACT") OF THE SECURITIES
LAWS OF CERTAIN STATES OF THE UNITED STATES OF AMERICA AND NO INTEREST
THEREIN MAY BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION AND QUALIFICATION OR COMPLIANCE WITH THE PROVISIONS OF
REGULATION S OF THE ACT WITHOUT AN OPINION OF COUNSEL FOR THE HOLDER THAT
SUCH REGISTRATION AND QUALIFICATION ARE NOT REQUIRED, WHICH OPINION AND
COUNSEL SHALL BE REASONABLY SATISFACTORY TO THE COMPANY.
THESE SECURITIES ARE PLEDGED AS COLLATERAL FOR A SECURED PROMISSORY
NOTE DATED THE DATE OF THESE SECURITIES AND ISSUED TO THE ISSUER OF THESE
SECURITIES BY THE REGISTERED HOLDER HEREOF.
Such legend shall be removed by the Company upon delivery to it of an opinion,
which opinion and counsel rendering same shall be reasonably satisfactory to the
Company and its counsel that a registration statement under the Act is at the
time effective with respect to the transfer of the legended security or that
such security can be transferred without such registration statement being in
effect and without the requirements of a legend on the certificate in the hands
of the transferee, and upon release of the Securities as provided in the Note.
Purchaser agrees that it will resell the Securities only in accordance
with the provisions of Regulation S under the United States Securities Act of
1933, or pursuant to an available exemption from registration under such Act,
and that it will not transfer record or beneficial interest in the Securities to
any person unless such person agrees to be bound by the provisions of this
paragraph.
7. SURVIVAL OF REPRESENTATIONS AND WARRANTIES, ENTIRE AGREEMENT
All representations and warranties contained herein shall survive the
execution and delivery of this Agreement and the Securities, the purchase or
transfer by Purchaser of the Securities or portion thereof or interest therein
and the payment of the Note, and may be relied upon by the Company regardless of
any investigation made at any time by or on behalf of the Company. Subject to
the preceding sentence, this Agreement and the Note embody the entire agreement
and understanding between Purchaser and the Company and supersede all prior
agreements and understandings relating to the subject matter hereof or any other
proposed transaction.
8. NOTICES
All notices and communications provided for hereunder shall be in writing
and sent (a) by telecopy if the sender on the same day sends a confirming copy
of such notice by a recognized international delivery service (charges prepaid),
or (b) by a recognized international delivery service (with charges prepaid).
Any such notice must be sent:
(i) if to Purchaser to:
Lexus Commercial Enterprises, Ltd.
Attention:___________________________
-----------------------------------
London_____________________________
United Kingdom
with a copy to:
Mr. Michael Wilson Smith
55 St. James's Street
London SW1A 1LA
or at such other address as it shall have specified to the Company in writing;
(ii) if to the Company, to:
EqualNet Holding Corp.
Attn: Michael L. Hlinak
1250 Wood Branch Park Drive
Houston, Texas 77079
USA
with a copy to:
Mr. Robert F. Gray, Jr.
Fulbright & Jaworski L.L.P.
1301 McKinney, Suite 5100
Houston, Texas 77010-3095
USA
Notices under this Section will be deemed given only when actually received.
9. REGISTRATION RIGHTS
Subject to Purchaser making timely payments of amounts due under the Note,
as promptly as practicable after the date hereof, the Company will file a
registration statement on Form S-3 (or any successor form) the (the "Shelf
Registration") with the Securities and Exchange Commission (the "SEC") under the
Securities Act of 1933 permitting the disposition of the Securities in
accordance with the intended methods thereof as specified in writing by the
Purchaser. Subject to Purchaser making timely payments of amounts due under the
Note, the Company will use its commercially reasonable efforts to have the Shelf
Registration declared effective by the SEC as soon as practicable after the
filing date and to at all times maintain the effectiveness thereof.
10. CONFIDENTIAL INFORMATION
For the purposes of this Section 10, "Confidential Information" means
information delivered to Purchaser by or on behalf of the Company or any
Subsidiary in connection with the transactions contemplated by or otherwise
pursuant to this Agreement that is clearly marked or labeled or otherwise
adequately identified when received by Purchaser as being confidential
information of the Company or such Subsidiary, provided that such term does not
include information that (a) was publicly known or was otherwise disclosed to
Purchaser by a third party prior to the time of such disclosure to Purchaser by
the Company, (b) subsequently becomes publicly known through no act or omission
by Purchaser or any person acting on its behalf, (c) otherwise becomes known to
Purchaser other than through disclosure by the Company or any Subsidiary, or (d)
constitutes financial statements that are otherwise publicly available.
Purchaser will maintain the confidentiality of such Confidential Information in
accordance with procedures adopted by Purchaser in good faith to protect
confidential information of third parties delivered to Purchaser, provided that
Purchaser may deliver or disclose Confidential Information to (i) its financial
and legal advisors and other professional advisors who agree to hold
confidential the Confidential Information substantially in accordance with the
terms of this Section 10, or (ii) any other person to which such delivery or
disclosure may be necessary in its opinion (w) to effect compliance with any
law, rule, regulation or order applicable to Purchaser, (x) in response to any
subpoena or other legal process, (y) in connection with any litigation to which
Purchaser is a party.
11. MISCELLANEOUS
11.1 Successors and Assigns
All covenants and other agreements contained in this Agreement by or on
behalf of any of the parties hereto bind and inure to the benefit of their
respective successors and assigns whether so expressed or not.
11.2 Severability
Any provision of this Agreement that is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall (to the full extent permitted by law) not invalidate or
render unenforceable such provision in any other jurisdiction.
11.3 Construction
Each covenant contained herein shall be construed (absent express
provision to the contrary) as being independent of each other covenant contained
herein, so that compliance with any one covenant shall not (absent such an
express contrary provision) be deemed to excuse compliance with any other
covenant. Where any provision herein refers to action to be taken by any person,
or which such person is prohibited from taking, such provision shall be
applicable whether such action is taken directly or indirectly by such person.
As used herein, the term "Person" shall include natural persons, corporations,
partnerships and any other form of entity. As used herein, "business day" means
any day other than Saturday, a Sunday or a day on which commercial banks in
Houston, Texas are required or authorized to be closed.
11.4 Counterparts
This Agreement may be executed in any number of counterparts, each of
which shall be an original but all of which together shall constitute one
instrument. Each counterpart may consist of a number of copies hereof, each
signed by less than all, but together signed by all, of the parties hereto.
11.5 Governing Law
This Agreement shall be construed and enforced in accordance with, and the
rights of the parties shall be governed by, the law of the State of Texas
excluding choice-of-law principles of the law of such State that would require
the application of the laws of a jurisdiction other than such State.
<PAGE>
EXECUTED as of the date first written above.
LEXUS COMMERCIAL ENTERPRISES, LTD.
By:______________________________________
Name:____________________________________
Title:_____________________________________
ACCEPTED as of the date first written above.
EQUALNET HOLDING CORP.
By:_______________________________________
Michael L. Hlinak, Chief Operating Officer
EXHIBIT 10.2
LEXUS COMMERCIAL ENTERPRISES, LTD.
SECURED PROMISSORY NOTE
US $1,050,000.00 July 1, 1997
FOR VALUE RECEIVED, the undersigned, LEXUS COMMERCIAL ENTERPRISES, LTD.
(herein called the "Debtor"; other terms used but not defined herein shall have
the meanings assigned thereto in the Subscription Agreement referred to below),
hereby promise to pay to EQUALNET HOLDING CORP. (the "Company"), or registered
assigns, the principal sum of ONE MILLION, FIFTY THOUSAND DOLLARS
(US$1,050,000.00) in accordance with and subject to the terms hereof and of that
certain Subscription Agreement (the "Agreement") dated as of even date herewith,
by and between the Company and the Debtor.
1. Payments of principal of this Note are to be made in lawful money of
the United States of America by wire trnasfer of immediately available funds for
the account of the Company to account number 7877891957 at Comerica Bank (ABA
No. 111000753), credit "EqualNet Corporation"), or at such other place as the
Company shall have designated by written notice to the Debtor.
The Debtor will make required payments of principal on the dates and in
the amounts specified in the attached Schedule A. This Note shall mature on the
latest date set forth in Schedule A, and all amounts owing thereunder shall then
be due and payable. The Purchaser may prepay this Note at any time and without
penalty. No interest shall accrue on any amount of principal that has been so
prepaid.
So long as all payments of interest are paid when due, no interest shall
accrue on this note. Interest shall accrue on overdue principal and interest at
the lesser of (a) 8% per annum or (b) the maximum amount permitted by Texas law.
Anything in this Agreement or this Note to the contrary notwithstanding,
any payment of principal of or interest on this Note that is due on a date other
than a business day shall be made on the net succeeding business day without
including the additional days elapsed in the computation of the interest payable
on such next succeeding business day.
2. Debtor hereby grants to the Company a first priority security
interest in and lien on 508,968 shares (the "Pledged Shares") of the Company's
common stock, par value $.01 per hare, registered in the name of Debtor. The
Certificate representing such shares is hereby pledged to the Company. The
Company shall release such security interest and lien at the time all amounts
owing under this Note have been paid in full; provided that, upon the payment of
each regularly scheduled payment as set forth in Schedule A hereto, the Company
shall release its lien and security interest in 67,862 Pledged Shares. Upon the
final scheduled payment as reflected on Schedule A hereto, will release its
interest in the remainder of the Pledged Shares. As such Pledged Shares are
released, the Company shall issue new certificates representing uch shares in
the name of debtor or its designee with the legend as to the Company's security
interest removed.
3. An "Event of Default" under this Note shall exist if any of the
following conditions or events shall occur and be continuing:
(a) the Purchaser defaults in the payment of any principal
on this Note when the same becomes due and payable, and such
default continues for three business days; or
(b) the Purchaser defaults in the payment on any interest
on this Note for more than five business days after the same
becomes due and payable.
Subject to Section 5 hereof, if an Event o Default has occurred and is
continuing, the Company may declare, by notice to the debtor, this Note to be
immediately due and payable, and may foreclose upon the Securities. If any Event
of default has occurred and is continuing, and irrespective of whether this Note
has become or have been declared immediately due and payable, the Company may
proceed to protect and enforce the rights of such holder by an action at law,
suit in equity or other appropriate proceeding, whether for the specific
performance of any agreement contained herein or in the Agreement, or for an
injunction against a violation of any of the terms hereof or thereof, or in aid
of the exercise of any power granted hereby or thereby or by law or otherwise.
4. This Note shall be construed and enforced in accordance with, and the
rights of the parties shall be governed by, the laws of the State of Texas
excluding choice-of-law principles of the law of such state that would require
the application of the laws of a jurisdiction other than such State.
5. It is the intention of the Company and the Purchaser to comply with
(i) applicable usury laws of the State of Texas and (ii) if the maximum lawful
nonusurious rates of interest that any holder is permitted to take or receive
from, or charge to, the Company shall be governed by the federal laws of the
United States of America, such federal laws. Accordingly, notwithstanding any
provision to the contrary herein or in the Agreement, in no event shall this
Note or the Agreement require the payment or permit th collection of interest in
excess of the maximum nonusurious rate or amount permitted by such laws. If any
such excess is (except for the application of this paragraph) contracted for, or
charged or received, pursuant to or in connection with this Note or the
Agreement, or if the maturity of the indebtedness evidenced by this Note is
accelerated in shole or in part, or in the event that all or part of the
principal of or interest on this Note shall be prepaid, so that under any
circumstances the amount of interest contracted for, charged or received
pursuant to or in connection with this Note or the Agreement shall exceed the
maximum nonusurious amount of interest permitted by such laws, then (i) the
provisions of this paragraph shall govern and control, (ii) neither the company
nor any other person shall be obligated to pay the amount of such interest that
is in excess of the maximum amount of interest permitted by such laws, (iii) any
such excess which may have been collected shall, at the option of the holder of
this Note, be either (x) applied as credit against the unpaid principal amount
of this Note or accrued and unpaid interest on such unpaid principal amount or
(y) refunded to the Company, and (iv) the effective rate of interest shall be
automatically reduced to the maximum lawful nonusurious rate allowed under such
laws. Without limiting the foregoing provisions of this paragraph, all
calculation of the rate of interest contracted for, charged or received under
this Note or the Agreement that are made for the purpose of determining whether
such rate exceeds the maximum lawful nonusurious rat shall be made, to the
extent permitted by such laws, by amortizing, prorating, allocating and
spreading during the period of the full stated term of the loan evidenced
hereby, all interest at any time contracted for, charged or received by the any
holder.
6. Except as specifically an expressly provided in the Agreement, the
debtor and each and every other Person now or hereafter liable hereon waives
grace, notice, presentment for payment, notice of non-payment, protest, notice
of protest, notice of acceleration of the indebtedness due hereunder and notice
of intent to accelerate and all other notice, filing of suit and diligence in
collecting this Note and the enforcing of any security rights of any holder
hereof, and consent and agree that the time of payment hereof may be extended at
any time and from time to time, without notice or consideration to, or consent
from, any of such Persons.
7 In the event any one or more of the provisions of this Note or of the
Agreement shall be invalid, illegal or unenforceable in any respect, the
provisions hereof and thereof shall not in any way be affected thereby.
EXECUTED and EFFECTIVE as of the 1st day of July, 1997.
LEXUS COMMERCIAL ENTERPRISES, LTD.
by ____________________________________
name: MICHAEL WILSON-SMITH
title: Authorized Signatory
<PAGE>
SCHEDULE A
Schedule of Payments of Principal
US$175,000 due and payable on July 2, 1997; US$175,000 due and payable on July
9, 1997; US$175,000 due and payable on July 16, 1997; US$175,000 due and payable
on July 23, 1997; US$175,000 due and payable on July 30, 1997; and US$175,000
together with any other amounts that may be due hereunder, due and payable on
August 6, 1997.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF EQUALNET HOLDING CORP. AT MARCH
31, 1997 AND FOR THE NINE MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 786,437
<SECURITIES> 0
<RECEIVABLES> 7,849,021
<ALLOWANCES> 511,438
<INVENTORY> 0
<CURRENT-ASSETS> 10,785,161
<PP&E> 5,869,350
<DEPRECIATION> 3,369,998
<TOTAL-ASSETS> 16,208,745
<CURRENT-LIABILITIES> 16,535,248
<BONDS> 0
0
0
<COMMON> 66,828
<OTHER-SE> (3,479,762)
<TOTAL-LIABILITY-AND-EQUITY> 16,208,745
<SALES> 8,327,219
<TOTAL-REVENUES> 8,327,219
<CGS> 6,264,718
<TOTAL-COSTS> 6,264,718
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 387,025
<INTEREST-EXPENSE> 353,385
<INCOME-PRETAX> (2,096,897)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,096,897)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,096,897)
<EPS-PRIMARY> (.33)
<EPS-DILUTED> (.33)
</TABLE>
