SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ]Preliminary Proxy Statement
[ ]Confidential, for Use of the Commission only (as permitted by Rule
14a-6(e)(2))
[ ]Definitive Proxy Statement
[X]Definitive Additional Materials
[ ]Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
EQUALNET HOLDING CORP.
(Name of Registrant as Specified in its Charter)
Payment of Filing Fee (Check the appropriate box):
[ ]No fee required.
[ ]Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1. Title of each class of securities to which transaction applies: SERIES
C CONVERTIBLE PREFERRED STOCK, PAR VALUE $.01 PER SHARE
2. Aggregate number of securities to which transaction applies: 196,553
3. Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: $27.50 PER SHARE OF SERIES C
PREFERRED. THIS AMOUNT IS THE FACE VALUE OF SUCH SECURITIES AND IS
BASED ON A NEGOTIATED AMOUNT.
4. Proposed maximum aggregate value of transaction: $12,882,708. THIS IS
THE TOTAL AMOUNT OF CASH, DEBT, AND EQUITY TO BE PAID. IT IS BASED ON
A NEGOTIATED AMOUNT.
5. Total fee paid: $2,577.
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1. Amount Previously Paid: N/A
2. Form, Schedule or Registration Statement No.: N/A
3. Filing Party: N/A
4. Date Filed: N/A
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[EQUALNET LOGO]
June 15, 1998
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders of
EqualNet Holding Corp. to be held at 10:00 a.m., Houston time, on Tuesday, June
30, 1998, in the Equal Access Room at EqualNet's headquarters, 1250 Wood Branch
Park Drive, Houston, Texas.
At the Meeting you will be asked to vote in favor of the following
proposals: (i) to approve an acquisition by the Company of certain assets of SA
Telecommunications, Inc. in exchange for an aggregate of approximately
$3,477,500 in cash and the assumption of approximately $4,000,000 in liabilities
and approximately 196,553 shares of a newly-designated series of the Company's
Preferred Stock; (ii) to amend the Company's Employee Stock Option and
Restricted Stock Plan to increase the number of shares available for grant under
that Plan; (iii) to amend the Company's Non-Employee Director Stock Option Plan
to increase the number of shares available for grant under that Plan and to
increase the amounts granted under that plan; (iv) to amend the Company's
Articles of Incorporation to change the name of the Company to EqualNet
Communications Corp.; (v) to ratify the issuance of 3,000 shares of the
Company's Series B Senior Convertible Preferred Stock on March 9, 1998; and (vi)
to ratify the issuance by the Company of warrants to two current directors of
the Company in connection with the resignation of those directors from offices
of the Company to purchase an aggregate of up to 180,000 shares of the Company's
common stock. These matters are more fully described and explained in the
attached proxy statement, which you are encouraged to read.
The Board of Directors has unanimously approved the proposals described
herein. THE BOARD OF DIRECTORS BELIEVES THAT THE PROPOSALS DESCRIBED HEREIN ARE
IN THE BEST INTERESTS OF EQUALNET AND ITS SHAREHOLDERS AND UNANIMOUSLY
RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE MATTERS PROPOSED HEREIN.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, IT IS IMPORTANT THAT YOUR
SHARES BE REPRESENTED AND VOTED. ACCORDINGLY, WE ASK THAT YOU MARK, DATE, SIGN
AND RETURN YOUR PROXY AT YOUR EARLIEST CONVENIENCE IN THE ENVELOPE PROVIDED.
Thank you for your continued interest and cooperation.
Very truly yours,
/s/ MARK A. WILLIS
Mark A. Willis
Chairman of the Board
<PAGE>
EQUALNET HOLDING CORP.
1250 Wood Branch Park Drive
Houston, Texas 77079
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD JUNE 30, 1998
A Special Meeting of the Shareholders of EqualNet Holding Corp., a Texas
corporation (the "Company"), will be held at 10:00 a.m., Houston time, on
Tuesday, June 30, 1998, in the Equal Access Room at the Company's headquarters,
1250 Wood Branch Park Drive, Houston, Texas, for the following purposes:
(i) To approve an acquisition by the Company of certain assets of SA
Telecommunications, Inc. in exchange for the payment of an aggregate of
approximately $3,477,500 in cash, the assumption of approximately
$4,000,000 in liabilities and the issuance of approximately 196,553 shares
of a newly-designated series of the Company's Preferred Stock;
(ii) To amend the Company's Employee Stock Option and Restricted
Stock Plan to increase the number of shares available for grant under that
Plan;
(iii) To amend the Company's Non-Employee Director Stock Option Plan
to increase the number of shares available for grant under that Plan and to
increase the amounts granted under that plan;
(iv) To amend the Company's Articles of Incorporation to change the
name of the Company to Equalnet Communications Corp.;
(v) To ratify the issuance of 3,000 shares of the Company's Series B
Senior Convertible Preferred Stock on March 9, 1998;
(vi) To ratify the issuance by the Company of warrants to two current
directors of the Company in connection with the resignation of those
directors from offices of the Company to purchase an aggregate of up to
180,000 shares of the Company's common stock, and
(vii) To transact such other business as may properly come before the
meeting or any adjournment thereof.
THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS THAT YOU VOTE
FOR ALL OF THE PROPOSALS SET FORTH IN THE ATTACHED PROXY STATEMENT.
The holders of record of Common Stock and the Company's Series B Senior
Convertible Preferred Stock, par value $.01 per share ("Series B Preferred")
at the close of business on May 29, 1998, will be entitled to one vote per
share, voting as a single class, at the meeting.
By Order of the Board of Directors,
/s/ DEAN H. FISHER
Dean H. Fisher
Senior Vice President,
General Counsel and Secretary
June 15, 1998
IMPORTANT
YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. EVEN IF YOU PLAN
TO BE PRESENT, YOU ARE URGED TO SIGN, DATE AND MAIL THE ENCLOSED PROXY PROMPTLY.
IF YOU ATTEND THE MEETING YOU CAN VOTE EITHER IN PERSON OR BY YOUR PROXY.
<PAGE>
EQUALNET HOLDING CORP.
PROXY STATEMENT
FOR SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE 30, 1998
This proxy statement is furnished to the shareholders of EqualNet Holding
Corp. ("EqualNet" or the "Company"), 1250 Wood Branch Park Drive, Houston,
Texas 77079 (Tel. No. 281/529-4600), in connection with the solicitation by the
Board of Directors of the Company of proxies to be used at a Special Meeting of
Shareholders to be held at 10:00 a.m., Houston time, on Tuesday, June 30, 1998,
in the Equal Access Room at the Company's headquarters, 1250 Wood Branch Park
Drive, Houston, Texas, or any adjournment thereof (the "Meeting").
Proxies in the form enclosed, properly executed and received in time for
the meeting, will be voted as specified therein. If you do not specify
otherwise, the shares represented by your proxy will be voted for the proposals
described herein. Granting your proxy does not preclude you from attending the
Meeting and voting in person should you so desire. You may revoke your proxy at
any time before it is exercised by delivering written notice to the Company at
or before the Meeting. This Proxy Statement is being mailed on or about June 15,
1998, to shareholders of record on May 29, 1998 (the "Record Date").
At the close of business on the Record Date, 21,393,070 shares of Common
Stock and 3,000 shares of Series B Preferred were outstanding and entitled to
vote at the Meeting. Only the holders of Common Stock or Series B Preferred of
record on the Record Date will be entitled to vote at the Meeting.
The holders of Common Stock and Series B Preferred of record on the Record
Date will be entitled to one vote per share, voting as a single class, on each
matter presented to the shareholders at the Meeting, except that the votes of
Series B Preferred will not be counted in the vote to ratify the issuance of the
Series B Preferred. The enclosed form of proxy provides a means for you (i) to
vote for or against the approval of the proposed acquisition of certain assets
by the Company or to abstain from voting on such approval (ii) to vote for or
against approval of the proposed amendment to the Company's Employee Stock
Option and Restricted Stock Plan or to abstain from voting on such approval,
(iii) to vote for or against approval of the proposed amendment to the Company's
Non Employee Director Stock Option Plan or to abstain from voting on such
approval, (iv) to vote for or against approval of the proposed amendment to the
Company's Articles of Incorporation to change the name of the Company to
EqualNet Communications Corp. or to abstain from voting on such approval, (v) to
vote for or against ratification of the issuance of 3,000 shares of Series B
Preferred or to abstain from voting on such ratification, and (vi) to vote for
or against the issuance of warrants to two of the Company's directors as
described herein or to abstain from voting on such issuance.
<PAGE>
TABLE OF CONTENTS
PAGE
-----
PROPOSAL 1: TO APPROVE THE SA
TELECOM ACQUISITION.................. 1
Background of the SA Telecom
Transaction..................... 1
The SA Telecom Agreement........ 1
Management Services Agreement... 3
Reasons for the SA Telecom
Transaction..................... 4
Financial Information Regarding
SA Telecom...................... 4
Regulatory Filings and
Approvals....................... 4
Possible Adverse Consequences of
the SA Telecom Transaction...... 5
Required Vote................... 5
Recommendation of the Board of
Directors....................... 5
PROPOSAL 2: TO AMEND THE EMPLOYEE
PLAN................................. 5
Reasons for the Amendment....... 5
Certain Considerations.......... 5
Description of Employee Plan.... 6
The Employee Plan Amendment..... 7
Employee Plan Amendment
Benefits........................ 7
Federal Tax Consequences........ 7
Required Vote................... 8
Recommendation of the Board of
Directors....................... 8
PROPOSAL 3: TO AMEND THE
NON-EMPLOYEE DIRECTOR PLAN........... 8
Reasons for the Director Plan
Amendment....................... 9
Certain Considerations.......... 9
Description of the Director
Plan............................ 9
The Director Plan Amendment..... 9
Required Vote................... 9
Recommendation of the Board of
Directors....................... 9
PROPOSAL 4: TO CHANGE THE NAME OF
THE COMPANY TO EQUALNET
COMMUNICATIONS CORP............. 10
Reason for the Charter
Amendment....................... 10
Required Vote................... 10
Recommendation of the Board of
Directors....................... 10
PROPOSAL 5: TO RATIFY THE ISSUANCE
OF SERIES B PREFERRED................ 10
Background...................... 10
Terms of the Series B
Preferred....................... 11
Required Vote................... 11
Recommendation of the Board of
Directors....................... 11
PROPOSAL 6: APPROVAL OF ISSUANCE OF
SEVERANCE WARRANTS................... 12
Officer Resignations and
Issuance of Severance
Warrants........................ 12
Terms of the Severance
Warrants........................ 12
Required Vote................... 12
Recommendation of the Board of
Directors....................... 12
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PAGE
-----
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND
MANAGEMENT...................... 13
Change of Control............... 14
EXECUTIVE COMPENSATION............... 15
Summary of Compensation......... 15
Outstanding Options and Option
Grants in Fiscal 1997........... 15
Employment and Severance
Agreements...................... 16
PROPOSALS FOR NEXT ANNUAL MEETING.... 16
OTHER MATTERS........................ 17
CAUTION AS TO FORWARD-LOOKING
STATEMENTS........................... 17
INCORPORATION OF CERTAIN INFORMATION
BY REFERENCE......................... 17
Annex A -- Resolution
Establishing Series C Preferred
Annex B -- SA Telecom Agreement
Annex C -- SA Telecom Financial
Statements
Annex D -- Amendment to Employee
Stock Option and Restricted
Stock Plan
Annex E -- Amendment to Non
Employee Director Stock Option
Plan
Annex F -- Amendment to the
Company's Articles of
Incorporation
Annex G -- Resolution
Establishing Series B Preferred
ii
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PROPOSAL 1: TO APPROVE THE SA TELECOM ACQUISITION
Effective January 15, 1998, EqualNet entered into a Purchase Agreement with
SA Telecommunications, Inc. and certain of its subsidiaries (collectively, "SA
Telecom") providing for the Company to acquire substantially all of the assets
(the "SA Telecom Assets") of SA Telecom (the "SA Telecom Acquisition"). In
exchange for the SA Telecom Assets, the Company will pay SA Telecom
approximately $3,477,500 in cash, assume liabilities of approximately
$4,000,000, and issue approximately 196,553 of a newly-designated series of the
Company's stock, Series C Convertible Preferred Stock, par value $.01 per share
("Series C Preferred"). At the Meeting, you will be asked to vote to approve
the SA Telecom Acquisition.
BACKGROUND OF THE SA TELECOM TRANSACTION
EqualNet is a full service nationwide telecommunications company offering
discounted long distance telephone, prepaid telephone, "800/888" services,
internet access, website development and other services.
SA Telecom is a full service regional interexchange carrier providing long
distance telecommunications services in the west, southwest and south central
United States, including domestic long distance services, wholesale long
distance services, operator and wireless services, voice and data private lines,
"800/888" services, internet access and telephone travel cards. On November
19, 1997, SA Telecom filed petitions for relief under Chapter 11 of the
Bankruptcy Code.
On December 2, 1997, EqualNet entered into several agreements involving
Willis Group, LLC, a Texas limited liability company ("Willis Group") and MCM
Partners, a Washington limited partnership ("MCM"), which agreements were
approved by the Company's shareholders at the Company's Annual Meeting of
Shareholders held March 5, 1998 (the "Annual Meeting"), pursuant to which
agreements the Company acquired several telecommunications switches and related
network assets and became a switch-based carrier and Willis Group became the
Company's controlling shareholder (the "Willis Transactions"). The Willis
Transactions were consummated on March 6, 1998, following the Annual Meeting.
Effective January 15, 1998, pending the Annual Meeting, the Company entered
into the SA Telecom Agreement. At the time of the Annual Meeting, the SA Telecom
Acquisition was subject to numerous contingencies, including that the Company be
the highest bidder in an auction for the SA Telecom Assets and the approval of
the bankruptcy court in which SA Telecom's bankruptcy proceedings were pending.
Due to such contingencies and other uncertainties regarding the final form of
the SA Telecom Acquisition, the Company did not submit the SA Telecom
Acquisition to a vote of the Company's shareholders at the Annual Meeting.
On March 4, 1998, SA Telecom conducted an auction of its assets at which
multiple prospective purchasers submitted bids. SA Telecom and the creditors'
committee in the SA Telecom bankruptcy proceedings determined that EqualNet had
submitted the best offer for the assets. On March 6, 1998, the bankruptcy court
approved the sale of the SA Telecom Assets to EqualNet on the terms set forth
below.
On March 12, 1998, the Company and SA Telecom entered into a Management
Services Agreement (the "Management Agreement"), to facilitate the purchase of
the SA Telecom Assets and the transition of SA Telecom's subscribers to
EqualNet's network of switching and transmission facilities (the
"Transition").
THE SA TELECOM AGREEMENT
The SA Telecom Agreement provides for the acquisition by the Company of the
SA Telecom Assets in exchange for approximately $3,477,500 in cash, the
assumption of liabilities aggregating approximately $4,000,000, and the issuance
of approximately 196,553 of Series C Preferred.
THE SA TELECOM ASSETS
The SA Telecom Assets consist of, among other things, (i) all of SA
Telecom's rights and interests to accounts of subscribers to the services of SA
Telecom; (ii) all accounts receivable and notes receivable of SA Telecom; (iii)
all network facilities owned by SA Telecom; (iv) certain designated contracts;
(v) all
1
<PAGE>
assignable licenses, permits, authorizations and approvals issued to SA Telecom
by governmental entities; (vi) all intangible telecommunications assets owned or
used by SA Telecom, including numbering codes, locating routing codes and
"800" and "888" numbers, and carrier identification codes; (vii) all
intellectual property rights of SA Telecom; (viii) SA Telecom's rights to use
their corporate names; (ix) manufacturers' warranties; and (x) the capital stock
of a special purpose corporation that has the right to use certain carrier
identification codes assigned to SA Telecom.
CONSIDERATION TO BE PAID BY EQUALNET
The aggregate consideration to be paid by EqualNet for the SA Telecom
Assets consists of (i) the payment and discharge by EqualNet of all obligations
of SA Telecom on the closing date in respect of the outstanding principal amount
of, and all accrued and unpaid interest on, the $1.5 million debtor in
possession financing provided by EqualNet to SA Telecom (the "EqualNet DIP
Financing"), if any; plus (ii) a cash payment in an amount equal to the excess
of $3,000,000 over the outstanding principal amount of, and all accrued and
unpaid interest on, the EqualNet DIP Financing on the closing date; plus (iii) a
cash payment in the amount of $477,500; plus (iv) a promissory note (the
"Note") to be issued by EqualNet in favor of SA Telecom's existing debtor in
possession lender, Greyrock Business Credit ("Greyrock") in an amount equal to
$1,000,000; plus (v) a cash payment equal to all cure amounts required to be
made by SA Telecom in respect of contracts of SA Telecom to be assumed by
EqualNet (expected to be less than $5,000); plus (vi) the number of shares of
Series C Preferred equal to the quotient of (A) (x) 40% of the amount of SA
Telecom's annualized revenues based on its revenues in December 1997 and January
1998 (the "Revenue Amount") less (y) the aggregate amount paid by EqualNet
pursuant to clauses (i), (ii), (iii), (iv) and (v) above, and (B) $27.50. The
Revenue Amount is estimated to be $24.7 million and is subject to audit by
independent auditors selected by EqualNet. The Revenue Amount may be adjusted
downward if SA Telecom's February 1998 revenues are substantially below its
January 1998 revenues. The aggregate amount of cash required for the Company to
consummate the SA Telecom Acquisition (including the amount of EqualNet DIP
Financing previously provided) is approximately $3,477,500. The Company expects
to fund the cash portion of the acquisition with available funds, including
funds raised in recent private equity transactions. However, there can be no
assurance that the Company will not continue to suffer losses and deplete its
available cash such that it would be required to seek additional debt or equity
financing to consummate the SA Telecom Acquisition.
In addition to the consideration described above, on the closing date,
EqualNet will assume indebtedness accruing on or before the closing date under
the debtor in possession financing provided by Greyrock to SA Telecom (the
"Greyrock Financing") up to a maximum amount equal to the sum of (i)
$1,276,031 and (ii) 80% of SA Telecom's eligible receivables. Such indebtedness
is secured by the accounts receivable of SA Telecom to be acquired by EqualNet.
EqualNet anticipates being able to repay a portion of such indebtedness with the
proceeds of such accounts receivable. EqualNet estimates that the total amount
of this indebtedness will be approximately $4,000,000.
SERIES C PREFERRED
As partial consideration for the SA Telecom Assets, the Company will issue
SA Telecom approximately 196,553 shares of the Series C Preferred. A copy of the
Statement of Resolution establishing the Series C Preferred, as filed with the
Secretary of State of the State of Texas, is attached to this Proxy Statement as
ANNEX A. The following is an accurate summary of the material provisions of the
Series C Preferred, but is not a complete description thereof and is qualified
by reference to ANNEX A.
The Series C Preferred consists of 300,000 shares. The Company does not
anticipate issuing any shares of Series C Preferred other than in connection
with the SA Telecom Acquisition or as dividends on the Series C Preferred. Each
share of Series C Preferred will have a stated value of $27.50 and will be
entitled to receive dividends at the rate of $2.00 per year, payable when, as
and if declared by the Company's Board of Directors. Any dividends that accrue
on the Series C Preferred may be paid, at EqualNet's option, in cash or, in
whole or in part, by issuing additional shares of Series C Preferred. Under the
terms of the Series C
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Preferred, the Company will not be permitted to declare or distribute any
dividends to holders of Common Stock unless all accrued dividends on the Series
C Preferred have been paid.
Holders of Series C Preferred will have the right to convert their shares
into shares of Common Stock at the rate of 10 shares of Common Stock per share
of Series C Preferred, or an aggregate of 1,965,530 shares of Common Stock,
subject to adjustment pursuant to the anti-dilution provisions set forth in
ANNEX A. The Company will have the right to redeem the outstanding shares of
Series C Preferred for cash at any time after the earlier of (i) one year from
the closing of the SA Telecom Acquisition and (ii) such time as the average of
the highest closing prices for the Common Stock for 20 of 30 consecutive trading
days prior to the date in question shall be greater than $3.4375. The redemption
price for the Series C Preferred shall be an amount equal to all accrued and
unpaid dividends on the Series C Preferred plus (a) $28.875 per share for
redemptions between June 1, 1998 and May 31, 1999, (b) $28.1875 per share for
redemptions between June 1, 1999 and May 31, 2000 or (c) $27.50 per share for
redemptions at any time thereafter.
If the Company were to be liquidated, the holders of the Series C Preferred
would be entitled to receive out of the assets of the Company $27.50 (plus any
accrued and unpaid dividends) per share of Series C Preferred before any
distributions would be made to holders of Common Stock (but only after
liquidation preferences or the Company's Series A Preferred Stock and Series B
Preferred Stock have been satisfied). The Series C Preferred will not have
voting rights other than in transactions involving an amendment or waiver of the
rights of holders of Series C Preferred or in the creation of a series of shares
with rights equal to or greater than the Series C Preferred.
DIP FINANCING
In connection with the SA Telecom Agreement, SA Telecom, EqualNet and
Greyrock entered into a Stipulation Concerning Debtor-In-Possession Financing
provided by EqualNet Holding Corp. dated March 10, 1998 (the "DIP
Stipulation"). Under the DIP Stipulation, EqualNet is a participant in the
existing Greyrock DIP Financing in a maximum amount of $1.5 million. The
EqualNet DIP Financing has the benefit of all liens, security interests and
priorities afforded to Greyrock under the Greyrock Financing, although the liens
securing the EqualNet DIP Financing are junior and subordinate to the liens
securing the Greyrock Financing.
A copy of the SA Telecom Agreement is attached to this Proxy Statement as
ANNEX B. The foregoing is an accurate summary of the material provisions of the
SA Telecom Agreement, but is not a complete description thereof and is qualified
by reference to ANNEX B.
MANAGEMENT SERVICES AGREEMENT
To facilitate the purchase of the SA Telecom Assets and the transition of
SA Telecom's subscribers to EqualNet's network of switching and transmission
facilities, EqualNet and SA Telecom have entered into the Management Services
Agreement pursuant to which EqualNet is managing the telecommunications business
of SA Telecom and SA Telecom is providing EqualNet with telecommunications
services pursuant to certain network contracts specified by EqualNet (the
"Specified Network Contracts") at a cost equal to the cost to SA Telecom of
providing those services.
The Management Services Agreement provides that this arrangement will
continue for 60 days after the closing of the SA Telecom Acquisition and for
such longer period as EqualNet determines is sufficient to complete the
transition of SA Telecom's subscribers to EqualNet's network. EqualNet has
agreed, pursuant to the Management Services Agreement, to pay increased costs
incurred by SA Telecom from the effective date of the Management Services
Agreement to March 31, 1998. EqualNet has also agreed to pay all operating
losses incurred by SA Telecom, on an accrual basis, from April 1, 1998 to the
closing of the SA Telecom Acquisition. Operating losses are the amount by which
SA Telecom's costs and expenses exceed its revenues, but operating loss excludes
all non-cash items and all professional fees and expenses incurred by SA Telecom
in connection with the administration of SA Telecom's bankruptcy.
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REASONS FOR THE SA TELECOM TRANSACTION
EqualNet believes that the SA Telecom Acquisition is in the best interests
of the Company and its shareholders for the following reasons.
INCREASED SHAREHOLDER VALUE. The Company believes that the SA Telecom
Acquisition will enhance shareholder value by combining SA Telecom's similar
telecommunications business with that of EqualNet. EqualNet believes that the
expected financial condition, results of operations and overall business
prospects of the Company subsequent to the SA Telecom Acquisition are likely to
be better than those of the Company standing alone. EqualNet believes the
expertise and management of personnel currently employed by SA Telecom will add
value to the Company's operations.
OPERATIONAL SYNERGIES. The Company also believes that the potential exists
for internal growth from the sales and distribution channels to be acquired as a
result of the SA Telecom Acquisition, which the Company expects would result in
efficiencies and in economies of scale. The Company anticipates that these
efficiencies may be gained through the use of EqualNet's recently acquired
telecommunication network assets. Additional savings could also arise from the
elimination of certain staff redundancies as well as potentially greater
purchasing efficiencies for underlying and off-network transmission expenses.
FINANCIAL INFORMATION REGARDING SA TELECOM
Audited Financial Statements of SA Telecom, together with pro-forma
financial data of EqualNet giving effect to the SA Telecom Acquisition, are
attached to this Proxy Statement as ANNEX C. The SA Telecom Acquisition will be
treated as a purchase transaction for accounting purposes. Ernst & Young LLP
served as the Company's principal independent public accountants for the 1997
fiscal year and has assisted the Company in fiscal 1998. Representatives of
Ernst & Young LLP are expected to be present at the Meeting, will have the
opportunity to make a statement if they so desire and will be available to
respond to appropriate questions. SA Telecom's accountants for the most recent
fiscal year have been Hein + Associates LLP. SA Telecom's accountants are not
expected to attend the Meeting.
REGULATORY FILINGS AND APPROVALS
Certain public service or utility commissions require prior approval or
notification of the acquisition of assets, including transfer of customers, from
one telecommunications provider to another. A significant majority of the
customers of SA Telecom are located in the states of Texas and California.
EqualNet is in the process of amending its tariffs to include tariffed services
identical to those services and at the same tariffed rates as those currently
provided by SA Telecom for any customers that will be affected by SA Telecom's
cessation of business and EqualNet's agreement to provide service for those
customers in the future. EqualNet either has obtained or is in the process of
obtaining such regulatory consents as are necessary in those states with larger
numbers of SA Telecom's customers. In those states where only a few of SA
Telecom's customers are located, EqualNet intends to solicit those customers
individually and ask them to select EqualNet as their long distance carrier. In
addition, a customer notice of change in service will be included as a billing
insert for each customer whose service is to be transferred to EqualNet.
Before acquiring switch-based facilities, EqualNet filed on December 31,
1997 with the Public Utilities Commission of the State of California Advice
Letter No. 8 requesting reclassification as a switch-based reseller of
telecommunications services. This advice letter was effective February 13, 1998.
On March 13, 1998, EqualNet filed Advice Letter No. 9 notifying the Public
Utilities Commission of its intent to acquire substantially all of the assets of
SA Telecom and its subsidiaries. This notice became effective April 22, 1998
without opposition. SA Telecom must also give notice to its customers thirty
(30) days in advance of the impending change in service for its customers.
In the state of Texas, non-dominant interexchange carriers are not required
to petition for authority to acquire assets of other companies or to petition
for authority to acquire switches or other network facilities. EqualNet is
registered in the state of Texas as a competitive, non-dominant interexchange
carrier.
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POSSIBLE ADVERSE CONSEQUENCES OF THE SA TELECOM TRANSACTION
The SA Telecom Transaction could have adverse consequences for holders of
Common Stock. Under the SA Telecom Agreement, the Company will incur additional
debt of approximately $4,000,000. Given the Company's historical cash flow
difficulties, there can be no assurance that it will be able to adequately
service this additional debt. If the Company were unable to make payments on its
existing debt and the debt to be incurred in connection with the SA Telecom
Acquisition as such debts become due, such nonpayment could have a material
adverse effect on the Company, its business, operations and cash flow. Further,
there can be no guarantee that the Company will be able to realize the value of
SA Telecom's subscriber base, as that subscriber base may be diminished through
attrition. EqualNet has attributed significant value to SA Telecom's subscriber
base in negotiating the SA Telecom Acquisition. An inability to retain that
subscriber base could have a material adverse effect on the Company's results of
operations and cash flow.
REQUIRED VOTE
The approval of the SA Telecom Transaction requires the votes of the
holders of a majority of the combined shares of Common Stock and Series B
Preferred present and voting at the Meeting. Abstentions and broker non-votes
will not be treated as either a vote for or against the proposal. Therefore,
abstentions and broker non-votes will have no effect on the approval of the
Transactions.
RECOMMENDATION OF THE BOARD OF DIRECTORS
For the reasons set forth above, the Board of Directors believes the SA
Telecom Transaction is fair to and in the best interests of EqualNet and the
holders of EqualNet Common Stock. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT YOU VOTE "FOR" THE APPROVAL OF THE SA TELECOM TRANSACTION.
PROPOSAL 2: TO AMEND THE EMPLOYEE PLAN
At the meeting, you will be asked to vote on a proposal (the "Employee
Plan Amendment") to amend the EqualNet Holding Corp. Employee Stock Option and
Restricted Stock Plan (the "Employee Plan"). The Employee Plan and the
Employee Plan Amendment are summarized under " -- Description of Employee
Plan" and " -- The Employee Plan Amendment", and the Employee Plan Amendment
is set forth in full in ANNEX D attached to this Proxy Statement.
REASONS FOR THE AMENDMENT
The Board of Directors believes it is in the best interests of the Company
to attract and retain the services of experienced and knowledgeable employees
and to provide an incentive for such employees to increase their proprietary
interest in the Company's long-term success and progress. The Employee Plan is
designed to provide certain full-time key employees, including officers and
employee directors of the Company and its subsidiaries (approximately 30 persons
at March 31, 1998), with additional incentives to promote the success of the
Company's business and to enhance the Company's ability to attract and retain
the services of qualified persons. The Employee Plan Amendment would provide the
Company with additional shares to be granted pursuant to options and restricted
stock awards under the Employee Plan and would allow the Company greater
flexibility in granting such awards.
CERTAIN CONSIDERATIONS
Shareholders should note that certain disadvantages may result from the
adoption of the Employee Plan Amendment, including a reduction in their
interests of the Company with respect to earnings per share, voting, liquidation
value and book and market value per share if options to acquire the authorized
shares of Common Stock are granted and subsequently exercised or if restricted
stock is granted and subsequently vests.
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DESCRIPTION OF EMPLOYEE PLAN
Pursuant to applicable federal securities laws, the Company is required to
furnish to its shareholders in this proxy statement certain information with
respect to the Employee Plan. The following summary does not purport to be a
complete summary of the Employee Plan and is qualified in its entirety by
reference to such plan.
The Employee Plan was adopted by the Board of Directors and approved by the
shareholders in February 1995. The Employee Plan authorizes a committee of the
Board of Directors to issue options intended to qualify as incentive stock
options ("ISOs"), as defined in Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), stock options that are not intended to conform
to the requirements of the Code Section ("Non-ISOs") and restricted stock
awards.
The Employee Plan is designed to provide certain full-time key employees,
including officers and employee directors of the Company and its subsidiaries
(approximately 30 persons at March 31, 1998), with additional incentives to
promote the success of the Company's business and to enhance the Company's
ability to attract and retain the services of qualified persons. The Employee
Plan is to be administered by a committee (the "Committee") of no less than
two-persons appointed by the Board of Directors. Committee members may not be
employees of the Company and must be disinterested persons. Under the Employee
Plan, options to purchase Common Stock and restricted stock awards of Common
Stock, up to an aggregate of 800,000 shares of Common Stock, may be granted by
the Committee. The maximum number of shares of Common Stock subject to options
that may be awarded under the Employee Plan to any employee during any
consecutive three year period is 200,000. The maximum number of shares of Common
Stock that may be awarded under the Employee Plan to any employee pursuant to
restricted stock awards during any consecutive three year period is 100,000. The
exercise price of an option granted pursuant to the Employee Plan is determined
by the Committee on the date the option is granted and may not be less than the
fair market value of the shares of Common Stock on such date. 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 Employee 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
Employee Plan for a term of more than ten years. In the case of a 10%
Shareholder, no option that is an ISO may be granted that is exercisable for
more than five years from the date of grant. To the extent that the aggregate
fair market value (determined as of the date the option is granted) of the
Common Stock with respect to which ISOs are exercisable for the first time by
the option holder in any calendar year (under this Employee Plan and any other
incentive stock option plans of the Company and any parent and subsidiary
corporation within the meaning of Section 424 of the Code) exceeds $100,000, the
options must be treated as Non-ISOs. In making this determination, options shall
be taken into account in the order in which they were granted. No options were
granted under the Employee Plan prior to the end of fiscal 1996. In July 1996,
the Company granted options to purchase 45,000, 45,000, and 17,500 shares of
Common Stock to Messrs. Zane Russell, Michael L. Hlinak and Dean H. Fisher,
respectively. In January 1997, the Company granted additional options to
purchase 45,000, 45,000, and 17,500 shares of Common Stock to Messrs. Russell,
Hlinak and Fisher, respectively.
Under the Employee Plan, the Committee also 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 Employee Plan. Restricted stock will
constitute issued and outstanding Common Stock for all corporate purposes.
Subject to the terms of the Employee Plan and the recipient's agreement with
respect to the award, the recipient will have the right to vote the restricted
stock awarded to such recipient and to receive and retain all regular cash
dividends, and to exercise all other rights, powers, and privileges of a holder
of Common Stock with respect to such restricted stock. In 1995, the Company
granted restricted stock awards for an aggregate of 63,638 shares of Common
Stock to certain key employees, none of whom are directors or named executive
officers. These employees were not required to make any payment for these
restricted stock awards, which will 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
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lapse and the stock will be owned by the employees free of further restrictions
under the Employee Plan. The Company granted no restricted stock awards in
fiscal 1996 or fiscal 1997.
The Employee Plan may be amended by the Board of Directors without any
requirement of shareholder approval, except as required by the incentive stock
option provisions of the Code.
THE EMPLOYEE PLAN AMENDMENT
The Employee Plan currently provides (i) that options to purchase Common
Stock and restricted stock awards of Common Stock may be granted with respect to
an aggregate of up to 800,000 shares of Common Stock (ii) that the maximum
number of shares of Common Stock subject to options that may be awarded to any
one employee in any consecutive three-year period under the Employee Plan is
200,000 and (iii) that the maximum number of shares of Common Stock that may be
awarded to any one employee pursuant to restricted stock awards in any
consecutive three-year period under the Employee Plan is 100,000. The Employee
Plan Amendment would increase the aggregate number of shares of Common Stock
with respect to which such awards could be granted to 4,000,000. The Employee
Plan Amendment would also reduce the measurement periods related to maximum
grants to any one employee from three years to twelve months such that the
maximum number of shares of Common Stock subject to options that may be awarded
to any one employee in any consecutive 12-month period under the Employee Plan
would be 750,000 and the maximum number of shares of Common Stock that may be
awarded to any one employee pursuant to restricted stock awards in any
consecutive 12-month period under the Employee Plan would be 200,000. The Board
of Directors has adopted the Employee Plan Amendment and directed that it be
presented to the shareholders for their approval.
EMPLOYEE PLAN AMENDMENT BENEFITS
Non-employee directors are not eligible to receive awards under the
Employee Plan. The benefits or amounts that will be received by or allocated to
the executive officers and employees of the Company under the Employee Plan
Amendment are not determinable, as the Employee Plan does not provide for any
automatic grants but is administered by the Committee. In fiscal 1996, no awards
were granted under the Employee Plan. In fiscal 1997, the Company granted
options to purchase 90,000, 90,000 and 35,000 shares of Common Stock to Messrs.
Russell, Hlinak and Fisher, respectively, and options to purchase an aggregate
of 281,000 shares of Common Stock to employees other than executive officers.
Each of Messrs. Russell and Hlinak has agreed, subject to the approval of
Proposal 6, to cancel such options in favor of warrants to be granted as
described in Proposal 6.
Subject to the approval of this Proposal 2, the Committee has granted
options to purchase 700,000 shares of Common Stock at $1.50 per share (the
"Turner Signing Bonus Options") to Mr. Robert H. Turner pursuant to the
Employee Plan in connection with Mr. Turner's appointment to the offices of
President and Chief Executive Officer of the Company. The Turner Signing Bonus
Options, which are NSOs, are exercisable immediately. The Company has also
agreed with Mr. Turner that the Committee will grant Mr. Turner additional
options to purchase 100,000 shares of Common Stock on each of the first and
second anniversaries of his employment with the Company, which options will have
an exercise price equal to the market price on the date of grant and will be
subject to a vesting period of not more than three years.
FEDERAL TAX CONSEQUENCES
Options granted under the Employee Plan may be either ISOs which satisfy
the requirements of Section 422 of the Code or Non-ISOs which are not intended
to meet these requirements. The federal income tax treatment for the two types
of options differs as follows.
In general, no tax consequences should result from the grant to or exercise
by an employee of an ISO under the Employee Plan. The optionee will, however,
recognize taxable income in the year in which the purchased shares are sold or
otherwise made the subject of a disposition.
For federal income tax purposes, dispositions are either qualifying or
disqualifying. An optionee makes a qualifying disposition of the purchased
shares if he sells or otherwise disposes of the shares after holding
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them for more than two years after the date the option was granted and more than
one year after the exercise date. If the optionee fails to satisfy either of
these two holding periods prior to the sale or other disposition, a
disqualifying disposition will result.
Upon a qualifying disposition of the shares, the optionee will recognize
long-term capital gain in an amount equal to the excess of (i) the amount
realized upon the sale or other disposition of the purchased shares over (ii)
the exercise price paid for such shares. If there is a disqualifying disposition
of the shares, the excess of (i) the fair market value of those shares on the
date the option was exercised over (ii) the exercise price paid for the shares
generally will be taxable as ordinary income. Any additional gain recognized
upon the disposition will be a capital gain. If, however, the disqualifying
disposition is a sale or exchange with respect to which a loss (if sustained)
would be recognized, the amount of ordinary income realized by the optionee
cannot exceed the amount on the sale or exchange over the exercise price paid
for the shares.
If the optionee makes a disqualifying disposition of the purchased shares,
the Company will be entitled to an income tax deduction for the taxable year in
which the disposition occurs, equal to the excess of (i) the fair market value
of such shares on the date the option was exercised over (ii) the exercise price
paid for the shares. In no other instance will the Company be allowed a
deduction with respect to the optionee's disposition of the purchased shares.
No taxable income is recognized by an optionee upon the grant of a Non-ISO.
The optionee will in general recognize ordinary income, in the year in which the
option is exercised, equal to the excess of the fair market value of the
purchased shares on the date of exercise over the exercise price paid for the
shares. The Company is entitled to a deduction in the same amount as the income
recognized by the optionee, provided that the Company withholds income tax with
respect to that amount if the optionee is an employee.
In general, the recipient of a restricted stock award will recognize income
as the award vests. The Company will be entitled to a deduction for the income
attributable to the restricted stock, subject to certain limitations that apply
if the recipient's aggregate compensation is greater than $1,000,000. Although
amounts in excess of $1,000,000 may not, under certain circumstances, be
deductible by the Company, the Company does not anticipate that any recipient's
compensation will exceed the $1,000,000 limit on deductions.
REQUIRED VOTE
Approval of the Employee Plan Amendment requires the affirmative vote of
the holders of a majority of the combined shares of Common Stock and Series B
Preferred that are voted at the meeting in person or by proxy. If not otherwise
provided, proxies will be voted "'FOR" approval of the Employee Plan
Amendment. Abstentions will not be counted as shares voting on the proposal,
and, therefore, an abstention will have no effect on the outcome of the
proposal. A broker non-vote will not be treated as a share entitled to vote on
the proposal and will not be considered as a vote for or against the proposal.
Therefore, a broker non-vote will have no effect on the outcome of the proposal.
RECOMMENDATION OF THE BOARD OF DIRECTORS
For the reasons set forth above, the Board of Directors believes the
Employee Plan Amendment is in the best interests of the Company's shareholders.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE EMPLOYEE
PLAN AMENDMENT.
PROPOSAL 3: TO AMEND THE NON-EMPLOYEE DIRECTOR PLAN
At the meeting, you will be asked to vote on a proposal (the "Director
Plan Amendment") to amend the EqualNet Holding Corp. 1995 Non-Employee Director
Stock Option Plan (the "Director Plan"). The Director Plan and the Director
Plan Amendment are summarized under " -- Description of Director Plan" and
" -- The Director Plan Amendment", and the Director Plan Amendment is set
forth in full in ANNEX E attached to this Proxy Statement.
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REASONS FOR THE DIRECTOR PLAN AMENDMENT
The Board of Directors believes it is in the best interests of the Company
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's long-term success and
progress. The Board of Directors believes that the Director Plan Amendment will
provide a more consistent incentive for directors from year to year.
CERTAIN CONSIDERATIONS
Shareholders should note that certain disadvantages may result from the
adoption of the Director Plan Amendment, including a reduction in their
interests of the Company with respect to earnings per share, voting, liquidation
value and book and market value per share if options to acquire the authorized
shares of Common Stock are granted and subsequently exercised.
DESCRIPTION OF THE DIRECTOR PLAN
The Director Plan currently provides for automatic grants of a fixed number
of stock options to non-employee directors of the Company. Each non-employee
director is granted options to purchase 5,000 shares of Common Stock upon
becoming a non-employee director and options to purchase 1,000 shares of Common
Stock annually. In each case the exercise price is determined based upon the
market value of the Common Stock at the time of the grant. The Director Plan
currently provides for grants, in the aggregate, to purchase up to 250,000
shares of Common Stock.
THE DIRECTOR PLAN AMENDMENT
The Director Plan Amendment would revise the Director Plan such that the
automatic grants of stock options would be for a variable number of stock
options determined by dividing a fixed dollar amount by the market value of the
Common Stock at the time of the grant. Under the Director Plan Amendment, each
non-employee director would be granted options to purchase a number of shares of
Common Stock upon becoming a non-employee director determined by dividing
$60,000 by the market price of the Common Stock on the date of grant, and each
non-employee director would receive annually options to purchase a number of
shares of Common Stock determined by dividing $30,000 by the market price of the
Common Stock on the date of grant. The Board of Directors believes that the
Director Plan Amendment will provide more grants to non-employee directors of
more consistent value from year-to-year.
The Director Plan Amendment would also increase the number of shares of
Common Stock available for issuance under the Director Plan to 500,000.
REQUIRED VOTE
Approval of the Director Plan Amendment requires the affirmative vote of
the holders of a majority of the combined shares of Common Stock and Series B
Preferred that are voted at the meeting in person or by proxy. If not otherwise
provided, proxies will be voted "FOR" approval of the Director Plan Amendment.
Abstentions will not be counted as shares voting on the proposal, and,
therefore, an abstention will have no effect on the outcome of the proposal. A
broker non-vote will not be treated as a share entitled to vote on the proposal
and will not be considered as a vote for or against the proposal. Therefore, a
broker non-vote will have no effect on the outcome of the proposal.
RECOMMENDATION OF THE BOARD OF DIRECTORS
For the reasons set forth above, the Board of Directors believes the
Director Plan Amendment is in the best interests of the Company's shareholders.
The Board of Directors unanimously recommends that you vote "FOR" the Director
Plan Amendment.
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PROPOSAL 4: TO CHANGE THE NAME OF THE COMPANY TO
EQUALNET COMMUNICATIONS CORP.
The Board of Directors has adopted an amendment (the "Charter Amendment")
to the Articles of Incorporation of the Company to change the name of the
Company to Equalnet Communications Corp. and directed that the Charter Amendment
be submitted to the shareholders of the Company for approval. At the Meeting,
you will be asked to vote in favor of the Charter Amendment. The Charter
Amendment is set forth in full as ANNEX F to this Proxy Statement
REASON FOR THE CHARTER AMENDMENT
The Board of Directors believes that the change in the Company's name will
more clearly identify the Company with the industry in which it operates.
REQUIRED VOTE
Approval of the Charter Amendment requires the affirmative vote of the
holders of a two-thirds of the combined shares of Common Stock and Series B
Preferred that are outstanding and entitled to vote at the meeting in person or
by proxy. If not otherwise provided, proxies will be voted "FOR" approval of
the Charter Amendment. Abstentions and broker non-votes will not be treated as
either a vote for or against approval of the Charter Amendment. However, because
the approval of the Charter Amendment requires the affirmative vote of two
thirds of the outstanding shares of Common Stock, abstentions and broker non-
votes will have the same effect as a vote against approval of the Charter
Amendment.
RECOMMENDATION OF THE BOARD OF DIRECTORS
For the reason set forth above, the Board of Directors believes the Charter
Amendment is in the best interests of the Company's shareholders. THE BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE CHARTER AMENDMENT.
PROPOSAL 5: TO RATIFY THE ISSUANCE OF SERIES B PREFERRED
At the Meeting, you will be asked to ratify the issuance by the Company of
3,000 shares of the Company's Series B Senior Convertible Preferred Stock, par
value $.01 per share ("Series B Preferred").
BACKGROUND
On February 11, 1997, the Company issued to The Furst Group, Inc., a New
Jersey corporation ("Furst Group") a $3,000,000 Note bearing interest at the
rate of 10% per year and maturing December 31, 1998 (the "Furst Note"), and a
warrant for the purchase of up to 1,500,000 shares of Common Stock at an
exercise price of $2.00 per share, (the "Furst Warrant"). The Furst Warrant
was exercisable by delivery of the Furst Note.
In December 1997, the Company was notified by The Nasdaq Stock Market, Inc.
that the Common Stock would be delisted from the Nasdaq National Market (the
"NNM") if the Company was unable to demonstrate compliance with the continuing
listing requirements of the NNM and certain other financial matters. Among the
requirements for continued listing was that the Company demonstrate that it had
not less than $7.5 million in net tangible assets.
To meet this requirement, the Company needed to restructure its balance
sheet to reduce its outstanding debt. To assist the Company in meeting this
requirement, the Company began negotiations with Furst Group pursuant to which
Furst Group would agree to exercise the Furst Warrant by delivery of the Furst
Note, thereby converting its debt into equity. As a result of these
negotiations, the Company and Furst Group entered into an Exchange Agreement,
dated March 9, 1998 (the "Exchange Agreement"), pursuant to which Furst Group
exchanged the Furst Note and the Furst Warrant for 3,000 shares of Series B
Preferred and 322,000 shares of Common Stock (representing the accrued and
unpaid interest on the Furst Note). The Exchange Agreement enabled the Company
to reduce its debt load and increase its tangible net worth while
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allowing Furst Group to maintain a liquidation preference over the Common Stock
with respect to its initial $3,000,000 investment.
TERMS OF THE SERIES B PREFERRED
A copy of the Statement of Resolution establishing the Series B Preferred,
as filed with the Secretary of State of the State of Texas, is attached to this
Proxy Statement as ANNEX G. The following is an accurate summary of the material
provisions of the Series B Preferred, but is not a complete description thereof
and is qualified by reference to ANNEX G.
Each share of Series B Preferred is convertible initially into 500 shares
of Common Stock (for an aggregate of 1,500,000 shares), subject to adjustment.
The conversion rate of the Series B Preferred will be automatically adjusted if
the average trading price of the Common Stock is below $2.00 per share for a
period of either 20 trading days or five trading days before 90 days from the
date the Series B Preferred was issued. Effectively, if the average trading
price of the Common Stock is below $2.00 per share between May 8, 1998 and June
5, 1998 or between June 1, 1998 and June 5, 1998, the aggregate number of shares
of Common Stock into which the Series B Preferred will be convertible will
increase to a number equal to the quotient of $3,000,000 divided by the lower of
those two average trading prices. The number of shares into which the Series B
Preferred is convertible is also subject to adjustment pursuant to the
anti-dilution provisions set forth in ANNEX G. However, the Statement of
Resolution governing the terms of the Series B Preferred provides that the
Series B Preferred will not be convertible into more than 3,250,000 shares of
Common Stock unless the issuance of the Series B Preferred has been ratified by
the Company's shareholders. Each outstanding share of Series B Preferred
automatically converts into Common Stock based on the conversion ratio then in
effect on December 31, 1999.
The Series B Preferred consists of 3,000 shares, all of which have were
issued in connection with the Exchange Agreement. Each share of Series B
Preferred has a stated value of $1,000 and is entitled to receive dividends only
if, as and when the Board of Directors declares dividends on the Common Stock.
If the Company were to be liquidated, the holders of the Series B Preferred
would be entitled to receive out of the assets of the Company $1,000 per share
of Series B Preferred before any distributions would be made to holders of
Common Stock. Each share of Series B Preferred generally entitles the holder
thereof to one vote on matters submitted to the holders of Common Stock for
approval, with the holders of Common Stock and Series B Preferred voting as a
single class. In addition, holders of Series B Preferred will be entitled to
vote as a class on transactions involving an amendment or waiver of the rights
of holders of Series B Preferred or in the creation of a series of shares with
liquidation rights equal to or greater than the Series B Preferred.
REQUIRED VOTE
Ratification of the issuance of the Series B Preferred requires the
affirmative vote of the holders of a majority of the shares of Common Stock that
are voted at the meeting in person or by proxy. If not otherwise provided,
proxies will be voted "FOR" ratification of the issuance of the Series B
Preferred. Abstentions will not be counted as shares voting on the proposal,
and, therefore, an abstention will have no effect on the outcome of the
proposal. A broker non-vote will not be treated as a share entitled to vote on
the proposal and will not be considered as a vote for or against the proposal.
Therefore, a broker non-vote will have no effect on the outcome of the proposal.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Company believes the issuance of the Series B Preferred was necessary
for it to meet the financial criteria required for continued listing on the NNM.
The Board of Directors unanimously approved the issuance of the Series B
Preferred. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR"
THE RATIFICATION OF THE ISSUANCE OF THE SERIES B PREFERRED.
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PROPOSAL 6: APPROVAL OF ISSUANCE OF SEVERANCE WARRANTS
At the meeting, you will be asked to vote in favor of a proposal to ratify
the issuance by the Company of warrants to purchase an aggregate of up to
180,000 shares of Common Stock to two current directors of the Company in
connection with the resignation of those directors from offices of the Company.
OFFICER RESIGNATIONS AND ISSUANCE OF SEVERANCE WARRANTS
Mr. Zane Russell served as Chairman of the Board, President and Chief
Executive Officer of the Company until his resignation from those offices
effective March 16, 1998. Mr. Russell continues to serve as a director of the
Company. Effective April 1, 1998, the Company and Mr. Russell entered into a
severance agreement (the "Russell Severance Agreement") relating to the
termination of Mr. Russell's employment with the Company. See "Executive
Compensation -- Employment and Severance Agreements".
Mr. Michael L. Hlinak served as Chief Operating Officer of the Company
until his resignation from that office effective April 1, 1998. Mr. Hlinak
continues to serve as a director of the Company. The Company had previously
entered into an employment agreement with Mr. Hlinak. Effective April 1, 1998,
the Company and Mr. Hlinak entered into a severance agreement (the "Hlinak
Severance Agreement", and together with the Russell Severance Agreement, the
"Severance Agreements") relating to the termination of the Hlinak Employment
Agreement and Mr. Hlinak's employment with the Company. See "Executive
Compensation -- Employment and Severance Agreements".
Pursuant to the Severance Agreements, each of Messrs. Russell and Hlinak
agreed to surrender outstanding options to purchase an aggregate of 90,000
shares of Common Stock (45,000 shares at $2.00 per share and 45,000 shares at
$4.25 per share) held by him and release the Company from any claims he may have
in exchange for certain continued compensation benefits and the issuance by the
Company, subject to shareholder approval, of warrants (the "Severance
Warrants") to purchase up to 90,000 shares of Common Stock at $2.00 per share.
TERMS OF THE SEVERANCE WARRANTS
The Severance Warrants, which were granted subject to the approval of the
Company's shareholders, have an exercise price of $2.00 per share and are
exercisable for three years, in the case of Mr. Russell, and five years in the
case of Mr. Hlinak, from the date of grant. The Severance Warrants have
customary anti-dilution provisions.
REQUIRED VOTE
Approval of the issuance of the Severance Warrants requires the affirmative
vote of the holders of a majority of the shares of Common Stock that are voted
at the meeting in person or by proxy. If not otherwise provided, proxies will be
voted "FOR" approval of the issuance of the Severance Warrants. Abstentions
will not be counted as shares voting on the proposal, and, therefore, an
abstention will have no effect on the outcome of the proposal. A broker non-vote
will not be treated as a share entitled to vote on the proposal and will not be
considered as a vote for or against the proposal. Therefore, a broker non-vote
will have no effect on the outcome of the proposal.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Company believes the issuance of the Severance Warrants was appropriate
in connection with the severance agreements negotiated with each of Messrs.
Russell and Hlinak. The Board of Directors, with each of Messrs. Russell and
Hlinak abstaining, unanimously approved the issuance of the Severance Warrants.
THE BOARD OF DIRECTORS UNANIMOUSLY (WITH EACH OF MESSRS. RUSSELL AND HLINAK
ABSTAINING) RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL OF THE ISSUANCE OF THE
SEVERANCE WARRANTS.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of the Record Date, Furst Group held 3,000 shares of Series B Preferred,
constituting all of the outstanding shares of Series B Preferred. Mr. James D.
Kaylor and Mr. John S. Streep may also be beneficial owners of such shares as
discussed in footnote (3) to the following table. The following table sets forth
information with respect to Ownership of Common Stock as of the Record Date
(unless indicated otherwise), with respect to (i) persons known to the Company
to be the beneficial owners of more than 5% of the outstanding shares of the
Common Stock, (ii) each director and Named Executive Officer and (iii) all
directors and executive officers of the Company as a group:
BENEFICIAL
OWNERSHIP(1)
---------------------
NAME SHARES PERCENT
- ------------------------------------- ---------- -------
Michael T. Willis(2)................. 9,632,966 42.8%
Willis Group, LLC(2)................. 9,132,966 41.5
Mark A. Willis(2)(3)................. 9,132,966 41.5
James T. Harris(2)(3)................ 9,132,966 41.5
James R. Crane(4).................... 3,570,000 16.6
MCM Partners(5)...................... 2,000,000 8.5
The Furst Group, Inc.(6)............. 1,822,000 8.0
James D. Kaylor(6)................... 1,822,000 8.0
John S. Streep(6).................... 1,822,000 8.0
Advantage Fund, Ltd.(7).............. 1,522,500 7.1
Frank Hevrdejs(8).................... 1,400,000 6.5
Mitchell H. Bodian(3)................ -- --
John Isaac "Ike" Epley(3).......... -- --
Michael L. Hlinak(3)(9).............. 357,973 1.6
Zane Russell(3)(9)................... 1,057,556 4.9
Ronald J. Salazar, Ph.D.(3).......... -- --
Robert H. Turner(10)................. 500,000 2.3
Bobby H. Henson...................... -- --
Dean H. Fisher(11)................... 264,482 1.2
Current directors and executive
officers as a group (10
persons)(12)....................... 11,812,977 50.9
- ------------
* Less than one percent.
(1) Except as otherwise noted, each shareholder has sole voting and dispositive
power with respect to the shares of Common Stock.
(2) The Willis Group holds directly 8,532,966 shares of Common Stock. The
Willis Group also holds warrants for the purchase of an aggregate of
600,000 shares of Common Stock. Messrs. Michael T. Willis and Mark A.
Willis each own 47.5% of the membership interest in the Willis Group and
Mr. Harris owns the remaining 5% membership interest. Mr. Michael T. Willis
is the Secretary of the Willis Group, Mr. Mark A. Willis is the President
of the Willis Group and Mr. Harris is the Treasurer of the Willis Group.
According to the report, the Willis Group has sole voting and dispositive
power with respect to all of such shares and Messrs. Michael T. Willis,
Mark A. Willis and Harris have shared voting and dispositive power with
respect to such shares. In addition, Mr. Michael T. Willis holds directly a
warrant for the purchase of 500,000 shares of Common Stock. The address of
each of The Willis Group, Mr. Michael T. Willis, Mr. Mark A. Willis and Mr.
Harris is c/o The Willis Group, 5005 Woodway, Suite 350, Houston, Texas
77056.
(3) Excludes 5,000 shares of Common Stock issuable upon exercise of stock
options awarded under the EqualNet Holding Corp. 1995 Non-Employee Director
Stock Option Plan (the "Director Plan") that are not exercisable within
sixty days.
(4) Mr. Crane holds 3,400,000 shares of Common Stock directly and a warrant for
the purchase of an additional 170,000 shares of Common Stock. Mr. Crane's
address is 15350 Vickery Drive, Houston, Texas 77032.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
13
<PAGE>
(5) MCM Partners holds 2,000 shares of the Company's Series A Convertible
Preferred Stock, par value $.01 per share, which is convertible in the
aggregate into 2,000,000 shares of Common Stock. MCM Partner's address is
10500 NE 8th, Suite 1920, Bellevue, Washington 98004-4332.
(6) Information relating to ownership by Furst, Mr. Kaylor and Mr. Streep is
based on reports on Schedule 13D filed with the Commission on March 31,
1998. According to those reports, Furst holds directly 3,000 shares of
Series B Preferred, which is convertible in the aggregate into 1,500,000
shares of Common Stock, and 322,000 shares of Common Stock. Messrs. Kaylor
and Streep each own 45% of the common stock of Furst, Mr. Kaylor is the
Chairman of the Board of Furst, and Mr. Streep is the Chief Executive
Officer of Furst. According to those reports, Furst has sole voting and
dispositive power with respect to all of such shares and Messrs. Kaylor and
Streep have shared voting and dispositive power with respect to such
shares. Furst's address is 459 Oakshade Road, Shamong, New Jersey 08088.
Mr. Kaylor's address is 916 P Street, Suite 200, Lincoln, Nebraska 68508.
Mr. Streep's address is 15841 Kilmarnock Drive, Ft. Myers, Florida 33912.
(7) The address of Advantage Fund, Ltd. is c/o MCM Partners, 10500 NE 8th,
Suite 1920, Bellevue, Washington 98004-4332.
(8) Mr. Hevrdejs holds directly 666,666 shares of Common Stock and a warrant
for the purchase of an additional 33,333 shares of Common Stock, and
indirectly an additional 666,667 shares of Common Stock and an additional
warrant for the purchase of 33,334 shares of Common Stock. Mr. Hevrdejs'
address is 8 Greenway Plaza, Suite 702, Houston, Texas 77046-0801.
(9) Includes 90,000 shares of Common Stock issuable upon exercise of stock
options awarded under the Employee Plan, which options were canceled,
subject to approval of Proposal 6, pursuant to the Severance Agreements.
Does not includes the Severance Warrants to be issued upon approval of
Proposal 6.
(10) Includes options to purchase 500,000 shares of Common Stock granted subject
to the approval of Proposal 2. Does not include options to purchase an
additional 200,000 shares of Common Stock granted subject to the approval
of Proposal 2, which options are not exercisable within 60 days.
(11) Also excludes 40,000 shares of Common Stock held by trusts for the benefit
of Mr. Fisher's children. Mr. Fisher has disclaimed any beneficial
ownership of these shares.
(12) See notes (2), (3) and (9) through (11) above.
CHANGE OF CONTROL
On March 6, 1998, EqualNet consummated the Willis Transactions, pursuant to
which Willis Group acquired an aggregate of 8,532,633 newly issued shares of the
Company and became the controlling shareholder of the Company. In the aggregate,
Willis Group provided consideration for such shares of $4,000,000 in cash, a
note from the Company for an additional $1,000,000 (for which Willis Group had
previously paid the Company $1,000,000 in cash), certain telecommunications
equipment and the stock of a company holding certain intangible rights related
to that equipment. Willis Group now beneficially owns 9,132,966 shares of the
Company, or approximately 41.5% of the outstanding shares of Common Stock of the
Company on a fully-diluted basis.
14
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY OF COMPENSATION
The following table summarizes compensation information concerning the
Chief Executive Officer and each of the Company's most highly compensated
executive officers as to whom the total annual salary and bonus for the fiscal
year ended June 30, 1997, exceeded $100,000 (the "Named Executive Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION COMMON
------------------------------ STOCK
NAME AND FISCAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS(1) OPTIONS COMPENSATION(2)
- ---------------------------------------- ------ -------- -------- ---------- ---------------
<S> <C> <C> <C> <C>
Zane Russell............................ 1997 $178,000 -- 90,000 $ 3,498
Former Chairman of the Board 1996 178,000 -- -- 4,249
and Chief Executive Officer and 1995 175,000 $ 69,025 -- 7,107
President
Michael L. Hlinak....................... 1997 155,000 -- 90,000 3,607
Executive Vice President, Former 1996 128,000 -- -- 6,576
Chief Financial Officer and Chief 1995 125,000 34,513 -- 2,409
Operating Officer
Dean H. Fisher.......................... 1997 129,000 -- 35,000 3,451
Senior Vice President, General 1996 128,000 -- -- 6,097
Counsel and Secretary 1995 125,000 34,513 -- 8,401
</TABLE>
- ------------
(1) Bonuses reported for fiscal 1995, although paid in fiscal 1996, relate to
the Company's results of operations in fiscal 1995. No bonuses were paid
relating to the Company's results of operations for fiscal 1996, and none
will be paid relating to the Company's results of operations for fiscal
1997.
(2) Represents contributions in 1995 by the Company under the Company's 401(k)
Plan for Messrs. Russell, Hlinak and Fisher of $2,002, $2,409, and $2,011,
respectively, and health insurance premiums paid by the Company for Messrs.
Russell, Hlinak and Fisher of $5,105, $0 and $6,390, respectively.
Represents contributions in 1996 by the Company under the Company's 401(k)
Plan for Messrs. Russell, Hlinak and Fisher of $1,676, $2,477 and $1,676,
respectively, and health insurance premiums paid by the Company for Messrs.
Russell, Hlinak and Fisher of $4,572, $4,100 and $4,421, respectively.
Represents contributions in 1997 by the Company under the Company's 401(k)
Plan for Messrs. Russell, Hlinak and Fisher of $1,676, $1,785, and $1,676,
respectively, and health insurance premiums paid in 1997 by the Company for
Messrs. Russell, Hlinak and Fisher of $1,823, $1,823, and $1,775,
respectively.
OUTSTANDING OPTIONS AND OPTION GRANTS IN FISCAL 1997
The following table sets forth information regarding the value of
unexercised options held by the Named Executive Officers at June 30, 1997. Each
of Messrs. Russell and Hlinak has agreed, subject to the approval of Proposal 6,
to the cancellation of such options. None of the Named Executive Officers
exercised any options in fiscal 1997.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING
UNEXERCISED OPTIONS VALUE OF UNEXERCISED
AT JUNE 30, 1997 IN-THE-MONEY OPTIONS AT
(# SHARES) JUNE 30, 1997 ($)(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------ ----------- ------------- ----------- -------------
<S> <C> <C>
Zane Russell.................. 45,000 45,000 -- --
Michael L. Hlinak............. 45,000 45,000 -- --
Dean H. Fisher................ 17,500 17,500 -- --
</TABLE>
- ------------
(1) Based on $2.06 per share, the closing price of the Common Stock on June 30,
1997, as reported by The Nasdaq Stock Market, Inc.
15
<PAGE>
The following table summarizes options to purchase shares of the Company's
Common Stock that were granted pursuant to the Employee Plan to the Named
Executive Officers during fiscal 1997. Each of Messrs. Russell and Hlinak has
agreed, subject to the approval of Proposal 6, to the surrender and cancellation
of such options. None of the Named Executive Officers exercised any options in
fiscal 1997.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
SHARES OF PERCENT OF PRICE APPRECIATION FOR
COMMON STOCK TOTAL EXERCISE OPTION TERM(1)
UNDERLYING OPTIONS GRANTED PRICE PER ----------------------
NAME OPTIONS TO EMPLOYEES SHARE EXPIRATION 5% 10%
- -------------------------------- ------------ --------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Zane Russell.................... 45,000 9.1% $4.25 7/11/06 $ 120,276 $ 354,409
45,000 9.1 2.50 1/20/07 70,750 208,476
Michael L. Hlinak............... 45,000 9.1 4.25 7/11/06 120,276 354,409
45,000 9.1 2.50 1/20/07 70,750 208,476
Dean H. Fisher.................. 17,500 3.5 4.25 7/11/06 46,774 137,826
17,500 3.5 2.50 1/20/07 27,514 81,074
</TABLE>
- ------------
(1) The potential realizable value of the options, if any, granted in fiscal
1997 to each of the Named Executive Officers was calculated by multiplying
the number of shares of Common Stock underlying such options by the excess
of (a) the assumed value, at the date of expiration of such option, of the
Company's Common Stock if the value of the Company's Common Stock were to
appreciate at a compounded annual rate of 5% or 10% from the date of the
grant of the option until the date of expiration of the option over (b) the
exercise price shown. The 5% and 10% appreciation rates are set forth in
regulations promulgated by the Commission, and no representation is made
that the Common Stock will appreciate at these assumed rates or at all.
EMPLOYMENT AND SEVERANCE AGREEMENTS
Mr. Russell served as Chairman of the Board, President and Chief Executive
Officer of the Company until his resignation from those offices effective March
16, 1998. Mr. Russell continues to serve as a director of the Company. Effective
April 1, 1998, the Company and Mr. Russell entered into the Russell Severance
Agreement relating to the termination of Mr. Russell's employment with the
Company. The Russell Severance Agreement provides that Mr. Russell will be paid
severance payments for 11 months at an annualized rate of $87,500, and that,
subject to the approval of Proposal 6, Mr. Russell will receive Severance
Warrants for the purchase of 90,000 shares of Common Stock. Pursuant to the
Russell Severance Agreement, Mr. Russell released the Company for any claims he
may have against the Company.
Mr. Hlinak served as Chief Operating Officer of the Company until his
resignation from that office effective April 1, 1998. Mr. Hlinak continues to
serve as a director of the Company. The Company had previously entered into an
employment agreement with Mr. Hlinak. Effective April 1, 1998, the Company and
Mr. Hlinak entered into the Hlinak Severance Agreement relating to the
termination of the Hlinak Employment Agreement and Mr. Hlinak's employment with
the Company. The Hlinak Severance Agreement provides that Mr. Hlinak will be
paid severance payments for 11 months at an annualized rate of $170,000, that
Mr. Hlinak will be entitled to certain medical benefits for such period, and
that, subject to the approval of Proposal 6, Mr. Hlinak will receive Severance
Warrants for the purchase of 90,000 shares of Common Stock. Pursuant to the
Hlinak Severance Agreement, Mr. Hlinak released the Company for any claims he
may have against the Company.
PROPOSALS FOR NEXT ANNUAL MEETING
Any proposals of holders of Common Stock intended to be presented at the
annual meeting of shareholders of the Company to be held in November 1998 must
be received by the Company at its principal executive offices, 1250 Wood Branch
Park Drive, Houston, Texas 77079, no later than September 29, 1998 to be
included in the proxy statement and form of proxy relating to that meeting.
16
<PAGE>
OTHER MATTERS
The management of the Company knows of no other matters which may come
before the meeting. However, if any matters other than those referred to above
should properly come before the meeting, it is the intention of the persons
named in the enclosed proxy to vote such proxy in accordance with their best
judgment.
The cost of solicitation of proxies in the accompanying form will be paid
by the Company. In addition to solicitation by use of the mails, certain
directors, officers or employees of the Company may solicit the return of
proxies by telephone, telegram or personal interview.
CAUTION AS TO FORWARD-LOOKING STATEMENTS
This Proxy Statement includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. 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 elsewhere in this Proxy Statement, including, without limitation, in
conjunction with the forward-looking statements included in this Proxy
Statement, and under the heading "Cautionary Statements" in the Company's
Annual Report on Form 10-K for the Year Ended June 30, 1997, as amended,
Quarterly Report on Form 10-Q for the Quarterly Period Ended September 30, 1997,
Quarterly Report on Form 10-Q for the Quarterly Period Ended December 31, 1997,
and Quarterly Report on Form 10-Q for the Quarterly Period Ended March 31, 1998.
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.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed with the Commission by the Company (File No.
000-25482) are incorporated in this Proxy Statement by reference, and a copy of
such documents is being sent to holder of Common Stock and Series B Preferred
Stock entitled to vote at the Meeting together with this Proxy Statement:
1. Annual Report on Form 10-K for the fiscal year ended June 30, 1997,
as amended by Amendment No. 1 on Form 10-K/A, filed with the
Commission on September 30, 1997, Amendment No. 2 on Form 10-K/A,
filed with the Commission on October 28, 1997, Amendment No. 3 on
Form 10-K/A, filed with the Commission on January 20, 1998, and
Amendment No. 4 on Form 10-K/A, filed with the Commission on January
30, 1998.
2. Quarterly Report on Form 10-Q for the Quarterly Period Ended March
31, 1998.
17
<PAGE>
ANNEX A
EQUALNET HOLDING CORP.
STATEMENT OF RESOLUTION
ESTABLISHING SERIES OF SHARES
(Series C Convertible Preferred Stock)
To the Secretary of State
Of the State of Texas:
Pursuant to the provisions of Article 2.13 of the Texas Business
Corporation Act, EqualNet Holding Corp., a Texas corporation (the
"Corporation"), submits the following statement for the purpose of
establishing and designating a series of shares and fixing and determining the
preferences, limitations and relative rights thereof:
1. The name of the corporation is EqualNet Holding Corp.
2. The following resolution, establishing and designating a series of
shares and fixing and determining the preferences, limitations and
relative rights thereof, was duly adopted by the board of directors
of the Corporation on May 1, 1998:
WHEREAS, Article IV of the Articles of Incorporation, as amended, of the
Corporation (the "Articles of Incorporation") provides for a class of
authorized shares known as "Common Stock," comprising 50,000,000 shares, with
a par value of $0.01 per share, issuable from time to time, and for a class of
authorized shares known as "Preferred Stock", comprising 5,000,000 shares,
with a par value of $0.01 per share, issuable from time to time in one or more
series; and
WHEREAS, pursuant to Article IV of the Articles of Incorporation of the
Corporation, the Board of Directors of the Corporation is authorized to fix and
determine the preferences, limitations and relative rights of any wholly
unissued series of Preferred Stock, and to fix the number of shares constituting
such series, and to increase or decrease the number of shares of any such series
(but not below the number of shares thereof then outstanding); and
WHEREAS, it is the desire of the Board of Directors of the Corporation,
pursuant to its authority as aforesaid, to establish, designate and issue an
additional series of such Preferred Stock and to fix and determine the
preferences, limitations and relative rights relating thereto;
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors does hereby
establish and designate a series of Preferred Stock of the Corporation and does
hereby fix and determine the preferences, limitations and relative rights
relating to said series of Preferred Stock as follows:
Section 1. Designation and Amount; Rank.
The shares of such series shall be designated as "Series C Convertible
Preferred Stock" and the number of shares constituting the Series C Convertible
Preferred Stock shall be 300,000, and shall not be subject to increase. The
shares of Series C Convertible Preferred Stock shall rank senior to the shares
of the Corporation's Common Stock, par value $0.01 per share (the "Common
Stock"), as to dividends and liquidation rights and shall rank junior to the
Corporation's Series A Convertible Preferred Stock and Series B Convertible
Preferred Stock as to dividends and liquidation rights.
Section 2. Dividends and Distributions.
(a). The holders of outstanding shares of Series C Convertible Preferred
Stock shall be entitled to receive, when, as, and if declared by the Board of
Directors of the Corporation (the "Board of Directors" or the "Board") out
of funds legally available for such purpose, dividends at the rate of $2.00 per
annum per share, and no more, which shall be fully cumulative, shall accrue
without interest from the date of original issuance and shall be payable
quarterly on January 1, April 1, July 1, and October 1 of each year, commencing
July 1, 1998 (except that if any such date is a Saturday, Sunday, or legal
holiday, then such dividend shall be payable on the next succeeding day that is
not a Saturday, Sunday, or legal holiday) to
A-1
<PAGE>
holders of record as they appear on the stock books of the Corporation on such
record dates, not more than 20 nor less than 10 days preceding the payment dates
for such dividends, as shall be fixed by the Board. Any dividends that accrue
with respect to the Series C Convertible Preferred Stock may be paid, at the
option and in the sole discretion of the Board of Directors, in cash or, in
whole or in part, by issuing fully-paid and nonassessable shares of Series C
Convertible Preferred Stock ("PIK Dividend Shares"), or fractions thereof,
such that the Liquidation Preference of such PIK Dividend Shares, if any, plus
the amount, if any, of such dividends paid in cash together therewith shall
constitute payment of the full amount of such dividends. If the Board of
Directors elects to pay any dividends in part in cash and in part by the
issuance of PIK Dividend Shares, the proportion of such cash paid and shares
issued with respect to each outstanding share of Series C Convertible Preferred
Stock shall be the same. In no event shall an election by the Board of Directors
to pay dividends, in full or in part, in cash or through the issuance of PIK
Dividend Shares with respect to any dividends preclude the Board of Directors
from electing either such alternative in respect of payment of subsequent
dividends. All dividends paid pursuant to this Section 2 shall be paid pro rata
to the holders entitled thereto. The amount of the dividends payable per share
of Series C Convertible Preferred Stock for each quarterly dividend period shall
be computed by dividing the annual dividend amount by four. The amount of
dividends payable for the initial dividend period and any period shorter than a
full quarterly dividend period shall be computed on the basis of a 360-day year
of twelve 30-day months. Accrued but unpaid dividends shall not bear interest.
No dividends or other distributions, other than dividends payable solely in
shares of Common Stock or other capital stock of the Corporation ranking junior
as to dividends to the Series C Convertible Preferred Stock (collectively, the
"Junior Dividend Stock"), shall be paid or set apart for payment on any shares
of Junior Dividend Stock, and no purchase, redemption, or other acquisition
shall be made by the Corporation of any shares of Junior Dividend Stock unless
and until all accrued but unpaid dividends on the Series C Convertible Preferred
Stock shall have been paid or declared and set apart for payment. No full
dividends shall be paid or declared and set apart for payment on any class or
series of the Corporation's capital stock ranking, as to dividends, on a parity
with the Series C Convertible Preferred Stock (the "Parity Dividend Stock")
for any period unless all accrued but unpaid dividends have been, or
contemporaneously are, paid or declared and set apart for such payment on the
Series C Convertible Preferred Stock. No full dividends shall be paid or
declared and set apart for payment on the Series C Convertible Preferred Stock
for any period unless all accrued but unpaid dividends have been, or
contemporaneously are, paid or declared and set apart for payment on the Parity
Dividend Stock and any shares of capital stock of the Corporation ranking senior
as to dividends to the Series C Convertible Preferred Stock (the "Senior
Dividend Stock") for all dividend periods terminating on or prior to the date
of payment of such full dividends. When dividends are not paid in full upon the
Series C Convertible Preferred Stock and the Parity Dividend Stock, all
dividends paid or declared and set apart for payment upon shares of Series C
Convertible Preferred Stock and the Parity Dividend Stock shall be paid or
declared and set apart for payment pro rata, so that the amount of dividends
paid or declared and set apart for payment per share on the Series C Convertible
Preferred Stock and the Parity Dividend Stock shall in all cases bear to each
other the same ratio that accrued and unpaid dividends per share on the shares
of Series C Convertible Preferred Stock and the Parity Dividend Stock bear to
each other.
Any references to "distribution" contained in this Section 2 shall not be
deemed to include any stock dividend or distributions made in connection with
any liquidation, dissolution, or winding up of the Corporation, whether
voluntary or involuntary.
(b). Neither the Corporation nor any subsidiary of the Corporation shall
redeem, repurchase or otherwise acquire in any one transaction or series of
related transactions any shares of Common Stock, Junior Dividend Stock or Junior
Liquidation Stock (as defined in Section 3) if the number of shares so
repurchased, redeemed or otherwise acquired in such transaction or series of
related transactions is more than either (x) 5.0% of the number of shares of
Common Stock, Junior Dividend Stock or Junior Liquidation Stock, as the case may
be, outstanding immediately prior to such transaction or series of related
transactions or (y) 1.0% of the number of shares of Common Stock, Junior
Dividend Stock or Junior Liquidation Stock, as the case may be, outstanding
immediately prior to such transaction or series of related
A-2
<PAGE>
transactions if such transaction or series of related transactions is with any
one person or group of affiliated persons, unless the Corporation or such
subsidiary offers to purchase for cash from each holder of shares of Series C
Convertible Preferred Stock at the time of such redemption, repurchase or
acquisition the same percentage of such holder's shares of Series C Convertible
Preferred Stock as the percentage of the number of outstanding shares of Common
Stock, Junior Dividend Stock or Junior Liquidation Stock, as the case may be, to
be so redeemed, repurchased or acquired at a purchase price per share of Series
C Convertible Preferred Stock equal to the sum of (x) $27.50 and (y) an amount
equal to the accrued but unpaid dividends on such share of Series C Convertible
Preferred Stock.
(c). Neither the Corporation nor any subsidiary of the Corporation shall
(1) make any tender offer or exchange offer (a "Tender Offer") for outstanding
shares of Common Stock unless the Corporation contemporaneously therewith makes
an offer, or (2) enter into an agreement regarding a Tender Offer for
outstanding shares of Common Stock by any person other than the Corporation or
any subsidiary of the Corporation, unless such person agrees with the
Corporation to make an offer, in either such case to each holder of outstanding
shares of Series C Convertible Preferred Stock to purchase for cash at the time
of purchase in such Tender Offer the same percentage of shares of Series C
Convertible Preferred Stock held by such holder as the percentage of outstanding
shares of Common Stock offered to be purchased in such Tender Offer at a price
per share of Series C Convertible Preferred Stock equal to the sum of (x) $27.50
and (y) an amount equal to the accrued but unpaid dividends on such share of
Series C Convertible Preferred Stock.
Section 3. Liquidation Preference.
In the event of a liquidation, dissolution, or winding up of the
Corporation, whether voluntary or involuntary, the holders of Series C
Convertible Preferred Stock shall be entitled to receive out of the assets of
the Corporation, whether such assets constitute stated capital or surplus of any
nature, an amount per share of Series C Convertible Preferred Stock equal to the
sum of (i) all dividends accrued and unpaid thereon to the date of final
distribution to such holders and (ii) $27.50 (collectively, the "Liquidation
Preference"), and no more, before any payment shall be made or any assets
distributed to the holders of Common Stock or any other class or series of the
Corporation's capital stock ranking junior as to liquidation rights to the
Series C Convertible Preferred Stock (collectively, the "Junior Liquidation
Stock"); provided, however, that such rights shall accrue to the holders of
Series C Convertible Preferred Stock only in the event that the Corporation's
payments with respect to the liquidation preference of any holders of capital
stock of the Corporation ranking senior as to liquidation rights to the Series C
Convertible Preferred Stock (the "Senior Liquidation Stock") are fully met.
After the liquidation preferences of any Senior Liquidation Stock are fully met,
the entire assets of the Corporation available for distribution shall be
distributed ratably among the holders of the Series C Convertible Preferred
Stock and any other class or series of the Corporation's capital stock having
parity as to liquidation rights with the Series C Convertible Preferred Stock
(the "Parity Liquidation Stock") in proportion to the respective preferential
amounts to which each is entitled (but only to the extent of such preferential
amounts). After payment in full of the liquidation price of the shares of the
Series C Convertible Preferred Stock and any Parity Liquidation Stock, the
holders of such shares shall not be entitled to any further participation in any
distribution of assets by the Corporation. Neither a consolidation or merger of
the Corporation with another corporation nor a sale or transfer of all or part
of the Corporation's assets for cash, securities, or other property in and of
itself will be considered a liquidation, dissolution, or winding up of the
Corporation.
Section 4. No Sinking Fund.
The shares of Series C Convertible Preferred Stock shall not be subject to
the operation of a purchase, retirement, or sinking fund.
Section 5. Optional Redemption.
At any time after the one year anniversary of the Issuance Date (as defined
in Section 6(b)) or at any time after the Issuance Date so long as the Market
Price (as defined below) of the Corporation's Common Stock shall have been in
excess of 125% of $2.75, but in each case, only if the Corporation is in
compliance
A-3
<PAGE>
in all material respects with all of its obligations to the holders of shares of
Series C Convertible Preferred Stock, the Corporation shall have the right,
exercisable on not less than 30 days nor more than 60 days written notice to the
holders of record of the shares of Series C Convertible Preferred Stock to be
redeemed, to redeem all, and from time to time to redeem any part of not less
than 1,000 shares (or such lesser number of shares of Series C Convertible
Preferred Stock as shall remain outstanding at the time of exercise of such
redemption right), of the Series C Convertible Preferred Stock in accordance
with this Section 5. Any notice of redemption (a "Notice of Redemption") under
this Section shall be delivered to the holders of the shares of Series C
Convertible Preferred Stock at their addresses appearing on the records of the
Corporation; provided, however, that any failure or defect in the giving of
notice to any such holder shall not affect the validity of notice to or the
redemption of shares of Series C Convertible Preferred Stock of any other
holder. Any Notice of Redemption shall state (1) that the Corporation is
exercising its right to redeem all or a portion of the outstanding shares of
Series C Convertible Preferred Stock pursuant to this Section 5, (2) the number
of shares of Series C Convertible Preferred Stock held by such holder which are
to be redeemed, (3) the calculation of the Redemption Price (as defined below)
per share of Series C Convertible Preferred Stock determined in accordance
herewith, and (4) the date of redemption of such shares of Series C Convertible
Preferred Stock, determined in accordance with this Section (the "Redemption
Date"). On the Redemption Date and after receipt by the Corporation of
certificates for shares of Series C Preferred Stock to be redeemed pursuant to
this Section 5, the Corporation shall make payment of the applicable Redemption
Price to each holder of shares of Series C Convertible Preferred Stock to be
redeemed to or upon the order of such holder as specified by such holder in
writing to the Corporation at least one business day prior to the Redemption
Date. If the Corporation exercises its right to redeem all or a portion of the
outstanding shares of Series C Convertible Preferred Stock, the Corporation
shall make payment to the holders of the shares of Series C Convertible
Preferred Stock to be redeemed in respect of each share of Series C Convertible
Preferred Stock to be redeemed of an amount equal to the Redemption Price. Upon
redemption of less than all of the shares of Series C Convertible Preferred
Stock evidenced by a particular certificate, promptly, but in no event later
than three business days after surrender of such certificate to the Corporation,
the Corporation shall issue and deliver to the holder of record of the
surrendered certificate (or such holder's assignee) a replacement certificate
for the shares of Series C Convertible Preferred Stock that have not been
redeemed. Only whole shares of Series C Convertible Preferred Stock may be
redeemed. If the Corporation exercises its right to redeem less than all
outstanding shares of Series C Convertible Preferred Stock, then such redemption
shall be made, as nearly as practical, pro rata among the holders of record of
the Series C Convertible Preferred Stock. No share of Series C Convertible
Preferred Stock as to which the holder exercises the right of conversion
pursuant to Section 6 may be redeemed by the Corporation pursuant to this
Section 5 on or after the date of exercise of such conversion right unless the
Notice of Redemption shall have been given prior to the date of exercise of such
conversion right.
If a Notice of Redemption shall have been given as provided in this Section
5, then each holder of shares of Series C Convertible Preferred Stock called for
redemption shall be entitled to all relative rights accorded by this resolution,
except as described in the next two sentences, until and including the
Redemption Date. The right to convert pursuant to Section 6 hereof for any
shares called for redemption shall terminate on the close of business on the
business day immediately prior to the date on which the Notice of Redemption
shall have been given for such shares (unless the Corporation shall default in
paying the Redemption Price on the Redemption Date). Shares of Series C
Convertible Preferred Stock that have been called for redemption shall not be
deemed to be outstanding shares for the purpose of voting or determining the
total number of shares entitled to vote on any matter on and after the Notice of
Redemption has been given to the holders thereof and a sum sufficient to redeem
such shares has been irrevocably deposited or set aside to pay the Redemption
Price to the holders of the shares upon surrender of certificates therefor. From
and after the Redemption Date, the shares of Series C Convertible Preferred
Stock called for redemption shall no longer be deemed to be outstanding, and all
rights of holders of such shares shall cease and terminate (unless the
Corporation shall default in making payment of the Redemption Price), except for
the right of holders of such shares, upon surrender of the certificate or
certificates therefor, to receive the Redemption Price thereof, without
interest. The deposit in trust of the Redemption Price shall be irrevocable
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except that (i) the Corporation shall be entitled to receive the interest, if
any, allowed on any money so deposited, and the holders of any redeemed shares
shall have no claim to such interest and (ii) any balance of moneys so deposited
by the Corporation and unclaimed by the holders of shares of Series C
Convertible Preferred Stock entitled thereto at the expiration of one year from
the Redemption Date shall be repaid, together with any interest thereon, to the
Corporation and, after any such repayment, the holders of the shares entitled to
the funds so repaid to the Corporation shall look only to the Corporation for
payment, without interest.
As used in this resolution, "Market Price" shall mean the current market
price per share of Common Stock on any date and shall be deemed to be the
average of the highest closing sales prices for 20 of 30 consecutive trading
days before the day in question. The closing sales price for each day shall be
(i) the last reported sales price or, in case no such reported sale takes place
on such day, the average of the reported closing bid and asked prices, in either
case on the principal national securities exchange on which the Common Stock is
listed or admitted to trading or (ii) if not listed or admitted to trading on
any national securities exchange, the closing sales price as reported by The
Nasdaq Stock Market, Inc. or, if such firm at the time is not engaged in the
business of reporting such prices, as furnished by any similar firm then engaged
in such business as selected by the Board of Directors.
As used in this resolution, "Redemption Price" means the sum of (i) an
amount equal to the accrued but unpaid dividends on such share of Series C
Convertible Preferred Stock and (ii) for a Redemption Date occurring during each
of the 12-month periods beginning on June 1:
REDEMPTION
YEAR AMOUNT
- ------------------------------------- -----------
1998................................. $ 28.875
1999................................. $ 28.1875
2000 and thereafter.................. $ 27.50
Section 6. Conversion.
(a) At any time after the Issuance Date, the holders of the Series C
Convertible Preferred Stock may convert any or all of their shares of Series C
Convertible Preferred Stock into fully paid and nonassessable shares of Common
Stock and such other securities and property as hereinafter provided. Each share
of Series C Convertible Preferred Stock may be converted at the office of the
conversion agent for the Series C Convertible Preferred Stock that was appointed
prior to issuance of the shares of Series C Convertible Preferred Stock or at
such other additional office or offices, if any, as the Board of Directors may
designate, initially into such number of fully paid and nonassessable shares of
Common Stock (calculated as to each conversion to the nearest 1/100th of a
share) determined by dividing (x) the sum of (i) the Conversion Amount and (ii)
accrued but unpaid dividends to the applicable Conversion Date on the share of
Series C Convertible Preferred Stock being converted, by (y) $2.75 (subject to
equitable adjustments for stock splits, stock dividends, combinations,
recapitalizations, reclassifications and similar events occurring on or after
the date of filing of this Statement of Rights and Preferences with the
Secretary of State of the State of Texas), in each case subject to adjustment as
hereinafter provided (the "Conversion Rate").
(b) Certain Definitions.
As used herein, the "Conversion Amount" shall be equal to $27.50, subject
to adjustment as provided in Section 10.
As used herein, "Conversion Date" shall mean the date on which the notice
of conversion is actually received by the conversion agent, whether by mail,
courier, personal service, facsimile or other means, with respect to a
conversion at the option of the holder pursuant to Section 6(a).
As used herein, "Issuance Date" means the first date of original issuance
of any shares of Series C Convertible Preferred Stock.
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(c). Other Provisions.
(1). The holders of shares of Series C Convertible Preferred Stock at the
close of business on the record date for any dividend payment to holders of
Series C Convertible Preferred Stock who have surrendered shares of Series C
Convertible Preferred Stock for conversion during the period between the close
of business on any record date for a dividend payment and the opening of
business on the corresponding dividend payment date shall not be entitled to
receive the dividend payable on such shares on the corresponding dividend
payment date notwithstanding the conversion thereof after such dividend payment
record date or the Corporation's default in payment of the dividend due on such
dividend payment date. A holder of shares of Series C Convertible Preferred
Stock on a record date for a dividend payment who (or whose transferee) tenders
any of such shares for conversion into shares of Common Stock on or after such
dividend payment date will receive the dividend payable by the Corporation on
such shares of Series C Convertible Preferred Stock on such date, and the
converting holder need not make any payment of the amount of such dividend in
connection with such conversion of shares of Series C Convertible Preferred
Stock. Except as provided above, no adjustment shall be made in respect of cash
dividends on Common Stock or Series C Convertible Preferred Stock that may be
accrued and unpaid at the date of surrender of shares of Series C Convertible
Preferred Stock.
(2). To convert shares of Series C Convertible Preferred Stock into Common
Stock, the holder thereof shall (i) surrender the certificate or certificates
for such shares of Series C Convertible Preferred Stock, duly endorsed to the
Corporation in blank, to the Corporation at its principal office (currently
located at 1250 Wood Br. Pk. Drive, EqualNet Plaza, Houston, Texas 77079) or at
the office of the agency maintained for that purpose, (ii) give written notice
(the "Conversion Notices") to the Corporation at such office that such holder
elects to convert shares of Series C Convertible Preferred Stock and specifying
the number of shares to be converted, and (iii) state in such written notice the
name or names in which such holder wishes the certificate or certificates for
shares of Common Stock to be issued. The Corporation shall notify a holder who
has given a Conversion Notice of any claim of error in such Conversion Notice
within two business days after such holder gives such Conversion Notice and no
such claim of error shall limit or delay performance of the Corporation's
obligation to issue upon such conversion the number of shares of Common Stock
that are not in dispute. A Conversion Notice shall be deemed to be in proper
form unless the Corporation notifies a holder of shares of Series C Convertible
Preferred Stock being converted within two business days after a Conversion
Notice has been received (which notice shall specify all defects in the
Conversion Notice) and any Conversion Notice containing any such defect shall
nonetheless be effective on the date given if the converting holder promptly
undertakes in writing to correct all such defects. Each conversion shall be
deemed to have been effected at the close of business on the date on which the
Corporation or such agency shall have received such surrendered Series C
Convertible Preferred Stock certificate or certificates, and the person or
persons in whose name or names any certificate or certificates for shares of
Common Stock shall be issuable upon such conversion shall be deemed to have
become the record holder or holders of the shares represented thereby at such
time. As soon as practicable, but in any event within five business days after
such conversion, the Corporation shall issue or deliver at such office to the
holder for whose account such shares of Series C Convertible Preferred Stock
were so surrendered, or to such holder's nominee or nominees, certificates
(bearing such legends as may be required under applicable state or federal
securities laws) for the number of full shares of Common Stock to which such
holder shall be entitled, plus, in lieu of any fractional share to which such
holder would otherwise be entitled, cash equal to such fraction multiplied by
the arithmetic average of the Market Price of a share of Common Stock on the
three consecutive trading days ending on the trading day immediately preceding
the Conversion Date. Upon conversion of only a portion of the number of shares
covered by a certificate representing shares of Series Convertible Preferred
Stock surrendered for conversion, the Corporation shall issue and deliver to or
upon the written order of the holder of the certificate so surrendered for
conversion, at the expense of the Corporation, a new certificate covering the
number of unconverted shares of Series C Convertible Preferred Stock represented
by the surrendered certificate. The holder of any shares of Series C Convertible
Preferred Stock converting such shares shall pay any tax arising in connection
with such conversion. Upon any
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change in the address of the principal office of the Corporation, the
Corporation shall give notice thereof to each holder of shares of Series C
Preferred Stock.
(3). The Corporation (and any successor corporation) shall take all action
necessary so that a number of shares of the authorized but unissued Common Stock
(or common stock in the case of any successor corporation) sufficient to provide
for the conversion of the Series C Convertible Preferred Stock outstanding upon
the basis hereinbefore provided are at all times reserved by the Corporation (or
any successor corporation), free from preemptive rights, for such conversion,
subject to the provisions of the next succeeding paragraph. If the Corporation
shall issue any securities or make any change in its capital structure that
would change the number of shares of Common Stock into which each share of the
Series C Convertible Preferred Stock shall be convertible as herein provided,
the Corporation shall at the same time also make proper provision so that
thereafter there shall be a sufficient number of shares of Common Stock
authorized and reserved, free from preemptive rights, for conversion of the
outstanding Series C Convertible Preferred Stock on the new basis. If at any
time the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all of the outstanding shares of Series C
Convertible Preferred Stock, the Corporation promptly shall take such corporate
action as may, in the opinion of its counsel, be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares as shall
be sufficient for such purpose.
(4). In case of any consolidation or merger of the Corporation with any
other corporation in which the Corporation is not the surviving corporation, or
in case of any sale or transfer of all or substantially all of the assets of the
Corporation, or in the case of any share exchange pursuant to which all of the
outstanding shares of Common Stock are converted into other securities or
property, the Corporation shall make appropriate provision or cause appropriate
provision to be made so that each holder of shares of Series C Convertible
Preferred Stock then outstanding shall have the right thereafter to convert such
shares of Series C Convertible Preferred Stock into the kind of shares of stock
and other securities and property receivable upon such consolidation, merger,
sale, transfer, or share exchange by a holder of shares of Common Stock into
which such shares of Series C Convertible Preferred Stock could have been
converted immediately prior to the effective date of such consolidation, merger,
sale, transfer, or share exchange and on a basis which preserves the economic
benefits of the conversion rights of the holders of shares of Series C
Convertible Preferred Stock on a basis as nearly as practical as such rights
exist hereunder prior thereto. If, in connection with any such consolidation,
merger, sale, transfer, or share exchange, each holder of shares of Common Stock
is entitled to elect to receive securities, cash, or other assets upon
completion of such transaction, the Corporation shall provide or cause to be
provided to each holder of Series C Convertible Preferred Stock the right to
elect the securities, cash, or other assets into which the Series C Convertible
Preferred Stock held by such holder shall be convertible after completion of any
such transaction on the same terms and subject to the same conditions applicable
to holders of the Common Stock (including, without limitation, notice of the
right to elect, limitations on the period in which such election shall be made,
and the effect of failing to exercise the election). The Corporation shall not
effect any such transaction unless the provisions of this paragraph have been
complied with. The above provisions shall similarly apply to successive
consolidations, mergers, sales, transfers, or share exchanges.
(5). If a holder shall have given a Conversion Notice for shares of Series
C Convertible Preferred Stock, the Corporation shall issue and deliver to such
person certificates for the Common Stock issuable upon such conversion within
five business days after such Conversion Notice is received and the person
converting shall be deemed to be the holder of record of the Common Stock
issuable upon such conversion as of the date of receipt, and any rights with
respect to the shares surrendered shall forthwith terminate except the right to
receive the Common Stock or other securities, cash or other assets as herein
provided. If a holder shall have given a Conversion Notice as provided herein,
the Corporation's obligation to issue and deliver the certificates for Common
Stock shall be absolute and unconditional, irrespective of any action or
inaction by the converting holder to enforce the same, any waiver or consent
with respect to any provision thereof, the recovery of any judgment against any
person or any action to enforce the same, any failure or delay in the
enforcement of any other obligation of the Corporation to the holder of record,
or any set off, counterclaim, recoupment, limitation or termination, or breach
or alleged breach by the holder of any
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obligation to the Corporation, and irrespective of any other circumstance that
might otherwise limit such obligation of the Corporation to the holder in
connection with such conversion. If the Corporation fails to issue and deliver
the certificates for the Common Stock to the holder converting shares of Series
C Convertible Preferred Stock pursuant to the first sentence of this paragraph
as and when required to do so, in addition to any other liabilities the
Corporation may have hereunder and under applicable law, such holder may by
written notice (which may be given by mail, courier, personal service or
facsimile) given at any time prior to delivery to such holder of the
certificates for the shares of Common Stock issuable upon such conversion of
shares of Series C Convertible Preferred Stock, rescind such conversion,
whereupon such holder shall have the right to convert such shares of Series C
Convertible Preferred Stock thereafter in accordance herewith.
(6). Notwithstanding anything in this Section 6(c) to the contrary, no
change in the Conversion Amount pursuant to Section 6(c) shall actually be made
until the cumulative effect of the adjustments called for by this Section 6(c)
since the date of the last change in the Conversion Amount would change the
Conversion Amount by more than 1%. However, once the cumulative effect would
result in such a change, then the Conversion Amount shall actually be changed to
reflect all adjustments called for by this Section 6(c) and not previously made.
Notwithstanding anything in this Section 6(c), no change in the Conversion
Amount shall be made that would result in a Conversion Amount of less than the
par value of the Common Stock into which shares of Series A Convertible
Preferred Stock are at the time convertible.
(7). No fractional shares of Common Stock shall be issued upon conversion
of Series A Convertible Preferred Stock but, in lieu of any fraction of a share
of Common Stock that would otherwise be issuable in respect of the aggregate
number of such shares surrendered for conversion at one time by the same holder,
the Corporation shall pay in cash an amount equal to the product of (i) the
arithmetic average of the Market Price of a share of Common Stock on the three
consecutive trading days ending on the trading day immediately preceding the
Conversion Date and (ii) such fraction of a share.
(8). The Conversion Amount shall be adjusted from time to time under
certain circumstances, subject to the provisions of Section 6(c)(7), as follows:
(i) In case the Corporation shall issue rights or warrants on a pro
rata basis to all holders of the Common Stock on a given record date
entitling such holders to subscribe for or purchase Common Stock at a price
per share less than the average daily Market Prices of the Common Stock on
the 30 consecutive trading days commencing 45 trading days before such
record date (the "Current Market Price"), then in each such case the
Conversion Amount in effect on such record date shall be adjusted in
accordance with the formula
C1 = C x O + N
------------------
O + N x P/M
where
C1 = the adjusted Conversion Amount
C = the current Conversion Amount
O = the number of shares of Common Stock
outstanding on the record date.
N = the number of additional shares of
Common Stock issuable pursuant to the
exercise of such rights or warrants.
P = the offering price per share of the
additional shares (which amount shall
include amounts received by the
Corporation in respect of the
issuance and the exercise of such
rights or warrants).
M = the Current Market Price per share of
Common Stock on the record date.
Such adjustment shall become effective immediately after the record date
for the determination of shareholders entitled to receive such rights or
warrants. If any or all such rights or warrants are not so issued or expire or
terminate before being exercised, the Conversion Amount then in effect shall be
readjusted appropriately.
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(ii) In case the Corporation shall, by dividend or otherwise,
distribute to all holders of its Junior Stock (as defined below) evidences
of its indebtedness or assets (including securities, but excluding any
rights or warrants referred to in subparagraph (i) above and any dividend
or distribution paid in cash out of the retained earnings of the
Corporation), then in each such case the Conversion Amount then in effect
shall be adjusted in accordance with the formula
C1 = C x M
---------------
M -- F
where
C1 = the adjusted Conversion Amount
C = the current Conversion Amount
M = the Current Market Price per share of
Common Stock on the record date
mentioned below
F = (i) the aggregate amount of such cash
dividend and/or the fair market value
on the record date of the assets or
securities to be distributed divided
by (ii) the number of shares of
Common Stock outstanding on the
record date. The Board of Directors
shall determine such fair market
value, which determination shall be
conclusive.
Such adjustment shall become effective immediately after the record date
for the determination of shareholders entitled to receive such dividend or
distribution. For purposes of this subparagraph (ii), "Junior Stock" shall
include any class of capital stock ranking junior as to dividends or upon
liquidation to the Series C Convertible Preferred Stock.
(iii) All calculations hereunder shall be made to the nearest cent or
to the nearest 1/100 of a share, as the case may be.
(iv) If at any time as a result of an adjustment made pursuant to
Section 6(c)(4), the holder of any Series C Convertible Preferred Stock
thereafter surrendered for conversion shall become entitled to receive
securities, cash, or assets other than Common Stock, the number or amount
of such securities or property so receivable upon conversion shall be
subject to adjustment from time to time in a manner and on terms nearly
equivalent as practicable to the provisions with respect to the Common
Stock contained in subparagraphs (i) to (iii) above.
(9). Except as otherwise provided above in this Section 6, no adjustment
in the Conversion Amount shall be made in respect of any conversion for share
distributions or dividends theretofore declared and paid or payable on the
Common Stock.
(10). Whenever the Conversion Amount is adjusted as herein provided, the
Corporation shall send to each holder and each transfer agent, if any, for the
Series C Convertible Preferred Stock and the Common Stock, a statement signed by
the Chairman of the Board, the President, or any Vice President of the
Corporation and by its Treasurer or its Secretary or an Assistant Secretary
stating the adjusted Conversion Amount determined as provided in this Section 6,
and any adjustment so evidenced, given in good faith, shall be binding upon all
shareholders and upon the Corporation. Whenever the Conversion Amount is
adjusted, the Corporation will give notice by mail to the holders of record of
Series C Convertible Preferred Stock, which notice shall be made within 15 days
after the effective date of such adjustment and shall state the adjustment and
the Conversion Amount. Notwithstanding the foregoing notice provisions, failure
by the Corporation to give such notice or a defect in such notice shall not
affect the binding nature of such corporate action of the Corporation.
(11). Whenever the Corporation shall propose to take any of the actions
specified in Section 6(c)(4) or in subparagraphs (i) or (ii) of Section 6(c)(8)
that would result in any adjustment in the Conversion Amount under this Section
6(c), the Corporation shall cause a notice to be mailed at least 20 days prior
to the date on which the books of the Corporation will close or on which a
record will be taken for such action, to the holders of record of the
outstanding Series C Convertible Preferred Stock on the date of such notice.
Such notice shall specify the action proposed to be taken by the Corporation and
the date as of which holders of record of the Common Stock shall participate in
any such actions or be entitled to exchange their
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Common Stock for securities or other property, as the case may be. Failure by
the Corporation to mail the notice or any defect in such notice shall not affect
the validity of the transaction.
(12). No conversion shall be effected until the expiration or termination
of the waiting period imposed by the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended, if that act is applicable to the conversion.
Section 7. Voting Rights.
Except as otherwise required by law or expressly provided herein, shares of
Series C Convertible Preferred Stock shall not be entitled to vote on any
matter.
The affirmative vote or consent of the holders of a majority of the
outstanding shares of the Series C Convertible Preferred Stock voting separately
as a class, will be required for (1) any amendment, alteration, or repeal,
whether by merger or consolidation or otherwise, of the Corporation's Articles
of Incorporation if the amendment, alteration, or repeal materially and
adversely affects the powers, preferences, or special rights of the Series C
Convertible Preferred Stock, (2) the waiver of any preference, right, privilege
or power of the Series C Convertible Preferred Stock or any term or condition
pertaining thereto, or (3) the creation and issuance of any Senior Dividend
Stock Senior Liquidation Stock, Parity Dividend Stock or Parity Liquidation
Stock; provided, however, that any increase in the authorized preferred stock of
the Corporation or the creation and issuance of any stock which is both Junior
Dividend Stock and Junior Liquidation Stock shall not be deemed to affect
materially and adversely such powers, preferences, or special rights and any
such increase or creation and issuance may be made without any such vote by the
holders of Series C Convertible Preferred Stock except as otherwise required by
law.
Section 8. Outstanding Shares.
For purposes of this resolution, all shares of Series C Convertible
Preferred Stock shall be deemed outstanding except (i) from the date of receipt
by the Corporation of a Conversion Notice requesting that Series C Convertible
Preferred Stock be converted into Common Stock, all shares of Series C
Convertible Preferred Stock that are so converted into Common Stock; (ii) from
the date of registration of transfer, all shares of Series C Convertible
Preferred Stock held of record by the Corporation or any subsidiary of the
Corporation, and (iii) from the Redemption Date, all shares of Series C
Convertible Preferred Stock that are redeemed, so long as the Redemption Price
of such shares of Series C Convertible Preferred Stock shall have been paid by
the Corporation as and when required hereby.
Section 9. Amendment Upon Conversion or Redemption of Outstanding Shares.
When, as a result of the conversion or redemption of the Series C
Convertible Preferred Stock, no shares of Series C Convertible Preferred Stock
remain outstanding, the Board of Directors may, at its discretion and without a
vote of the shareholders of the Corporation, withdraw this designation in its
entirety by providing for the filing of an applicable amendment or restatement
of the Corporation's Articles of Incorporation, and the Series C Convertible
Preferred Stock designated hereby shall thereby return to the status of
authorized but unissued and undesignated shares of Preferred Stock of the
Corporation.
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
affixed and this certificate to be signed by a duly authorized officer this 12th
day of June, 1998.
EQUALNET HOLDING CORP.
By: /s/ ROBERT H. TURNER
Robert H. Turner
Chief Executive Officer
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ANNEX B
PURCHASE AGREEMENT
PURCHASE AGREEMENT, dated as of January 15, 1998 among EQUALNET
CORPORATION, a Delaware corporation ("BUYER"), EQUALNET HOLDING CORP., a Texas
corporation ("EQUALNET"), and SA TELECOMMUNICATIONS, INC., a Delaware
corporation ("SA TELECOM"), and its subsidiaries named on the signature page
hereof (collectively, "SELLERS").
R E C I T A L S
A. Sellers are full service regional interexchange carriers providing long
distance telecommunication services (the "SERVICES") in the west, southwest and
south central United States, including domestic long distance services,
wholesale long distance services, operator and wireless services, voice and data
private lines, "800/888" services, internet access and telephone travel cards.
B. Sellers provide the Services through a network of owned and leased
switching and transmission facilities (the "NETWORK FACILITIES") consisting of
equipment, switches, software and line capacity (the Services and the Network
Facilities collectively, the "BUSINESS").
C. On November 19, 1997 (the "Petition Date") Sellers filed petitions for
relief under Chapter 11 of title 11 of the United States Code, as amended (the
"BANKRUPTCY CODE"), in the United States Bankruptcy Court for the District of
Delaware (the "BANKRUPTCY Court"), Case Nos. 97-2395 through 97-2401 (PJW).
D. Sellers have determined that it is in their best interests to sell to
Buyer, and for Buyer to purchase from Sellers, pursuant to Section 363(b) of the
Bankruptcy Code, specified assets and rights of Sellers described herein for the
consideration and upon the terms and conditions hereinafter set forth, and Buyer
is willing, in connection with its purchase of the Assets, to assume certain
liabilities and obligations of Sellers, all on the terms and conditions set
forth below.
E. Buyer is a wholly owned subsidiary of EqualNet.
ACCORDINGLY, in consideration of the mutual benefits to be derived from
this Agreement and the representations, warranties, covenants and agreements
contained herein, the parties hereto represent, warrant, covenant and agree as
follows:
Section I. As used herein the following terms shall have the respective
meanings set forth for such terms in this Section 1 or elsewhere in this
Agreement:
"ADJUSTED PRE-CLOSING MONTHLY MINUTES" shall mean (i) the
Pre-Closing Monthly Minutes multiplied by (ii) the seasonality factor referred
to in clause (ii) of the definition of the term Revenue Amount.
"ASSETS" shall have the meaning specified in Section 3(a).
"ASSUMED LIABILITIES" shall have the meaning specified in
Section 3(c).
"BANKRUPTCY CASES" shall mean the cases under Chapter 11 of the
Bankruptcy Code commenced by the Debtors in the Bankruptcy Court (Case Nos.
97-2395 through 97-2401 (PJW)) and any cases under Chapter 7 of the Bankruptcy
Code to which any such cases are converted.
"BANKRUPTCY CODE" and "BANKRUPTCY COURT" shall have the meanings
specified in Recital C hereto.
"BANKRUPTCY RULES" shall mean the Federal Rules of Bankruptcy
Procedure.
"BILLABLE MINUTE" shall mean (i) prior to the Closing Date, all
billable minutes generated by Sellers' Business and (ii) after the Closing Date,
all billable minutes generated by the Subscribers, in each case as measured by
call detail records supplied by switch tapes and carrier tapes.
"BREAK-UP FEE" shall have the meaning specified in Section 14(b).
"BUSINESS" shall have the meaning specified in the Recitals hereto.
"BUYER" shall mean EqualNet Corporation, a Delaware corporation.
"BUYER'S AUDITOR" and "BUYER'S AUDITOR CERTIFICATE" shall have the
respective meanings specified in Section 5(a)(ii).
"CLOSING" and "CLOSING DATE" shall have the meanings specified in
Section 4(a).
"CLOSING DATE MARKET VALUE" shall mean, with respect to the Common
Stock, the average of the last sale price of shares of the Common Stock on the
five (5) business days ending on the third business day immediately preceding
the Closing Date.
"COMMON STOCK" shall mean the common stock, par value $.01 per
share, of EqualNet.
"CONFIDENTIALITY AGREEMENT" shall have the meaning specified in
Section 9(c).
"CONSIDERATION" shall have the meaning specified in Section 3(d).
"CONVERSION RATE" shall mean the number of shares of Common Stock
that the holder of Preferred Shares shall receive upon conversion of one
Preferred Share, as set forth below (subject to adjustment as set forth in the
Preferred Stock Provisions for the effect of dilutive and concentrative events
affecting the Common Stock). If the Closing Date Market Value of Common Stock is
less than or equal to $2.07 per share, one Preferred Share shall be convertible
into ten shares of the Common Stock. If the Closing Date Market Value of the
Common Stock is greater than $2.07 per share, one Preferred Share shall be
convertible into the number of shares of the Common Stock equal to the product
of (i) ten and (ii) a fraction, the numerator of which is equal to $2.75 and the
denominator of which is equal to 133% of the Closing Date Market Value.
"CREDITORS' COMMITTEE" shall mean the Official Unsecured Creditors'
Committee appointed in the Bankruptcy Cases.
"CURE AMOUNTS" shall mean all monetary amounts which the Bankruptcy
Court finds are required to cure monetary defaults under the Designated
Contracts so as to permit Sellers to assume the Designated Contracts pursuant to
Section 365(b)(1) of the Bankruptcy Code and to assign them to Buyer under
Section 365(f) of the Bankruptcy Code.
"DAMAGES" means, as to any party, all claims, actions, losses,
damages, costs (including, without limitation, costs of investigation), expenses
and liabilities (including reasonable attorneys' fees incident to the
foregoing), incurred or suffered by such party.
"DESIGNATED CONTRACTS" shall have the meaning specified in clause
(iii) of Section 3(a).
"DESIGNATED PERMITS" shall have the meaning specified in clause (iv)
of Section 3(a).
"DESIGNEE" shall have the meaning specified in Section 3(e).
"DIP FINANCING" shall mean the Greyrock Financing and the Willis
Group DIP Financing.
"DIP FINANCING DOCUMENTS" shall mean all agreements, instruments,
stipulations and Bankruptcy Court orders pursuant to which the DIP Financing is
extended, evidenced and authorized.
"DISPUTE AUDITOR" and "DISPUTE AUDITOR'S CERTIFICATE" shall have the
respective meanings specified in Section 5(a)(iii).
"EMPLOYEE BENEFIT PLAN" shall mean any "employee pension benefit
plan", "employee benefit plan" or "employee welfare plan" as defined in Sections
3(1) or 3(3) of ERISA including any multiemployer employee benefit plan.
"EQUALNET" shall mean EqualNet Holding Corp., a Texas corporation.
"EQUALNET PARTY" shall mean Buyer or EqualNet.
"ERISA" shall mean the Employee Retirement Security Act of 1974, as
amended, and all regulations issued thereunder.
"ESCROW AGENT", "ESCROW AGREEMENT" and "ESCROWED SHARES" shall have
the meanings specified in Section 4(d).
"EXCLUDED ASSETS" shall have the meaning specified in Section 3(b).
"EXCLUDED LIABILITIES" shall mean all liabilities and obligations of
Sellers other than the Assumed Liabilities.
"EXCLUDED RECEIVABLES" shall have the meaning specified in the DIP
Financing Documents.
"FCC" shall mean the Federal Communications Commission.
"FINAL AUDITOR'S CERTIFICATE" shall mean (a) the Sellers'
Auditor Certificate if no Buyer's Notice of Disagreement is delivered, (b) the
Buyer's Auditor Certificate if a Buyer's Notice of Disagreement is delivered but
no Sellers' Notice of Disagreement is delivered, and (c) the Dispute Auditor's
Certificate if both a Buyer's Notice of Disagreement and a Sellers' Notice of
Disagreement is delivered.
"GAAP" shall mean generally accepted accounting principles in the
United States.
"GOVERNMENTAL ENTITY" shall mean any domestic or foreign court,
government, governmental agency, authority, entity or instrumentality.
"GREYROCK" shall mean Greyrock Business Credit, a division of
NationsCredit Commercial Corporation.
"GREYROCK FINANCING" shall mean the pre-petition and post-petition
financing provided by Greyrock to Sellers pursuant to that certain Loan and
Security Agreement, dated December 26, 1996, between Greyrock and Sellers, as
amended, restated or otherwise modified.
"INDEMNITOR" and "INDEMNITEE" shall have the respective meanings
specified in Section 16(e).
"INTANGIBLES" shall have the meaning specified in clause (v) of
Section 3(a).
"INTELLECTUAL PROPERTY" shall have the meaning specified in clause
(vi) Section 3(a).
"LEGAL PROCEEDINGS" shall mean any judicial, administrative,
regulatory or arbitral proceeding, investigation or inquiry or administrative
charge or complaint pending at law or in equity before any Governmental Entity.
"LEGAL REQUIREMENTS" shall have the meaning specified in
Section 7(g).
"LETTER OF INTENT" shall mean the Letter of Intent dated December
24, 1997, as amended by the Amendment to Letter of Intent dated as of January 7,
1998, among Sellers, EqualNet, the Willis Group and Greyrock.
"LIENS" shall mean liens, security interests, mortgages, pledges,
charges, claims, conditional sales arrangements, adverse interests (whether
legal or equitable) and other encumbrances of any kind.
"NETWORK FACILITIES" shall have the meaning specified in Recital B.
"PAYMENT ORDER" shall have the meaning specified in Section 6(a).
"PERMITTED LIENS" shall mean the Liens securing the DIP Financing
and any Liens to which any real estate owned by the Borrower is subject.
"PERSON" shall mean an individual corporation, partnership, trust,
limited liability company, Governmental Entity or other type of entity.
"PETITION DATE" shall have the meaning specified in Recital C.
"POST-PETITION OVERADVANCES" shall mean advances under the Greyrock
Financing after the Petition Date to the extent that after giving effect thereto
the principal amount of the DIP Financing exceeds the sum of (i) $1,276,031 plus
(ii) 80% of the Eligible Receivables (as defined in the DIP Financing Documents)
as of the date of any such advance.
"PRE-CLOSING MONTHLY MINUTES" and "POST-CLOSING MONTHLY MINUTES"
shall have the respective meanings specified in Section 5(b)(i).
"PREFERRED SHARES" shall mean the shares of Preferred Stock issued
to Sellers as part of the Consideration pursuant to Sections 3(d) and 5(a),
including the Escrowed Shares.
"PREFERRED STOCK" shall mean the Series B Convertible Preferred
Stock of EqualNet.
"PREFERRED STOCK PROVISIONS" shall mean the provisions of EqualNet's
Statement of Resolution Establishing Series B Convertible Preferred Stock
setting forth the terms of the Preferred Stock, which terms shall be consistent
with the terms specified for the Preferred Stock herein and in Exhibit A hereto.
"REVENUE AMOUNT" shall mean (i) the gross revenue of Sellers,
determined in accordance with GAAP, during the two calendar month period
immediately preceding the month in which the Closing occurs multiplied by (ii)
an adjustment factor mutually agreed to by the EqualNet Parties and Sellers to
reflect industry seasonality, such factor to be determined based on data
available from the FCC for interstate access minutes, by month, for Southwestern
Bell in Texas.
"SA TELECOM" shall mean SA Telecommunications, Inc., a Delaware
corporation.
"SALE ORDER" shall have the meaning specified in Section 10(a).
"SCHEDULING ORDER" shall have the meaning specified in Section 6(b).
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended.
"SELLERS" shall mean SA Telecom and its subsidiaries named on the
signature page hereof.
"SELLERS' AUDITOR" and "SELLERS' AUDITOR CERTIFICATE" shall have the
respective meanings specified in Section 5(a)(i).
"SELLERS' REVENUE AMOUNT CERTIFICATE" shall mean a certificate of SA
Telecom setting forth SA Telecom's determination of the Revenue Amount, subject
to the final determination thereof pursuant to Section 5(a).
"SPC" shall have the meaning specified in Section 9(j).
"SUBSCRIBERS" shall have the meaning specified in clause (i) of
Section 3(a).
"TRANSACTION DOCUMENTS" shall mean this Agreement, the Escrow
Agreement, the Confidentiality Agreement and all bills of sale, assignment
instruments and assumption instruments executed or delivered by the parties
hereto at the Closing.
"UPSET PRICE" shall have the meaning specified in Section 14(a).
"WILLIS GROUP" shall mean the Willis Group LLC, a Texas limited
liability company.
"WILLIS GROUP DIP FINANCING" shall mean the post-petition financing,
if any, provided by the Willis Group to Sellers.
Section II. RULES OF CONSTRUCTION, ETC.
(a) Unless the context otherwise requires, (i) all references to Sections,
Schedules or Exhibits are to Sections of or to Schedules or Exhibits to this
Agreement, (ii) each accounting term not otherwise defined in this Agreement has
the meaning assigned to it in accordance with GAAP, (iii) "or" is disjunctive
but not necessarily exclusive, and (iv) words in the singular include the plural
and vice versa. All references to "$" or dollar amounts will be to lawful
currency of the United States of America.
(b) No provision of this Agreement will be interpreted in favor of, or
against, any of the parties hereto by reason of the extent to which either such
party or its counsel participated in the drafting thereof.
(c) The Section headings and other captions contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
Section III. SALE AND PURCHASE
A. ASSETS. Subject to the terms and conditions hereof, on the Closing
Date, Sellers will sell, convey, transfer and deliver to Buyer, and Buyer will
purchase from Sellers, except as provided in Section 3(b), all of the assets of
Sellers' Business (collectively, the "ASSETS"), free and clear of liens,
encumbrances and claims other than Permitted Liens, including any and all of the
following assets:
1. SUBSCRIBERS. All of Sellers' rights and interests to all
accounts of subscribers to the Services of Sellers (collectively, the
"SUBSCRIBERS") as of the Closing Date;
2. all accounts receivable and notes receivable of Sellers (other
than Excluded Receivables specified in Section 3(b)(xi));
3. NETWORK FACILITIES. The Network Facilities of Sellers, as more
fully described in Schedule 3(a)(iii) (provided that to the extent the
Network Facilities are represented by contracts, said contracts shall not
be an Asset unless they are Designated Contracts);
4. CONTRACTS. All rights, title and interests of Sellers under the
leases, contracts and agreements specified in Schedule 3(a)(iv), to the
extent assignable pursuant to applicable law without regard to the consent
of any third party that may be required with respect to such assignment or
as to which such third party consents have been obtained (collectively,
the "DESIGNATED CONTRACTS");
5. PERMITS. All rights, title and interest of Sellers in and under
the licenses, permits, authorizations and approvals issued to Sellers by
any Governmental Entity and listed on Schedule 3(a)(v), but only to the
extent the same are assignable under applicable law (collectively, the
"DESIGNATED PERMITS");
6. INTANGIBLE TELECOMMUNICATIONS ASSETS. To the extent assignable,
all rights, title and interest of Sellers in and to the intangible
telecommunications assets owned or used by Sellers in connection with the
Business, including, telecommunications numbering codes, locating routing
codes and "800" and "888" numbers and other customer billing and inquiry
numbers, carrier identification codes and other operating codes,
including, without limitation, those listed or described on Schedule
3(a)(vi) (collectively, the "INTANGIBLES");
7. INTELLECTUAL PROPERTY. All rights, title and interest of Sellers
in and to all domestic and foreign letters patent, patents, patent
applications, patent licenses, software licenses and know-how licenses,
trade names, trademarks, registered copyrights, service marks, trademark
registrations and applications, service mark registrations and
applications and copyright registrations and applications, if any, owned
or used by Sellers and all trade secrets, technical knowledge, know-how
and other confidential proprietary information and related ownership, use
and other rights of Sellers, including, without limitation, those listed
or described on Schedule 3(a)(vii) (collectively, the "INTELLECTUAL
PROPERTY");
8. SELLERS' NAMES. All of Sellers' rights to use their corporate
names as well as the names "USC", "USI", "First Choice Long Distance",
"Southwest Long Distance Network", "Addtel", "SA Telecom" and any other
trade names used in Sellers' Business and any and all variants,
combinations and derivatives thereof, and any and all trademarks, service
marks, tradenames and copyrights which contain said names or any variants,
combinations and derivatives thereof; PROVIDED, HOWEVER, that Sellers
shall be entitled to continue to use their respective corporate name for
purposes of the Bankruptcy Cases and filing tax returns;
9. MANUFACTURERS WARRANTIES. All of Sellers' rights under
warranties, representations and guaranties made by suppliers and
manufacturers of the Assets or the Business;
10. BOOKS AND RECORDS. All of Sellers' existing books and records
relating to the foregoing Assets or the Business, including, but not
limited to, sales records, customer lists, customer folders and all
historical customer records and files which relate to the Business, but
excluding those books and records listed on Schedule 3(b)(x) or specified
in Section 3(b);
11. SHARES OF SPC. All shares of the capital stock of the SPC, if it
is established pursuant to Section 9(j); and
12. GOODWILL. All goodwill relating to the foregoing Assets and the
Business.
Buyer shall have the right, exercisable in writing prior to the Closing
Date, to exclude from the Assets any asset it elects, and specifically to
exclude from Designated Contracts any contract or lease it elects, but such
election shall not entitle Buyer to any adjustment in the Consideration.
B. EXCLUDED ASSETS. There are expressly excluded from the sale,
conveyance, transfer and delivery referred to in Section 3(a) above, and the
term "Assets" shall not include, the following assets of Sellers' Business (the
"EXCLUDED ASSETS"):
1. all cash and cash equivalent of Sellers;
2. all income tax refunds and income tax credits of Sellers;
3. all claims and causes of action of Sellers;
4. all claims and causes of action of Sellers' estates
arising under Sections 509, 510, 542 through 549, inclusive, 550, 552 or
553 of the Bankruptcy Code;
5. all assets excluded from the Assets by Buyer in
writing prior to the Closing Date;
6. all rights of Sellers under insurance policies and under
warranties (expressed or implied), representations and guaranties made by
suppliers, manufacturers and contractors relating to Excluded Assets or
any event, condition or occurrence that gives rise to a liability that is
not an Assumed Liability;
7. all capital stock and stock certificates of Sellers (other than
to the stock of the SPC and the certificates representing the same),
including all treasury stock and stock of subsidiaries;
8. the assets listed in Schedule 3(b)(viii); 9. the contracts and
leases listed in Schedule 3(b)(ix);
10. the books and records listed on Schedule 3(b)(x) and any other
books, records or other data relating to Sellers' ownership or operation
of the Business which are required by applicable law to be retained by
Sellers; PROVIDED, HOWEVER, that copies of such books, records and other
data relating to the Business shall be furnished to Buyer promptly upon
Buyer's written request; and
11. All Excluded Receivables more than 90 days past due as of the
Closing Date and Excluded Receivables 90 days or less past due as of the
Closing Date in an amount equal to the lesser of (A) 133% of the claims of
Zero Plus Dialing, Inc., d/b/a U.S. Billing ("ZPDI/USBI") against Sellers
as of the Closing Date for outstanding advances by ZPDI/USBI to Sellers in
respect of the Excluded Receivables and (B) the amount specified in
Schedule 3(b)(xi).
C. ASSUMPTION OF LIABILITIES. Subject to the terms and conditions hereof,
on the Closing Date Buyer shall assume and agree to pay, perform and discharge
(i) all liabilities arising out of, related to or incurred in connection with
the ownership of the Assets after the Closing Date; (ii) all liabilities and
obligations of each Seller (x) under all Designated Contracts and the other
Assets which accrue after the Closing Date and (y) in respect of all security
deposits, if any, of the Subscribers to be acquired hereunder; and (iii) all
liabilities and obligations of Sellers in respect of indebtedness accruing on or
before the Closing Date under the Greyrock Financing and all interest, costs and
attorneys' fees accruing under the Greyrock Financing after the Closing Date
(limited to principal (not to exceed $7,000,000), interest and costs and
attorneys' fees, provided that Buyer shall not be required to assume or pay (x)
any Post-Petition Overadvances or any interest thereon or (y) more than $100,000
of costs and attorneys' fees under the Greyrock Financing, other than any such
costs and expenses arising after the Closing Date and attributable to actions of
Buyer after the Closing Date, all at which shall be guarantied by EqualNet
pursuant to Greyrock's standard form guaranty) (all the foregoing herein
collectively called the "ASSUMED LIABILITIES"). Except as expressly provided in
this Section 3(c), Buyer will not assume or be bound by any liabilities or
obligations of Sellers.
D. CONSIDERATION. In addition to the assumption of the Assumed Liabilities
and subject to Section 4(d), the consideration to be paid or delivered by Buyer
to Sellers on the Closing Date for the Assets (the "CONSIDERATION") shall
consist of: (i) the payment and discharge by Buyer of all obligations of Sellers
on the Closing Date in respect of the outstanding principal amount of, and all
accrued and unpaid interest on, the Willis Group DIP Financing, if any; plus
(ii) a cash payment in an amount equal to the excess of $3,000,000 over the
outstanding principal amount of, and all accrued and unpaid interest on, the
Willis Group DIP Financing on the Closing Date; plus (iii) a cash payment in the
amount of $22,500 per calendar day for each day from January 30, 1998 through
the Closing Date (provided that the cash payment referred to in this clause
(iii) shall not exceed $472,500 in the aggregate and shall stop accruing on the
date following the satisfaction or waiver of all conditions precedent set forth
in Sections 10, 11 and 12); plus (iv) a promissory note (the "NOTE") to be
issued by Buyer in favor of Greyrock in an amount equal to the lesser of (a) the
amount of the outstanding indebtedness (limited to principal (excluding
Post-Petition Overadvances), interest and up to $100,000 of costs and attorneys'
fees) of Sellers to Greyrock under the Greyrock Financing on the Closing Date in
excess of 75% of Sellers then outstanding accounts receivable that have aged by
no more than 119 days (excluding Excluded Receivables) and (b) $1,000,000; plus
(v) a cash payment equal to all Cure Amounts; plus (vi) the number of shares of
Preferred Stock equal to the quotient of (A) (x) 40% of the annualized Revenue
Amount (i.e., the Revenue Amount multiplied by six (6)) less (y) the aggregate
amount paid by Buyer pursuant to clauses (i), (ii), (iii), (iv) and (v) above,
and (B) $27.50. Said shares of Preferred Stock shall be convertible at the
option of the holder thereof into shares of Common Stock at the Conversion Rate.
E. TRANSFERABILITY OF PREFERRED SHARES. The Preferred Shares will not be
registered under the Securities Act. Accordingly, unless and until Sellers
deliver to EqualNet a "no action letter" from the Securities and Exchange
Commission or a final order of the Bankruptcy Court providing that the Preferred
Shares will be exempt from registration under the Securities Act and any state
law pursuant to Section 1145 of the Bankruptcy Code, the Preferred Shares may
not be sold, assigned, hypothecated or otherwise disposed by Sellers (except
that Sellers may grant to Greyrock (which retains a security interest in the
Preferred Shares as proceeds of its collateral) a security interest in the
Preferred Shares to secure the Greyrock Financing) until such time that the sale
and transfer of the Preferred Shares is registered under the Securities Act;
provided that any such sale, transfer or other disposition may be made if the
holder of the Preferred Shares seeking to effect such disposition delivers to
EqualNet an opinion of counsel for such holder reasonably satisfactory to
EqualNet to the effect that such registration is not required for such
disposition. Absent such "no action letter," final order of the Bankruptcy Court
or opinion of counsel reasonably satisfactory to EqualNet, then prior to any
distribution of the Preferred Shares to any creditors or equity security holders
of the Sellers or to any other Person, EqualNet will at the request of SA
Telecom register the Preferred Shares under the Securities Act and under any
applicable state securities laws. EqualNet may defer such registration for a
period not exceeding 75 days after SA Telecom's request therefor if EqualNet
reasonably determines that to do so is necessary to avoid an adverse effect on
any pending or contemplated securities offering by EqualNet. The cost of any
such registration of the Preferred Shares shall be borne 50% by Sellers and 50%
by EqualNet.
F. PAYMENT OF CURE AMOUNTS; ASSURANCE OF FUTURE PERFORMANCE. Sellers shall
apply the applicable portion of the RFORMANCE Consideration to the payment of
the Cure Amounts, as and when required to do so by Section 365 of the Bankruptcy
Code. Buyer will provide adequate assurances of future performance in respect of
Designated Contracts, in such manner and in such amounts as the Bankruptcy Court
may direct.
G. ALLOCATION OF CONSIDERATION AMONG ASSETS. The Consideration shall be
allocated among the Assets in accordance with the provisions of Schedule 3(g),
which allocation shall be binding upon Buyer and the Sellers, provided that such
allocation shall not preclude or limit any allocation of the Assets or
Consideration among Sellers pursuant to Section 3(h). Each party agrees to
report the transactions contemplated hereby on all applicable tax returns or
filings in a manner consistent with such allocation.
H. ALLOCATION OF CONSIDERATION AMONG SELLERS. The Consideration shall be
delivered by Buyer to SA Telecom, as agent for all Sellers, and shall be held by
SA Telecom for all Sellers. SA Telecom shall apply the portion of the
Consideration consisting of the Cure Amounts to the payment of the Cure Amounts.
The balance of the Consideration shall be allocated among Sellers in such manner
as Sellers shall agree, subject to the approval of the Bankruptcy Court,
consistent with each Seller's interest in the Assets, Designated Contracts and
Assumed Liabilities.
I. TRANSFER AND SALES TAXES. All sales, transfer and similar taxes
incurred as a result of the sale of the Assets shall be paid 50% by Buyer and
50% by Sellers.
J. DISCLAIMER OF WARRANTIES. Buyer and EqualNet hereby acknowledge and
agree that the Sellers are not making any representation or warranty whatsoever,
express or implied, except those representations and warranties of Sellers
expressly set forth in this Agreement. Subject to the foregoing, THE ASSETS
BEING PURCHASED BY BUYER PURSUANT TO THIS AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED HEREBY SHALL BE ACQUIRED BY BUYER ON AN "AS IS, WHERE IS" BASIS AND
IN THEIR THEN PRESENT CONDITION, AND BUYER SHALL RELY SOLELY UPON ITS OWN
EXAMINATION THEREOF. Without limiting the generality of the foregoing, except as
expressly set forth in this Agreement, NONE OF SELLERS OR ANY OF THEIR OFFICERS,
DIRECTORS, EMPLOYEES, AGENTS, AFFILIATES OR REPRESENTATIVES HAS MADE OR IS
MAKING ANY REPRESENTATION, EXPRESS OR IMPLIED, AS TO THE VALUE OF ANY ASSET
BEING ACQUIRED, OR ANY WARRANTY OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A
PARTICULAR PURPOSE OR QUALITY WITH RESPECT TO ANY OF THE ASSETS, OR AS TO THE
CONDITION OR WORKMANSHIP THEREOF, OR AS TO THE ABSENCE OF ANY DEFECTS THEREIN,
WHETHER LATENT OR PATENT.
K. PRORATIONS; EXPENSES. Prepaid rentals, prepaid utility charges, real
property taxes, personal property taxes, similar assessments and other prepaid
expenses (the "EXPENSES") payable in respect of any of the Assets applicable to
periods both prior to and after Closing, shall be prorated as of the Closing
Date. The estimated net amounts of such prorations shall be subtracted from the
cash portion of the Consideration if Buyer is entitled to a credit therefor, or
added to the cash portion of the Consideration if Sellers are entitled to a
credit therefor. Buyer and Sellers shall use their reasonable best efforts to
calculate all prorations and the Expenses at or prior to the Closing. In the
event that such proration cannot be agreed to by Sellers and Buyer, such dispute
shall be referred to the Dispute Auditor under and in accordance with the
provisions of Section 5(a), whose determination shall be binding upon the
parties.
L. ASSIGNMENT TO BUYER'S DESIGNEES. Subject to Bankruptcy Court approval,
Buyer shall have the right to assign to one or more subsidiaries of Buyer the
right to purchase such of the Assets as Buyer shall determine and to designate
one or more subsidiaries of Buyer to assume all or any portion of the Assumed
Liabilities specified by Buyer, provided that (i) Buyer shall unconditionally
guarantee the performance by each such designated subsidiary of all Assumed
Liabilities assumed by such subsidiary and (ii) no such assignment or
designation may be made if it would materially delay the Closing or otherwise
adversely affect the prompt consummation of the transactions contemplated
hereby. Any such assignee or designee of Buyer is herein called a "DESIGNEE".
Section IV. THE CLOSING; ESCROW OF SHARES
A. Subject to the satisfaction of all of the conditions in Sections 10, 11
and 12, the closing of the sale and transfer of the Assets (the "CLOSING") shall
take place at the offices of White & Case LLP (or at such other place as the
parties may designate) on the first business day after each condition specified
in Sections 10, 11 and 12 has been satisfied (or waived by the party entitled to
waive that condition). The date on which the Closing occurs is herein called the
"CLOSING DATE."
B. At the Closing: (i) Buyer shall pay the cash portion of the
Consideration by a wire transfer in immediately available funds to the account
of SA Telecom, as agent for Sellers, at __________________________ or to such
other account or accounts as SA Telecom shall specify by a notice in writing to
Buyer at least two business days prior to the Closing Date; (ii) EqualNet shall
deliver to SA Telecom, as agent for Sellers, or (to the extent provided in
Section 4(d)) to the Escrow Agent the Preferred Shares, registered in such names
as SA Telecom shall reasonably specify; (iii) Buyer shall deliver to SA Telecom,
as agent for Sellers, such documentation as Sellers shall reasonably specify
evidencing Buyer's assumption of the Assumed Liabilities; (iv) Sellers shall
deliver to Buyer a bill of sale in form and substance reasonably satisfactory to
Buyer and consistent with the terms hereof and such other instruments of
assignments as Buyer shall reasonably specify; and (v) Sellers and Buyer shall
deliver to each other the respective documents, certificates and agreements
specified in Sections 10, 11 and 12.
C. All proceedings to be taken and all documents to be executed and
delivered at the Closing shall be reasonably satisfactory in form and substance
to Buyer and its counsel and to Sellers and their counsel. All proceedings to be
taken and all documents to be executed and delivered by all parties at the
Closing shall be deemed to have been taken, executed and delivered
simultaneously, and no proceedings shall be deemed taken nor any documents
executed or delivered until all have been taken, executed and delivered.
D. On the Closing Date a number of Preferred Shares having a value (as
determined below) equal to 20% of the total Consideration to be paid to Sellers
pursuant to Section 3(d) shall be placed in escrow with an escrow agent mutually
acceptable to EqualNet and Sellers (the "ESCROW AGENT") pursuant to an Escrow
Agreement substantially in the form of Exhibit B hereto (the "ESCROW
Agreement"). The Preferred Shares so placed in escrow are herein called the
"ESCROWED SHARES." For purposes of the foregoing, each Preferred Share shall be
deemed to have a value equal to $27.50. The Escrowed Shares shall be released
from escrow on the terms set forth in the Escrow Agreement and Section 5(b).
Section V. POST-CLOSING ADJUSTMENTS
A. VERIFICATION OF REVENUE AMOUNT. 1. As soon as practicable, but in any
event no later than fifteen (15) days after the Closing Date, Sellers will cause
Price Waterhouse LLP (the "SELLERS' AUDITOR") to verify Sellers' calculation of
the Revenue Amount. The Sellers' Auditor will deliver certified copies of its
calculations (the "SELLERS' AUDITOR CERTIFICATE") simultaneously to Sellers,
Buyer.
2. If, on or prior to the 15th day following its receipt of the Sellers'
Auditor Certificate, Buyer shall not have delivered to Sellers a notice
("BUYER'S NOTICE OF DISAGREEMENT") stating that Buyer disagrees with the
Sellers' Auditor Certificate, the Revenue Amount shall be deemed to be finally
determined for the purposes of this Agreement in accordance with the Sellers'
Auditor Certificate. Buyer's Notice of Disagreement shall specify in reasonable
detail the nature of any disagreement so asserted. If a Buyer's Notice of
Disagreement has been delivered to Sellers within such 15-day period, then (x)
Sellers shall have five (5) business days to review the objections set forth
therein, (y) Sellers and Buyer will seek in good faith to resolve in writing
such matters of disagreement specified in such Buyer's Notice of Disagreement
for a period of 30 days after the delivery thereof, and (z) if no such
resolution has been reached at the end of such 30-day period, the parties hereto
will submit any matters remaining in disagreement to Ernst & Young (the "BUYER'S
AUDITOR") for review. The Buyer's Auditor shall determine all disputed
calculations relating to the Revenue Amount and shall deliver a certificate to
the parties as soon as practicable, which certificate shall set forth the
Buyer's Auditor's determination of the Revenue Amount (the "BUYER'S AUDITOR
CERTIFICATE").
3. If, on or prior to the 15th day following its receipt of the Buyer's
Auditor Certificate, SA Telecom shall not have delivered to Buyer a notice
("SELLERS' NOTICE OF DISAGREEMENT") stating that Sellers disagree with the
Buyer's Auditor Certificate, the Revenue Amount shall be deemed to be finally
determined for the purposes of this Agreement in accordance with the Buyer's
Auditor Certificate. Any Sellers' Notice of Disagreement shall specify in
reasonable detail the nature of any disagreement so asserted. If a Sellers'
Notice of Disagreement has been delivered to Buyer within such 15-day period,
then (x) Buyer shall have five (5) business days to review the objections set
forth therein, (y) Sellers and Buyer will seek in good faith to resolve in
writing such matters of disagreement specified in Sellers' Notice of
Disagreement for a period of 30 days after the delivery thereof, and (z) if no
such resolution has been reached at the end of such 30-day period, the parties
hereto will submit any matters remaining in disagreement to Arthur Andersen LLP
(the "DISPUTE AUDITOR") for review;
4. The Dispute Auditor shall determine all disputed calculations relating
to the Revenue Amount and shall deliver a certificate to the parties as soon as
practicable, which certificate shall set forth the Dispute Auditor's
determination of the Revenue Amount (the "DISPUTE AUDITOR'S CERTIFICATE"). Upon
receipt of the Dispute Auditor's Certificate, the Revenue Amount shall be deemed
to be finally determined for purposes of this Agreement in accordance with such
Certificate. The fees and expenses of Sellers' Auditor shall be borne by
Sellers, the fees and expenses of Buyer's Auditor shall be borne by Buyer and
the fees and expenses of the Dispute Auditor shall be borne 50% by Buyer and 50%
by Sellers; PROVIDED that if the Dispute Auditor determines that one party's
position is completely correct, then such party shall not pay any of the fees,
costs and expenses charged by the Dispute Auditor and the other party shall pay
all of such fees, costs and expenses.
5. If the Revenue Amount, as set forth in the Final Auditor's Certificate
is greater than or less than the Revenue Amount set forth in the Sellers'
Revenue Amount Certificate, the number of Preferred Shares constituting the
Consideration shall be recalculated in accordance with the provision of clause
(iv) of Section 3(d). If the Revenue Amount as so finally determined is greater
than the amount set forth in the Sellers' Revenue Amount Certificate, EqualNet
will, subject to compliance with applicable securities laws, deliver to Sellers
additional Preferred Shares equal to the difference between the recalculated
number of the Preferred Shares and the number of Preferred Shares delivered on
the Closing Date. If the Revenue Amount as so finally determined is less than
the Revenue Amount set forth in the Sellers' Revenue Amount Certificate,
EqualNet shall cancel, and Sellers shall return to EqualNet, so many of the
Preferred Shares as exceed such recalculated number of Preferred Shares. If the
escrow referred to in Section 5(b) below is in effect on the date that the
recalculation specified in this paragraph (iv) is made, 20% of all additional
Preferred Shares to be delivered to Sellers shall be delivered instead to the
Escrow Agent and shall constitute additional Escrowed Shares and 20% of all
Preferred Shares required to be returned by Sellers to Buyer shall be returned
by the Escrow Agent from the Escrowed Shares.
B. ADJUSTMENT FOR POST-CLOSING MONTHLY MINUTES.
1. On or before the Closing Date, Sellers shall calculate the average
monthly Billable Minutes for each of the two full calendar months immediately
preceding the month in which the Closing occurs (the "PRE-CLOSING MONTHLY
MINUTES") and notify Buyer thereof, which notice shall set forth in reasonable
detail Sellers' calculation thereof. On the fifth business day following the end
of the first two full calendar months immediately following the month in which
the Closing occurs, Buyer shall calculate the average monthly Billable Minutes
for each of such two calendar months (the "POST-CLOSING MONTHLY MINUTES") in
respect of all Subscribers acquired by Buyer pursuant hereto and shall notify
Sellers thereof, which notice shall set forth in reasonable detail Buyer's
calculation thereof. Subject to paragraph (ii) below, if the Post-Closing
Monthly Minutes are at least equal to 90% of the Adjusted Pre-Closing Monthly
Minutes, 100% of the Escrowed Shares shall be delivered by the Escrow Agent to
SA Telecom. If the Post-Closing Monthly Minutes are more than 87% but less than
90% of the Adjusted Pre-Closing Monthly Minutes, 50% of the Escrowed Shares
shall be delivered to SA Telecom, and the balance of the Escrowed Shares shall
be returned to, and canceled by, Buyer. If the Post Closing Monthly Minutes are
equal to or less than 87% of the Adjusted Pre-Closing Monthly Minutes, 100% of
the Escrowed Shares shall be returned to, and canceled by, Buyer. All Escrowed
Shares delivered by the Escrow Agent to SA Telecom shall be held by it as agent
for all Sellers.
2. Sellers' calculation of the Pre-Closing Monthly Minutes shall be
verified by the Sellers' Auditor at the time Sellers' Auditor verifies the
Revenue Amount. Concurrently with the delivery to Buyer of the Sellers' Auditor
Certificate, Sellers' Auditor shall deliver to Buyer and the Escrow Agent a
certificate setting forth the Seller's Auditor's calculation of the Pre-Closing
Monthly Minutes. The Sellers' Auditor's calculation of the Pre-Closing Monthly
Minutes, as set forth in the certificate referred to above, shall be conclusive
unless, within 15 days after its receipt of such certificate, any EqualNet Party
delivers a notice to SA Telecom and the Escrow Agent disputing such calculation,
which notice shall specify in reasonable detail the nature of any disagreement.
In the event of any such dispute by any EqualNet Party, such dispute shall be
resolved in accordance with the provisions of Section 2(a) of the form of the
Escrow Agreement attached hereto.
3. Buyer's calculation of the Post-Closing Monthly Minutes shall be
verified by the Buyer's Auditor, and the Buyer's Auditor shall deliver to
Sellers and the Escrow Agent a certificate setting forth the Buyer's Auditor's
calculation of the Post-Closing Monthly Minutes, which certificate shall be
delivered no later than fifteen (15) days after Buyer's notice to Sellers of the
Post-Closing Monthly Minutes. The Buyer's Auditor's calculation of the
Post-Closing Monthly Minutes, as set forth in the certificate referred to above,
shall be conclusive unless, within fifteen (15) days after its receipt of such
certificate, any Seller delivers a notice to Buyer disputing such calculation,
which notice shall specify in reasonable detail the nature of any disagreement.
In the event of such dispute by any Seller, such dispute shall be resolved in
accordance with the provisions of Section 2(b) of the form of Escrow Agreement
attached hereto.
4. Seller shall pay the fees and expenses of Sellers' Auditor for
verifying the Pre-Closing Monthly Minutes and the Post-Closing Monthly Minutes,
and Buyer shall pay the fees and expenses of Buyer's Auditor for verifying the
Pre-Closing Monthly Minutes and the Post-Closing Monthly Minutes. Buyer shall
pay all fees and expenses of the Dispute Auditor in calculating the Pre-Closing
Monthly Minutes unless the Dispute Auditor determines that the Pre-Closing
Monthly Minutes are more than 103% of the amount thereof calculated by Sellers'
Auditor, in which case Sellers shall pay such fees and expenses of the Dispute
Auditor. Sellers shall pay all fees and expenses of the Dispute Auditor in
calculating the Post-Closing Monthly Minutes, unless the Dispute Auditor
determines that the Post-Closing Monthly Minutes are more than 103% of the
amount thereof calculated by Buyer's Auditor, in which case Buyer shall pay such
fees and expenses of the Dispute Auditor.
5. From the Closing Date until the expiration of the first two full
calendar months immediately following the month in which the Closing occurs (the
"RELEVANT PERIOD") Buyer shall not reduce the level or quality of services
provided to Subscribers acquired by Buyer from Sellers from that provided by
Sellers to such Subscribers as of the Closing Date or increase the rates charged
to such Subscribers from those charged by Sellers to such Subscribers for such
services as of the Closing Date; PROVIDED, HOWEVER, that Buyer shall be
permitted to (x) terminate service to any Subscriber whose account is more than
60 days past due and (y) increase the rates charged to any Subscriber to the
extent necessary to cover increased costs arising after the date hereof of
providing Services to such Subscriber that affect the entire industry. Buyer
shall take all appropriate steps during the Relevant Period (including
maintenance of appropriate identifying codes) to ensure that Billable Minutes of
any Subscriber acquired by the Buyer from Sellers are properly attributed to
such Subscriber for purpose of determining the Post-Closing Monthly Minutes.
Buyer shall also take due care to implement any network changes during the
Relevant Period so as not to affect the number of billable minutes recorded for
purposes of determining the Post-Closing Monthly Minutes. Buyer's calculation of
the Post-Closing Monthly Minutes shall account for any unidentifiable or
unbillable traffic or service disruptions resulting from any network changes.
Section VI. BANKRUPTCY COURT FILINGS.
A. APPROVAL OF BREAK-UP FEE, EXPENSE REIMBURSEMENT AND UPSET PRICE.
On December 23, 1997, Sellers have filed motions with the Bankruptcy Court to
approve the provisions of Section 14 relating to the Break-up Fee, the Expense
Reimbursement and the Upset Price and have given notice thereof as required by
the Bankruptcy Court, and on January 8, 1998 the Bankruptcy Court entered an
order (the "PAYMENT ORDER") granting such approval.
B. SCHEDULING OF AUCTION SALE AND APPROVAL OF SALE PROCEDURE. On December
23, 1997 Sellers filed a motion with the CEDURE Bankruptcy Court for an order
scheduling an auction sale of the Assets and setting forth the procedures for
such auction sale and on January 9, 1998 the Bankruptcy Court entered such order
(the "SCHEDULING ORDER").
C. MOTION TO APPROVE SALE. As promptly as practicable after the date
hereof, but in any event no later than January 16, 1998, Sellers shall file
motions with the Bankruptcy Court for an order approving the sale of the Assets
pursuant to ss. 363(b) and 363(f) of the Bankruptcy Code and authorizing Sellers
to assume and assign the Designated Contracts pursuant to ? 365 of the
Bankruptcy Code and authorizing Sellers to execute and deliver such instruments
as Sellers are required to execute and deliver pursuant to the terms of this
Agreement. Sellers shall give prompt notice of such motions, in accordance with
Rules 6004 and 6006 of the Bankruptcy Rules, to the U.S. Trustee, to all other
parties in interest who have filed a notice of appearance in the Bankruptcy
Cases and as directed by the Bankruptcy Court. As part of the motion to approve
the sale, Sellers shall request that the Bankruptcy Court's order provide that
(i) Buyer is acting and has acted in good faith and is entitled to the
protections of a buyer under Section 363(m) of the Bankruptcy Code; (ii) notice
of the transactions contemplated by this Agreement has been properly given;
(iii) the transfer of the Assets by Sellers to Buyer will be a legal, valid and
effective transfer of the Assets notwithstanding any requirement for approval or
consent by any Person; (iv) title to the Assets will be transferred to Buyer
free and clear of (x) all Liens and claims, other than Permitted Liens, and (y)
all rights or options to effect any forfeiture, modification or termination of
Sellers' or Buyer's interest in the Assets by reason of such transfer, and any
such Liens or claims which existed prior to the sale of the Assets shall attach
to the Consideration paid to the Sellers; (v) neither Buyer nor EqualNet shall
be deemed to be a successor to Sellers for any purpose, including claims arising
out of the Employee Benefit Plans, other than ? 1145(a) of the Bankruptcy Code;
(vi) in the event the Preferred Shares are distributed to the creditors or
equity security holders of any of Sellers in exchange for a claim against or
interest in any of the Sellers in connection with plans or reorganization of
Sellers, EqualNet shall be deemed to be persons that participate in good faith
in the offer, issuance or sale of a security offered or sold under the plan or
plans of the Sellers as provided in ? 1125(e) of the Bankruptcy Code and a
successor of the Sellers solely for purposes of Section 1145 of the Bankruptcy
Code; and (vii) the transfer of the Assets to Buyer is not subject to taxation
under any state or local law imposing a stamp or similar tax in accordance with
ss. 1146(c) and 105 of the Bankruptcy Code.
D. REVIEW BY BUYER. Sellers will provide Buyer and EqualNet with a
reasonable opportunity to review and comment upon all motions, applications and
supporting papers prepared by Sellers relating to this Agreement (including
forms of orders and notices to interested parties) prior to the filing thereof
in the Bankruptcy Cases.
Section VII. REPRESENTATIONS AND WARRANTIES OF SELLERS. Sellers hereby
represent and warrant to Buyer and EqualNet as follows:
A. ORGANIZATION AND GOOD STANDING. Each Seller is a corporation duly
organized and validly existing under the laws of the jurisdiction of its
incorporation. Each Seller has all requisite corporate power to carry on its
business as it is now being conducted and to own, lease or otherwise hold the
Assets owned, leased or held by it.
B. AUTHORITY. Each Seller has the requisite corporate power and authority
to execute and deliver this Agreement and each other Transaction Document to
which it is a party and to carry out the transactions contemplated hereby and
thereby. The execution, delivery and performance by Sellers of this Agreement
and the other Transaction Documents to which any of them is a party, including,
without limitation, the sale of the Assets contemplated hereby, have all been
duly and effectively authorized by each of the Sellers' Board of Directors. No
other corporate proceedings on the part of the Sellers are necessary to
authorize this Agreement and the other Transaction Documents and the
transactions contemplated herein and therein.
C. EXECUTION AND DELIVERY. This Agreement has been duly executed and
delivered by each Seller and when approved by the Bankruptcy Court (and assuming
the due execution and delivery of this Agreement by Buyer) will constitute, the
legal, valid and binding obligation of each Seller enforceable against each
Seller in accordance with its terms, subject to all orders of the Bankruptcy
Court (including the Sale Order). When executed and delivered by each Seller and
Buyer and when approved by the Bankruptcy Court, each of the other Transaction
Documents to which any Seller is a party will constitute the legal, valid and
binding obligation of each Seller enforceable against each Seller in accordance
with its terms, subject to all orders of the Bankruptcy Court (including the
Sale Order).
D. NO CONFLICT. Assuming the approval of this Agreement by the Bankruptcy
Court, neither the execution and delivery of this Agreement or the other
Transaction Documents to which any Seller is a party, nor the consummation by
Sellers of the transactions contemplated herein and therein, nor the compliance
by Sellers with any of the provisions hereof or thereof will (with or without
the giving of notice or the passage of time) (i) violate, conflict with, result
in a breach of, or constitute a default under (x) the certificate of
incorporation or by-laws of any Seller or (y) any contract, agreement,
instrument, security, lease or license to which any Seller is a party or by
which it or any of its assets or properties may be bound, or (ii) violate any
law, regulation or any order of any Governmental Entity applicable to any Seller
or any of its assets other than, in the case of clause (i), any violation,
conflict, breach or default which, individually or in the aggregate, would not
materially adversely affect the Assets or materially impair or delay the ability
of Sellers to perform their obligations hereunder.
E. GOVERNMENTAL APPROVALS. The only approvals, licenses, permits or
authorizations of, or filing or qualifications with, any Governmental Entity
required to be obtained or made by Sellers to consummate the transactions
contemplated by this Agreement and the other Transaction Documents to which any
Seller is a party (other than the Sale Order and other required Bankruptcy Court
orders) are those specified in Schedule 7(e) hereto.
F. LEGAL PROCEDINGS. Except for the Bankruptcy Cases, there are no Legal
Proceedings pending or, to the knowledge of Sellers, threatened that question
the validity of this Agreement or any other Transaction Document to which any
Seller is a party or any action taken or to be taken by Sellers in connection
with the consummation of the transactions contemplated hereby or thereby. All
Legal Proceedings relating to the Business pending or, to the knowledge of
Sellers, threatened in which any Seller is or would be the defendant and which,
if adversely determined, would have a material adverse effect on the Assets or
would result in a judgment against any Sellers, not covered by insurance,
exceeding $10,000 are set forth in SA Telecom's Report on Form 10-K for its
fiscal year ended December 31, 1996, its Report on Form 10-Q for its fiscal
quarter ended June 30, 1997 or in Schedule 7(f).
G. COMPLIANCE WITH LAW. Except for violations of law asserted in the Legal
Proceedings referred to in Section 7(f), Sellers are in compliance with all
federal, state and local laws, regulations, permits, orders and decrees,
including those relating to protection of the environment and employee health
and safety ("LEGAL REQUIREMENTS"), except for any failure to comply which would
not, alone or in the aggregate, have a material adverse effect on the Assets.
Nothing in this Section 7(g) is intended to address any compliance issue that is
specifically addressed by any other representation or warranty set forth herein.
H. DESIGNATED CONTRACTS. To Sellers' knowledge, other than (i) payment
defaults listed in Schedule 7(h) or in the Schedule of Liabilities filed by
Sellers with the Bankruptcy Court and (ii) defaults triggered by the financial
condition or insolvency of the Sellers or the existence of the Bankruptcy Cases,
Sellers and all other parties to the Designated Contracts are in compliance with
the provisions thereof. Other than as set forth on Schedule 7(h), Sellers have
not received notice that any event has occurred which with or without the giving
of notice or lapse of time, or both, would constitute a default under any
Designated Contract. The copies of the Designated Contracts provided to Buyer by
Sellers pursuant to Section 9(l) shall be true and complete copies of such
Designated Contracts.
I. TITLE TO ASSETS. Except for Liens securing the DIP Financing, Liens
covering real estate owned by Sellers or Liens listed or described on Schedule
7(i) and except for lessors' interest in assets leased by Sellers, Sellers have
good and valid title to all Assets, free and clear of all Liens.
J. INTELLECTUAL PROPERTY AND INTANGIBLES. Except as set forth on
Schedule 7(j), Sellers own the entire right, title and interest in and to the
Intellectual Property, if any, and Intangibles included in the Assets
(including, without limitation, the right to use and license the same). Except
as set forth in Schedule 7(j), there are no pending or, to the knowledge of the
Sellers, threatened actions of any nature affecting the Intellectual Property or
Intangibles. Schedule 7(j) lists all notices or claims concurrently pending or
received by Sellers that claim infringement of any domestic or foreign letters
patent, patents, patent applications, patent licenses, software licenses and
know-how licenses, trade names, trademark registrations and applications,
service marks, copyrights, copyright registrations and applications, trade
secrets, technical knowledge, know-how or other confidential proprietary
information relating to the Assets. All letters patent, registrations and
certificates issued by any Governmental Entity relating to any of the
Intellectual Property or Intangibles and all licenses and other agreements
pursuant to which Sellers use any of the Intellectual Property or Intangibles
are valid and subsisting, have been properly maintained and, to the knowledge of
Sellers, neither Sellers nor any other persons are in material default or
violation thereunder.
K. PERMITS, LICENSES AND TARIFFS. The permits listed on Schedule 7(k)
represent all material permits, tariffs, authorizations, variances, exemptions,
orders and approvals from Governmental Entities required to be held by Sellers
in order to conduct the Business substantially in the manner heretofore
conducted.
L. EMPLOYEE BENEFIT PLANS; LABOR AGREEMENTS. Except as set forth on
Schedule 7(l), (i) Sellers do not maintain or contribute to, are not required to
contribute to, and are not a party to or a participating employer of, any
Employee Benefit Plans and (ii) Sellers are not parties to any collective
bargaining or other labor agreements.
M. NO BORKERS. Such Seller has not entered into and will not enter into
any agreement, arrangement or understanding with any person or firm which will
result in the obligation of Buyer to pay any finder's fee, brokerage commission
or similar payment in connection with the transactions contemplated hereby or by
the other Transaction Documents.
N. INVESTOR REPRESENTATIONS. Sellers understand that the Preferred Shares
have not been registered under the Securities Act and that the transferability
thereof is restricted as provided in Section 3(e). Sellers recognize that
ownership of the Preferred Shares involves a high degree of risk including, but
not limited to, the risk of economic losses from the EqualNet Parties'
operations and the total loss of investment. Sellers have been furnished by
EqualNet with copies of all reports filed by EqualNet under the Securities
Exchange Act of 1934, as amended, since June 30, 1995.
O. SUBSCRIBERS. Sellers have heretofore delivered, or prior to the Closing
Date will deliver, to Buyer a complete and correct list of the names, addresses
and account information of all Subscribers of Sellers as of a date close to the
date of such delivery, including the security deposits paid by each Subscriber.
All of Sellers' rights and interests to all accounts of the Subscribers to the
Services of Sellers are assignable to Buyer without the consent of the
Subscribers.
P. EMPLOYEES. Each Seller acknowledges and agrees that Buyer may, but
shall not be required to, offer employment to and employ any employees or
officers of Sellers following the Closing Date. Notwithstanding the foregoing,
Sellers have assumed that Buyer will not hire any employees or officers of
Sellers and Sellers have given, or prior to the Closing Date will give, all
notices (if any) required by the Worker Adjustment and Retraining Notification
Act (WARN) as if all of Sellers' employees and officers will be terminated by
Sellers as of the Closing Date.
Q. SPC. If the SPC is established pursuant to Section 9(j), it shall be a
corporation duly organized and validly existing under the laws of the State of
Delaware and shall have all requisite power to hold the assets transferred to it
by Sellers. The shares of the SPC transferred to Buyer on the Closing Date shall
constitute all outstanding shares of the capital stock of the SPC and all such
shares shall be duly issued, fully paid and non-assessable.
R. SCHEDULES. All Schedules delivered to Buyer by Sellers pursuant to
Section 7 are complete and correct.
S. SELLERS. The subsidiaries of SA Telecom named as Sellers in this
Agreement are all the operating subsidiaries of SA Telecom and own all the
operating assets of the Business.
Section VIII. REPRESENTATIONS AND WARRANTIES OF BUYER. Each EqualNet Party
hereby represents and warrants to each Seller as follows:
A. ORGANIZATION AND GOOD STANDING. Each EqualNet Party is a corporation
duly organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation, and has all requisite corporate power to carry on
its business as it is now being conducted and contemplated to be conducted after
the Closing.
B. AUTHORITY; EXECUTION AND DELIVERY. Each EqualNet Party has the
requisite corporate power and authority to execute, deliver and perform its
obligations under this Agreement and each other Transaction Document to which it
is a party, to purchase the Assets in accordance with the terms hereof (in the
case of Buyer) and to issue to Sellers the Preferred Shares (in the case of
EqualNet). The execution, delivery and performance by each EqualNet Party of
this Agreement and the other Transaction Documents to which it is a party,
including, without limitation, the purchase of the Assets contemplated hereby
and the issuance to Sellers of the Preferred Shares, have all been duly and
effectively authorized by each EqualNet Party's Board of Directors. No other
corporate proceedings on the part of any EqualNet Party are necessary to
authorize this Agreement, the other Transaction Documents, the issuance of the
Preferred Shares to Sellers pursuant hereto and the transactions contemplated
herein and therein. This Agreement has been duly executed and delivered by each
EqualNet Party and (assuming the due execution and delivery of this Agreement by
each Seller) constitutes the legal, valid and binding obligation of each
EqualNet Party enforceable against it in accordance with its terms, subject to
the orders of the Bankruptcy Court (including the Sale Order). When executed and
delivered by the EqualNet Party and each Seller party thereto and approved by
the Bankruptcy Court, each of the other Transaction Documents to which Buyer is
a party will constitute the legal, valid and binding obligation of each EqualNet
Party enforceable against it in accordance with its terms, subject to all orders
of the Bankruptcy Court (including the Sale Order).
C. NO CONFLICTS, ETC. Neither the execution and delivery of this Agreement
or the other Transaction Documents to which an EqualNet Party is a party nor the
issuance to Sellers of the Preferred Shares, nor the consummation by the
EqualNet Parties of the transactions contemplated herein and therein nor the
compliance by the EqualNet Parties with any of the provisions hereof or thereof
will (with or without the giving of notice or the passage of time) (i) violate,
conflict with, result in a breach of, or constitute a default under (x) the
certificate or articles of incorporation or by-laws of any EqualNet Party or (y)
any contract, agreement, instrument, security, lease or license to which any
EqualNet Party is a party or by which it or any of its assets or properties may
be bound, or (ii) violate any law, regulation or any order of any Governmental
Entity applicable to any EqualNet Party or any of its assets other than, in the
case of clause (i), any violation, conflict, breach or default which,
individually or in the aggregate, would not materially impair or delay the
ability of the EqualNet Parties to perform their respective obligations
hereunder or impair the validity or value of the Preferred Shares.
D. GOVERNMENTAL APPROVALS. The only approvals, licenses, permits or
authorizations of, or filings or qualifications with, any Governmental Entity
required to be obtained or made by any EqualNet Party to consummate the
transactions contemplated by this Agreement and the other Transaction Documents
to which any EqualNet Party is a party (other than the Sale Order and other
required Bankruptcy Court orders) are those specified in Schedule 8(d) hereto.
E. PREFERRED SHARES. Upon the delivery thereof to Sellers or the Escrow
Agent pursuant to Sections 3(d) or 5(b), the Preferred Shares will be duly
authorized, fully paid and non-assessable and will not be issued in violation of
any preemptive rights. Subject to the escrow of the Escrowed Shares in
accordance with Section 4(d) and the Escrow Agreement and the security interest
thereon in favor of Greyrock in respect of the Greyrock Financing, the Preferred
Shares will be delivered to Sellers free from any Liens.
LEGAL PROCEEDINGS. Except for the Bankruptcy Cases and as set forth in
EqualNet's Report on Form 10-K for the fiscal year ended June 30, 1997,
EqualNet's Report on Form 10-Q for the quarterly period ended September 30, 1997
or in Schedule 8(f), there are no Legal Proceedings pending or, to the knowledge
of any EqualNet Party, threatened that question the validity of this Agreement
or any other Transaction Document to which any EqualNet Party is a party or any
action taken or to be taken by any EqualNet Party in connection with the
consummation of the transactions contemplated hereby or thereby or which, if
adversely determined, would have a material adverse effect on the financial
condition, business or operations of any EqualNet Party.
G. FINANCING. On the Closing Date, Buyer will have sufficient funds to
effect the Closing and consummate the transactions contemplated by this
Agreement.
H. FINANCIAL STATEMENTS AND REPORTS. EqualNet's financial statements for
its fiscal year ended June 30, 1997 and for its fiscal quarter ended September
30, 1997 contained in EqualNet's Reports on Form 10-K and 10-Q filed with the
Securities and Exchange Commission, copies of which have heretofore been
delivered by EqualNet to Sellers, have been, and EqualNet's financial statements
in all such Reports delivered to Sellers on or before the Closing Date pursuant
to Section 9(b) will be, prepared in accordance with GAAP applied consistently
with past practice and present and will present fairly, in all materials
respects, the consolidated financial position and results of operations of
EqualNet at and for the fiscal periods specified therein, subject (in the case
of unaudited interim financial statements) to normal year end audit adjustments.
Said Reports do not and will not contain any untrue statement of a material
fact, and do not and will not omit to state any material fact necessary to make
the statements contained therein not misleading.
I. NO BROKERS. Neither EqualNet Party has entered into any agreement,
arrangement or understanding with any Person which will result in the obligation
of Seller to pay any finder's fee, brokerage commission or similar payment in
connection with the transactions contemplated hereby.
Section IX. CERTAIN COVENANTS AND AGREEMENTS
A. ACCESS TO FACILITIES OF SELLERS. From and after the date hereof, each
EqualNet Party and its employees, agents and representatives, upon reasonable
notice to Sellers, shall have full access to all books, records, facilities and
personnel of Sellers. Each Seller shall make available to each EqualNet Party,
upon reasonable prior notice for examinations and reproduction (at Buyer's
expense), all documents and data of every kind and character relating to the
Assets in possession or control of, or subject to reasonable access by, such
Seller, including, without limitation, all files, records, data and information
relating to the Assets (whether stored in paper, magnetic or other storage
media) and all agreements, instruments, contracts, assignments, certificates,
orders, and amendments thereto. Each Seller shall also allow each EqualNet Party
reasonable access to, and the right to inspect, the Assets of such Seller during
normal business hours and upon reasonable prior notice.
B. ACCESS TO INFORMATION AND REPORTS OF EQUALNET PARTIES. If so requested
by Sellers, upon reasonable prior notice, each EqualNet Party shall cause its
officers, directors and representatives to meet with Sellers' officers,
directors or representatives at EqualNet's offices for the purpose of permitting
such officers, directors and representatives of Sellers to ask questions of, and
receive answers to such questions from, such officers and representatives of
such EqualNet Party concerning the business and operations of such EqualNet
Party and to obtain any additional information regarding EqualNet to the extent
reasonably available. EqualNet shall deliver to Sellers copies of all final
reports and final proxy statements filed by EqualNet under the Securities
Exchange Act of 1934, as amended, at any time after September 30, 1997 and prior
to the Closing Date.
C. CONFIDENTIALITY. The parties hereto have heretofore entered into a
Confidentiality Agreement in connection with the transactions contemplated
hereby (as from time to time amended, the "CONFIDENTIALITY AGREEMENT"). During
the period through the Closing Date and (in the event for any reason the Closing
under this Agreement does not occur) thereafter each party shall keep, and cause
its affiliates, employees and representatives to keep, strictly confidential in
accordance with the terms of the Confidentiality Agreement, all information of
any kind relating to the other parties, their business, assets or operations
obtained by such party in connection with this transaction and not otherwise
publicly available or learned through third-parties under no confidentiality
obligation, whether learned before or after the date hereof, and shall not use
any such information for any purposes whatsoever nor disclose any such
information to any third party. If this Agreement shall terminate for any
reason, each party shall immediately return all documents or other writings
received from any other party or copied by such party and shall destroy any
other writings containing any of such information.
D. CONDUCT OF SELLERS' BUSINESS. Subject to (i) orders of the Bankruptcy
Court, (ii) the DIP Financing Documents, (iii) applicable duties, obligations
and limitations of a debtor in bankruptcy proceedings under the Bankruptcy Code
and (iv) Sellers' financial condition and cash availability, from the date
hereof up to and including the earlier of the Closing Date or the termination of
this Agreement, Sellers will use their reasonable good faith efforts to (x)
cause their business to be conducted only in the ordinary course (except that
Sellers will have no obligation to solicit or obtain new customers or (except
when necessary to operate the Business in the ordinary course) retain personnel)
and (y) do, or as the case may be not do the following:
a. maintain in full force and effect Sellers' insurance policies
insofar as they cover any of the Assets;
b. maintain Sellers' books and records in the manner consistent with
past practices and in any event in a commercially reasonable manner;
c. preserve the Assets intact as well as the present relationships
of Sellers with persons having significant relationships therewith;
d. not sell, lease, transfer or dispose of any Assets (other than
the transfers to the SPC specified in Section 9(j));
e. not terminate any contract, agreement, license or other
instrument to which such Seller is a party constituting or relating to the
Assets, other than for any such termination in the ordinary course which
would not have a material adverse effect on the Assets;
f. to the extent that failure to do so would have a material adverse
effect on the Assets, pay or cause to be paid all post-petition costs and
expenses incurred in connection with the operation of Sellers' assets or
their bankruptcy proceedings in a timely manner and, to the extent
permitted by the Bankruptcy Code, keep all material contracts in full
force and effect;
g. comply with all applicable Legal Requirements except when failure
to do so would not have a material adverse effect on the Business or the
Assets;
h. retain all Subscribers in existence on the date of this
Agreement; and
i. not compromise or discount any account receivable except for
compromises of billing disputes with Subscribers in the ordinary course of
business.
E. MUTUAL COOPERATION. The parties hereto will cooperate with each other,
and will use all reasonable efforts to cause the fulfillment of the conditions
to the parties' obligations hereunder (including, without limitation, the
entering of the Sale Order), to assume and assign all agreements necessary for
the transfer to Buyer of the Assets, and to obtain as promptly as possible all
consents, authorizations, orders or approvals from each and every third party,
whether private or governmental, required in connection with the transactions
contemplated by this Agreement.
F. CONSENTS AND PERMITS. Sellers and the EqualNet Parties shall use all
reasonable efforts to obtain any consents, approval, permit, order or
authorization of any Governmental Entities and other third parties required for
the purchase and sale of the Assets and the other transactions contemplated
hereby, including all approvals, authorizations, permits and consents specified
in Schedules 7(e) and 8(d).
G. INFORMATION. From and after the date hereof until the Closing Date, (x)
Sellers shall keep the EqualNet Parties fully informed with respect to all
material developments relating to the Assets and shall promptly comply with any
reasonable requests of any EqualNet Party for Sellers to provide it with
information with respect to the Assets and (y) the EqualNet Parties shall keep
Sellers fully informed with respect to all material developments affecting the
EqualNet Parties, their business, assets and or capital stock. Any such
information provided by Sellers or the EqualNet Parties shall be true and
correct to the best knowledge of the party providing such information.
H. NON-SOLICITATION. If the Closing does not take place, no EqualNet Party
will (i) prior to December 31, 1999, solicit any subscribers of any Seller who
were such subscribers on the date hereof or any day prior to the termination of
this Agreement, except for solicitations directed to the public at large and not
to specific subscribers of Sellers and (ii) prior to February 28, 1998, solicit
for employment, consulting or other relevant services any officers or employees
of any Seller except with the consent of SA Telecom or solicitations directed to
the public at large and not to specific officers or employees of any Seller.
I. EVIDENCE OF BUYER'S ABILITY TO CLOSE. If so requested by Sellers, Buyer
shall promptly furnish to Sellers evidence reasonably satisfactory to Sellers
that Buyer has, or on the Closing Date will have, sufficient funds to consummate
the transactions contemplated hereby.
J. ESTABLISHMENT OF SPC. Prior to the Closing Date, if so requested by
Buyer (and provided the same can be effected without a material disruption of
Sellers' Business and at no material cost to Sellers), Sellers shall, subject to
the approval of the Bankruptcy Court, establish a Delaware corporation (the
"SPC") to which all Sellers will transfer all carrier identification codes,
their Subscriber accounts and all other Assets reasonably specified by Buyer
which are necessary to provide services to such Subscribers in connection with
such transfer of such carrier identification codes. The shares of the SPC's
capital stock shall be allocated among Sellers as agreed to by Sellers so as to
reflect their respective contribution of assets to the SPC. Promptly after such
transfer to the SPC, each transferor shall give notice thereof to BELLCORE. The
SPC shall engage in no business other than holding the carrier identification
codes and the Subscriber accounts transferred to it and activities directly
incidental thereto and shall incur no indebtedness or liabilities to any Person.
K. LIENS IN FAVOR OF GREYROCK. Buyer acknowledges that the Assets will be
transferred to it subject to the Liens thereon in favor of Greyrock, and Buyer
agrees that the Assets will remain subject to such Liens after the Closing Date
until payment of the Greyrock Facility assumed by Buyer. Without limiting the
generality of the foregoing, Buyer agrees that stock of the SPC, if required to
be delivered to Buyer on the Closing Date, will be pledged by it to Greyrock to
secure the Greyrock Facility. Buyer further agrees to grant to Greyrock a
perfected senior Lien on all accounts receivable arising after the Closing Date
generated from Subscribers acquired by Buyer from Sellers, which Lien shall
secure all amounts of the Greyrock Facility assumed by Buyer and shall be
evidenced by a UCC-1 Financing Statement and Security Agreement containing
provisions identical to the Greyrock Facility.
L. DESIGNATED CONTRACTS. Promptly upon Buyer's request, Sellers shall
provide Buyer with true and correct copies of the Designated Contracts.
M. SCHEDULES. Sellers shall, as soon as practicable but in any event no
later than January 23, 1998 deliver to Buyer all Schedules specified in Section
7 or Sections 3(a) and 3(b) to the extent not attached hereto on the date
hereof. Buyer shall, within five (5) business days after the delivery of any
such Schedule to it, notify Sellers whether Buyer is satisfied with the terms
thereof or the information contained therein. The EqualNet Parties shall deliver
to Sellers as soon as practicable but in any event no later than January 20,
1998 the schedule of Designated Contracts specified in clause (iv) of Section
3(a). Buyer and Sellers shall co-operate to complete all other Schedules hereto
on or before January 23, 1998 (or such later date as shall be agreed to by all
parties), which other Schedules shall be satisfactory to all parties hereto. All
Schedules attached hereto or delivered by any party pursuant hereto are an
integral part of this Agreement.
Section X. CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective
obligations of each party to consummate the transactions contemplated by this
Agreement shall be subject to the fulfillment on or prior to the Closing Date of
the following conditions:
A. BANKRUPTCY COURT APPROVAL. The Payment Order and the Scheduling Order
shall have been entered by the Bankruptcy Court and shall contain terms and
conditions reasonably satisfactory to Buyer and Sellers. The Bankruptcy Court
shall have entered an order (the "SALE ORDER") approving the transactions
contemplated by this Agreement, any motion for rehearing or reconsideration of
the Sale Order shall have been denied, the time allowed for appeals of the Sale
Order shall have expired without appeals being taken or if the Sale Order shall
have been appealed, no stay thereof shall be in effect. The Sale Order shall
provide that (i) this Agreement and the transactions contemplated herein are
approved; (ii) the transfer of the Assets by Sellers to Buyer will be a legal,
valid and effective transfer of the Assets notwithstanding any requirement for
approval or consent by any Person; (iii) the Sellers have good and valid title
to the Assets and such title shall be transferred to Buyer or its designees free
of (x) all Liens and claims, other than Permitted Liens, and (y) all rights or
options to effect any forfeiture, modification or termination of Sellers' or
Buyer's interest in the Assets by reason of such transfer, and any such Liens or
claims which existed prior to the sale of the Assets shall attach to the
Consideration paid to the Sellers; (iv) Buyer is purchasing the Assets in good
faith within the meaning of ? 363(m) of the Bankruptcy Code; (v) the
consideration to be paid by Buyer for the Assets is fair and reasonable; (vi)
there exist exigent business reasons for the sale of the Assets contemplated
hereby; (vii) such sale is in the best interests of the Sellers' estates, their
creditors and equity security holders; (viii) there has been proper and adequate
notice given to all parties required by law to receive notice of the sale; (ix)
the Assets have been adequately marketed and will lose value absent a sale; (x)
the requirements of ? 363 of the Bankruptcy Code have been met; (xi) provided a
plan of reorganization for Sellers is confirmed in the Bankruptcy Cases, the
issuance and sale of the Preferred Shares is exempt from registration under the
Securities Act and all applicable state securities laws pursuant to Section 1145
of the Bankruptcy Code and neither Buyer nor EqualNet shall be deemed to be a
successor to the Sellers for any purpose, including claims arising out of the
Employee Benefit Plans, other than ?1145 of the Bankruptcy Code; and (xii) in
accordance with Sections 1146(c) and 105(a) of the Bankruptcy Code, the transfer
of the Assets to Buyer is not subject to taxation under any state or local law
imposing a stamp or similar tax on such transfer. The Sale Order shall not
impose any material obligations on the EqualNet Parties or Sellers not
contemplated herein. Nothing in this Agreement shall preclude Sellers or Buyer
from consummating the transactions contemplated herein if Buyer, in its sole
discretion, waives the requirement that the Sale Order or any other order shall
have become final orders. No notice of such waiver of this or any other
condition to Closing need be given except to Sellers, as explicitly required in
this Agreement, it being the intention of the parties hereto that Buyer shall be
entitled to, and is not waiving, the protection of Section 363(m) of the
Bankruptcy Code, the mootness doctrine and any similar statute or body of law if
the Closing occurs in the absence of final orders.
B. NO ADVERSE PROCEEDINGS. There shall not be outstanding any injunction,
decree or order of any court or Governmental Entity prohibiting the consummation
of the transactions contemplated by this Agreement that remains in effect
following entry of the Sale Order.
C. NO CHANGE IN LAW. There shall not have been any action taken or any
statute enacted by any Governmental Entity that would render the parties unable
to consummate the transactions contemplated hereby or make the transactions
contemplated hereby illegal or prohibit the consummation of the transactions
contemplated hereby.
D. GOVERNMENTAL APPROVALS AND CONSENTS. Sellers and the EqualNet Parties
shall have obtained all approvals and consents from all Governmental Entities
specified in Schedule 10(d).
E. EXCROW AGREEMENT. The Escrow Agent shall have executed the Escrow
Agreement.
Section XI. CONDITIONS TO OBLIGATIONS OF BUYER. In addition to the
conditions set forth in Section 10, the obligation of the EqualNet Parties to
consummate the transactions contemplated by this Agreement shall be subject to
the fulfillment, or the waiver by the EqualNet Parties, on or prior to the
Closing Date, of the following conditions:
A. BANKRUPTCY COURT ORDERS; EVIDENCE OF SERVICE. Sellers shall have
delivered to Buyer copies of the Payment Order, the Scheduling Order and the
Sale Order and appropriate proof of service demonstrating service of the
Scheduling Order in accordance with the terms thereof.
B. REPRESENTATIONS AND WARRANTIES OF SELLERS. The representations and
warranties of Sellers contained in this Agreement shall be true and correct in
all material respects on and as of the Closing Date as though made on such date,
and Sellers shall have delivered to Buyer a certificate dated the Closing Date
to such effect, signed by an officer of SA Telecom.
C. CORPORATE ACTION. At the Closing Sellers shall deliver to Buyer
certified copies of board of directors resolutions approving the execution,
delivery and performance of this Agreement and the other Transaction Documents
and the transactions contemplated hereunder and thereunder.
D. SELLERS' PERFORMANCE. Each of the obligations of Sellers to be
performed on or before the Closing Date, pursuant to the terms of this Agreement
shall have been duly performed in all material respects by the Closing Date.
E. INSTRUMENTS OF CONVEYANCE AND TRANSFER. At the Closing, each Seller
shall have delivered to Buyer a bill of sale in form and substance reasonably
satisfactory to Buyer and consistent with the terms hereof, as well as such
other instruments of assignment, conveyance and transfer as Buyer shall
reasonably require.
F. MATERIAL CONSENTS. The EqualNet Parties shall have obtained the
third-party consents listed on Schedule 11(f) hereto.
G. ESCROW AGREEMENT. Sellers shall have executed the Escrow Agreement.
H. SELLERS' REVENUE AMOUNT CERTIFICATE. SA Telecom shall have delivered
the Sellers' Revenue Amount Certificate to Buyer.
I. PRE-CLOSING MONTHLY MINUTES CERTIFICATE. SA Telecom shall have
delivered to Buyer a certificate as to the Adjusted Pre-Closing Monthly Minutes.
J. ADDITIONAL MATTERS. Buyer shall have received such additional
documents, instruments or items of information reasonably requested by it from
Sellers in respect of any aspect of the transactions contemplated hereby. All
corporate and other proceedings, and all documents, instruments and other legal
matters in connection with the transactions contemplated by this Agreement or by
the other agreements referred to herein shall be reasonably satisfactory in form
and substance to Buyer and its counsel.
K. Buyer shall have received all Schedules to this Agreement and shall be
satisfied with the information set forth therein.
L. SPC. If so requested by Buyer at least ten days prior to the Closing
Date, the SPC shall have been established and all assets required to be
transferred thereto pursuant to Section 9(j), to the extent assignable, shall
have been so transferred, and Buyer shall have received stock certificates, duly
endorsed by the registered owners thereof, representing all shares of the
capital stock of the SPC.
M. NO MATERIAL ADVERSE CHANGE. There shall have occurred no material
adverse change after the date hereof in the Assets, Business or operations of
Sellers, taken as a whole, and Sellers shall have delivered to Buyer a
certificate dated the Closing Date and signed by an officer of SA Telecom to
such effect and further certifying that since the date of this Agreement Sellers
have caused their business to be conducted only in the ordinary course (which
certificate may be qualified as being to the best knowledge and belief of such
officer).
Section XII. CONDITIONS TO OBLITGATIONS OF SELLERS. In addition to the
conditions set forth in Section 10, the obligations of Sellers to consummate the
transactions contemplated hereby shall be subject to the fulfillment, or the
waiver by Sellers, on or prior to the Closing Date of the following conditions:
A. REPRESENTATIONS AND WARRANTIES TRUE AT THE CLOSING DATE. The
representations and warranties of each EqualNet Party contained in this
Agreement shall be true and correct in all material respects on and as of the
Closing Date as though made on such date, and the EqualNet Parties shall have
delivered to Sellers a certificate dated the Closing Date to such effect, signed
by an officer of Buyer.
B. CORPORATE ACTION. At the Closing the EqualNet Parties shall deliver to
Sellers certified copies of board of director resolutions approving the
execution, delivery and performance of this Agreement and the other Transaction
Documents, the issuance of the Preferred Shares to Sellers and the transactions
contemplated hereunder and thereunder.
C. EQUALNET PARTIES' PERFORMANCE. Each of the obligations of the EqualNet
Parties to be performed on or before the Closing Date pursuant to the terms of
this Agreement shall have been duly performed in all material respects by the
Closing Date.
D. MATERIAL CONSENTS. Sellers shall have obtained the third-party consents
listed on Schedule 12(d) hereto.
E. ESCROW AGREEMENT. The EqualNet Parties shall have executed the Escrow
Agreement.
F. PREFERRED STOCK PROVISIONS. The terms of the Preferred Stock Provisions
shall be consistent with the terms of Section 3(d) and Exhibit A and shall
otherwise be reasonably acceptable to Sellers.
G. CONDISERATION. The EqualNet Parties shall have paid and delivered the
Consideration (other than the Escrowed Shares) to or for the account of Sellers
and shall have delivered the Escrowed Shares to the Escrow Agent.
H. DISCHARGE OF WILLIS GROUP DIP FINANCING. To the extent that the Willis
Group DIP Financing exists, the Willis Group shall have delivered to Sellers
written confirmation that Buyer has paid and discharged all obligations of
Sellers in respect of the Willis Group DIP Financing.
I. ADDITIONAL MATTERS. Sellers shall have received such additional
documents, instruments or items of information reasonably requested by them in
respect of any aspect of the transactions contemplated hereby. All corporate and
other proceedings, and all documents, instruments and other legal matters in
connection with the transactions contemplated by this Agreement or by the other
agreements referred to herein shall be reasonably satisfactory in form and
substance to Sellers and their counsel.
J. NO MATERIAL ADVERSE CHANGE. There shall have occurred no material
adverse change in the financial condition or results of operations of EqualNet
from that reflected in its financial statements at and for the period ending
September 30, 1997.
Section XIII. TERMINATION
A. TERMINATION. This Agreement may be terminated by written notice at any
time:
1. by mutual consent of the EqualNet Parties and Sellers;
2. by either the EqualNet Parties or Sellers if there shall be in
effect a final nonappealable order of a court of competent jurisdiction
restraining, enjoining or otherwise prohibiting the consummation of the
transactions contemplated hereby;
3. by either the EqualNet Parties or Sellers (provided that the
terminating party is not then in material breach of any representation,
warranty, covenant or other agreement contained herein) if there shall
have been a material breach of any of the representations or warranties
set forth in this Agreement on the part of the other party, which breach
is not cured within fifteen (15) days following written notice (which
shall state that it is a "Notice of Default") to the party committing such
breach or which breach, by its nature, cannot be cured prior to the
Closing, and which breach, individually or together with all other such
breaches, would have a material adverse effect on the Assets or Sellers'
ability to consummate the transactions contemplated hereby, in the case of
breaches by Sellers, or a material adverse effect on the EqualNet Parties'
ability to consummate the transactions contemplated hereby or the value of
the Preferred Shares, in the case of breaches by an EqualNet Party;
4. by either the EqualNet Parties or Sellers (provided that the
terminating party is not then in material breach of any representation,
warranty, covenant or the agreement contained herein) if there shall have
been a material breach of any of the covenants or agreements set forth in
this Agreement on the part of the other party, which breach shall not have
been cured within fifteen (15) days following receipt by the breaching
party of written notice of such breach from the other party hereto, which
notice shall state that it is a "Notice of Default";
5. by any party (unless such party is in default under this
Agreement) if the Sale Order is not entered on or before February 16, 1998
or if the Closing does not occur on or before February 28, 1998;
6. upon entry of an order of the Bankruptcy Court approving the
sale of all or a material portion of the Assets to a Person other than
Buyer or its Designees; or
7. pursuant to an order of the Bankruptcy Court.
B. EFFECT OF TERMINATION. In the event of the termination of this
Agreement as provided in Section 13(a), this Agreement, other than the
provisions of this Section 13 and Sections 9(c), 9(h), 14(b), 17 and 18 and, to
the extent applicable, Section 16, shall forthwith become wholly void and of no
further force and effect; PROVIDED, HOWEVER, that the termination of this
Agreement shall not relieve any party hereto from any liability hereunder which
accrued prior to such termination.
C. REMEDIES CUMULATIVE. The remedies provided herein shall be cumulative
and shall not preclude assertion by any party hereto of any other right or the
seeking of any other remedies against any other party hereto.
D. SPECIFIC PERFORMANCE. Each of the parties hereto acknowledges and
agrees that the EqualNet Parties on the one hand, and the Sellers on the other,
would be irreparably damaged in the event any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. Accordingly, each of the parties hereto agrees that each
shall be entitled to an injunction or injunctions to prevent breaches of the
provisions hereof and/or the remedy of specific performance hereof in any action
instituted in any court of the United States or any state thereof having subject
matter jurisdiction, in addition to any other remedy to which such party may be
entitled, at law or in equity.
Section XIV. BREAK-UP PROVISIONS AND BIDDING PROCEDURE.
A. UPSET PRICE. Sellers shall be entitled to solicit higher and better
offers for the Business and the Assets from third parties, provided that (i)
Sellers shall require that any such offer for the Assets have a fair market
value (including the amount of Sellers' liabilities to be assumed) at least
$500,000 greater than the fair market value of the sum of the Consideration and
the Assumed Liabilities (the "UPSET PRICE") and (ii) Sellers shall not sell the
Assets to any Person whose offer, as determined jointly by Sellers and the
Creditors' Committee, with the approval of the Bankruptcy Court, does not have a
fair market value at least equal to the Upset Price.
B. PAYMENT OF BREAK-UP FEE AND REIMBURSEMENT OF EXPENSES. If, following
the execution of this Agreement by all parties hereto, any third party or
parties (other than Buyer or its affiliates) acquire, for consideration other
than the cancellation of indebtedness or the extension of trade credit terms by
vendors, 50% or more of, or 50% or more of an interest in, the Assets or equity
in Sellers (the "OTHER ACQUISITION"), whether such Other Acquisition is
accomplished by means of an asset sale, stock sale, merger, consolidation,
reorganization or other business combination, and regardless of whether such
Other Acquisition is accomplished pursuant to a plan of reorganization in the
Bankruptcy Cases or a sale pursuant to section 363(b) of the Bankruptcy Code,
then upon the closing of such Other Acquisition (or upon the effective date of a
plan of reorganization for Sellers in the Bankruptcy Cases accomplishing the
same), Sellers shall (i) reimburse the EqualNet Parties for up to $100,000 of
the EqualNet Parties' aggregate expenses (including reasonable attorneys' fees)
incurred by them in connection with the transactions contemplated hereby (the
"SALE EXPENSE REIMBURSEMENT"), and (ii) pay to Buyer a fee of $300,000 (the
"BREAK-UP FEE"). If by February 13, 1998, a sale hearing pursuant to section
363(b) of the Bankruptcy Code has not been held and concluded by the Bankruptcy
Court, then Sellers shall reimburse the EqualNet Parties for up to $100,000 of
the aggregate expenses (including reasonable attorneys' fees) incurred by them
in connection with the transactions contemplated hereby (the "RESTRUCTURING
EXPENSE REIMBURSEMENT", and collectively with the Sale Expense Reimbursement,
the "EXPENSE REIMBURSEMENTS"). If due and payable in accordance with the terms
hereof, Sellers shall pay the EqualNet Parties the approved Restructuring
Expense Reimbursement on March 31, 1998. To the extent of any inconsistency
between the foregoing provisions of this Section 14(b) and the Payment Order,
the Payment Order shall prevail; provided, HOWEVER, that notwithstanding the
foregoing provisions of this Section 14(b), Buyer shall not be entitled to the
Break-Up Fee or Expense Reimbursement (i) if this Agreement is terminated by
Sellers pursuant to clause (iii) or (iv) of Section 13(a) prior to the approval
by the Bankruptcy Court of an Other Transaction, (ii) if Buyer breaches its
covenants contained in Section 9(i) or (iii) if Buyer fails to purchase the
Assets on the Closing Date notwithstanding the satisfaction of all conditions
specified in Sections 10, 11 and 12 to Buyer's obligation to do so.
Section XV. ADDITIONAL POST-CLOSING COVENANTS.
A. FURTHER ASSURANCES. From and after the Closing Date, from time to time,
at Buyer's request and expense, Sellers will execute and deliver such other
instruments and take such other action as Buyer may reasonably request to more
effectively put Buyer in possession and control of all or any part of the Assets
and confirm its title thereto.
B. BENEFITS UNDER UNASSIGNABLE CONTRACTS. If a consent of a third party
which is required in order to assign any Asset (or claim, right or benefit
arising thereunder or resulting therefrom) is not obtained prior to the Closing
Date, or if an attempted assignment would be ineffective or would adversely
affect the ability of Sellers to convey their interest in question to Buyer,
Sellers will cooperate with Buyer and use reasonable efforts in any lawful
arrangement to provide that Buyer shall receive Sellers' interest in the
benefits of such Asset. If any consent or waiver is not obtained before the
Closing Date and the Closing is nevertheless consummated, Sellers agree to
continue to use their reasonable efforts for a period of 90 days after the
Closing to obtain all such consents as have not been obtained prior to such
date.
C. USE OF SELLERS' PREMISES. Buyer shall remove all Assets at its sole
expense as soon after the Closing as possible but shall have the option to use
all or some of the premises under lease to Sellers for a period of up to 60 days
after the Closing in order to facilitate the sale and transfer of the Assets
(the "DESIGNATED PREMISES"). At least three (3) days prior to Closing, Buyer
shall notify Sellers in writing of those premises it intends to utilize
subsequent to the Closing and for what period of time. Buyer shall pay to
Sellers use and occupancy, calculated on a per diem basis, so as to pay those
monetary obligations Sellers may incur under Section 365(d)(3) of the Bankruptcy
Code in respect of such Designated Premises. Sellers agree to timely move to
extend their time to assume or reject the leases for the Designated Premises
upon timely request of Buyer and to use reasonable good faith efforts to obtain
an extension of its time to assume or reject said leases. In no event will
Sellers be required by this Section to assume any lease. To the extent Sellers'
ability to comply with this Section 15(a) is conditioned by the Bankruptcy Court
upon assumption of one or more leases, then Sellers shall be excused from
complying with this Section unless such leases constitute Designated Contracts.
D. RECORDS. Buyer covenants and agrees that following the Closing it shall
1. hold, maintain and preserve for a period of at least four (4) years all books
and records and other documents and materials relating to the assets,
properties, business and operations of Sellers included in the Assets and
transferred to Buyer pursuant hereto and shall not destroy or discard any such
books, records, documents or materials without at least thirty (30) days prior
notice to the Sellers and in no event until the Bankruptcy Cases are concluded
and 2. allow Sellers and their employees, accountants and agents access to such
books, records, documents, material and personnel, and (at Sellers' expense)
permit Sellers to make copies of or extracts from such books, records and
documents, for valid purposes, upon reasonable advance notice during normal
business hours and (iii) direct Buyer's employees to assist Sellers in obtaining
access to or copies of such books, records and documents. Such access shall
include the right to examine and make extracts or copies of any such books,
records, documents or materials and, if deemed necessary by counsel for Sellers,
the right to have the originals thereof delivered to and held by such counsel
during the pendency of the Bankruptcy proceedings.
E. SELLERS' EMPLOYEES. Buyer may, but shall not be required to, offer
employment to or employ any employees or officers of Sellers as Buyer shall
determine in its sole discretion on such terms and conditions as Buyer shall
determine in its sole discretion. Sellers agree to use their reasonable efforts
to cause their employees and officers who have received offers of employment
from Buyer to accept such offers of employment. In the event that Buyer employs
any officer or employee of Sellers, Sellers shall provide Buyer with such
information in respect of such individuals as Buyer reasonably may request,
including, without limitation, personnel files and other records. Buyer shall
not have any liability in respect of any officers or employees of Sellers,
whether employed by Buyer or not, resulting from such officers' and employees'
termination of employment with Sellers, including, without limitation, any
liability under the Worker Adjustment and Retraining Notification Act, on
account of severance benefits, bonuses, vacation time or pay or incentive
programs of any type, nor shall Buyer acquire any obligation under any contract,
Employee Benefit Plan or other agreement or arrangement of Sellers with respect
to any officer or employee or former officer employee of Sellers, except to the
extent such liability is an Assumed Liability.
Section XVI. INDEMNIFICATION AND RELATED MATTERS
(a) INDEMNIFICATION BY SELLERS. Subject to the provisions of this Section
16 and if (but only if) the Closing is consummated, Sellers agree, jointly and
severally, to indemnify and hold each EqualNet Party and its officers,
directors, employees and agents (collectively, the "BUYER INDEMNIFIED PARTIES")
harmless from and against all Damages resulting from or arising out of:
(i) any breach of Sellers' representations and warranties set forth
in Sections 7(a), 7(b), 7(c), 7(f), 7(h), 7(i), 7(j), 7(m), 7(o), 7(p) and
7(q); and/or
(ii) the Excluded Liabilities.
(b) DETERMINATION OF DAMAGES AND RELATED MATTERS. Subject to the
provisions of this Section 16 and if (but only if) the Closing is consummated,
the EqualNet Parties agree, jointly and severally, to indemnify and hold Sellers
and their respective officers, directors, employees and agents (collectively,
the "SELLER INDEMNIFIED PARTIES") harmless from and against all Damages
resulting from or arising out of:
(i) a breach of any EqualNet Party's representations and warranties
set forth in sections 8(a), 8(b), 8(e), 8(g), 8(h) and 8(i); and/or
(ii) the Assumed Liabilities.
(c) DETERMINATION OF DAMAGES AND RELATED MATTERS. In calculating any
amounts payable pursuant to paragraphs (a) and (b) above, Sellers or the
EqualNet Parties, as the case may be, shall receive credit for (a) any tax
benefit allowable as a result of the facts giving rise to the claim for
indemnification, and (b) any insurance recoveries, and no amount shall be
included for the EqualNet Parties' or Sellers', as the case may be, special,
consequential or punitive damages. Sellers and the EqualNet Parties agree that,
except as specifically set forth in this Agreement (including the Schedules and
Exhibits hereto), no party to this Agreement (including its respective
representatives) has made or shall have liability for any representation or
warranty, express or implied, in connection with the transactions contemplated
by this Agreement, including in the case of Sellers and their respective
representatives, any representation or warranty, express or implied (written or
oral), as to the accuracy or completeness of any information regarding the
Business.
(d) TERMINATION OF REPRESENTATIONS AND WARRANTIES. The parties hereto
agree that the representations and warranties made in this Agreement (other than
the representations and warranties set forth in Sections 7(a), 7(b), 7(c), 7(f),
7(h), 7(i), 7(j), 7(m), 7(o), 7(p), 7(q), 8(a), 8(b), 8(e), 8(g), 8(h) and 8(i))
shall terminate immediately upon consummation of the Closing or upon the
termination of this Agreement pursuant to Section 13, as the case may be, and
that Sellers' representations and warranties contained in Sections 7(f), 7(h),
7(i), 7(j), 7(o), 7(p) and 7(q) shall terminate on the earlier of (i) the
confirmation of plans of reorganization for Sellers and (ii) the 120th day
following the Closing Date. No claim in respect of a breach of any
representation or warranty may be made after the termination thereof. However,
each party hereto shall remain liable for any breach by such party of any
covenant or agreement of such party contained herein.
(e) NOTICE OF INDEMNIFICATION. In the event any Legal Proceeding shall be
threatened or instituted or any claim or demand shall be asserted by any Buyer
Indemnified Party entitled to indemnification or any Seller Indemnified Party
entitled to indemnification in respect of which payment may be sought under the
provisions of this Section 16 or for breach of any of the representations and
warranties set forth herein, the Buyer Indemnified Party entitled to
indemnification or the Seller Indemnified Party entitled to indemnification
seeking indemnification (the "INDEMNITEE") shall promptly cause written notice
of the assertion of any such claim of which it has knowledge and which it
reasonably believes to be covered by this indemnity to be forwarded to Sellers
or Buyer, as the case may be (the "INDEMNITOR"); PROVIDED, HOWEVER, that the
failure to give such notice shall not affect the indemnification provided
hereunder except to the extent the Indemnitor has actually been prejudiced as a
result of such failure. Subject to the foregoing, any notice of a claim by
reason of any of the covenants contained in this Agreement shall state
specifically the covenant with respect to which the claim is made, the facts
giving rise to an alleged basis for the claim, and the amount of the liability
asserted against the Indemnitor by reason of the claim.
(f) INDEMNIFICATION PROCEDURE FOR THIRD PARTY CLAIMS. Except as otherwise
provided herein, in the event of the initiation of any Legal Proceeding against
an Indemnitee by a third party, the Indemnitor shall have the right after the
receipt of notice, at its option and at its own expense, to be represented by
counsel (which counsel shall be reasonably satisfactory to the Indemnitee) and
to defend against, negotiate, settle or otherwise deal with any proceeding,
claim or demand which relates to any Damages indemnified against hereunder;
PROVIDED, HOWEVER, (i) that the Indemnitor exercises such option in writing
within 30 days of receipt of notice; and (ii) that the Indemnitee may
participate in any such proceeding with counsel of its choice and at its
expense. The parties hereto agree to cooperate fully with each other in
connection with the defense, negotiation or settlement of any such Legal
Proceeding, claim or demand. To the extent the Indemnitor elects not to defend
such proceeding, claim or demand, and the Indemnitee defends against or
otherwise deals with any such proceeding, claim or demand, the Indemnitee may
retain counsel (reasonably satisfactory to Indemnitor) at the expense of the
Indemnitor and control the defense of and settlement of such proceeding;
PROVIDED, that the Indemnitor shall nevertheless indemnify the Indemnitee for
the full amount of the Damages relating to such proceeding, claim or demand; and
PROVIDED, FURTHER, that the Indemnitee shall give the Indemnitor twenty (20)
days written notice prior to entering into any such settlement and shall not
settle any such claim without the consent of the Indemnitor, which consent shall
not be unreasonably withheld and which consent shall be deemed to have been
granted if the Indemnitor fails to respond to the Indemnitee's properly noticed
request for such consent. If the Indemnitee shall settle any such proceeding
without the consent of the Indemnitor, the Indemnitee shall thereafter have no
claim against the Indemnitor under this Section 16 with respect to any Damages
occasioned by such settlement.
(g) Notwithstanding anything to the contrary contained herein, no
Indemnitee shall be entitled to recover any amount from any Indemnitor for
breach of such Indemnitor's representations and warranties contained herein
(other than the representations and warranties contained in Section 7(m) and
8(i)) unless the aggregate Damages incurred by the Indemnitee for breach of the
Indemnitor's representations and warranties contained herein exceed $75,000, and
then the Indemnitee shall only be entitled to recover the amount of such excess.
The foregoing limitation shall not apply to a breach of the representations and
warranties contained in Section 7(m) or 8(i) or to a claim for breach of any
covenant or agreement of any party contained herein, for failure by Buyer to pay
any Assumed Liabilities or for any Damages incurred by the EqualNet Parties in
respect of Excluded Liabilities.
(h) EXCLUSIVE REMEDY. The exclusive remedy available to a party hereto in
respect of the matters covered by Section 16(a) or 16(b) shall be to proceed in
the manner and subject to the limitations contained in this Section 16.
Section XVII. GOVERNING LAW; SUBMISSION TO JURISDICTION
A. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO THE CHOICE OF LAW PRINCIPLES
THEREOF WHICH WOULD MAKE THE LAWS OF ANY OTHER JURISDICTION APPLICABLE TO THIS
AGREEMENT.
B. ANY LEGAL ACTION OR PROCEEDING RELATING TO OR ARISING UNDER THIS
AGREEMENT SHALL BE BROUGHT IN THE BANKRUPTCY COURT AND, BY EXECUTION AND
DELIVERY OF THIS AGREEMENT, EACH SELLER HEREBY ACCEPTS FOR ITSELF AND IN RESPECT
OF ITS PROPERTY, AND EACH EQUALNET PARTY HEREBY ACCEPTS FOR ITSELF, GENERALLY
AND UNCONDITIONALLY, THE JURISDICTION OF THE BANKRUPTCY COURT WITH REGARD TO ALL
SUCH ACTIONS OR PROCEEDINGS. THE PARTIES HERETO HEREBY IRREVOCABLY WAIVE ANY
OBJECTION, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE
OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH ANY OF THEM MAY NOW OR
HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING IN THE
BANKRUPTCY COURT.
Section XVIII. MISCELLANEOUS
A. NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing (including facsimile transmission) and shall be
deemed to have been duly given when received if delivered in person or by
courier, or facsimile transmission or mailed by certified or registered mail,
postage prepaid: If to any Seller:
c/o SA Telecommunications, Inc.
1600 Promenade Center, 15th Floor
Richardson, Texas 75080
Fax No. 972-889-1543
972-690-5925
Attention: Albert B. Gordon, Jr.
WITH COPIES TO:
White & Case LLP
1155 Avenue of the Americas
New York, New York 10036
Fax No. 212-354-8113
Attention: Andrew DeNatale, Esq.
IF TO ANY EQUALNET PARTY:
c/o EqualNet Holding Corp.
1250 Wood Branch Park Drive
Houston, Texas 77079
Fax No. 281-529-4650
Attention: Mr. Michael L. Hlinak
WITH COPIES TO:
Weil Gotshal & Manges LLP
700 Louisiana, Suite 1600
Houston, Texas 77002
Fax No. 713-224-9511
Attention: W. Robert Shearer, Esq.
Copies of all notices given by any party hereunder shall be sent to
counsel for the Creditors' Committee, addressed as follows (but failure to send
such copy shall not affect the validity of any such notices):
Kelley, Drye & Warren, LLP
101 Park Avenue
New York, New York
Fax No. 212-808-7897
Attention: Mark I. Bane, Esq.
Any party may, by written notice to the other parties, change the address
to which notices to such party are to be delivered or mailed.
B. ENTIRE AGREEMENT; AMENDMENTS. This Agreement, the Confidentiality
Agreement, the Escrow Agreement, the other Transaction Documents and the other
agreements referred to herein and entered into in connection herewith set forth
the entire agreement and understanding of the parties in respect of the
transactions contemplated hereby and supersede all prior agreements,
arrangements and understandings relating to the subject matter hereof between
Sellers and the EqualNet Parties, including the Letter of Intent. No
representation, promise, inducement or statement of intention has been made by
Sellers or the EqualNet Parties that is not embodied in this Agreement or any of
the other agreements referred to herein and entered into in connection herewith,
the Exhibits or Schedules hereto, or the written statements, certificates or
other documents delivered pursuant hereto, and neither Sellers nor the EqualNet
Parties shall be bound by or liable for any alleged representation, promise,
inducement or statement of intention not set forth herein. This Agreement may be
amended or modified only by a written instrument executed by the EqualNet
Parties and Sellers or by their successors and assigns.
C. PRESS RELEASES. Neither Sellers nor the EqualNet Parties shall issue
any press releases or make any public announcements of any of the transactions
contemplated by this Agreement except as may be mutually agreed to in writing by
Sellers and the EqualNet Parties; PROVIDED, HOWEVER, that notwithstanding the
foregoing, Sellers and the EqualNet Parties shall be permitted, upon prior
notice to the other party, to make such disclosures to the public, customers,
employees, carriers or other providers of wholesale telephone services or
Governmental Entities, including filings with the Bankruptcy Court, as they or
their respective counsel shall deem necessary to maintain existing commercial
relationships or comply with, or prevent violation of, applicable laws.
D. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of
and be binding upon the successors and assigns of Sellers and the EqualNet
Parties. Except as provided in Section 3(l), neither party hereto may assign its
rights or obligations hereunder without the prior written consent of the other
party hereto.
E. NO THIRD PARTY BENEFICIARIES. Nothing in this Agreement, expressed or
implied, is intended to confer upon any other person or entity other than the
parties hereto and their successors and assigns, any rights or remedies
hereunder and all third-party beneficiary rights are hereby expressly
disclaimed.
F. WAIVERS. Any of the terms or conditions of this Agreement may be waived
at any time and from time to time in writing by the party entitled to the
benefits thereof without affecting any other terms or conditions of this
Agreement.
G. SEVERABILITY. To the extent that any provision of this Agreement shall
be invalid or unenforceable, it shall be considered deleted herefrom and the
remainder of such provision and of this Agreement shall be unaffected and shall
continue in full force and effect.
H. EXPENSES. Except as otherwise expressly provided in this Agreement or
the Escrow Agreement and regardless of whether the actions contemplated in this
Agreement are consummated, each of the parties hereto shall bear its own
expenses (including, without limitation, fees and disbursements of its counsel,
accountants, financial advisors and other experts), incurred by it in connection
with the preparation, negotiation, execution, delivery and performance of this
Agreement, each of the other documents and instruments executed in connection
with or contemplated by this Agreement and the consummation of the transactions
contemplated hereby and thereby; PROVIDED, HOWEVER, that in any litigation to
enforce the terms of this Agreement the prevailing party shall be entitled to
recover from the losing party the legal fees and expenses incurred by the
prevailing party in such litigation.
I. NO RECOURSE. Notwithstanding any provision of this Agreement, each of
the EqualNet Parties, on the one hand, and the Sellers, on the other hand, agree
that neither it nor any person acting on its behalf may assert any claims or
cause of action against any officer or director of the other party or parties or
(except as provided in Section 18(j)) stockholder of such other party or parties
in connection with or arising out of this Agreement or the transactions
contemplated hereby.
J. GUARANTY BY EQUALNET. EqualNet hereby guaranties the due and punctual
payment and performance by Buyer of all Buyer's obligations hereunder and under
any Transaction Document to which Buyer is a party.
K. COURTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed the day and year first above written.
BUYER:
EQUALNET CORPORATION
By /s/ MICHAEL L. HLINAK
Name: Michael L. Hlinak
Title: Chief Operatint Officer
EQUALNET:
EQUALNET HOLDING CORP.
By /s/ MICHAEL L. HLINAK
Name: Michael L. Hlinak
Title: Chief Operating Officer
SELLERS:
SA TELECOMMUNICATIONS, INC.
ADDTEL COMMUNICATIONS, INC.
LONG DISTANCE NETWORK, INC.
NORTH AMERICAN TELECOMMUNICATIONS CORPORATION
U.S. COMMUNICATIONS, INC.
SOUTHWEST LONG DISTANCE NETWORK, INC.
UNIQUEST COMMUNICATIONS, INC.,
Debtors and Debtors-in-possession
By /s/ A. B. GORDON, JR.
Name: A. B. Gordon, Jr.
Title: Chief Executive Officer
<PAGE>
EXHIBIT A
SUMMARY OF TERMS OF PREFERRED STOCK
Dividend rate: $2.00 per share per annum when, as and if declared
by the Board of Directors out of funds legally available
for the payment of dividends, payable "in kind" or cash
at EqualNet's sole discretion.
Liquidation Preference
Amount: $27.50 per share.
Redemption at the
Company's option: The Preferred Stock may be redeemed by
EqualNet as a whole or in part at any time on
not less than 30 nor more than 60 days' prior
notice, beginning on the one year anniversary
of the date of issuance of the Preferred
Stock, except that the Preferred Stock may be
called prior to that date at such time as the
Common Stock of EqualNet shall have traded at
125% or more of $2.75 (unless adjusted in
accordance with the definition of the term
"Conversion Rate") for at least 20 of 30
trading days. The redemption price per share
for the twelve-month periods beginning on the
Closing Date and on each anniversary thereof
of each year set below will be:
YEAR
----
REDEMPTION
----------
PRICE PER SHARE
- ---------------
1998
$28.875
1999
28.1875
2000 and
thereafter 27.50
Rank: Prior to the Common Stock and junior to the
Series A Preferred Stock to be issued in
connection with the transactions among
EqualNet, the Willis Group and MCM Partners.
<PAGE>
SCHEDULE 3(B)(X)
EXCLUDED BOOKS AND RECORDS
1. All of Sellers' tax returns and related records.
2. All of Sellers' corporate records, including, without limitation, minutes,
the stock ledger and the minute books.
3. Any of Sellers' books and records relating to liabilities that are not
Assumed Liabilities or assets that are not Assets.
4. General ledger and related information supporting Sellers' financial
statements.
5. Corporate seal.
6. Business plans and financial projections of Sellers.
<PAGE>
ANNEX C
SUMMARY FINANCIAL INFORMATION
The following historical consolidated financial information of the Company
and SA Telecom has been derived from their respective historical consolidated
financial statements and should be read in conjunction with the separate
consolidated financial statements and the notes thereto located elsewhere in
this Proxy Statement or incorporated herein by reference. The historical
information is not necessarily indicative of results to be expected after the
acquisition is consummated. The selected historical consolidated financial
information for each company corresponds to its respective annual reporting
period, which is the fiscal year ending June 30 for the Company and December 31
for SA Telecom.
EQUALNET HOLDING CORP
SELECTED CONSOLIDATED HISTORICAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS
ENDED MARCH 31, YEAR ENDED JUNE 30,
---------------------------- --------------------------------------------------------
1998 1997 1997 1996 1995 1994
------------- ------------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales........................ $ 20,574,243 $ 36,067,019 $ 46,588,496 $ 78,354,858 $ 67,911,405 $ 35,397,331
Gross profit..................... 4,939,952 8,289,768 12,107,368 16,547,745 13,256,092 6,595,815
Operating income (loss).......... (7,367,359) (10,348,053) (10,746,344) (9,988,379) 2,964,158 1,026,426
Interest expense................. 1,180,773 719,010 1,022,284 679,745 526,733 140,743
Income (loss) before income
taxes.......................... (8,467,510) (11,451,795) (12,635,233) (11,077,266) 2,871,302 1,769,342
Net income (loss)................ (8,467,510) (10,648,950) (14,980,544) (8,417,413) 2,364,245 1,769,342
Earnings (loss) per common
share(1)....................... (1.15) (1.75) (2.46) (1.40) 0.38 0.27
Cash dividends per share......... -- -- -- -- .22 .61
BALANCE SHEET DATA:
Working capital (deficit)........ (4,098,481) (3,625,014) (4,667,109) (3,161,437) 7,772,366 230,448
Total assets..................... 30,454,964 24,379,875 19,162,160 34,595,832 39,315,569 9,044,595
Long-term debt and capital
leases, net of current
portion........................ 6,050,000 2,851,372 2,864,058 45,000 1,142,640 512,914
Stockholders' equity (deficit)... 8,755,101 (2,620,554) (1,688,539) 12,383,998 20,705,724 1,350,698
</TABLE>
1993
------------
INCOME STATEMENT DATA:
Net sales........................ $ 18,950,168
Gross profit..................... 2,509,167
Operating income (loss).......... 630,694
Interest expense................. 73,234
Income (loss) before income
taxes.......................... 595,333
Net income (loss)................ 595,333
Earnings (loss) per common
share(1)....................... 0.09
Cash dividends per share......... --
BALANCE SHEET DATA:
Working capital (deficit)........ (158,007)
Total assets..................... 6,012,925
Long-term debt and capital
leases, net of current
portion........................ 84,378
Stockholders' equity (deficit)... 466,830
SA TELECOMMUNICATIONS
SELECTED CONSOLIDATED HISTORICAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
---------------------------- -------------------------------------------------------
1998(2) 1997 1997 1996 1995 1994
------------- ------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales........................ $ 5,936,035 $ 13,115,271 $ 39,841,012 $ 35,668,502 $ 20,748,021 $ 9,755,343
Gross profit..................... 1,674,424 3,087,523 4,441,872 13,138,274 6,631,908 1,456,913
Operating loss................... (425,661) (2,562,994) (49,386,332) (3,473,458) (1,277,110) (1,810,641)
Interest expense................. 215,045 789,782 5,511,564 2,129,876 682,796 29,903
Loss before income taxes......... (629,982) (3,332,576) (7,474,338) (5,382,159) (1,935,221) (1,819,070)
Net loss......................... (629,982) (3,332,576) (7,474,338) (4,054,515) (6,465,963) (2,446,986)
Loss per common share............ (.04) (0.22) (0.50) (0.28) (0.57) (0.27)
BALANCE SHEET DATA:
Working capital (deficit)........ $ -- $ (2,688,567) $ -- $ (3,011,355) $ (2,841,834) $ 561,902
Total assets..................... 14,861,735 50,558,542 14,562,001 62,679,069 26,040,803 11,776,834
Long-term debt and capital
leases, net of current
portion(3)..................... 63,240,766 33,351,848 61,845,137 29,808,206 8,528,129 430,393
Stockholders' equity............. -- 2,873,253 -- 6,251,304 8,978,945 9,984,357
</TABLE>
1993
------------
INCOME STATEMENT DATA:
Net sales........................ $ 2,592,473
Gross profit..................... 197,429
Operating loss................... (1,042,129)
Interest expense................. 11,721
Loss before income taxes......... (969,404)
Net loss......................... (1,075,608)
Loss per common share............ (0.17)
BALANCE SHEET DATA:
Working capital (deficit)........ $ 1,485,217
Total assets..................... 6,345,183
Long-term debt and capital
leases, net of current
portion(3)..................... --
Stockholders' equity............. 5,595,623
- ------------
(1) Amounts presented for years ended June 30, 1993 through 1995 are for pro
forma taxes of $232,180, $690,043 and $612,751 in 1993, 1994 and 1995,
respectively for the years the Company was an S corporation.
(2) The income statement data for the three months ended March 31, 1998 was
obtained from the internal accounting records. SA Telecom has presented its
financial statements on a liquidation basis, therefore the statement of
operations for the period may not be indicative of ongoing results.
(3) Long term debt for the three months ended March 31, 1998 and the year ended
December 31, 1997 is the total liability before the adjustment to reduce the
liability to estimated liquidation value of assets.
C-1
<PAGE>
The following table presents selected unaudited combined pro forma
consolidated historical financial information of the Company and SA Telecom
after giving effect to the acquisition under the "purchase" method of
accounting as if the acquisition had been consummated at the dates and the
beginning of each of the periods presented. The selected unaudited combined pro
forma consolidated historical financial information has been derived from the
unaudited pro forma financial statements and the notes thereto. The pro forma
information is not necessarily indicative of the results that would have been
obtained if the acquisition had been consummated on July 1, 1997 and July 1,
1996 (in the case of income statement items) or on March 31, 1998 (in the case
of balance sheet items), or that may be obtained in the future.
THE COMPANY AND SA TELECOMMUNICATIONS COMBINED
SELECTED PRO FORMA CONSOLIDATED HISTORICAL FINANCIAL INFORMATION(1)
NINE MONTHS
ENDED YEAR ENDED
MARCH 31, JUNE 30,
-------------- ------------
1998 1997
-------------- ------------
(UNAUDITED)
INCOME STATEMENT DATA:
Net sales....................... $ 41,842,267 $ 92,528,076
Gross profit.................... 7,549,973 22,803,730
Operating loss.................. (25,696,792) (21,709,844)
Interest expense................ 1,526,072 1,481,610
Loss before income taxes........ (27,078,586) (23,756,985)
Net loss applicable to common
shareholders.................. (27,693,088) (26,696,246)
Pro forma loss per common
share(2)...................... (3.76) (4.38)
MARCH 31, 1998
--------------
BALANCE SHEET DATA:
Working capital (deficit)....... (8,750,481)
Total assets.................... 40,453,098
Long-term debt and capital
leases, net of current
portion....................... 6,050,000
Stockholders' equity............ 14,160,802
NOTES:
(1) The combined income statement data relating to the Company and SA
Telecom is for the nine months ended March 31, 1998 and the year ended
June 30, 1997. Since SA Telecom's year end is December 31, their
financial information was derived by conforming to the Company's
fiscal year end using previously reported quarterly information and
restating.
(2) Pro forma loss per common share for each period is based upon the
Company's weighted average number of common shares outstanding, since
no common shares are to be issued for this acquisition.
C-2
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The Unaudited Pro Forma Financial Statements are based on the historical
consolidated financial statements of the Company and SA Telecom included
elsewhere or incorporated by reference in this Proxy Statement and should be
read in conjunction with those consolidated financial statements and related
notes. These Unaudited Pro Forma Financial Statements are not necessarily
indicative of the operating results that would have been achieved had the
acquisition been in effect as of the beginning of the periods presented and
should not be construed as representative of future operations.
UNAUDITED PRO FORMA BALANCE SHEET
The following unaudited pro forma balance sheet presents the combined
financial position of the Company and SA Telecom. Such unaudited pro forma
combined information is based on the historical consolidated balance sheets of
the Company and SA Telecom as of March 31, 1998 after giving effect to the
acquisition using the purchase method of accounting and to the pro forma
adjustments as described in the notes to the Unaudited Pro Forma Financial
Statements.
<TABLE>
<CAPTION>
EQUALNET SA TELECOM
MARCH 31, MARCH 31, PRO FORMA
1998 1998 ADJUSTMENTS REF. PRO FORMA
----------- ----------- ------------ --- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and equivalents............. $ 2,999,201 $ 524,628 $(2,451,628 ) 1,3 $ 1,072,201
Accounts receivable, net of
allowance...................... 4,795,026 3,592,433 -- -- 8,387,459
Due from agents.................. 1,539,080 -- -- 1,539,080
Acquisition advance.............. 1,550,000 -- (1,550,000 ) 1 --
Prepaid expenses and other....... 440,584 117,346 (117,346 ) 3 440,584
Assets held for sale............. -- -- 625,090 1 625,090
----------- ----------- ------------ -----------
Total current assets................. 11,323,891 4,234,407 (3,493,884 ) 12,064,414
Property and equipment, net.......... 15,809,601 5,601,310 (5,550,790 ) 1,3 15,860,121
Customer acquisition costs, net...... 282,199 -- 9,207,091 1 9,489,290
Other assets......................... 2,148,055 -- 2,148,055
Goodwill, net of accumulated
amortization....................... 891,218 5,026,018 (5,026,018 ) 3 891,218
----------- ----------- ------------ -----------
Total assets......................... $30,454,964 $14,861,735 $(4,863,601 ) $40,453,098
=========== =========== ============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable................. $ 1,973,966 $ 140,695 $ (140,695 ) 3 $ 1,973,966
Accrued expenses................. 2,958,613 -- -- 2,958,613
Post-petition accounts payable &
accrued exp.................... -- 7,532,328 (7,532,328 ) 3 --
Pre-petition accounts payable &
accrued exp.................... -- 11,518,229 (11,518,229 ) 3 --
Accrued sales taxes.............. 257,725 -- -- 257,725
Brokerage commissions payable.... 75,320 -- -- 75,320
Payable to providers of long
distance services.............. 6,712,415 -- -- 6,712,415
Current maturities of capital
lease obligations.............. -- -- -- --
Note payable to long distance
provider....................... 1,183,059 -- -- 1,183,059
Current maturities of notes
payable........................ 400,000 -- -- 400,000
Notes payable due secured
creditors expected to be
assumed........................ -- 3,539,428 1,053,005 1 4,592,433
Other notes payable and capital
lease obligations due secured
creditors...................... -- 4,257,128 (4,257,128 ) 3 --
Contractual obligations with
regard to receivable sales
agreement...................... 1,861,274 -- -- 1,861,274
----------- ----------- ------------ -----------
Total current liabilities............ 15,422,372 26,987,808 (22,395,375 ) 20,014,805
Note payable......................... 6,050,000 252,958 (252,958 ) 3 6,050,000
Subordinated note payable............ -- 36,000,000 (36,000,000 ) 3 --
Deferred rent........................ 227,491 -- -- 227,491
Adjustment to reduce liabilities to
estimated liquidation value of
assets............................. -- -- -- --
Secured creditors................ -- (110,691) 110,691 3 --
Other creditors.................. -- (48,268,340) 48,268,340 3 --
----------- ----------- ------------ -----------
21,699,863 14,861,735 (10,269,302 ) 26,292,296
Shareholders' equity................. --
Preferred stock:................. --
Series A..................... 20 -- -- 20
Series B..................... 30 -- -- 30
Series C..................... 1,966 1 1,966
Common stock..................... 183,934 -- -- 183,934
Treasury stock at cost........... (804,881) -- -- (804,881)
Additional paid in capital....... 38,957,886 -- 5,403,735 1 44,361,621
Warrants outstanding............. 1,249,000 -- -- 1,249,000
Deferred compensation............ (193,327) -- -- (193,327)
Retained earnings................ (30,637,561) -- (30,637,561)
----------- ----------- ------------ -----------
Total shareholders' equity........... $ 8,755,101 $ -- $ 5,405,701 $14,160,802
----------- ----------- ------------ -----------
Total liabilities and shareholders'
equity............................. $30,454,964 $14,861,735 $(4,863,601 ) $40,453,098
=========== =========== ============ ===========
</TABLE>
See notes to unaudited pro forma financial statements.
C-3
<PAGE>
UNAUDITED PRO FORMA STATEMENTS OF INCOME
The following unaudited pro forma statements of income give effect to the
proposed acquisition by combining the results of continuing operations for the
nine months ended March 31, 1998 and the year ended June 30, 1997 using the
purchase method of accounting, as if the companies had been combined since the
beginning of each respective period.
<TABLE>
<CAPTION>
EQUALNET SA TELECOM
NINE NINE EQUALNET SA TELECOM
MONTHS MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, PRO FORMA JUNE 30, JUNE 30,
1998 1998(5) ADJUSTMENTS PRO FORMA 1997 1997
---------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Sales................................ $20,574,243 $21,268,024 $ -- $41,842,267 $46,588,496 $45,939,580
Cost of sales........................ 15,634,291 18,658,003 -- 34,292,294 34,481,128 35,243,218
---------- ----------- ------------ ----------- ----------- -----------
Gross margin......................... 4,939,952 2,610,021 -- 7,549,973 12,107,368 10,696,362
Selling, general and
administrative..................... 9,005,284 16,867,851 -- 25,873,135 12,453,814 14,012,491
Depreciation and amortization........ 3,302,027 2,338,603 1,693,000 (6) 7,333,630 5,999,898 4,280,429
Write down of assets................. -- 24,738,237 (24,738,237 )(7) -- 4,400,000 1,833,805
Nonrecurring network reconfiguration
costs.............................. -- -- -- -- -- 806,436
Nonrecurring restructuring and
integration costs.................. -- -- -- -- -- 2,015,506
---------- ----------- ------------ ----------- ----------- -----------
Operating loss....................... (7,367,359) (41,334,670) 23,045,237 (25,656,792) (10,746,344) (12,252,305)
Other expense (income):
Interest Income.................. (6,700) (186 ) -- (6,886) (3,685) --
Interest Expense................. 1,180,773 4,016,299 (3,671,000 )(2) 1,526,072 1,022,284 3,146,326
Miscellaneous.................... (73,922) (23,470 ) -- (97,392) 870,290 (301,074)
Adjustment to reduce liabilities
to estimated liquidation value
of assets...................... -- (47,283,136) 47,283,136 (7) -- -- --
---------- ----------- ------------ ----------- ----------- -----------
Income (loss) before income taxes &
preferred dividend req............. (8,467,510) 1,955,823 (20,933,146 )(4) (27,078,586) (12,635,233) (15,097,557)
Preferred dividend requirement....... 11,557 308,115 294,830 614,502 -- 200,844
Provision for taxes.................. -- -- -- (27,693,088) 2,345,311 --
---------- ----------- ------------ ----------- ----------- -----------
Net income (loss) applicable to
common shareholders................ $(8,479,067) $1,647,708 $(21,227,976) $(27,693,088) $(14,980,544) $(15,298,401)
========== =========== ============ =========== =========== ===========
Net loss per common share............ $ (1.15) $ (3.76) $ (2.46)
========== =========== ===========
Weighted average common shares
outstanding........................ 7,365,587 7,365,587 6,096,932
========== =========== ===========
</TABLE>
PRO FORMA
ADJUSTMENTS PRO FORMA
------------ -----------
Sales................................ $ -- $92,528,076
Cost of sales........................ -- 69,724,346
------------ -----------
Gross margin......................... -- 22,803,730
Selling, general and
administrative..................... -- 26,466,305
Depreciation and amortization........ 545,000(6) 10,825,327
Write down of assets................. (1,833,805)(7) 4,400,000
Nonrecurring network reconfiguration
costs.............................. -- 806,436
Nonrecurring restructuring and
integration costs.................. -- 2,015,506
------------ -----------
Operating loss....................... 1,288,805 (21,709,844)
Other expense (income):
Interest Income.................. -- (3,685)
Interest Expense................. (2,687,000)(2)(6) 1,481,610
Miscellaneous.................... -- 569,216
Adjustment to reduce liabilities
to estimated liquidation value
of assets...................... -- --
------------ -----------
Income (loss) before income taxes &
preferred dividend req............. 3,975,805(4) (23,756,985)
Preferred dividend requirement....... 393,106 593,950
Provision for taxes.................. -- 2,345,311
------------ -----------
Net income (loss) applicable to
common shareholders................ $3,582,699 $(26,696,246)
============ ===========
Net loss per common share............ $ (4.38)
===========
Weighted average common shares
outstanding........................ 6,096,932
===========
- ------------
(1) Pro forma purchase accounting and issuance of Preferred Stock upon
consummation of the transaction. The cash consideration due was reduced by
the acquisition advance of $1.55 million previously advanced to SA Telecom.
(2) To eliminate interest expense associated with debt not being assumed, net of
interest expense on additional $1.0 million of Greyrock debt being assumed.
(3) Remove SA Telecom Balance Sheet items not being purchased.
(4) Record preferred dividend requirements for Series C Preferred.
(5) The income statement data for the three months ended March 31, 1998 was
obtained from the internal accounting records. SA Telecom has presented its
financial statements and liquidation basis, therefore the statement of
operations for the period may not be indicative of ongoing results.
(6) Record additional amortization expense in connection with recorded acquired
customer base which will be amortized by applying the Company's attrition
rate associated with the acquired customers (estimated to be 6%) 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 adjustment is
net of the amount of depreciation and amortization expense related to fixed
assets and goodwill not being acquired.
(7) To remove the write down of assets and adjustment to reduce liabilities
associated with assets not being purchased and liabilities not being
assumed.
C-4
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
STATEMENT OF NET ASSETS IN LIQUIDATION
AS OF MARCH 31, 1998
(UNAUDITED)
ASSETS
Cash and cash equivalents............ $ 524,628
Trade accounts receivable............ 3,592,433
Inventory, prepaid expenses and
other.............................. 117,346
Property and equipment............... 5,601,310
Customer lists and other
intangibles........................ 5,026,018
---------------
Total assets......................... $ 14,861,735
===============
LIABILITIES
Accounts payable..................... $ 140,695
Post-petition accounts payable and
accrued expenses................... 7,532,328
Pre-petition accounts payable and
accrued expenses................... 11,518,229
Notes payable due secured creditors
expected to be assumed............. 3,539,428
Other notes payable and capital lease
obligations due secured
creditors.......................... 4,257,128
---------------
Unsecured notes payable.............. 252,958
Unsecured subordinated debt.......... 36,000,000
---------------
Total liabilities before adjustment
to reduce liabilities to estimated
liquidation
value of assets.................... 63,240,766
Adjustment to reduce liabilities to
estimated liquidation value of
assets:
Secured creditors............... (110,691)
Other creditors................. (48,268,340)
---------------
Total adjustment to reduce
liabilities to estimated
liquidation value of
assets.................... (48,379,031)
---------------
Total liabilities.................... $ 14,861,735
===============
See accompanying note to these financial statements.
C-5
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION
THREE MONTHS ENDED
MARCH 31,
1998
------------------
(UNAUDITED)
INCREASES IN NET ASSETS IN
LIQUIDATION
Debtor-in-possession financing
and working capital advances
provided by purchaser of
customer lists and other
assets......................... $ 1,550,000
DECREASES IN NET ASSETS IN
LIQUIDATION
Purchase of property and
equipment...................... (13,674)
Increase in inventory and
prepaid expenses............... (55,770)
Reduction of secured notes
payable to be assumed.......... (12,116)
Repayment of other accrued notes
and leases..................... (280,062)
Payment of priority accounts
payable and accrued expenses... (397,831)
Net loss for three months ended
March 31, 1998................. (629,982)
------------------
(1,389,435)
------------------
INCREASE IN NET ASSETS IN
LIQUIDATION BEFORE
ADJUSTMENTS.................... 160,565
ADJUSTMENTS OF ESTIMATED VALUES...... (160,565)
------------------
INCREASE IN NET ASSETS IN
LIQUIDATION.................... 0
NET ASSETS IN LIQUIDATION AS OF
DECEMBER 31, 1997.................. 0
------------------
NET ASSETS IN LIQUIDATION AS OF MARCH
31, 1998........................... $ 0
==================
See accompanying note to these financial statements.
C-6
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED
MARCH 31,
------------------
1997
------------------
(UNAUDITED)
Telecommunications revenues.......... $ 13,115,271
Cost of revenue...................... 10,027,748
------------------
Gross profit......................... 3,087,523
Operating expenses:
General and administrative...... 3,349,940
Depreciation and amortization... 1,202,797
Nonrecurring restructuring and
integration costs.............. 1,097,780
------------------
Total operating expenses... 5,650,517
------------------
Loss from continuing operations
before other income (expense)...... (2,562,994)
Other income (expense):
Interest expense................ (789,782)
Other, net...................... 20,200
------------------
Total other income
(expense).................... (769,582)
------------------
Net loss............................. (3,332,576)
------------------
Preferred dividend requirements,
including accretion.................. (50,211)
------------------
Net loss applicable to common
shareholders......................... (3,382,787)
==================
Loss per weighted average common
share outstanding:
Net loss per share.............. $ (0.22)
==================
Net loss per share applicable to
common shareholders............. $ (0.22)
==================
Weighted average number of
common shares outstanding...... 15,665,792
==================
See accompanying note to these financial statements.
C-7
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
------------------
1997
------------------
(UNAUDITED)
OPERATING ACTIVITIES
Net loss............................. $ (3,332,576)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization... 1,202,797
Provisions for losses on
accounts receivable............ 364,080
(Increase) decrease, net of
effect of acquisitions:
Accounts and notes
receivable............... 18,702
Prepaid expenses and
other.................... (201,090)
Other assets............... 5,000
Decrease, net of effect of
acquisitions:
Accounts payable and
accrued expenses......... (5,554,564)
------------------
Net cash used in
operating
activities.......... (7,497,651)
------------------
Cash flows from investing activities:
Additions to property and
equipment...................... (451,025)
Purchase of Addtel, net of cash
acquired....................... (112,436)
Acquisition
obligation -- Addtel........... (8,000,000)
Sale of assets.................. 69,433
------------------
Net cash used in
investing
activities.......... (8,494,028)
------------------
Cash flows from financing activities:
Borrowings...................... 3,230,000
Revolving line of credit........ 2,055,242
Debt issuance cost.............. (81,673)
Principal payments of
obligations.................... (988,812)
Proceeds from exercise of
options........................ 4,736
------------------
Net cash provided by
financing
activities.......... 4,219,493
------------------
Decrease in cash and cash
equivalents........................ (11,772,186)
Cash and cash equivalents, beginning
of period.......................... 14,360,466
------------------
Cash and cash equivalents, end of
period............................. $ 2,588,280
==================
See accompanying note to these financial statements.
C-8
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTE TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
LIQUIDATION BASIS OF ACCOUNTING
As described above, in January 1998 the Company agreed to sell certain
assets and operations and expects that its remaining assets either will be
assigned to secured creditors or sold with any remaining proceeds distributed to
other creditors. As a result, the Company has changed its basis of accounting
from the going concern basis to the liquidation basis as of December 31, 1997.
The liquidation basis of accounting presents assets at the amounts expected to
be realized in liquidation and liabilities at amounts expected to be paid to
creditors. The accompanying financial statements present liabilities at their
stated amounts and include a contra-liability to reduce the total liabilities to
the estimated liquidation value of the assets, because the relative amounts of
the assets that will be distributed to the various groups of creditors has not
yet been determined by the Bankruptcy Court. The reduction of the liabilities to
the estimated liquidation value of the assets is included under the "other
income (expense)" caption in the accompanying statement of operations.
C-9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
In November 1997, the Company filed for protection under the U. S.
Bankruptcy Code. Management of the Company determined in early 1998 that the
remaining assets would be sold or assigned to secured creditors, with any
remaining proceeds distributed to other creditors. Therefore, the Company is not
expected to continue as a going concern, and as a result, has changed its basis
of accounting as of December 31, 1997, from the going concern basis to the
liquidation basis.
The financial statements as of March 31, 1998 and for the three months then
ended were prepared on a liquidation basis. Assets are presented at the amounts
expected to be realized in liquidation and liabilities at amounts expected to be
paid to creditors. A statement of net assets in liquidation as of March 31, 1998
and a statement of changes in net assets in liquidation for the three months
ended March 31, 1998 are presented separately from the same periods in fiscal
1997. Due to the lack of comparability, fluctuations between fiscal 1998 and
1997 are not presented herein.
Net assets in liquidation was $0 at March 31, 1998 and December 31, 1997.
There was an increase in assets of approximately $300,000 and an increase in
liabilities of approximately $1,396,000 for the three months ended March 31,
1998. The excess of liabilities over assets reduces the amount of assets
available to pre-petition creditors and can be primarily attributed to the
operating deficit of approximately $630,000 for the three month period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's initial entry into the telecommunications business was the
result of the acquisition of North American Telecommunications Corporation in
1991. Growth of the Company's customer base and business operations has been
accomplished through acquisitions of assets and entities engaged in the
telecommunications business. In 1994 and 1995, the Company acquired two
switchless resellers of long distance services. Using a strategy of growth by
acquisition resulted in 1996 purchases of one switched reseller, two switchless
resellers and a third party customer verification services/telemarketing
company.
The aforementioned acquisitions had an aggregate purchase price of
approximately $25 million, which the Company initially financed with bank debt
of $7 million, common stock purchase obligations of $2.9 million and $2.1
million of subordinated debentures. In August 1996, the $7 million of bank debt,
$2.1 million of debentures and the $2.9 million stock purchase obligation were
paid from the proceeds of a $27.2 million private placement of convertible
notes. The balance of the $25.4 million netted from the sale of the notes was
used to complete the 1996 acquisitions described above.
The utilization of long-term debt as a source of capital to finance
acquisitions resulted in adding $2.8 million in 1996 of annual fixed charges for
interest due on the $27.2 million of notes payable. The Company has historically
relied upon external sources of capital to meet its ongoing working capital
needs. Since its inception, the Company has not been able to generate a profit
from its business activities or earn sufficient gross margins to cover its fixed
charges. The operating deficit totaled approximately $9.1 million for the fiscal
years ended December 31, 1994, 1995 and 1996. In fiscal 1997, approximately
$21.9 million was used by operations despite the implementation of a
restructuring plan in July 1997 that focused on the reduction of costs and
expenses.
Without sufficient internal sources of liquidity from its operating
activities, the Company had experienced erosion in its equity position by the
beginning of 1997. The resulting debt/equity ratio substantially reduced the
possibility of attracting any form of equity capital or financing tied to the
Company's equity securities. A credit facility was completed with Greyrock
Business Credit in January 1997, which gave the Company new borrowing capacity
of $4 million against its accounts receivable. In February 1997, approximately
$1.4 million was borrowed from this facility to pay the semi-annual interest
payment due on the $27.2 million notes payable.
Two additional private placements of debentures, $3.8 million in March 1997
and $5.0 million in August 1997, generated net proceeds after discounts of $6.73
million. The Company used approximately
C-10
<PAGE>
$1.5 million to pay semi-annual interest payments due in August 1997, repaid
$1.5 million on the Greyrock credit facility and used the balance of the
proceeds to meet working capital / operational needs. In November 1997, the
Company had to seek protection under Chapter 11 of the Federal Bankruptcy Code.
Certain of the Company's existing obligations and administrative expenses
incurred after the filing of the bankruptcy petition have been paid from
accounts receivable remittances not applied to the Greyrock credit facility
(approximately 20%), available borrowing capacity on the credit facility and
from a $1.5 million debtor-in-possession lending arrangement with EqualNet that
has agreed to purchase the Company's customer base and existing business
operations. As of April 1, 1998 the purchaser has assumed financial
responsibility for the Company's business operations and has provided the
necessary working capital. The purchase agreement requires that the purchaser
continue to meet working capital requirements until the expected closing in June
1998.
Upon completion of the aforementioned transaction, the Company will receive
cash and preferred stock of approximately $4,000,000 to pay remaining
administrative expenses and priority claims. Any remaining cash or stock will be
distributed to the holders of pre-petition claims against the Company. The
purchaser of Company's assets will assume the obligations of the Greyrock credit
facility. The Company expects to complete a liquidation of its remaining assets
in connection with distributions to creditors as required by the bankruptcy
court.
RESULTS OF OPERATIONS
The following table sets forth certain items in the Company's Consolidated
Statements of Operations as a percentage of its revenues for the years ended
December 31, 1995, 1996 and 1997.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Operating revenue.................... 100% 100% 100%
Cost of revenue...................... 68 63 89
--------- --------- ---------
Gross Profit......................... 32 37 11
Operating Expenses:
General and administrative........... 32 31 57
Depreciation and amortization........ 6 8 12
Impairment of long-lived asset
values............................. 0 0 66
Nonrecurring network reconfiguration
costs.............................. 0 2 0
Nonrecurring restructuring and
integration costs.................. 0 6 0
--------- --------- ---------
Loss from continuing operations
before other....................... (6) (10) (124)
Other income (expense)............... (3) (5) 105
--------- --------- ---------
Loss from continuing operations...... (9) (15) (19)
Loss from discontinued operations.... (22) 0 0
Extraordinary net gain on
extinguishment of debt............. 0 4 0
--------- --------- ---------
Net loss............................. (31) (11) (19)
--------- --------- ---------
Net cash provided by (used in)
operating activities............... $ (1,224,486) $ 635,390 $ (21,868,058)
Net cash used in investing
activities......................... $ (7,141,820) $ (3,172,528) $ (1,066,698)
Net cash provided in financing
activities......................... $ 8,858,613 $ 16,073,866 $ 8,802,785
Net loss............................. $ (6,465,963) $ (4,054,515) $ (7,474,388)
</TABLE>
YEAR ENDED DECEMBER 31, 1997 VERSUS YEAR ENDED DECEMBER 31, 1996
Revenues increased $4,172,510, or 11%, from $35,668,502 in fiscal 1996 to
$39,841,012 in fiscal 1997. The number of minutes billed increased 73,000,000,
or 41%, from approximately 179,000,000 minutes in 1996 to approximately
252,000,000 minutes in 1997.
C-11
<PAGE>
The overall increase in revenue was primarily due to the acquisition of
Addtel as of November 1, 1996, which accounted for $17,473,000 in fiscal 1997
revenues compared to $5,299,000 in fiscal 1996. Increases in consolidated
revenues from Addtel operations were offset by a decline of approximately
$8,000,000 in revenues from all other sources. Minutes billed from non Addtel
sources declined by only 18,000,000 minutes, from approximately 157,000,000
minutes in 1996 to approximately 139,000,000 minutes in 1997. However, the
average rate per minute declined from $.19 per minute at the beginning of 1997
to $.12 per minute in December 1997.
A principal factor in the decline of the Company's average billing rate per
minute was the sale of NATC, a subsidiary that generated monthly billings of
approximately 100,000 minutes at an average rate of $1.37 per minute. The
Company also lost revenue from operator services billings in August 1997 that
generated approximately 500,000 minutes per month at $.50 per minute. The
Company also suffered the loss of approximately 2,000,000 retail minutes per
month (at a rate of $.17 per minute) in October 1997 due to attribution.
Gross Profit decreased from $13,138,274 in fiscal 1996 to $4,441,872 in
fiscal 1997. The $8,696,402 decrease was attributable to several factors. The
Company experienced a change in its ratio of retail to wholesale business from
85%/15% in 1996 to 70%/30% in 1997. Gross margins are significantly higher on
retail business than on wholesale. The following factors should be considered
regarding the reported balance of cost of sales for 1996 of $22,530,228: 1)
approximately $1,500,000 in line costs was included in accounts receivable at
December 31, 1996, principally due to disputed costs, that were charged to cost
of sales in 1997 after it became clear that they were not collectible: 2)
$806,436 of line costs related to Addtel was reclassified as non-recurring costs
in the 1996 statement of operations: and 3) in 1996 the Company capitalized
$2,489,106 of line costs related to bringing new switches on line, including
costs of testing and integration of new circuits.
General and administrative expenses increased $11,642,365, from $10,927,890
in fiscal 1996 to $22,570,255 in fiscal 1997. The increase was primarily
attributable to the additional costs associated with the newly-acquired Addtel
operations and the effect of the Company's bankruptcy filing. Approximately
$6,284,000 of charges, $3,039,401 of which were for professional fees that
included estimated amounts projected through the windup of bankruptcy case in
1998, were directly related to the bankruptcy and the Company's decision to
change from going concern basis to liquidation basis accounting. A charge of
$3,120,219 was recorded in 1997 to write-off deferred debt issuance costs plus
prepaid expenses that have no future value on a liquidation basis, to adjust
inventory to net realizable value in liquidation and to recognize additional
capital lease obligations due pursuant to bankruptcy regulations.
Depreciation and amortization increased $1,841,788 from $2,861,900 in
fiscal 1996 to $4,703,688 in fiscal 1997. The increase was attributable to the
additional depreciable assets added by acquisitions in 1996. Addtel and First
Choice Long Distance were acquired in 1996 and the assets purchased were
depreciated for two months and four months, respectively, in 1996.
The Company recorded an impairment of long-lived assets of $26,554,261 in
fiscal 1997. No corresponding impairment was recorded in fiscal 1996. The
impairment was recorded in late fiscal 1997 to reduce the carrying amounts of
long-lived assets to their estimated values. The primary assets for which an
impairment was recorded were excess of cost over net assets acquired
($20,215,000), and property and equipment ($6,100,000).
Interest expense increased $3,381,688, from $2,129,876 in fiscal 1996 to
$5,511,564 in fiscal 1997. The increase was primarily due to (1) the additional
interest expense associated with the increases in total debt with the issuances
of convertible notes and subordinated debentures in August 1996, March 1997 and
August 1997 as described above, and (2) a charge to interest expense of
$1,986,000 in fiscal 1997 for the difference between the face amount of the
$8,800,000 of debentures issued in 1997 and the $6,814,000 of proceeds.
The Company recorded other income of $47,283,136 in fiscal 1997 to reduce
liabilities as of December 31, 1997 to the estimated liquidation value of assets
at that date. This entry was necessary as part
C-12
<PAGE>
of the change in basis of accounting from the going concern basis to the
liquidation basis as of December 31, 1997. There was no corresponding entry in
the fiscal 1996 financial statements.
YEAR ENDED DECEMBER 31, 1996 VERSUS YEAR ENDED DECEMBER 31, 1995
Revenues increased $14,920,481, or 72%, from $20,748,021 in 1995 to
$35,668,502 in 1996. Revenue minutes increased approximately 82,000,000, or 85%
from approximately 97,000,000 in 1995 to approximately 179,000,000 in 1996.
On a pro forma basis, as though the acquisition of USC occurred at the
beginnning of 1995, revenues and minutes for 1996 increased 24% and 29%,
respectively, compared with pro forma revenues of $28,694,683 or approximately
139,000,000 revenue minutes for 1995. Revenue growth for 1996 was also impacted
by the FCLD acquisition which contributed $1,049,504 and the Addtel acquisition
which contributed $2,057,176 in retail revenue and $3,241,667 in wholesale
revenue. Operator services, wholesale (excluding Addtel) and international call
back business revenues increased by $257,335 from 1995 to 1996; however, as a
percentage of total revenues, declined from 35% in 1995 to 21% in 1996.
Gross profit increased by $6,506,366 from $6,631,908 in 1995 to $13,138,274
in 1996. The gross profit margin increased by 5% from 32% in 1995 to 37% in
1996. This increase was primarily attributable to the integration and operation
of the Company's network coupled with an increased number of calls originating
and terminating on the network more than offsetting the unfavorable impact of
the circuit availability problems experienced during the third and fourth
quarters of 1996. Additionally, there has been an overall improved call mix with
the higher margin "1+" traffic comprising a larger percentage of total traffic
than the lower margin operator service and wholesale traffic. Negatively
impacting the margin was the $3,241,667 of wholesale revenue from the Addtel
acquisition which has a 4% gross profit margin.
General and administrative expense increased by $4,449,496 from $6,478,394
in 1995 to $10,927,890 in 1996, and as a percentage of revenues, decreased from
32% in 1995 to 31% in 1996. The increase in total general and administrative
expense is attributable to additional growth and acquisitions in 1996. The
decrease as a percentage of revenues reflects management's continued focus on
cost containment.
Depreciation and amortization expense increased $1,574,675 from $1,287,225
in 1995 to $2,861,900 in 1996, and as a percentage of revenues, increased from
6% in 1995 to 8% in 1996. This increase resulted from higher depreciation and
amortization charges arising from the acquisitions of USC, FCLD and Addtel, and
increased depreciation from the acquisition of switching and other network
equipment.
During the fourth quarter of 1996, the Company incurred an $806,436
nonrecurring charge to operations related to reconfiguring its network. This
reconfiguration included (i) the deployment of two additional switches to
enhance the efficiency of the network, (ii) the addition of a number of new
circuits throughout the Company's service area, and (iii) the planned expansion
of the network to the west coast. The combination of these factors necessitated
the Company to take its network down for a period of time, thus increasing the
volume of lower margin off-net traffic.
During 1996, the Company incurred a $2,015,506 nonrecurring restructuring
and integration charge to operations comprised of (i) $227,201 for restructuring
the Company's sales organization, (ii) $1,244,511 for discontinuing the
Company's international call back product line, and (iii) $543,794 for
integration of the FCLD and Addtel acquisitions during 1996.
The $227,201 sales restructuring charge represents excess and duplicate
costs in the fourth quarter of 1996 arising from restructuring the Company's
sales organization from a predominant single sales channel direct approach to a
more cost effective four channel approach consisting of (i) direct sales, (ii)
telemarketing, (iii) agents, and (iv) mass marketing. The preponderance of this
charge is comprised of salary and benefit costs associated with headcount
reductions. The $1,244,511 charge for discontinuing the Company's international
call back product line is principally comprised of employee associated costs and
reserves for uncollectible accounts receivable. The $543,794 charge for
integration of the FCLD and Addtel acquisitions is principally comprised of
costs associated with excess and duplicate personnel reductions.
C-13
<PAGE>
During 1995, the Company incurred a $143,558 nonrecurring charge to
operations related to the discontinuation of its non-telecommunications Russian
ventures. This charge was made for costs associated with winding down the
affairs of these ventures including termination costs, collectibility of
receivables, and write-down of certain assets.
The Company incurred a loss from continuing operations before other income
(expense) of $1,277,110 in 1995 versus a loss from continuing operations before
other income (expense) of $3,473,458 in 1996. This increase was primarily
attributable to the nonrecurring charges and increased depreciation and
amortization expense, partially offset by improved gross profit margins.
The Company had net other expense of $658,111 in 1995 compared to net other
expense of $1,908,701 in 1996. This increase was primarily due to an increase in
interest expense from $682,796 to $2,129,876 related to the offering of the
Notes in August 1996.
The Company recorded a loss from discontinued operations before other
income (expense) of $4,530,742 in 1995. The provision for operating losses of
the discontinued operations during the phase-out period was increased by
$475,000 in 1995. The $150,000 reserve established at December 31, 1994 became
inadequate due to unforeseen delays in the proposed spin-off of Strategic
Abstract & Title Corporation ("SATC") and the ultimate decision to cancel the
spin-off and sell the subsidiary after the death of SATC's president in
September 1995. On February 29, 1996, SATC was sold to a key member of SATC
management for a $500,000 note payable over ten years bearing interest at 7% per
annum. At December 31, 1995, the Company recorded an impairment loss of
$4,055,742, including a reserve against the note, to reflect the net realized
value of SATC. This amount was a noncash charge against earnings.
The Company recognized a net gain (made up of two components) on
extinguishment of debt of $1,327,644 for 1996. The first component was a gain on
extinguishment of debt of $2,149,191 relating to the Company's redemption of
securities issued in connection with the USC acquisition for an aggregate of
843,023 shares of the Company's Common Stock and $308,500 of cash. This gain was
recognized in the second quarter of 1996. These securities redeemed included (i)
notes having an aggregate principal amount of $3,150,000 and bearing interest at
11% per annum, (ii) an aggregate of 125,000 shares of Series B Cumulative
Convertible Preferred Stock, and (iii) a warrant which was exercisable into an
aggregate of 1,050,000 shares of the Company's Common Stock at any time prior to
July 31, 2000 at a per share price of $1.25. The second component was a loss on
extinguishment of debt of $821,547 relating to the Company's redemption of its
$2,000,000 principal amount of convertible debentures from the proceeds of the
offering of the Notes which was incurred in the third and fourth quarters of
1996.
The Company incurred a net loss of $6,465,963 in 1995 as compared to
$4,054,515 in 1996. This improvement is primarily attributable to the one-time
net extraordinary gain on extinguishment of debt, improved profit margins, and
the absence of a discontinued operations charge in 1996, partially offset by the
nonrecurring charges, increased interest expense and increased depreciation and
amortization expense.
C-14
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
SA Telecommunications, Inc.
Dallas, Texas
We have audited the statement of net assets in liquidation of SA
Telecommunications, Inc. as of December 31, 1997, and the statements of
operations, cash flows and changes in shareholders' equity and net assets in
liquidation for the year then ended. 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 audit.
We conducted our audit 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. An 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 that our audit provides a reasonable basis for our opinion.
As described in Note 2 to the financial statements, in November 1997, the
Company filed for protection under the U.S. Bankruptcy Code. However, in early
1998, management of the Company determined that the remaining assets most likely
either would be sold or assigned to secured creditors, with any remaining
proceeds distributed to other creditrs. Therefore, the Company is not expected
to continue as a going concern, and as a result, has changed its basis of
accounting as of December 31, 1997, from the going concern basis to the
liquidation basis.
In our opinion, the financial statements referred to in the first paragraph
present fairly, in all material aspects, the net assets in liquidation of SA
Telecommunications, Inc. as of December 31, 1997, and the results of its
operations and its cash flows for the the year then ended in conformity with
generally accepted accounting principles applied on the basis of accounting
described in the preceding paragraph.
HEIN + ASSOCIATES LLP
Dallas, Texas
April 23, 1998
C-15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of SA Telecommunications, Inc.
In our opinion, the consolidated balance sheet and the related consolidated
statements of operations, of cash flows and of changes in shareholders' equity
as of and for each of the two years in the period ended December 31, 1996, prior
to restatement (not presented separately herein), present fairly, in all
material respects, the financial position of SA Telecommunications, Inc. and its
subsidiaries at December 31, 1996, and the results of their operations and their
cash flows for each of the two years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements of SA
Telecommunications, Inc. for any perioid subsequent to December 31, 1996 nor
have we examined any adjustments applied to the 1996 financial statements.
PRICE WATERHOUSE LLP
Dallas, Texas
March 25, 1997
C-16
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
STATEMENT OF NET ASSETS IN LIQUIDATION
AS OF DECEMBER 31, 1997
ASSETS
Cash and cash equivalents............ $ 228,495
Trade accounts receivable............ 3,658,276
Inventory, prepaid expenses and
other................................ 61,576
Property and equipment............... 5,587,636
Customer lists and other
intangibles.......................... 5,026,018
---------------
Total assets............... $ 14,562,001
===============
LIABILITIES
Post-petition accounts payable and
accrued expenses................... $ 5,446,690
Notes payable due secured creditors
expected to be assumed............. 3,551,544
Other notes payable and capital lease
obligations due secured
creditors.......................... 4,537,190
Priority claims accounts payable and
accrued expenses................... 538,526
Pre-petition accounts payable and
accrued expenses................... 11,518,229
Unsecured notes payable.............. 252,958
Unsecured subordinated debt.......... 36,000,000
---------------
Total liabilities before
adjustment to reduce
liabilities to estimated
liquidation value of
assets................... 61,845,137
Less adjustment to reduce liabilities
to estimated liquidation value of
assets:
Secured creditors............... (110,691)
Other creditors................. (47,172,445)
---------------
Total adjustment to reduce
liabilities to estimated
liquidation value of
assets................... (47,283,136)
---------------
Total liabilities.......... $ 14,562,001
===============
Commitments and contingencies (Note
20)
See accompanying notes to these consolidated financial statements.
C-17
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1996
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 14,360,466
Accounts and note receivables:
Trade, net of allowance for
doubtful accounts of
$2,796,946................ 7,035,710
Other, net of allowance for
doubtful accounts of
$31,479................... 1,481,072
Inventory....................... 136,875
Prepaid expenses and other...... 594,081
---------------
Total current
assets............... 23,608,204
PROPERTY AND EQUIPMENT............... 10,054,937
Less accumulated depreciation
and amortization............... (1,380,307)
---------------
Net property and
equipment............ 8,674,630
EXCESS OF COST OVER NET ASSETS
ACQUIRED,
net of accumulated amortization.... 27,902,634
OTHER ASSETS:
Debt issuance cost.............. 2,083,843
Other........................... 409,758
---------------
Total other assets.... 2,493,601
---------------
Total assets.......... $ 62,679,069
===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................ $ 2,023,955
Accrued telecommunications
expenses....................... 11,360,002
Other accrued expenses.......... 2,382,504
Acquisition obligation.......... 9,500,000
Short-term notes payable........ 782,239
Current maturities of long-term
obligations.................... 570,859
---------------
Total current
liabilities.......... 26,619,559
---------------
LONG-TERM OBLIGATIONS, LESS CURRENT
MATURITIES......................... 28,477,903
COMMITMENTS AND CONTINGENCIES (Note
20)
SERIES A REDEEMABLE PREFERRED STOCK,
$.00001 par value, 250,000 shares
authorized; and 180,000 shares
issued............................. 1,330,303
SHAREHOLDERS EQUITY:
Common Stock, $.0001 par value,
50,000,000 shares authorized;
and 16,858,053 issued.......... 1,686
Additional paid-in capital...... 26,402,671
Accumulated deficit............. (16,299,038)
Treasury stock (1,197,518
shares) at cost................ (3,854,015)
---------------
Total shareholders'
equity............... 6,251,304
---------------
Total liabilities and
shareholders'
equity............... $ 62,679,069
===============
See accompanying notes to these consolidated financial statements.
C-18
<PAGE>
SA TELECOMMUNICATIONS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1996 1995
--------------- -------------- --------------
<S> <C> <C> <C>
Telecommunications revenues.......... $ 39,841,012 $ 35,668,502 $ 20,748,021
Cost of revenue...................... 35,399,140 22,530,228 14,116,113
--------------- -------------- --------------
Gross profit......................... 4,441,872 13,138,274 6,631,908
Operating expenses:
General and administrative...... 22,570,255 10,927,890 6,478,394
Depreciation and amortization... 4,703,688 2,861,900 1,287,225
Impairment of long-lived asset
values........................ 26,554,261 -- --
Nonrecurring network
reconfiguration costs......... -- 806,436 --
Nonrecurring restructuring and
integration costs............. -- 2,015,506 143,399
--------------- -------------- --------------
Total operating expenses... 53,828,204 16,611,732 7,909,018
--------------- -------------- --------------
Loss from continuing operations
before other income (expense) and
extraordinary item................. (49,386,332) (3,473,458) (1,277,110)
Other income (expense):
Interest expense................ (5,511,564) (2,129,876) (682,796)
Adjustment to reduce liabilities
to estimated liquidation value
of assets..................... 47,283,136 -- --
Other, net...................... 140,422 221,175 24,685
--------------- -------------- --------------
Total other income
(expense)............... 41,911,994 (1,908,701) (658,111)
--------------- -------------- --------------
Loss from continuing operations
before extraordinary
item............................... (7,474,338) (5,382,159) (1,935,221)
Discontinued operations:
Provision for operating losses
during phase-out period....... -- -- (475,000)
Loss from impairment............ -- -- (4,055,742)
--------------- -------------- --------------
Loss from discontinued
operations.............. -- -- (4,530,742)
--------------- -------------- --------------
Loss before extraordinary item....... (7,474,338) (5,382,159) (6,465,963)
Extraordinary item -- net gain on
extinguishment
of debts........................... -- 1,327,644 --
--------------- -------------- --------------
Net loss............................. (7,474,338) (4,054,515) (6,465,963)
Preferred dividend requirements,
including accretion................ (408,537) (248,344) (125,352)
--------------- -------------- --------------
Net loss applicable to common
shareholders....................... $ (7,882,875) $ (4,302,859) $ (6,591,315)
=============== ============== ==============
Loss per weighted average common
share outstanding:
Continuing operations (basic and
diluted)...................... $ (0.48) $ (0.35) $ (0.17)
Discontinued operations (basic
and diluted).................. $ -- $ -- $ (0.39)
Loss before extraordinary item
(basic and diluted)........... $ (0.48) $ (0.35) $ (0.56)
Extraordinary item (basic and
diluted)...................... -- 0.08 --
Net loss per share (basic and
diluted)...................... $ (0.48) $ (0.27) $ (0.56)
Net loss per share
applicable to common
shareholders (basic and
diluted)................ $ (0.50) $ (0.28) $ (0.57)
Weighted average number of common
shares
outstanding........................ 15,663,304 15,199,928 11,639,186
=============== ============== ==============
</TABLE>
See accompanying notes to these consolidated financial statements.
C-19
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
AND NET ASSETS IN LIQUIDATION
FOR THE PERIOD FROM JANUARY 1, 1995 THROUGH DECEMBER 31, 1997
<TABLE>
<CAPTION>
SERIES B
PREFERRED STOCK COMMON STOCK ADDITIONAL
-------------------- ------------------- PAID-IN ACCUMULATED TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCK
-------- --------- --------- ------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1995.......... -- $ -- 10,566,139 $ 1,057 $15,629,114 $(5,404,864) $ (240,950)
Private placements of common stock... -- -- 1,981,120 197 2,379,464 -- (44,057)
Issuance of common stock for exercise
of options......................... -- -- 914,861 92 633,521 -- (171,594)
Issuance of Series B Preferred Stock
for acquisition of USC............. 125,000 575,280 -- -- -- -- --
Issuance of warrants for acquisition
and financing of USC............... -- -- -- -- 2,213,000 -- --
Preferred dividend requirements,
including accretion................ -- -- -- -- -- (125,352) --
Net loss for the year................ -- -- -- -- -- (6,465,963) --
-------- --------- --------- ------- ----------- ----------- ----------
Balances at December 31, 1995........ 125,000 575,280 13,462,120 1,346 20,855,099 (11,996,179) (456,601)
Private placements of common stock... -- -- 251,700 25 369,975 -- --
Issuance of common stock for:
Exercise of options.............. -- -- 524,036 52 632,444 -- (497,414)
Exercise of warrants............. -- -- 1,090,000 109 1,362,391 -- --
Conversion of debt............... -- -- 267,856 27 449,973 -- --
Other............................ -- -- 419,318 42 750,633 -- --
Issuance of common stock for
acquisition of USC securities...... (125,000) (575,280) 843,023 85 1,613,229 -- (2,900,000)
Issuance of warrants................. -- -- -- -- 368,927 -- --
Preferred dividend requirements,
including accretion................ -- -- -- -- -- (248,344) --
Net loss for the year................ -- -- -- -- -- (4,054,515) --
-------- --------- --------- ------- ----------- ----------- ----------
Balances at December 31, 1996........ -- -- 16,858,053 1,686 26,402,671 (16,299,038) (3,854,015)
Issuance of common stock for cash.... -- -- 23,300 2 11,183 -- --
Preferred dividend requirement,
including accretion................ -- -- -- -- -- (408,537) --
Net loss for the year................ -- -- -- -- -- (7,474,338) --
Adjustments for expected
liquidation........................ -- -- -- (1,688) (26,413,854) 24,181,913 3,854,015
-------- --------- --------- ------- ----------- ----------- ----------
Net assets in liquidation at December
31, 1997........................... -- $ -- 16,881,353 $ -- $ -- $ -- $ --
======== ========= ========= ======= =========== =========== ==========
</TABLE>
TOTAL
------------
Balances at January 1, 1995.......... $ 9,984,357
Private placements of common stock... 2,335,604
Issuance of common stock for exercise
of options......................... 462,019
Issuance of Series B Preferred Stock
for acquisition of USC............. 575,280
Issuance of warrants for acquisition
and financing of USC............... 2,213,000
Preferred dividend requirements,
including accretion................ (125,352)
Net loss for the year................ (6,465,963)
------------
Balances at December 31, 1995........ 8,978,945
Private placements of common stock... 369,975
Issuance of common stock for:
Exercise of options.............. 135,082
Exercise of warrants............. 1,362,500
Conversion of debt............... 450,000
Other............................ 750,675
Issuance of common stock for
acquisition of USC securities...... (1,861,966)
Issuance of warrants................. 368,927
Preferred dividend requirements,
including accretion................ (248,344)
Net loss for the year................ (4,054,515)
------------
Balances at December 31, 1996........ 6,251,304
Issuance of common stock for cash.... 11,185
Preferred dividend requirement,
including accretion................ (408,537)
Net loss for the year................ (7,474,338)
Adjustments for expected
liquidation........................ 1,620,386
------------
Net assets in liquidation at December
31, 1997........................... $ --
============
See accompanying notes to these consolidated financial statements.
C-20
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................ $ (7,474,338) $ (4,054,515) $ (6,465,963)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Extraordinary net gain on
extinguishment of debts...... -- (1,327,644) --
Provision for discontinued
operations................... -- -- 4,530,742
Depreciation and
amortization................. 4,703,688 2,861,900 1,287,225
Provision for losses on
accounts receivable.......... 1,947,230 2,197,083 455,793
Write off of debt issuance
costs........................ 2,293,202 -- --
Write off of debenture
discount..................... 1,985,851 -- --
Cash used for discontinued SATC
business..................... -- -- (263,320)
Impairment of long-lived
assets....................... 26,554,261 -- --
Adjustment to reduce
liabilities to estimated
liquidation value of
assets....................... (47,283,172) -- --
Other.......................... (570,102) 17,946 (44,587)
(Increase) decrease, net of
effect of acquisitions:
Accounts and notes
receivable.............. 2,911,276 (925,570) (862,288)
Prepaid expenses and
other................... 669,380 (280,481) 394,822
Other assets............... -- 9,162 320,990
Increase (decrease), net of
effect of acquisitions:
Accounts payable and
accrued expense......... (7,605,334) 2,137,509 (577,900)
------------ ------------ ------------
Net cash provided by
(used in) operating
activities......... (21,868,058) 635,390 (1,224,486)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and
equipment.......................... (1,066,698) (3,588,786) (193,276)
Purchase of First Choice, net of
cash acquired...................... -- (2,244,110) --
Purchase of Addtel, net of cash
acquired........................... -- (6,840,481) --
Acquisition obligation -- Addtel.... -- 9,500,000 --
Purchase of USC, net of cash
acquired........................... -- -- (6,974,685)
Other............................... -- 849 26,141
------------ ------------ ------------
Net cash used in
investing
activities......... (1,066,698) (3,172,528) (7,141,820)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings.......................... 6,730,000 29,269,805 7,450,000
Debt issuance cost.................. (418,000) (2,174,799) --
Principal payments of obligations... (1,066,574) (9,671,270) (1,971,510)
Net additions to line of credit..... 3,546,174 -- --
Proceeds from private placements of
common stock....................... -- -- 2,073,104
Purchase of treasury stock.......... -- (2,900,000) --
Proceeds from common stock sale..... 11,185 -- --
Proceeds from exercise of options... -- 187,630 307,019
Proceeds from exercise of
warrants........................... -- 1,362,500 --
Proceeds from Series A Redeemable
Preferred Stock.................... -- -- 1,000,000
------------ ------------ ------------
Net cash provided by
financing
activities......... 8,802,785 16,073,866 8,858,613
------------ ------------ ------------
INCREASE (DECREASE) IN CASH............. (14,131,971) 13,536,728 492,307
CASH, beginning of year................. 14,360,466 823,738 331,431
------------ ------------ ------------
CASH, end of year....................... $ 228,495 $ 14,360,466 $ 823,738
============ ============ ============
</TABLE>
See accompanying notes to these consolidated financial statements.
C-21
<PAGE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITY:
During the year ended December 31, 1997, the Company entered into capital
leases for telecommunications equipment and a billing computer in the amount of
$3,587,000.
During the year ended December 31, 1997, the Company accrued dividends and
recorded accretion on the Series A Preferred Stock of $408,537.
C-22
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND ORGANIZATION
SA Telecommunications, Inc. (STEL or the Company) is a full-service,
regional interexchange carrier that has provided intrastate, interstate and
international service, as well as a variety of operator and other services. In
November 1997, the Company filed for protection under the U.S. Bankruptcy Code.
In January 1998, the Company entered into an agreement to sell a significant
portion of its assets as described in Note 3. Due to the bankruptcy filing and
the Company's intention to sell and otherwise dispose of its remaining assets,
the Company has changed its basis of accounting to the liquidation basis
effective December 31, 1997, which is described in Note 2.
The Company has conducted its domestic telecommunications operations
through U.S. Communications, Inc. (USC) (acquired effective June 1, 1995 -- see
Note 6), Long Distance Network, Inc. (LDN) acquired in 1994 -- see Note 7) and
AddTel Communications, Inc. (Addtel) (acquired effective November 1, 1996 -- see
Note 4). USC, LDN and Addtel provide direct dial long distance services to small
and medium-sized commercial customers and, to a lesser extent, residential
customers. Additionally, operator services (telephone calling card, collect,
third party billing, and credit card calls requiring operator assistance) are
provided to hotels, motels, hospitals, universities, private pay telephone
owners, and residences. Domestic telecommunications revenue comprised
approximately 97%, 95% and 92% of consolidated revenues in 1997, 1996 and 1995,
respectively.
The Company conducted its international call back telecommunications
operations mainly in Central and South America through North American
Telecommunications Corporation (NATC). NATC is a private telecommunications
carrier which provides various long distance telecommunications services to its
foreign customers, including interchange services, operator services,
international long distance, voice mail, conference calling, and facsimile
distribution. Foreign revenues comprised approximately 3%, 5% and 8% of total
consolidated revenues in 1997, 1996 and 1995, respectively. NATC conducted
business under the product name of "GlobalCOM". The Company sold the
operations of NATC in 1997 for an interest in future profits. No material
amounts related to the sale have been recorded in the accompanying financial
statements.
Until September 1995, the Company participated in various joint ventures in
the Baltic States and Commonwealth of Independent States (formerly the Soviet
Union). At September 30, 1995, the Company terminated its participation in these
joint ventures to focus on its telecommunications business. These operations had
no significant impact on the consolidated statements of operations for the year
ended December 31, 1995.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
LIQUIDATION BASIS OF ACCOUNTING
As described above, in January 1998 the Company agreed to sell certain
assets and operations and expects that its remaining assets either will be
assigned to secured creditors or sold with any remaining proceeds distributed to
other creditors. As a result, the Company has changed its basis of accounting
from the going concern basis to the liquidation basis as of December 31, 1997.
The liquidation basis of accounting presents assets at the amounts expected to
be realized in liquidation and liabilities at amounts expected to be paid to
creditors. The accompanying financial statements present liabilities at their
stated amounts and include a contra-liability to reduce the total liabilities to
the estimated liquidation value of the assets, because the relative amounts of
the assets that will be distributed to the various groups of creditors has not
yet been determined by the Bankruptcy Court. The reduction of the liabilities to
the estimated liquidation value of the assets is included under the "other
income (expense)" caption in the accompanying statement of operations.
C-23
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation. Certain prior period amounts have been
reclassified for comparative purposes.
FINANCIAL INSTRUMENTS
The fair market value of financial instruments is determined by reference
to various market data and other valuation techniques as appropriate. The
Company believes that the fair values of financial instruments at December 31,
1996 approximate their recorded values. As of December 31, 1997, financial
instruments are carried at estimated liquidation value in the accompanying
statement of net assets in liquidation.
BUSINESS AND CREDIT CONCENTRATIONS
In the normal course of business, the Company extends unsecured credit to
its customers. All international call back telecommunications services are
billed and principally paid in U.S. dollars. Management has provided an
allowance for doubtful accounts to provide for amounts which may eventually
become uncollectible and to provide for any disputed charges. No customers
individually accounted for more than 10% of consolidated revenues in 1997, 1996
or 1995.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and investments with
purchased original maturities of three months or less.
INVENTORY
Prior to December 31, 1997, inventory was valued at the lower of cost or
market with the cost determined using the first-in, first-out method. Inventory
consists of automatic dialers for installation in customers' telephone
equipment.
PROPERTY AND EQUIPMENT
Prior to December 31, 1997, property and equipment was stated at cost.
Depreciation and amortization for financial statement purposes was provided by
the straight-line method over the estimated useful lives of the depreciable
assets. Maintenance and repairs are expensed as incurred while replacements and
betterments are capitalized.
GOODWILL AND RELATED INTANGIBLES
Goodwill and related intangibles reflect the acquired cost of goodwill,
customer lists, non-compete agreements, and related items. These costs are
classified as "excess of cost over net assets acquired" in the accompanying
December 31, 1996 balance sheet. Prior to December 31, 1997, these intangibles
were amortized by the straight-line method over their estimated useful lives. It
is the Company's policy to review on an annual basis the net realizable value of
its intangible assets through an assessment of the estimated future cash flows
related to such assets. In the event that total assets (including property and
equipment) are found to be stated at amounts in excess of estimated future cash
flows, the assets are adjusted for impairment to a level commensurate with a
discounted cash flow analysis of the underlying assets. At December 31, 1997,
the Company recorded an impairment allowance to reduce the carrying value of its
goodwill and related intangibles by $20,215,000, as described in Note 3.
DEBT ISSUANCE COSTS
The Company defers costs incurred directly in connection with the issuance
of debt obligations and charges such costs to interest expense on a
straight-line basis over the terms of the respective debt
C-24
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
agreements. At December 31, 1997, the Company wrote off the remaining balance of
capitalized debt issuance costs of $2,293,000, because the related debt was in
default. This amount has been classified with general and administrative
expenses in the accompanying statement of operations.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-based Compensation" (SFAS 123), was issued. This
statement requires the fair value of stock options and other stock-based
compensation issued to employees either to be included as compensation expense
in the income statement, or the pro forma effect on net income and earnings per
share of such compensation expense to be disclosed in the footnotes to the
Company's financial statements commencing with the Company's 1996 fiscal year.
The Company applies SFAS 123 on a disclosure basis only.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. At December 31, 1997, as explained
above, assets are recorded at the amounts expected to be received in liquidation
and liabilities have been recorded at the amounts expected to be paid creditors.
Also, as described in Note 20, administrative costs to complete the bankruptcy
and liquidation of the Company have been estimated and accrued and additional
liabilities may arise during the course of the bankruptcy proceedings. These
amounts are estimates based on management's best judgment and other sources of
information. The actual amounts that are realized from the assets and paid on
liabilities, and the various bankruptcy and liquidation costs could differ
materially from those estimates.
LOSS PER SHARE
Loss per share is computed by dividing the net loss by the weighted average
number of shares of common stock outstanding during the periods. The effect of
outstanding options and warrants on the computation of net loss per share is
antidilutive and, therefore, is not included in the computation for the years
ended December 31, 1997, 1996 and 1995. Statement of Financial Accounting
Standards No. 128, "Earnings Per Share", requires the application of certain
new procedures to the calculation of earnings or loss per share. The new
accounting standard was adopted by the Company as of December 31, 1997 for all
years presented, but did not have a material effect on the Company's financial
statements.
FEDERAL INCOME TAXES
Deferred income taxes are calculated utilizing an asset and liability
approach whereby deferred taxes are provided for tax effects of basis
differences for assets and liabilities arising from differing treatments for
financial and income tax reporting purposes. Valuation allowances against
deferred tax assets are provided where appropriate.
STATEMENT OF CASH FLOWS
The Company considers debt instruments with maturities of three months or
less at the time of purchase to be cash equivalents. Cash paid for interest for
the years ended December 31, 1997, 1996 and 1995 was $2,909,886, $1,040,840, and
$374,249, respectively.
3. ASSET SALE AGREEMENT WITH EQUALNET
In January 1998, the Company entered into an agreement to sell certain
assets to EqualNet Corporation (EqualNet). The assets to be sold to EqualNet
consist primarily of the Company's rights relative to its subscribers (including
accounts receivable) certain network facilities, contracts and permits. Closing
of the
C-25
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
transaction is expected to occur following formal approval by the EqualNet
shareholders, which the Company believes will occur in June 1998. The purchase
price is to consist of cash and convertible preferred stock of EqualNet in a
total amount equal to 40% of annualized revenues plus the assumption of the
outstanding balances due Greyrock secured by eligible accounts receivable of the
Company (see Note 11). The amount to be paid at closing is to be reduced by
certain debtor in possession financing provided by a stockholder of EqualNet
after December 31, 1997 of $1,500,000, and approximately $1,000,000 of other
amounts due Greyrock. Annualized revenues are to be determined based on December
1997 and January 1998 revenues and 40% of such amount is expected to be
approximately $10,000,000. The cash and preferred stock expected to be received
at closing are approximately $2,000,000 and $5,500,000 (face value),
respectively. However, the actual value of the preferred stock is estimated to
be about $2,000,000 as described below.
The Company has recorded the asset "customer lists and other intangibles"
on the accompanying statement of net assets in liquidation as of December 31,
1997 in an amount equal to the excess of the estimated value of the purchase
price to be received from EqualNet (including liabilities to be assumed) over
the estimated values of the identifiable assets to be acquired. The difference
of $20,215,000 between this amount and the balance in the Company's account
"excess of cost over net assets acquired" that was recorded on the Company's
books prior to December 31, 1997, has been included with "impairment of
long-lived assets" in the accompanying statement of operations. In determining
the estimated value of the EqualNet convertible preferred stock, a discount of
64% was applied to its face value based on the estimated fair value of the
underlying common stock of EqualNet derived from recent sales of large blocks of
that stock. Management of the Company believes a discount of only 28% from the
face value is appropriate based on their analysis. An independent valuation of
the preferred stock has not been performed. The ultimate value of the preferred
stock may differ from both of these estimates.
4. ACQUISITION OF ADDTEL COMMUNICATIONS, INC.
Effective November 1, 1996, the Company acquired all of the outstanding
common stock of Addtel, a switchless reseller of long distance services located
in Glendale, California. The aggregate purchase price of $9.5 million (including
$2 million allocated to nonsolicitation agreements) was paid $8 million in cash
with the remaining $1.5 million held in escrow by the Company to offset certain
contractual adjustments or indemnity claims. The purchase price was funded in
January 1997 from the remaining proceeds of the Company's 10% Convertible Notes
issued in August 1996. Accordingly, the Company recorded an acquisition
obligation of $9,500,000 at December 31, 1996.
The acquisition was accounted for as a purchase whereby the excess purchase
price over the net assets acquired was recorded based upon the fair values of
the assets acquired and liabilities assumed. The Company's consolidated
statements of operations include the results of operations of Addtel since
November 1, 1996.
A summary of the Addtel excess of cost for financial reporting purposes
over net assets acquired that was recorded as of December 31, 1996 is as
follows:
DECEMBER 31,
1996 LIFE
------------ ------------
Goodwill................................ $ 7,916,825 25 years
Nonsolicitation agreements.............. 2,000,000 5 years
Customer acquisition costs.............. 878,673 10 years
------------ ------------
10,795,498
Accumulated amortization................ (134,043)
------------
$ 10,661,455
============
C-26
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited pro forma combined results of operations for the
Company assume that the acquisition of Addtel was completed at the beginning of
1995. These pro forma amounts represent historical operating results of Addtel
combined with those of the Company with appropriate adjustments which give
effect to interest expense and amortization. These pro forma amounts are not
necessarily indicative of consolidated operating results which would have
occurred had Addtel been included in the operations of the Company during the
periods presented, or which may result in the future, because these amounts do
not reflect full transmission and switched service cost optimization, and the
synergistic effect on operations, selling, general and administrative expenses
nor do the amounts reflect any higher costs associated with unanticipated
integration or other organizational activities the Company may be forced to
undertake as a result of the acquisition.
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
1996 1995
-------------- --------------
Revenues................................ $ 56,832,328 $ 33,474,021
Net loss................................ (6,210,115) (8,258,267)
Net loss per share outstanding.......... (0.41) (0.71)
5. ACQUISITION OF FIRST CHOICE LONG DISTANCE, INC.
Effective September 1, 1996, the Company acquired substantially all of the
assets of First Choice Long Distance, Inc. (First Choice), a switch-based
reseller of long distance services located in Amarillo, Texas, for a total
consideration of $2,070,000 (including noncompete agreements). The assets
acquired included First Choice's customer base of approximately 4,500 customers
and two Siemen Stromberg-Carlson DCO Central Office type switches, which will be
integrated into the Company's existing network. The purchase price was funded
from the proceeds of the Company's 10% Convertible Notes issued in August 1996.
The acquisition was accounted for as a purchase whereby the excess purchase
price over the net assets acquired was recorded based upon the fair market
values of assets acquired and liabilities assumed. The excess of cost over net
assets acquired of $741,757 and noncompete agreements of $720,000 were being
amortized on a straight-line basis over 25 and 2 years, respectively. This
allocation was based on preliminary estimates subject to revision at a later
date. The Company's consolidated statements of operations include the results of
operations of First Choice since September 1, 1996.
The following unaudited pro forma combined results of operations of the
Company assume that the acquisition of First Choice was completed at the
beginning of 1995. These pro forma amounts represent the historical operating
results of First Choice combined with those of the Company with appropriate
adjustments which give effect to interest expense and amortization expense.
These pro forma amounts are not necessarily indicative of consolidated operating
results which would have been included in the operations of the Company during
the periods presented, or which may result in the future, because these amounts
do not reflect full transmission and switched service cost optimization, and the
synergistic effect on operating, selling, and general and administrative
expenses nor do the amounts reflect any higher costs associated with
unanticipated integration or other organizational activities the Company may be
forced to undertake as a result of the acquisition.
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
1996 1995
-------------- --------------
Revenues................................ $ 37,836,495 $ 23,293,156
Net loss................................ (4,457,212) (6,857,991)
Net loss per share outstanding.......... (0.29) (0.59)
C-27
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. ACQUISITION OF U.S. COMMUNICATIONS INC.
Effective June 1, 1995, the Company acquired all of the outstanding common
stock of U.S. Communications, Inc. (USC), a switchless reseller of long distance
services located in Levelland, Texas. The stated purchase price of $12 million
for the USC common stock and the covenants not to compete were paid (i) $6.5
million in cash, (ii) $2.75 million in notes bearing 11% interest per annum,
(iii) $1.5 million in a separate group of notes also bearing 11% interest per
annum, (iv) 125,000 shares of Series B Preferred Stock and common stock purchase
warrants at their respective fair values as of the date of issuance. (See Note
12 regarding the Company's 1996 acquisition of these securities.)
In order to fund the cash portion of the purchase price, the Company
borrowed an aggregate of $7.0 million from Norwest Bank Minnesota, N.A. and
privately placed 166,667 shares of its Series A Preferred Stock, along with a
common stock purchase warrant exercisable into 500,000 shares of stock at $1.125
per share, with Jesup & Lamont Capital Markets, Inc. for $1.5 million. The
Company recorded the Series A Preferred Stock and common stock purchase warrants
at their respective fair values as of the date of issuance.
The acquisition was accounted for as a purchase whereby the excess purchase
price over the net assets acquired was recorded based upon the fair values of
assets acquired and liabilities assumed. The Company's consolidated statements
of operations include the results of operations of USC since June 1, 1995.
A summary of the USC excess of cost for financial reporting purposes over
net assets acquired is as follows:
DECEMBER 31,
1996 LIFE
------------ ----------
Goodwill............................. $ 9,399,153 25 years
Covenants not to compete............. 2,400,000 5 years
Customer acquisition costs........... 1,036,946 10 years
------------
12,836,099
Accumulated amortization............. (1,519,464)
------------
$ 11,316,635
============
The following unaudited pro forma combined results of operations for the
Company assume that the acquisition of USC was completed at the beginning of
1994. These pro forma amounts represent the historical operating results of USC
combined with those of the Company with appropriate adjustments which give
effect to interest expense and amortization. These pro forma amounts are not
necessarily indicative of consolidated operating results which would have
occurred had USC been included in the operations of the Company during the
periods presented, or which may result in the future, because these amounts do
not reflect full transmission and switched service cost optimization, and the
synergistic effect on operating, selling, general and administrative expenses
nor do the amounts reflect any higher costs associated with unanticipated
integration or other organizational activities the Company may be forced to
undertake as a result of the acquisition.
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
1996 1995
-------------- --------------
Revenues................................ $ 28,694,683 $ 26,173,431
Net loss................................ (7,083,441) (3,864,545)
Net loss per share outstanding.......... (0.61) (0.42)
C-28
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. ACQUISITION OF LONG DISTANCE NETWORK, INC.
Effective March 1, 1994, the Company acquired all of the outstanding common
stock of Long Distance Network, Inc. (LDN), a switchless reseller of long
distance services located in Dallas, Texas. The acquisition was accomplished
through the payment of $1,354,660 in cash and the issuance of 1,302,086 shares
of unregistered, restricted Common Stock of the Company to the shareholders of
LDN. The Company utilized working capital and funds generated from private
placements of unregistered, restricted Common Stock to complete the cash portion
of the transaction. Of the total 1,302,086 shares of unregistered, restricted
Common Stock issued, 1,041,666 shares related to the acquisition of LDN stock
and 260,420 shares related to "Covenants Not to Compete."
The acquisition was accounted for as a purchase whereby the excess purchase
price over the net assets acquired was recorded based upon the fair values of
assets acquired and liabilities assumed. The fair value of the stock issued in
connection with the acquisition was estimated to be approximately $3,750,000,
which reflects a discount of approximately 25% from the market price of the
Company's publicly traded stock and, in management's view, is reasonable given
its restricted nature. The Company's consolidated statements of operations
include the results of operations of LDN since March 1, 1994.
A summary of the LDN excess of cost for financial reporting purposes over
net assets acquired is as follows:
DECEMBER 31,
1996 LIFE
------------ ----------
Goodwill................................ $3,983,080 25 years
Covenants not to compete................ 750,000 10 years
Customer acquisition costs.............. 442,563 10 years
------------
5,175,643
Accumulated amortization................ (789,307)
------------
$4,386,336
============
8. DISCONTINUED OPERATIONS
On December 28, 1994, the Company's board of directors approved a spinoff
of the Company's title plant services subsidiary, Strategic Abstract and Title
Corporation (SATC), in the form of a stock dividend to shareholders. During
1995, SATC filed a Form 10-SB registration statement with the Securities and
Exchange Commission to become a publicly traded company prior to the
distribution to shareholders. Subsequent to this filing, a decision was made to
cancel the spinoff and sell 100% of the stock of the subsidiary, due in large
part to the SATC president's death in September 1995. As a result, an additional
$475,000 reserve was established for SATC losses until the expected date of
disposal.
On February 29, 1996, SATC was sold to a key member of SATC management for
a $500,000 note, payable over ten years, bearing interest at 7% per annum. At
December 31, 1995, the Company recorded an impairment loss of $4,055,742,
including a reserve against the note, to reflect the net realizable value of
SATC. Included among the SATC total assets are other assets, primarily trade
credits with a book value of $362,000, of which the Company retained a minority
portion at a de minimus value. Revenues for SATC for the year ended December 31,
1995 were $354,892.
C-29
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997(A) 1996 LIFE(A)
------------ -------------- -----------
<S> <C> <C> <C>
Land and buildings...................... $ 525,480 $ 766,860 30-40 yrs
Switching and other network equipment... 3,894,514 7,465,343 3-5 yrs
Equipment, computers and software....... 1,022,850 1,592,604 5 yrs
Furniture and fixtures.................. 144,792 230,130 5-7 yrs
------------ --------------
$ 5,587,636 $ 10,054,937
============ ==============
</TABLE>
- ------------
(a) As explained in Note 2, the carrying values of property and equipment at
December 31, 1997 are recorded at the amounts expected to be received in
liquidation. The adjustment to reduce the property and equipment to those
amounts totaled approximately $6,100,000 and is included in "impairment of
long-lived assets" in the accompanying statement of operations. The
depreciable life of each asset was applicable prior to the change to the
liquidation basis of accounting on December 31, 1997.
Switching equipment totaling $3,587,000 and $1,501,942 was recorded under
capital leases at December 31, 1997 and 1996, respectively. Total depreciation
expense, including amortization of equipment under capital leases, charged to
operations for the years ended December 31, 1997, 1996, and 1995 was $1,833,527,
$1,139,242, and $449,402, respectively.
10. SHORT-TERM NOTES PAYABLE
Short-term notes payable at December 31, 1996 consisted of:
Note payable to Addtel investor group... $ 772,743
Other................................... 9,496
----------
$ 782,239
==========
These notes were retired in 1997.
11. LINE OF CREDIT
On January 9, 1997, the Company completed a line of credit arrangement with
Greyrock Business Credit (Greyrock), a division of NationsCredit Commercial
Corporation. The line of credit has maximum availability of $10 million, with
borrowings based on 80% of eligible accounts receivable and inventory, other
than receivables arising from telecommunications services rendered to customers
which are billed to the customers by a regional Bell operating company, a Bell
operating company, a local exchange company, a credit card company, or a
provider of local telephone services. The borrowings are collateralized by
accounts receivable and certain other assets of the Company and its subsidiaries
and the stock of the Company's subsidiaries. The line of credit initially
matured on December 31, 1997, but automatically renews for successive additional
one month terms unless either party elects to terminate by giving written notice
to the other not less than 30 days prior to the next maturity date. Borrowings
under the line of credit bear interest at a floating rate of 2.5% above the
reference rate of Bank of America NT & SA, provided that the interest rate is
not less than 9% per annum. Interest is payable monthly and to the extent that
accrued interest does not equal $10,000 per month, the Company is required to
pay an unused line of credit fee of such difference. The Company had borrowed
$3,546,173 under this facility as of December 31, 1997. This amount is included
with "notes payable due secured creditors expected to be assumed" in the
accompanying statement of net assets in liquidation.
C-30
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The agreements regarding the line of credit contain covenants which, among
other matters, limit the ability of the Company and its subsidiaries to take the
following actions without the consent of Greyrock: (1) merge, consolidate and
acquire or sell assets, (2) incur indebtedness outside the ordinary course of
business which would have a material adverse effect on the Company and its
subsidiaries taken as a whole or on the prospect of repayment of the obligations
under the line of credit, (3) pay dividends other than stock dividends and
certain dividends with respect to the Company's Series A Cumulative Convertible
Preferred Stock, and (4) redeem, purchase or acquire its capital stock.
12. OTHER DEBT OBLIGATIONS
Other debt obligations at December 31, 1997 and 1996 consisted of:
DECEMBER 31,
--------------------------------
1997 1996
-------------- --------------
Subordinated Convertible Notes and
Debentures due on August 15, 2006 with
interest payable semi-annually at 10%
per annum............................. $ 36,000,000(a) $ 27,200,000
Note payable to a trust (collateralized
by land and building) due in monthly
installments of $1,586 including
interest at 10% with the balance due
in 2004............................... 90,860(b) 99,376
Note payable to a bank (collateralized
by land, building and equipment) due
in monthly installments of $8,338
including interest at 9.75% with the
balance due in 1998................... 5,371(c) 94,822
Other unsecured notes, various terms.... 252,958(d) 26,237
Other notes payable, various terms,
repaid in 1997........................ -- 85,203
Capital lease obligations............... 4,365,577(b) 1,543,124
-------------- --------------
Total......................... $ 40,714,766 29,048,762
==============
Less current maturities at December 31,
1996:
Long-term debt..................... (133,392)
Capital lease obligations.......... (437,467)
--------------
Long-term obligations at December 31,
1996.................................... $ 28,477,903
==============
- ------------
(a) The Notes and Debentures (described below) are classified as "unsecured
subordinated debt" at December 31, 1997.
(b) These notes and lease obligations are included with "notes payable and
capital lease obligations due secured creditors" at December 31, 1997.
(c) This note is included with "notes payable due secured creditors expected to
be assumed" at December 31, 1997.
(d) These notes are included with "unsecured notes payable" at December 31,
1997.
On August 12, 1996, the Company consummated a private placement of
$27,200,000 of its 10% Convertible Notes due 2006 (the Notes). The Notes are
currently convertible into the Company's Common Stock at a conversion price of
$2.55 per share, subject to adjustment under certain circumstances. The net
proceeds from the sale of the Notes were approximately $25.4 million after
giving effect to the transaction related fees and expenses. The Company used
approximately $12.0 million of the net proceeds from the private placement to
repay certain indebtedness, and to repurchase or redeem certain shares of the
Company's Common Stock and outstanding debentures. The Company utilized the
balance of the proceeds (approximately $13.4 million) primarily to effect
acquisitions and strategic alliances, to make capital expenditures, and for
general corporate purposes.
C-31
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In March 1997 and August 1997, the Company completed private placements of
$3,800,000 and $5,000,000, respectively of 10% Convertible Debentures due 2006
(the Debentures) on terms effectively identical to the terms of the Notes. The
difference between the face amount of the debentures of $8,800,000 and the net
proceeds of $6,814,149 was charged to interest expense in 1997.
Interest on the Notes and Debentures is payable semi-annually on February
15 and August 15 of each year commencing February 15, 1997 at the rate of 10%
per annum. The Company is currently in default under its obligations to the Note
and Debenture holders. Any rights of the Note and Debenture holders pursuant to
the default will be determined in the bankruptcy proceedings. No interest has
been accrued on the Notes and Debentures subsequent to the bankruptcy filing in
November 1997.
In September 1996, the Company redeemed its $2,000,000 principal amount of
convertible debentures which had been issued in March, April and June of 1996.
An $821,547 extraordinary loss on extinguishment of debt was recorded on this
redemption. This loss was comprised of $406,813 in unamortized debt issuance
costs attributable to the debentures and 182,706 shares of Common Stock (fair
market value of $414,734) issued to the debenture holders as consideration for
an "in the money" convertible feature of the debentures.
On March 8, 1996, the Company entered into an agreement with the former USC
shareholders to purchase debt and equity securities of the Company issued to the
USC shareholders in connection with the acquisition of USC for a $3,085,000
purchase price. The securities purchased by the Company consisted of promissory
notes of the Company in an aggregate principal amount of $3,150,000, 125,000
shares of the Company's Series B Cumulative Convertible Preferred Stock and
warrants exercisable into 1,050,000 shares of the Company's Common Stock. The
purchase was effected through a two-step integrated transaction whereby the
Company (i) acquired the USC securities for an aggregate of $308,500 in cash and
843,023 shares of the Company's Common Stock (fair market value of $2,320,000)
on June 21, 1996 and (ii) repurchased the Common Stock on August 14, 1996 for
$2,900,000 using proceeds of the Company's 10% Convertible Notes issued in
August 1996. Pursuant to this transaction, the Company recognized an
extraordinary gain on the extinguishment of the USC debt of $2,149,191.
13. CAPITAL STOCK
Due to the change to the liquidation basis of accounting as of December 31,
1997, all shareholders' equity accounts were reduced to zero at that time
because the Company's outstanding liabilities exceeded the estimated value of
its assets.
At December 31, 1996, the Chairman and Chief Executive Officer of the
Company voted an aggregate 4,257,309 shares of Common Stock (21.9% of voting
control) pursuant to various voting trust agreements. The agreements were
established in conjunction with the LDN acquisition, private placements and
other operating activities of the Company where terms of the transactions
included securities of the Company.
Each share of Series A Cumulative Convertible Preferred Stock entitles its
holder to receive an annual dividend of $.72 per share, payable at the option of
the Company in either cash or shares of Series A Preferred Stock; to convert it
into eight shares of Common Stock as adjusted in the event of future dilution
from stock dividends and recapitalizations; and to receive up to $9.00 per share
plus accrued and unpaid dividends in the event of involuntary or voluntary
liquidation. Subject to certain conditions in loan agreements, the Series A
Preferred Stock may be redeemed at the option of the Company on or after July
31, 1997, but must be mandatorily redeemed no later than July 21, 2000, at a
price of $9.00 per share plus accrued interest and unpaid dividends. Due to the
mandatory redemption requirements, the Series A Preferred Stock was recorded at
its fair value at the date of issuance, with increases to its carrying value via
periodic accretions up to the mandatory redemption date. Due to the change to
the liquidation basis of accounting as of December 31, 1997, the Series A
Preferred Stock was reduced to zero at that time because the Company's
outstanding liabilities exceeded the estimated value of its assets.
C-32
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In September 1995, the Company sold 1,100,000 shares of unregistered,
restricted Common Stock in a private placement transaction for $1,374,890. In
conjunction with this transaction, the purchasers received common stock purchase
warrants exercisable into an aggregate of 1,100,000 shares of stock at $1.25 per
share.
14. STOCK OPTIONS
As of December 31, 1997, the Company believes all outstanding stock options
have no value and any disclosure of stock option activity for 1997 would be
misleading. Therefore, the following disclosures apply only to 1996 and 1995.
At December 31, 1996, the Company had several stock option plans (the
Plans) under which options to acquire up to 8,000,000 shares could be granted to
directors, officers and employees of the Company. The options are
nontransferable and forfeitable if the holder resigns or leaves the Company for
any reason. Options under the Plans vest and may be exercised after six months
from the dates of grant, but the shares acquired upon exercise may only be sold
after periods of from eighteen to thirty months from the vesting date.
Unexercised options generally expire five years from the dates of grant. An
aggregate of 5,398,750 options had been granted under the Plans as of December
31, 1996.
The exercise price of options granted under the Plans is no less than the
market value of the stock on the dates the options are granted. Accordingly, no
compensation expense is recognized by the Company with respect to such grants.
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by SFAS No. 123, and has been determined as if the Company had
accounted for its director, officer and employee stock options under the fair
value method of that statement. The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in 1996 and 1995
respectively; no dividend yield; expected volatility of 63.2% and 66.9%; risk
free interest rates of 6.1% and 7.0%; and expected lives of 5 years and 7.5
years.
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:
<TABLE>
<CAPTION>
1996 1995
------------------------------ ------------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net loss................................ $ (4,054,515) $ (5,209,618) $ (6,456,963) $ (7,768,359)
Net loss per common share............... (0.27) (0.34) (0.56) (0.67)
A summary of options granted and outstanding under the Plans is summarized
below:
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
----------- ---------------- ----------- ----------------
Outstanding at beginning of year........ 2,123,470 $ 1.60 2,114,800 $ 1.15
Granted................................. 827,000 2.20 994,250 1.76
Exercised............................... (523,803) 1.21 (914,861) .69
Forfeited............................... (198,617) 2.14 (70,719) 1.99
Outstanding at end of year.............. 2,228,050 1.86 2,123,470 1.60
Exercisable at end of year.............. 2,173,050 1.87 2,123,470 1.60
Weighted-average fair value of
options granted during the
year.................................. $ 1.29 $ 1.15
</TABLE>
C-33
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about options outstanding under
the Plans at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS OUTSTANDING
------------------------------------------------- ------------------------------
RANGE OF SHARES WEIGHTED-AVERAGE WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ---------------------------------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$.43-$.80............................... 418,000 1.2 $ .70 418,000 $ .70
1.56-2.63............................... 1,642,550 3.1 1.99 1,587,550 2.01
3.47-3.50............................... 167,500 3.9 3.50 167,500 3.50
</TABLE>
In addition, in 1995 the Company granted additional options outside of the
Plans to the Chairman of the Board and Chief Executive Officer to acquire up to
1,000,000 shares of unregistered, restricted Common Stock. These options had a
fair value of $0.54 per share on the grant date and were unexercised at December
31, 1997.
15. FEDERAL INCOME TAXES
The components of the net deferred tax asset at December 31, 1996 were as
follows:
Deferred tax assets:
Allowance for doubtful accounts.... $ 986,990
Other reserves..................... 140,233
Amortization on excess of cost over
net assets acquired............... 276,626
Net operating loss carryforwards... 3,498,119
--------------
Gross deferred tax asset...... 4,901,968
Deferred tax liabilities:
Depreciation on other assets....... 723,214
--------------
4,178,754
Valuation allowance..................... (4,178,754)
--------------
Net deferred tax asset.................. $ --
==============
The following is a reconciliation of the provision for income taxes at the
U.S. federal income tax rate to the income taxes reflected in the consolidated
statements of operations:
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1996 1995
-------------- ------------
Income tax benefit at federal statutory
rate.................................... $ (1,285,221) $ (657,975)
Net operating losses not benefitted..... 867,509 657,975
Other................................... 417,712 --
-------------- ------------
Income tax benefit provided............. $ -- $ --
============== ============
At December 31, 1997, the Company had net operating loss carryforwards
aggregating approximately $27,000,000 which expire in various years between 2003
and 2012. Certain changes in the Company's ownership have occurred as defined by
Internal Revenue Code Section 382, which would result in an annual limitation on
the amount of tax carryforwards which can be utilized.
16. NONRECURRING CHARGES
The Company incurred an $806,436 nonrecurring charge in the fourth quarter
of 1996 related to the Company's reconfiguration of a portion of its network
including (i) the deployment of two additional
C-34
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
switches to enhance the efficiency of the network, (ii) the addition of a number
of new circuits throughout the Company's service area, and (iii) the planned
expansion of the network to the west coast. As a result of this combination of
factors, the Company was required to take its network down for a period of time
and incur nonrecurring incremental expenses to carry traffic outside its
network.
The Company incurred an aggregate of $2,015,506 in nonrecurring
restructuring and integration charges in 1996 comprised of (i) $227,201 in
payroll and related costs eliminated in a restructuring of the Company's sales
organization, (ii) $543,794 in principally payroll and related costs to be
eliminated on full integration of the First Choice and Addtel acquisitions, and
(iii) $1,244,511 in principally payroll and related costs and reserves for
uncollectible accounts receivable to be eliminated on the discontinuance of the
Company's international call back product line. 1996 revenues and cost of
revenue attributable to the Company's discontinuing international call back
product line were $1,937,807 and $1,478,797, respectively. While such amounts
are also nonrecurring, they have not been separately identified as nonrecurring
in the statement of operations.
The Company incurred $143,399 in nonrecurring costs in 1995 related to its
discontinued Russian ventures.
17. EMPLOYMENT CONTRACT AND SEVERANCE PACKAGES
In 1995, the Company entered into an employment agreement with the Chairman
of the Board and Chief Executive Officer. The employment agreement, which was to
expire on March 23, 2001, provided for an annual salary of $275,000 and
contained a bonus schedule based on audited consolidated net income on an annual
basis and certain stock options. In 1997, the employment agreement was canceled
and the individual was granted a severance package. Another officer was also
granted a severance package in 1997. Payments received by the two officers in
1997 totaled $38,000. In addition, $86,000 is accrued at December 31, 1997 with
pre-petition accrued expenses in the accompanying statement of net assets in
liquidation.
18. LEASES
The Company leases certain office facilities and equipment under capital
leases and noncancellable operating leases expiring through 2001. As permitted
under the Bankruptcy Code, the Company has rejected substantially all of these
leases and the related assets were returned to the lessors in early 1998 or are
in the process of being returned. Additional liability to the Company, if any,
under the remaining terms of the leases is determined by bankruptcy law and has
been estimated at $325,000. This amount has been recorded with "pre-petition
accounts payable and accrued expenses" in the accompanying statement of net
assets in liquidation at December 31, 1997.
The total rent expense incurred during the years ended December 31, 1997,
1996 and 1995 was $574,618, $425,665 and $319,758, respectively.
19. RELATED PARTY TRANSACTIONS
An individual who was a director of the Company for a period of time during
1996 and 1997 was also the manager of an investment fund that purchased
$8,800,000 of Debentures (see Note 12) in 1997.
The chairman of the board of the Company received $50,000 in 1997 under a
consulting agreement with the Company. In addition, the chairman is to receive
$105,000 upon successful completion of the sale of assets to EqualNet (see Note
3).
In 1995, six members of the board of directors made loans to the Company
aggregating $293,610 with interest at 12% per annum. All loans were repaid
during the year with the exception of $25,610 outstanding at December 31, 1995.
In connection with such loans, four directors accepted options to purchase
54,287
C-35
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
shares of the Company's unregistered, restricted Common Stock, all exercisable
between June 17, 1995 and December 17, 1995 at $1.75 per share. All of such
options expired unexercised.
The Company had a $195,904 note receivable due from an officer and director
bearing interest at 10% at December 31, 1995. Effective April 11, 1996, the
Company entered into a settlement agreement with this officer under which (i)
the officer's employment was terminated, (ii) the officer entered a covenant not
to compete with the Company for three years, and (iii) the officer agreed to
provide ongoing consulting services to the Company through March 31, 1999. In
consideration for the agreement, the Company issued to the officer 142,534
shares of unregistered, restricted Common Stock (fair market value of $249,120)
and released the officer from his obligations to the Company under the note
receivable in a principal sum of $195,904, plus accrued but unpaid interest of
$39,179. The Company capitalized the consideration given for the agreement and
charged the amount to operating expenses on a straight line basis over the term
of the agreement. The unamortized balance of $394,888 related to the agreement
is included in other noncurrent assets at December 31, 1996. The balance was
written off and charged to expense in 1997.
20. COMMITMENTS AND CONTINGENCIES
In July 1997 a long distance carrier filed a claim against the Company
seeking to recover approximately $864,000 allegedly due and owing for
telecommunications services provided to the Company. The Company has answered
the complaint raising affirmative defenses, however, the Company believes a
complete defense to this complaint is unlikely. Continuation of this action has
been stayed as a result of the Company's bankruptcy filing. The Company believes
that any allowed portion of the claim would be a general unsecured claim and has
accrued the full amount of $864,000 at December 31, 1997, prior to adjustment to
reduce liabilities to estimated liquidation value of assets.
In addition, certain of the Company's telecommunications service providers
have filed motions seeking termination of their contracts with the Company as
well as other forms of relief. These motions have been argued before the
Bankruptcy Court, but have not been ruled on by the Bankruptcy Court and are
subordinate to the Order of Relief. The carriers' termination of service to the
Company as a result of a ruling in their favor would have a material adverse
effect on the Company's ability to continue operations through the date of the
expected sale to EqualNet and liquidation of the Company and could reduce the
net assets ultimately available for distribution to creditors.
Further, pre-petition liabilities reflected in the accompanying statement
of net assets in liquidation are based on schedules filed by the Company with
the Bankruptcy Court (Bankruptcy Schedules) and reflect the claims which the
Company believes the respective entities could assert against the Company in the
bankruptcy proceedings. The claims listed in the Bankruptcy Schedules do not
necessarily encompass the universe of claimants, nor the amount of each claim,
which may be asserted against the Company in the bankruptcy proceedings. Any
entity which believes that it has a claim against the Company will be required
to file a proof of that claim, including the amount of the claim, prior to a
certain date fixed by the Bankruptcy Court (the "Bar Date"). The Company
anticipates that the Bar Date will be in early June 1998.
The Company has estimated administrative costs to complete the bankruptcy
and liquidation of the Company following December 31, 1997 to be approximately
$2,300,000. This amount has been accrued and classified with "post-petition
accounts payable and accrued expenses" in the accompanying statement of net
assets in liquidation.
21. BENEFIT PLAN
The Company adopted a 401K Retirement Plan (the 401K Plan) effective
January 1, 1996. Under the 401K Plan, employees could elect to reduce their
compensation and contribute to the 401K Plan provided they had completed six
months of employment eligibility, reached the age of twenty and completed at
least 1,000 hours of service during any twelve consecutive month period
following their first day of work. Each
C-36
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
employee could defer up to 15% of their salary not to exceed the limit allowable
by law in any one year. Vesting is 20% per year of service and the employee is
credited with a year of service if they have completed at least 1,000 hours of
service. The Company may, at its option, make discretionary matching
contributions to the 401K Plan. An employee must meet all the service
requirements of participation and be active on December 31 to be eligible for
any Company matching contributions. The Company made 50% matching contributions
of $12,000 and $30,599 for the 1997 and 1996 plan years, respectively.
Distributions from the Plan are not permitted before the age of 65 except in the
event of death, disability, or termination of employment.The Plan will terminate
effective April 30, 1998 due to the bankruptcy and expected liquidation of the
Company.
C-37
<PAGE>
ANNEX D
SECOND AMENDMENT
TO
EQUALNET HOLDING CORP.
EMPLOYEE STOCK OPTION AND RESTRICTED STOCK PLAN
ADOPTED BY THE BOARD OF DIRECTORS MARCH 20, 1998
1. Section 3 of the EqualNet Holding Corp. Employee Stock Option and
Restricted Stock Plan is hereby deleted in its entirety and replaced by the
following:
Section 3. STOCK SUBJECT TO THE PLAN
The total amount of the Common Stock with respect to which Awards may
be granted shall not exceed in the aggregate 4,000,000 shares. The class
and aggregate number of shares which may be subject to the Options granted
under this Plan shall be subject to adjustment under Section 7. The class
and aggregate number of shares which may be subject to the Restricted Stock
Awards granted under the plan also shall be subject to adjustment under
Section 8. Shares of Common Stock with respect to which Awards may be
granted may be treasury shares or authorized but unissued shares of Common
Stock. If any Award under the Plan shall expire or terminate for any reason
without having been exercised in full, or if any Award shall be forfeited,
the shares subject to the unexercised or forfeited portion of such Award
shall be available again for the purposes of the Plan.
2. Section 6 of the EqualNet Holding Corp. Employee Stock Option and
Restricted Stock Plan is hereby deleted in its entirety and replaced by the
following:
Section 6. MAXIMUM NUMBER OF SHARES SUBJECT TO AN AWARD
The maximum number of shares of Common Stock subject to Options that
may be awarded under the Plan to any Employee during any consecutive 12
month period is 750,000. The maximum number of shares of Common Stock that
may be awarded under the Plan to any Employee pursuant to Restricted Stock
Awards during any consecutive 12 month period is 200,000.
3. Except as expressly amended by this Amendment, the EqualNet Holding
Corp. Employee Stock Option and Restricted Stock Plan shall continue in full
force and effect in accordance with its terms.
D-1
<PAGE>
ANNEX E
FIRST AMENDMENT
TO
EQUALNET HOLDING CORP.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
ADOPTED BY THE BOARD OF DIRECTORS MARCH 20, 1998
1. Section 3 of the EqualNet Holding Corp. Non-Employee Director Stock
Option Plan is hereby deleted in its entirety and replaced by the following:
Section 3. AVAILABLE SHARES. The total amount of the Stock with
respect to which Options may be granted under this Plan shall not exceed in
the aggregate 500,000 shares; provided that the class and aggregate number
of shares of Stock with respect to which Options may be granted hereunder
shall be subject to adjustment in accordance with the provisions of
Paragraph 16 hereof. Such shares of Stock may be treasury shares or
authorized but unissued shares of Common Stock. If any outstanding Option
for any reason shall expire or is terminated or canceled, the shares of
Stock allocable to the unexercised portion of such Option may again be
subject to an Option or Options under the Plan.
2. Section 6 of the EqualNet Holding Corp. Non-Employee Director Stock
Option Plan is hereby deleted in its entirety and replaced by the following:
Section 6. OPTION GRANT SIZE AND GRANT DATES.
(a) INITIAL GRANTS. An Option to purchase a number of shares of
Stock equal to the quotient of $60,000 divided by the fair market value of
each share of Stock on the date of such grant (an "Initial Grant") shall
be granted to each person who shall become an Eligible Director after the
effective date of the First Amendment to the Plan on the day following the
day on which such Eligible Director is first elected or appointed to be a
Director, whichever is applicable; provided that if an Eligible Director
who previously received an Initial Grant terminates service as a Director
and is subsequently elected or appointed to the Board, such Director shall
not be eligible to receive a second Initial Grant, but shall be eligible
only to receive Annual Grants (defined below) as provided in this Paragraph
6, beginning with the Annual Meeting held immediately following the date on
which such Director was reelected or appointed. If, however, the Chairman
of the Board of the Company determines, in his sole discretion following
discussions with the Company's legal counsel, that at the time any Initial
Grant is scheduled to be made the Company is in possession of material,
nonpublic information about the Company, then such Initial Grant shall be
suspended until the second trading day after public dissemination of such
information.
(b) ANNUAL GRANTS. An Option to purchase a number of shares of Stock
equal to the quotient of $30,000 divided by the fair market value of each
share of Stock on the date of such grant shall be granted to each Eligible
Director as an annual retainer fee for service as a member of the Company's
Board of Directors (each, an "Annual Grant").
(i) ELIGIBLE DIRECTORS ON THE EFFECTIVE DATE OF THE PLAN. An
Annual Grant shall be granted to each person who is an Eligible Director
on the effective date of the Plan on the day following each Annual
Meeting beginning with the first Annual Meeting to occur after the date
on which the stockholders approve the Plan. If, however, the Chairman of
the Board of the Company determines, in his sole discretion following
discussions with the Company's legal counsel, that the Company is in
possession of material, nonpublic information about the Company, then
the Annual Grant shall be delayed until the second trading day after
public dissemination of such information.
(ii) ELIGIBLE DIRECTORS ELECTED OR APPOINTED AFTER THE EFFECTIVE
DATE OF THE PLAN. An Annual Grant shall be granted to each person who
shall become an Eligible Director after the
E-1
<PAGE>
effective date of this Plan on the day following each Annual Meeting
beginning with the later of (A) the first Annual Meeting to occur after
the date on which the stockholders approve the Plan and (B) the first
Annual Meeting after such Eligible Director is first elected or
appointed to be a Director, whichever is applicable. If, however, the
Chairman of the Board of the Company determines, in his sole discretion
following discussions with the Company's legal counsel, that the Company
is in possession of material, nonpublic information about the Company,
then the Annual Grant shall be delayed until the second trading day
after public dissemination of such information.
3. Except as expressly amended by this Amendment, the EqualNet Holding
Corp. Non-Employee Director Stock Option Plan shall continue in full force and
effect in accordance with its terms.
E-2
<PAGE>
ANNEX F
AMENDMENT TO THE ARTICLES OF INCORPORATION OF THE COMPANY
Article I of the Company's Articles of Incorporation is proposed to be
amended to read in its entirety as follows:
"The name of the Corporation is Equalnet Communications Corp."
F-1
<PAGE>
ANNEX G
EQUALNET HOLDING CORP.
STATEMENT OF RESOLUTION
ESTABLISHING SERIES OF SHARES
(SERIES B SENIOR CONVERTIBLE PREFERRED)
To the Secretary of State
Of the State of Texas:
Pursuant to the provisions of Article 2.13 of the Texas Business
Corporation Act, EqualNet Holding Corp., a Texas corporation (the
"Corporation"), submits the following statement for the purpose of
establishing and designating a series of shares and fixing and determining the
preferences, limitations and relative rights thereof:
1. The name of the corporation is EqualNet Holding Corp.
2. The following resolution, establishing and designating a series of
shares and fixing and determining the preferences, limitations and relative
rights thereof, was duly adopted by the board of directors of the
Corporation on March 6, 1998:
WHEREAS, Article IV of the Articles of Incorporation, as amended, of the
Corporation (the "Articles of Incorporation") provides for a class of
authorized shares known as "Common Stock", with a par value of $0.01 per
share, issuable from time to time, and for a class of authorized shares known as
"Preferred Stock", with a par value of $0.01 per share, issuable from time to
time in one or more series; and
WHEREAS, pursuant to Article IV of the Articles of Incorporation of the
Corporation, the Board of Directors of the Corporation is authorized to fix and
determine the preferences, limitations and relative rights of any wholly
unissued series of Preferred Stock, and to fix the number of shares constituting
such series, and to increase or decrease the number of shares of any such series
(but not below the number of shares thereof then outstanding); and
WHEREAS, it is the desire of the Board of Directors of the Corporation,
pursuant to its authority as aforesaid, to establish, designate and issue an
additional series of such Preferred Stock and to fix and determine the
preferences, limitations and relative rights relating thereto;
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors does hereby
establish and designate a series of Preferred Stock of the Corporation and does
hereby fix and determine the preferences, limitations and relative rights
relating to said series of Preferred Stock, as follows:
Section 1. Designation and Amount.
The shares of such series shall be designated as "Series B Senior
Convertible Preferred Stock," and the number of shares constituting the
Series B Senior Convertible Preferred Stock shall be 3,000, and shall not
be subject to increase.
Section 2. Dividends and Distributions.
The holders of outstanding shares of Series B Senior Convertible
Preferred Stock shall be entitled to share in any and all dividends
declared and paid on the Common Stock, when, as, and if declared by the
Board of Directors of the Corporation (the "Board of Directors" or the
"Board") out of funds legally available for such purpose. The amount of
dividends payable on each share of Series B Senior Convertible Preferred
Stock shall equal the product of (a) the amount of dividends per share
declared on the Common Stock multiplied by (b) the number of shares of
Common Stock into which each share of Series B Senior Convertible Preferred
Stock is convertible on the date such dividend is declared.
Section 3. Liquidation Preference.
In the event of a liquidation, dissolution, or winding up of the
Corporation, whether voluntary or involuntary, the holders of Series B
Senior Convertible Preferred Stock shall be entitled to receive out of the
assets of the Corporation, whether such assets constitute stated capital or
surplus of any nature,
G-1
<PAGE>
an amount per share of Series B Senior Convertible Preferred Stock equal to
$1,000.00 (the "Liquidation Preference"), and no more, before any payment
shall be made or any assets distributed to the holders of Common Stock or
any other class or series of the Corporation's capital stock ranking junior
as to liquidation rights to the Series B Senior Convertible Preferred Stock
(collectively, the "Junior Liquidation Stock"); provided, however, that
such rights shall accrue to the holders of Series B Senior Convertible
Preferred Stock only in the event that the Corporation's payments with
respect to the liquidation preference of any holders of capital stock of
the Corporation ranking senior as to liquidation rights to the Series B
Senior Convertible Preferred Stock (the "Senior Liquidation Stock") are
fully met. After the liquidation preferences of any Senior Liquidation
Stock are fully met, the entire assets of the Corporation available for
distribution shall be distributed ratably among the holders of the Series B
Senior Convertible Preferred Stock and any other class or series of the
Corporation's capital stock having parity as to liquidation rights with the
Series B Senior Convertible Preferred Stock (the "Parity Liquidation
Stock") in proportion to the respective preferential amounts to which each
is entitled (but only to the extent of such preferential amounts). After
payment in full of the liquidation price of the shares of the Series B
Senior Convertible Preferred Stock and any Parity Liquidation Stock, the
holders of such shares shall not be entitled to any further participation
in any distribution of assets by the Corporation. Neither a consolidation
or merger of the Corporation with another corporation nor a sale or
transfer of all or part of the Corporation's assets for cash, securities,
or other property in and of itself will be considered a liquidation,
dissolution, or winding up of the Corporation.
The Series B Senior Convertible Preferred Stock shall rank senior to
and be Senior Liquidation Stock with respect to the Company's Series A
Convertible Preferred Stock, par value $.01 per share, and the Company's
Series A Convertible Preferred Stock shall rank subordinate to and be
Junior Liquidation Stock with respect to the Series B Senior Convertible
Preferred Stock.
Section 4. No Sinking Fund.
The shares of Series B Senior Convertible Preferred Stock shall not be
subject to the operation of a purchase, retirement, or sinking fund.
Section 5. Mandatory Conversion.
At 5:00 p.m., Central Standard Time, on December 31, 1999, each share
of Series B Senior Convertible Preferred then outstanding shall
automatically convert, without any action on the part of the Company or the
holder thereof or any other party, into such number of fully paid and
nonassessable shares of Common Stock (calculated as to each conversion to
the nearest 1/100th of a share) as shall be determined by the Conversion
Rate (as defined below) then in effect, as if the holder thereof had
tendered such shares for conversion pursuant to Section 6 hereof and the
applicable Conversion Date (as defined below) had been December 31, 1999.
Section 6. Optional Conversion.
(a) The holders of the Series B Senior Convertible Preferred Stock
may convert any or all of their shares of Series B Senior Convertible
Preferred Stock into fully paid and nonassessable shares of Common Stock
and such other securities and property as hereinafter provided. Commencing
on the Issuance Date and at any time thereafter, each share of Series B
Senior Convertible Preferred Stock may be converted at the office of the
conversion agent for the Series B Senior Convertible Preferred Stock that
was appointed prior to issuance of the shares of Series B Senior
Convertible Preferred Stock or at such other additional office or offices,
if any, as the Board of Directors may designate, initially into such number
of fully paid and nonassessable shares of Common Stock (calculated as to
each conversion to the nearest 1/100th of a share) determined by dividing
(x) the Conversion Amount by (y) the Conversion Price (subject to equitable
adjustments for stock splits, stock dividends, combinations,
recapitalizations, reclassifications and similar events occurring on or
after the date of filing of this Statement of Rights and Preferences with
the Secretary of State of the State of Texas), in each case subject to
adjustment as hereinafter provided (the "Conversion Rate").
G-2
<PAGE>
(b) Certain Definitions.
As used herein, the "Conversion Amount" initially shall be equal to
$1,000.00, subject to adjustment as hereinafter provided.
As used herein, "Conversion Date" shall mean the date on which the
notice of conversion is actually received by the conversion agent, whether
by mail, courier, personal service, facsimile or other means, with respect
to a conversion at the option of the holder pursuant to Section 6(a).
As used herein, "Conversion Price" shall mean $2.00 unless changed
pursuant to Section 6(c)(8)(ii).
As used herein, "Issuance Date" means the first date of original
issuance of any shares of Series B Senior Convertible Preferred Stock.
As used herein, "Market Price" shall mean the current market price
per share of Common Stock on any date and shall be deemed to be the average
of the closing sales prices for the 20 consecutive trading days before the
day in question. The closing sales price for each day shall be (i) the last
reported sales price or, in case no such reported sale takes place on such
day, the average of the reported closing bid and asked prices, in either
case on the principal national securities exchange on which the Common
Stock is listed or admitted to trading or (ii) if not listed or admitted to
trading on any national securities exchange, the closing sales price as
reported by The Nasdaq Stock Market, Inc. or, if such firm at the time is
not engaged in the business of reporting such prices, as furnished by any
similar firm then engaged in such business as selected by the Board of
Directors.
As used herein, "Measurement Period" means, with respect to any
date, the period of five (5) consecutive trading days ending on the trading
day immediately preceding such date.
(c) Other Provisions.
(1) Notwithstanding anything in this Section 6(c) to the contrary, no
change in the Conversion Amount pursuant to Section 6(c) shall actually be
made until the cumulative effect of the adjustments called for by this
Section 6(c) since the date of the last change in the Conversion Amount
would change the Conversion Amount by more than 1%. However, once the
cumulative effect would result in such a change, then the Conversion Amount
shall actually be changed to reflect all adjustments called for by this
Section 6(c) and not previously made. Notwithstanding anything in this
Section 6(c), no change in the Conversion Amount shall be made that would
result in a Conversion Amount of less than the par value of the Common
Stock into which shares of Series B Senior Convertible Preferred Stock are
at the time convertible.
(2) Reserved.
(3) To convert shares of Series B Senior Convertible Preferred Stock
into Common Stock, the holder thereof shall (i) surrender the certificate
or certificates for such shares of Series B Senior Convertible Preferred
Stock, duly endorsed to the Corporation in blank, to the Corporation at its
principal office or at the office of the agency maintained for that
purpose, (ii) give written notice (the "Conversion Notice") to the
Corporation at such office that such holder elects to convert shares of
Series B Senior Convertible Preferred Stock and specifying the number of
shares to be converted, and (iii) state in such written notice the name or
names in which such holder wishes the certificate or certificates for
shares of Common Stock to be issued. The Corporation shall notify a holder
who has given a Conversion Notice of any claim of error in such Conversion
Notice within two business days after such holder gives such Conversion
Notice and no such claim of error shall limit or delay performance of the
Corporation's obligation to issue upon such conversion the number of shares
of Common Stock which are not in dispute. A Conversion Notice shall be
deemed to be in proper form unless the Corporation notifies a holder of
shares of Series B Senior Convertible Preferred Stock being converted
within two business days after a Conversion Notice has been received (which
notice shall specify all defects in the Conversion Notice) and any
Conversion Notice containing any such defect shall nonetheless be effective
on the date given if the converting holder promptly undertakes in writing
G-3
<PAGE>
to correct all such defects. Each conversion shall be deemed to have been
effected at the close of business on the date on which the Corporation or
such agency shall have received such surrendered Series B Senior
Convertible Preferred Stock certificate or certificates, and the person or
persons in whose name or names any certificate or certificates for shares
of Common Stock shall be issuable upon such conversion shall be deemed to
have become the record holder or holders of the shares represented thereby
at such time. As soon as practicable, but in any event within five business
days after such conversion, the Corporation shall issue or deliver at such
office to the holder for whose account such shares of Series B Senior
Convertible Preferred Stock were so surrendered, or to such holder's
nominee or nominees, certificates (bearing such legends as may be required
under applicable state or federal securities laws) for the number of full
shares of Common Stock to which such holder shall be entitled, plus, in
lieu of any fractional share to which such holder would otherwise be
entitled, cash equal to such fraction multiplied by the Market Price per
share of the Common Stock as of the close of business on the date of such
conversion. The holder of any shares of Series B Senior Convertible
Preferred Stock converting such shares shall pay any tax arising in
connection with such conversion.
(4) The Corporation (and any successor corporation) shall use its
best efforts to take such action as is necessary so that a number of shares
of the authorized but unissued (excluding unissued stock reserved for
issuance prior to the date hereof) Common Stock (or common stock in the
case of any successor corporation) sufficient to provide for the conversion
of the Series B Senior Convertible Preferred Stock outstanding upon the
basis hereinbefore provided are at all times reserved by the Corporation
(or any successor corporation), free from preemptive rights, for such
conversion, subject to the provisions of the next succeeding paragraph. If
the Corporation shall issue any securities or make any change in its
capital structure that would change the number of shares of Common Stock
into which each share of the Series B Senior Convertible Preferred Stock
shall be convertible as herein provided, the Corporation shall at the same
time also make proper provision so that thereafter there shall be a
sufficient number of shares of Common Stock authorized and reserved, free
from preemptive rights, for conversion of the outstanding Series B Senior
Convertible Preferred Stock on the new basis. If at any time the number of
authorized but unissued shares (excluding unissued stock reserved for
issuance prior to the date hereof) of Common Stock shall not be sufficient
to effect the conversion of all of the outstanding shares of Series B
Senior Convertible Preferred Stock, (A) the right of the holders of Series
B Senior Convertible Preferred Stock to convert such stock into Common
Stock pursuant to this Section 6 shall be limited to the extent that the
number of authorized but unissued shares (excluding unissued stock reserved
for issuance prior to the date hereof) of Common Stock is insufficient to
effect such conversion and (B) the Corporation promptly shall use its best
efforts to take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares
(excluding unissued stock reserved for issuance prior to the date hereof)
of Common Stock to such number of shares as shall be sufficient for such
purpose.
(5) In case of any consolidation or merger of the Corporation with
any other corporation (other than a wholly-owned subsidiary of the
Corporation) in which the Corporation is not the surviving corporation, or
in case of any sale or transfer of all or substantially all of the assets
of the Corporation, or in the case of any share exchange pursuant to which
all of the outstanding shares of Common Stock are converted into other
securities or property, the Corporation shall make appropriate provision or
cause appropriate provision to be made so that each holder of shares of
Series B Senior Convertible Preferred Stock then outstanding shall have the
right thereafter to convert such shares of Series B Senior Convertible
Preferred Stock into the kind of shares of stock and other securities and
property receivable upon such consolidation, merger, sale, transfer, or
share exchange by a holder of shares of Common Stock into which such shares
of Series B Senior Convertible Preferred Stock could have been converted
immediately prior to the effective date of such consolidation, merger,
sale, transfer, or share exchange and on a basis which preserves the
economic benefits of the conversion rights of the holders of shares of
Series B Senior Convertible Preferred Stock on a basis as nearly as
practical as such rights exist hereunder prior thereto. If, in connection
with any such consolidation, merger, sale, transfer, or share exchange,
each holder of shares of Common Stock is entitled to elect to receive
securities, cash,
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or other assets upon completion of such transaction, the Corporation shall
provide or cause to be provided to each holder of Series B Senior
Convertible Preferred Stock the right to elect the securities, cash, or
other assets into which the Series B Senior Convertible Preferred Stock
held by such holder shall be convertible after completion of any such
transaction on the same terms and subject to the same conditions applicable
to holders of the Common Stock (including, without limitation, notice of
the right to elect, limitations on the period in which such election shall
be made, and the effect of failing to exercise the election). The
Corporation shall not effect any such transaction unless the provisions of
this paragraph have been complied with. The above provisions shall
similarly apply to successive consolidations, mergers, sales, transfers, or
share exchanges.
(6) If a holder shall have given a Conversion Notice for shares of
Series B Senior Convertible Preferred Stock, the Corporation shall issue
and deliver to such person certificates for the Common Stock issuable upon
such conversion within five business days after such Conversion Notice is
received and the person converting shall be deemed to be the holder of
record of the Common Stock issuable upon such conversion as of the date of
receipt, and all rights with respect to the shares surrendered shall
forthwith terminate except the right to receive the Common Stock or other
securities, cash, or other assets as herein provided. If a holder shall
have given a Conversion Notice as provided herein, the Corporation's
obligation to issue and deliver the certificates for Common Stock shall be
absolute and unconditional, irrespective of any action or inaction by the
converting holder to enforce the same, any waiver or consent with respect
to any provision thereof, the recovery of any judgment against any person
or any action to enforce the same, any failure or delay in the enforcement
of any other obligation of the Corporation to the holder of record, or any
set off, counterclaim, recoupment, limitation or termination, or any breach
or alleged breach by the holder of any obligation to the Corporation, and
irrespective of any other circumstance that might otherwise limit such
obligation of the Corporation to the holder in connection with such
conversion. If the Corporation fails to issue and deliver the certificates
for the Common Stock to the holder converting shares of Series B Senior
Convertible Preferred Stock pursuant to the first sentence of this
paragraph as and when required to do so, in addition to any other
liabilities the Corporation may have hereunder and under applicable law (1)
the Corporation shall pay or reimburse such holder on demand for all
out-of-pocket expenses including, without limitation, fees and expenses of
legal counsel incurred by such holder as a result of such failure and (2)
such holder may by written notice (which may be given by mail, courier,
personal service or facsimile) or oral notice (promptly confirmed in
writing) given at any time prior to delivery to such holder of the
certificates for the shares of Common Stock issuable upon such conversion
of shares of Series B Senior Convertible Preferred Stock, rescind such
conversion, whereupon such holder shall have the right to convert such
shares of Series B Senior Convertible Preferred Stock thereafter in
accordance herewith.
(7) No fractional shares of Common Stock shall be issued upon
conversion of Series B Senior Convertible Preferred Stock but, in lieu of
any fraction of a share of Common Stock that would otherwise be issuable in
respect of the aggregate number of such shares surrendered for conversion
at one time by the same holder, the Corporation shall pay in cash an amount
equal to such fraction multiplied by the Market Price per share of the
Common Stock as of the close of business on the date of such conversion.
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<PAGE>
(8) The Conversion Amount shall be adjusted from time to time under
certain circumstances, subject to the provisions of the first three
sentences of the first paragraph of this Section 6(c), as follows:
(i) In case the Corporation shall issue rights or warrants on a pro
rata basis to all holders of the Common Stock on a given record date
entitling such holders to subscribe for or purchase Common Stock at a price
per share less than the average daily Market Price of the Common Stock on
the 30 consecutive trading days commencing 45 trading days before such
record date (the "Current Market Price"), then in each such case the
Conversion Amount in effect on such record date shall be adjusted in
accordance with the formula
C1 = C x O + N
-----------------------
O + N x P/M
where
C1 = the adjusted Conversion Amount
C = the current Conversion Amount
O = the number of shares of Common Stock outstanding on the record
date.
N = the number of additional shares of Common Stock issuable pursuant
to the exercise of such rights or warrants
P = the offering price per share of the additional shares (which
amount shall include amounts received by the Corporation in
respect of the issuance and the exercise of such rights or
warrants)
M = the Current Market Price per share of Common Stock on the record
date.
Such adjustment shall become effective immediately after the record
date for the determination of shareholders entitled to receive such rights
or warrants. If any or all such rights or warrants are not so issued or
expire or terminate before being exercised, the Conversion Amount then in
effect shall be readjusted appropriately.
(ii) On the 90th day after the Issuance Date, or the next business
day if such day is not a business day (the "Determination Date"), the
Conversion Price shall be adjusted to the lowest of (A) the quotient of (I)
the sum of the averages of the high and low trading price of the Common
Stock for the immediately preceding 20 consecutive trading days divided by
(II) 20, (B) the quotient of (I) the sum of the averages of the high and
low trading price of the Common Stock for the immediately preceding 5
trading days divided by (II) 5 and (C) $2.00.
(9) Except as otherwise provided above in this Section 6, no
adjustment in the Conversion Amount shall be made in respect of any
conversion for share distributions or dividends theretofore declared and
paid or payable on the Common Stock.
(10) Whenever the Conversion Amount is adjusted as herein provided,
the Corporation shall send to each holder and each transfer agent, if any,
for the Series B Senior Convertible Preferred Stock and the Common Stock, a
statement signed by the Chairman of the Board, the President, or any Vice
President of the Corporation and by its Treasurer or its Secretary or an
Assistant Secretary stating the adjusted Conversion Amount determined as
provided in this Section 6, and any adjustment so evidenced, given in good
faith, shall be binding upon all shareholders and upon the Corporation.
Whenever the Conversion Amount is adjusted, the Corporation will give
notice by mail to the holders of record of Series B Senior Convertible
Preferred Stock, which notice shall be made within 15 days after the
effective date of such adjustment and shall state the adjustment and the
Conversion Amount. Notwithstanding the foregoing notice provisions, failure
by the Corporation to give such notice or a defect in such notice shall not
affect the binding nature of such corporate action of the Corporation.
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<PAGE>
(11) Whenever the Corporation shall propose to take any of the
actions specified in Section 6(c)(5) or in subparagraph (i) of Section
6(c)(8) that would result in any adjustment in the Conversion Amount under
this Section 6(c), the Corporation shall cause a notice to be mailed at
least 20 days prior to the date on which the books of the Corporation will
close or on which a record will be taken for such action, to the holders of
record of the outstanding Series B Senior Convertible Preferred Stock on
the date of such notice. Such notice shall specify the action proposed to
be taken by the Corporation and the date as of which holders of record of
the Common Stock shall participate in any such actions or be entitled to
exchange their Common Stock for securities or other property, as the case
may be. Failure by the Corporation to mail the notice or any defect in such
notice shall not affect the validity of the transaction.
(12) Notwithstanding any other provision included herein, no
adjustment to the Conversion Amount, the Conversion Price or the Conversion
Rate shall be made if, after giving effect thereto, the sum of (i) the
aggregate number of shares of Common Stock into which all shares of Series
B Senior Convertible Preferred shall have been converted and (ii) the
aggregate number of shares of Common Stock into which all shares of Series
B Senior Convertible Preferred then outstanding are convertible shall
exceed 3,250,000 unless the issuance of the Series B Senior Convertible
Preferred shall have been ratified by the holders of the Company's Common
Stock.
Section 7. Voting Rights.
Except as otherwise required by law or expressly provided herein,
shares of Series B Senior Convertible Preferred Stock shall be entitled to
one vote per share on any matter submitted to the shareholders of the
Company, voting as a single class with the Common Stock.
The affirmative vote or consent of the holders of a majority of the
outstanding shares of the Series B Senior Convertible Preferred Stock,
voting separately as a class, will be required for (1) any amendment,
alteration, or repeal, whether by merger or consolidation or otherwise, of
the Corporation's Articles of Incorporation if the amendment, alteration,
or repeal materially and adversely affects the powers, preferences, or
special rights of the Series B Senior Convertible Preferred Stock, (2) the
waiver of any preference, right, privilege or power of the Series B Senior
Convertible Preferred Stock or any term or condition pertaining thereto, or
(3) the creation and issuance of any Senior Liquidation Stock or Parity
Liquidation Stock; provided, however, that any increase in the authorized
preferred stock of the Corporation or the creation and issuance of any
stock which is Junior Liquidation Stock shall not be deemed to affect
materially and adversely such powers, preferences, or special rights and
any such increase or creation and issuance may be made without any such
vote by the holders of Series B Senior Convertible Preferred Stock except
as otherwise required by law.
Section 8. Outstanding Shares.
For purposes of this resolution, all shares of Series B Senior
Convertible Preferred Stock shall be deemed outstanding except (i) from the
date of receipt by the Corporation of a Conversion Notice requesting that
Series B Senior Convertible Preferred Stock be converted into Common Stock,
all shares of Series B Senior Convertible Preferred Stock that are so
converted into Common Stock; (ii) from the date of registration of
transfer, all shares of Series B Senior Convertible Preferred Stock held of
record by the Corporation or any subsidiary of the Corporation, and (iii)
from the Redemption Date, all shares of Series B Senior Convertible
Preferred Stock that are redeemed, so long as the Redemption Price of such
shares of Series B Senior Convertible Preferred Stock shall have been paid
by the Corporation as and when required hereby.
Section 9. Amendment Upon Conversion or Redemption of Outstanding
Shares.
When, as a result of the conversion or redemption of the Series B
Senior Convertible Preferred Stock no shares of Series B Senior Convertible
Preferred Stock remain outstanding, the Board of Directors may, at its
discretion and without a vote of the shareholders of the Corporation,
withdraw this designation in its entirety by providing for the filing of an
applicable amendment or restatement of the Corporation's Restated Articles
of Incorporation, and the Series B Senior Convertible Preferred
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<PAGE>
Stock designated hereby shall thereby return to the status of authorized
but unissued and undesignated shares of Preferred Stock of the Corporation.
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
affixed and this certificate to be signed by its President this 6th day of
March, 1998.
EqualNet Holding Corp.
By: /s/ ZANE RUSSELL
ZANE RUSSELL, PRESIDENT
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<PAGE>
EQUALNET HOLDING CORP.
1250 WOOD BRANCH PARK DRIVE, HOUSTON, TEXAS 77079
THIS PROXY FOR HOLDERS OF COMMON STOCK IS SOLICITED BY THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF SHAREHOLDERS TO BE HELD JUNE 30, 1998
The shareholder of EqualNet Holding Corp. (the "Company") whose signature
appears on the reverse side of this Proxy hereby appoints Robert H. Turner and
Dean H. Fisher, and each of them, attorneys and proxies of the undersigned. with
full power of substitution. to vote, as designated on the reverse side of this
card, the number of votes which the undersigned would be entitled to cast if
personally present at the Special Meeting of the Shareholders of the Company to
be held at the Company's headquarters, 1250 Wood Branch Park Drive, Houston,
Texas, at 10:00 a.m. Tuesday. June 30, 1998, and at any adjournment thereof.
1. PROPOSAL TO APPROVE THE SA TELECOM ACQUISITION.
2. PROPOSAL TO APPROVE AN AMENDMENT TO THE COMPANY'S EMPLOYEE STOCK OPTION AND
RESTRICTED STOCK PLAN.
3. PROPOSAL TO APPROVE AN AMENDMENT TO THE COMPANY'S NON-EMPLOYEE DIRECTOR
STOCK OPTION PLAN.
4. PROPOSAL TO APPROVE AN AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION.
5. PROPOSAL TO RATIFY THE ISSUANCE OF SERIES B PREFERRED.
6. PROPOSAL TO RATIFY THE ISSUANCE OF SEVERANCE WARRANTS.
7. In their discretion, the above named proxies are authorized to vote on such
other business as may properly come before the meeting or any adjournment
thereof and upon matters incident to the conduct of the meeting.
THIS PROXY WILL BE VOTED AS DIRECTED. IF NOT OTHERWISE SPECIFIED, THIS PROXY
WILL BE VOTED FOR EACH OF THE PROPOSALS LISTED ABOVE. THESE PROPOSALS ARE
DESCRIBED IN THE ATTACHED PROXY STATEMENT.
See Reverse Side
PLEASE DATE, SIGN AND MAIL YOUR
PROXY CARD BACK AS SOON AS POSSIBLE!
SPECIAL MEETING OF SHAREHOLDERS
EQUALNET HOLDING CORP.
JUNE 30, 1998
Please Detach and Mail in the Envelope Provided
[X] PLEASE MARK YOUR
VOTES AS IN THIS
EXAMPLE.
<TABLE>
<S> <C>
FOR AGAINST ABSTAIN
PLEASE MARK, SIGN, DATE AND 1. Approval of SA Telecom Acquisition: [ ] [ ] [ ]
RETURN IMMEDIATELY. VOTES MUST 2. Approval of Amendment to Employee [ ] [ ] [ ]
BE INDICATED(X)IN BLACK OR Stock Option and Restricted Stock
BLUE INK. Plan:
3. Approval of Amendment to Non- [ ] [ ] [ ]
Employee Director Stock Option Plan: [ ] [ ] [ ]
4. Approval of Amendment to Articles of [ ] [ ] [ ]
Incorporation:
5. Ratification of issuance of Series B [ ] [ ] [ ]
Preferred:
6. Ratification of issuance of [ ] [ ] [ ]
Severance Warrants.
SIGNATURE(S)__________________________ SIGNATURE(S)_____________________ DATE-------, 1998
</TABLE>
