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))
|X| Definitive Proxy Statement |_| Definitive Additional Materials
|_| Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
EQUALNET HOLDING CORP.
(Name of Registrant as Specified in its Charter)
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|X| 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: N/A 2.
Aggregate number of securities to which transaction applies: N/A 3. Per
unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11: N/A
4. Proposed maximum aggregate value of transaction: N/A
5. Total fee paid: N/A
|_| 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
<PAGE>
[EQUALNET LOGO]
February 17, 1998
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders of
EqualNet Holding Corp. to be held at 10:00 a.m., Houston time, on Thursday,
March 5, 1998, in the Equal Access Room at EqualNet's headquarters, 1250 Wood
Branch Park Drive, Houston, Texas.
This year you will be asked to vote in favor of four proposals: one relating to
the approval of an amendment to EqualNet's Articles of Incorporation to increase
the Company's authorized share capital; one relating to the approval of certain
proposed transactions; one relating to the ratification of a transaction
EqualNet entered into in October 1997 and one relating to the election of six
directors, the election of five of whom is conditioned upon the successful
closing of these transactions. Pursuant to these transactions, the Company will
become a switch-based carrier, and two investors will beneficially own an
aggregate of 13,081,633 shares of the Company's common stock, representing
approximately 68% of the Company's common stock on a fully diluted basis. The
directors to be elected at the meeting have been designated by these investors.
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. If the Company's
shareholders do not approve the proposals described herein, the Company will be
forced to continue to seek other sources of capital. If the Company is not able
to secure additional funds it may be forced to seek protection under the United
States bankruptcy laws.
In connection with its approval of the transactions described herein, the Board
of Directors received and took into account the opinion, dated November 26,
1997, and updated as of the date of this letter, of J.C. Bradford & Co.
("Bradford"), EqualNet's financial advisor, to the effect that, as of the date
of such opinion and subject to certain matters stated therein, such transactions
were fair to EqualNet from a financial point of view. A copy of the opinion of
Bradford, originally dated November 26, 1997, and subsequently updated to the
date hereof, is included in the accompanying Proxy Statement as ANNEX E, and we
encourage you to read that opinion carefully in its entirety.
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/ ZANE RUSSELL
Zane Russell
Chairman of the Board and
Chief Executive Officer
<PAGE>
EQUALNET HOLDING CORP.
1250 Wood Branch Park Drive
Houston, Texas 77079
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MARCH 5, 1998
The Annual Meeting of the Shareholders of EqualNet Holding Corp., a Texas
corporation (the "Company"), will be held at 10:00 a.m., Houston time, on
Thursday, March 5, 1998, in the Equal Access Room at the Company's headquarters,
1250 Wood Branch Park Drive, Houston, Texas, for the following purposes:
(1) To approve an amendment to the Company's Articles of Incorporation
increasing the Company's authorized share capital to 55,000,000 shares,
consisting of 50,000,000 shares of common stock, par value $.01 per share
("Common Stock") and 5,000,000 shares of preferred stock, par value $.01 per
share ("Preferred Stock");
(2) To approve certain transactions involving:
(a) the acquisition by the Company of certain communications network
equipment for an aggregate of (i) $5,850,000 in cash, (ii) 1,400,000
shares of Common Stock and (iii) warrants to purchase 400,000 shares of
Common Stock at $1.00 per share, pursuant to which acquisition the Company
may issue an additional warrant to purchase 500,000 shares of Common Stock
at $1.00 per share in exchange for a guarantee of debt the Company expects
to incur to finance the cash consideration described in clause (i) above;
(b) the acquisition by the Company of certain intangible rights and
assets used in the telecommunications business through the merger of a
wholly-owned subsidiary of the Company with and into the holder of those
rights and assets, pursuant to which the Company will issue an aggregate
of approximately 3,581,633 shares of Common Stock and 2,000 shares of a
newly established series of Preferred Stock (convertible in the aggregate
into approximately 2,000,000 shares of Common Stock); and
(c) the issuance of 4,000,000 shares of Common Stock for $1 per
share in cash.
The consummation of each of such transactions is conditioned upon the
consummation of the others and the election of the directors set forth in
the attached Proxy Statement.
(3) To ratify the issuance by the Company on October 1, 1997, of a
$1,000,000 Convertible Secured Note (convertible into approximately 1,000,000
shares of Common Stock) and a warrant for the purchase of up to 200,000 shares
of Common Stock to one of such investors;
(4) To elect six directors (the election of five of whom is conditioned
upon the closing of the transactions referred to above): two to serve until the
Annual Meeting of Shareholders to be held in the fall of 1998, one to serve
until the 1999 Annual Meeting of Shareholders and two to serve until the 2000
Annual Meeting of Shareholders, and, in each case, until his successor has been
duly elected and qualified, five of which directors were designated by parties
to the transactions described in the attached Proxy Statement, and one of whom
has indicated his intent to resign upon the consummation of the transactions
described herein; and
<PAGE>
(5) To transact such other business as may properly come before the
meeting or any adjournment thereof.
As a result of the approval of the proposals set forth above and more
fully described in the attached Proxy Statement, two investors will beneficially
own an aggregate of approximately 13,081,633 shares of Common Stock,
representing approximately 68% of the Common Stock on a fully diluted basis, and
will control the Company's Board of Directors.
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 Common Stock of record at the close of business on January
20, 1998, will be entitled to vote at the meeting.
By Order of the Board of Directors,
/s/ DEAN H. FISHER
Dean H. Fisher
Senior Vice President,
General Counsel and
Secretary
February 17, 1997
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 ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MARCH 5, 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 the Annual Meeting of
Shareholders to be held at 10:00 a.m., Houston time, on Thursday, March 5, 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 election
of each of the director nominees identified herein and for the other proposals
described herein, including the approval of transactions pursuant to which two
investors will beneficially own an aggregate of 13,081,633 shares of the
Company's common stock, par value $.01 per share ("Common Stock"), representing
68% of the Common Stock on a fully diluted basis. 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 February 17, 1998, to shareholders of
record on January 20, 1998 (the "Record Date").
At the close of business on the Record Date, 6,282,271 shares of Common
Stock were outstanding and entitled to vote at the Meeting. Only the holders of
Common Stock of record on the Record Date will be entitled to vote at the
Meeting.
The holders of Common Stock of record on the Record Date will be entitled
to one vote per share on each matter presented to the shareholders at the
Meeting. The enclosed form of proxy provides a means for you (i) to vote for or
against the approval of the amendment to the Company's Article of Incorporation
described herein or to abstain from voting on such approval, (ii) to vote for or
against approval of the proposed transactions described herein or to abstain
from voting on such approval, (iii) to vote for or against ratification of the
issuances of securities described herein or to abstain from voting on such
ratification and (iv) to vote for each director-nominee named herein (in the
case of five of such nominees, conditioned upon the closing of the transactions
described herein) or to withhold authority to vote for such nominees.
<PAGE>
TABLE OF CONTENTS
PROPOSAL 1: TO APPROVE AN AMENDMENT TO THE ARTICLES OF
INCORPORATION........................................................ 1
PROPOSAL 2: TO APPROVE THE TRANSACTIONS................................... 2
GENERAL DESCRIPTION.................................................. 2
BACKGROUND OF THE TRANSACTIONS....................................... 2
THE SWITCH ACQUISITION............................................... 4
THE MERGER ACQUISITION............................................... 5
THE STOCK SALE....................................................... 7
REASONS FOR THE TRANSACTIONS......................................... 7
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS..................... 9
OPINION OF J.C. BRADFORD & CO........................................ 10
REQUIRED VOTE........................................................ 12
RECOMMENDATION OF THE BOARD OF DIRECTORS............................. 12
PROPOSAL 3: TO RATIFY PREVIOUS ISSUANCES OF SECURITIES.................... 13
PROPOSAL 4: TO ELECT SIX DIRECTORS........................................ 13
DIRECTOR NOMINEES.................................................... 13
BACKGROUND OF DIRECTORS AND NOMINEES................................. 14
COMMITTEES OF THE BOARD OF DIRECTORS AND MEETING ATTENDANCE.......... 15
COMPENSATION OF DIRECTORS............................................ 16
REQUIRED VOTE AND RECOMMENDATION OF THE BOARD OF DIRECTORS........... 16
EXECUTIVE OFFICERS AND COMPENSATION........................................ 17
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION.............. 17
SUMMARY OF COMPENSATION.............................................. 19
OPTION GRANTS IN FISCAL 1997......................................... 20
PERFORMANCE PRESENTATION............................................. 21
EMPLOYMENT AGREEMENTS................................................ 21
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................. 23
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............. 24
CHANGE OF CONTROL.......................................................... 25
RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS.................................. 26
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934....... 26
PROPOSALS FOR NEXT ANNUAL MEETING.......................................... 26
OTHER MATTERS.............................................................. 26
CAUTION AS TO FORWARD-LOOKING STATEMENTS................................... 26
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.......................... 27
ANNEX A--SWITCH AGREEMENT, AS AMENDED
ANNEX B--RESOLUTION ESTABLISHING SERIES A PREFERRED
ANNEX C--MERGER AGREEMENT, AS AMENDED
ANNEX D--STOCK PURCHASE AGREEMENT, AS AMENDED
ANNEX E--OPINION OF J.C. BRADFORD & CO.
ANNEX F--PRO FORMA BALANCE SHEET
<PAGE>
PROPOSAL 1: TO APPROVE AN AMENDMENT TO THE ARTICLES OF INCORPORATION
The Board of Directors of the Company has adopted a resolution setting
forth a proposed amendment to the Company's Articles of Incorporation (the
"Amendment") and directing that the Amendment be submitted to a vote at the
Meeting.
The Amendment would increase the authorized shares of the Company from
20,000,000 shares of Common Stock and 1,000,000 shares of preferred stock, par
value $.01 per share ("Preferred Stock"), to 50,000,000 shares of Common Stock
and 5,000,000 shares of Preferred Stock. The Amendment would amend the first
paragraph of Article IV of the Company's Articles of Incorporation, and the full
text of that paragraph, as amended, is as follows:
"The total number of shares of all classes of stock that the
Corporation shall be authorized to issue is fifty-five million
(55,000,000) shares, divided into the following: (i) five million
(5,000,000) shares of Preferred Stock, of the par value of $.01 per share
(hereinafter called "Preferred Stock"); and (ii) fifty million
(50,000,000) shares of common stock, of the par value of $.01 per share
(hereinafter called "Common Stock")."
The Company's Articles of Incorporation preclude preemptive rights with
respect to Common stock, and no preemptive rights will be related to the
additional Common Stock authorized by the Amendment.
At the close of business on the Record Date, 6,282,271 shares of Common
Stock were outstanding. In addition, the Company holds an aggregate of 378,698
shares of Common Stock in treasury, and the Board of Directors has reserved (i)
an aggregate of 200,000 unissued shares of Common Stock for issuance on exercise
of options outstanding and to be granted under the Company's stock option plans
and (ii) an aggregate of 2,800,000 shares of Common Stock for issuance on
exercise of warrants and convertible debt issued to third parties in connection
with various acquisition and financing transactions. Pursuant to the
Transactions (as defined in Proposal 2 below), and subject to shareholder
approval of the Transactions, the Company has authorized the issuance of an
aggregate of 8,981,633 shares of Common Stock to be issued and an additional
2,900,000 shares of Common Stock to be reserved for issuance in connection with
the Transactions. Following the Transactions, unless this Proposal 1 is
approved, the Company will have no authorized, unreserved Common Stock available
for issuance. The parties to the Transactions have agreed that if, upon the
closing of the Transactions, the Company does not have sufficient authorized,
unreserved shares available for issuance upon conversion of the warrants and
Preferred Stock to be issued in the Transactions, then (A) the Company will use
its best efforts to increase its authorized capital (which will require
shareholder approval) and (B), pending such increase in authorized capital, such
warrants will not be fully exercisable and such Preferred Stock will not be
fully convertible. Without approval of this Proposal 1, the Company would have
sufficient shares available to complete the Transactions, but would not have
sufficient shares to issue upon conversion of convertible securities to be
issued in connection with the Transactions. If the Transactions are consummated
and the Company does not increase its authorized capital stock before May 31,
1998, certain parties to the Transactions will have the right to rescind certain
of the Transactions. See "Proposal 2: To Approve the Transactions: The Switch
Acquisition". Furthermore, if this Proposal is not approved, the Company will
not have sufficient authorized capital stock to undertake future equity
financings or make any future acquisitions using Common Stock.
Preferred Stock may be issued in one or more series from time to time at
the discretion of the Board of Directors. The Board of Directors is authorized
to fix the respective designations, relative rights, preferences,
qualifications, restrictions and limitations of each series. The issuance of
Preferred Stock could be used as an anti-takeover device without requiring
further action on the part of the holders of Common Stock.
No shares of Preferred Stock have been issued. However, the Board of
Directors has established by resolution the Company's Series A Convertible
Preferred Stock (the "Series A Preferred") to be issued in connection with the
Transactions. See "Proposal 2: To Approve the Transactions--The Merger
Acquisition--Series A Preferred". Further, the Company may issue Preferred Stock
in connection with future acquisitions. In particular, on January 14, 1998, the
Company entered into an agreement with SA Telecommunications, Inc. ("SA
Telecom"), a telecommunications service provider that has sought protection
under the United States bankruptcy laws, pursuant to which it proposes to
acquire from SA Telecom a customer base and a telecommunications switch facility
(the "Proposed SA Telecom Acquisition") in exchange for the issuance of
Preferred Stock convertible, in the aggregate into between 3.0 million and 4.5
million shares of Common Stock. This transaction is subject to numerous
1
<PAGE>
contingencies, including that the Company be the highest bidder in an auction
for the assets it proposes to acquire, which auction is to be conducted under
authority of a bankruptcy court, and the approval of the bankruptcy court. The
Proposed SA Telecom Acquisition is not related to the Transactions, and, due to
the contingencies related to it, you are not being asked to vote on it at this
time. If the Company is able to reach a definitive agreement regarding the
Proposed SA Telecom Acquisition, which agreement is approved by the bankruptcy
court, and if such agreement provides for the issuance of Preferred Stock,
Common Stock or any securities convertible into such stock, then the Company
will seek the approval of its shareholders before consummating the Proposed SA
Telecom Acquisition.
Other than the Transactions, the Company does not have any current
obligations that would require the use of the additional shares of Common Stock
to be authorized. Other than the proposed SA Telecom Acquisition, the Company
currently has no understanding, arrangement or agreement to acquire any business
or assets, but the Company is actively evaluating opportunities to acquire
businesses and assets related to its business and operations. The Company
anticipates that it would use some portion of the additional shares authorized
by the Amendment in the future for acquisitions, as well as for stock-based
employee benefit plans and for private financings or public offerings of Common
Stock or securities convertible or exchangeable into shares of Common Stock.
Unless required by law, regulatory authorities or applicable rules of the Nasdaq
Stock Market, the Company does not anticipate that any future authorization by a
vote of shareholders will be sought for the issuance of any shares of Common
Stock. To the extent that the Company issues shares of Common Stock in an equity
financing or in connection with an acquisition, such issuance could be dilutive
to existing shareholders.
The affirmative vote of two thirds of the issued and outstanding Common
Stock is required to approve the Amendment. Abstentions and broker non-votes
will not be treated as either a vote for or against approval of the Amendment.
However, because the approval of the 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 Amendment.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL
OF THE AMENDMENT.
PROPOSAL 2: TO APPROVE THE TRANSACTIONS
GENERAL DESCRIPTION
On December 2, 1997, EqualNet entered into several related agreements (the
"Agreements") involving the Willis Group LLC, a Texas limited liability company
(the "Willis Group") and MCM Partners, a Washington limited partnership ("MCM").
Collectively, these agreements provide for a recapitalization of the Company and
for the Company to acquire certain telecommunications network assets and
switches formerly used by Total National Telecommunications, Inc. ("TNT"), a
wholly-owned subsidiary of Total World Telecommunications, Inc. The Agreements
include the Switch Agreement, the Merger Agreement and Stock Purchase Agreement
(in each case as defined below). The Agreements and the transactions provided
for thereby (the "Transactions") are described individually below; however, the
closing of each of the Transactions is conditioned upon the closing of the other
Transactions, and the closing of all of the Transactions is conditioned upon,
among other things, the approval of the holders of a majority of the Common
Stock present and voting at the Meeting and the continued listing of the Common
Stock on the Nasdaq National Market.
BACKGROUND OF THE TRANSACTIONS
EqualNet is a nationwide telecommunications company offering discounted
major carrier long distance and other services. EqualNet's revenues declined
from a peak of $78.4 million in fiscal year 1996 to $46.6 million for the fiscal
year ended June 30, 1997. Pre-tax income (loss) for the fiscal years ended June
30, 1995, 1996 and 1997 was $2.9 million, ($11.1) million and ($12.6) million,
respectively. The Company funded its operations during the year ended June 30,
1997 through extension of payment terms from the Company's major suppliers,
advances under its revolving credit facility, from a $3.0 million debt offering
and through operating cash flows. An additional source of liquidity during this
time period has been an extension of payment terms from the Company's major
suppliers, although there can be no assurance that any such extensions will be
granted in the future. At current levels of operations and with a declining
borrowing base, the Company must seek additional capital and continued
concessions from its vendors and must continue to reduce expenses to bring them
in line with current levels of revenues.
2
<PAGE>
Declining revenues beginning in the second quarter of fiscal year 1996
were attributable to a number of internal and external factors. With the rapid
growth of the Company, provisioning time -- the time it takes the Company's
primary underlying long-distance carrier to activate new customers -- rose
sharply, from approximately 20 days to approximately 45 days. In addition,
NetBase, the Company's customer management system, was not equipped to handle
the rapid growth, leading to delays in providing the Company's customers with
accurate bills on a timely basis. This problem was compounded when the Company
converted to the NetBase Plus operating system ("NetBase Plus"), a new customer
management information system. After implementation, NetBase Plus was determined
to have inherent design flaws which resulted in further billing and provisioning
problems and the entire system was subsequently abandoned. These conditions
caused customer attrition rates to increase and, although the number of new
customers placed on the Company's service was increasing, actual revenues were
declining due to the higher than expected loss of existing customers. The
difficulties in billing and provisioning accounts resulted in a substantial
increase in bad debt expense. The historical rapid growth and management's
expectations resulted in a structure designed for continued growth with an
increase in staffing, equipment and office space. The unanticipated decline in
revenues obscured by the lack of accurate and timely management information due
to the problems with NetBase Plus resulted in an inefficient cost structure. In
addition, substantial professional fees were incurred as the Company
aggressively pursued acquisition targets in early fiscal 1996, and other
professional fees increased due to cost associated with being a public company,
and costs associated with the negotiation of amendments to the line of credit
and the raising of additional capital.
The customer attrition referred to above significantly impacted the
Company's financial position. The Company wrote down assets in fiscal 1996 of
approximately $6.9 million, including a non-cash charge of $4.6 million to
reduce the carrying value of acquired customer bases to the present value of the
expected future cash flows associated with the underlying customer accounts.
This charge was necessitated by continued greater than expected turnover of
acquired customer bases, which resulted from difficulties in billing and
servicing the underlying customer accounts.
By December 31, 1995, the remaining funds from the Company's March 1995
initial public offering had been expended, and, due to the operating losses
sustained in the second half of fiscal 1996 and all of fiscal 1997 and the
declining revenue base, the Company reached its maximum borrowing capacity under
its revolving line of credit facility in the first quarter of fiscal 1997. The
Company's borrowing capacity under its credit facility continued to decline as a
result of operating losses, a decline in the revenue base and the exclusion of
certain receivables from the criteria of eligible receivables.
During fiscal 1997 the Company began to seek additional sources of capital
and possible strategic alliances. Effective February 3, 1997, the Company
executed an agreement with The Furst Group, Inc. ("Furst"), pursuant to which
the Company issued Furst a $3.0 million note bearing interest at the rate of 10%
per year, maturing December 31, 1998. In addition, the Company has issued stock
purchase warrants to Furst, exercisable for an aggregate of 1,500,000 shares of
Common Stock at a purchase price of $2.00 per share, subject to adjustment in
certain events. In connection with this transaction, the Company began
purchasing telecommunications services, effective November 1, 1996, under
Furst's contract with Sprint Communications Company, L.P. at costs less than
what the Company had been paying. Further discussions between EqualNet and Furst
regarding exploring other mutually beneficial moves related to billing,
marketing and operations did not result in any additional business or operating
combinations between the companies.
At June 30, 1997 the Company was in default on certain loan covenants of
its credit agreement. The Company replaced the revolving line of credit under
which borrowings at June 30, 1997 were outstanding with a new receivables sale
agreement effective June 18, 1997 and which funded July 7, 1997. The new
agreement provides for accounts receivable purchase commitments of up to $8.0
million for the purchase of the Company's receivables from customers that meet
specified eligibility requirements. Funding is based on a percentage of the
Company's outstanding receivables and allows for the lender to cease funding of
new receivables without prior written notice at the lenders option. Although
borrowings under the new line were sufficient to retire the previous credit
agreement and provide some working capital, the amount available under the new
agreement did not generate sufficient capital to satisfy the Company's liquidity
needs.
On July 2, 1997, the Company announced its intention to enter into a
business combination with Cherry Communications, Inc. ("Cherry"), a
privately-held, switch-based long distance provider. The announced transaction
was proposed to be structured as a merger resulting in the shareholders of
Cherry owning approximately 91% of the combined company and the shareholders of
EqualNet owning the remaining nine percent. Although this combination may have
resulted in EqualNet becoming a switch-
3
<PAGE>
based carrier, after further due diligence and an adverse outcome of a
litigation matter in which Cherry was involved, the Company determined that the
proposed combination would not be in the best interests of its shareholders. The
Company therefore discontinued negotiations with Cherry. However, the Company
continued to actively seek other combinations or alliances that would offer
synergies with its existing operations and allow the Company to return to
profitable growth.
As discussed in the Company's Annual Report on Form 10-K for the Year
Ended June 30, 1997, the Company determined that it must seek additional funding
or form a strategic alliance or it might be forced to seek protection under the
United States bankruptcy laws.
On September 25, 1997, the Company announced that it was in discussions
with the Willis Group and other parties relating to a series of transactions in
which the Company might ultimately acquire certain assets of TNT, a switch-based
carrier that had sought protection under the United States bankruptcy laws, and
thus become a switch-based carrier itself. See "--Reasons for the
Transactions--Becoming a Switch-based Carrier". The Willis Group purchased these
assets from TNT for an aggregate of approximately $9.2 million pursuant to an
order from the bankruptcy court. In discussions between the Company and the
Willis Group, the parties also considered an equity contribution to the Company
by the Willis Group to assist the Company in addressing its liquidity concerns.
On October 1, 1997, the Willis Group loaned the Company $1.0 million in
exchange for the issuance of a $1,000,000 Convertible Secured Note and a warrant
to purchase 200,000 shares of Common Stock. See "Proposal 3: To Ratify Previous
Issuances of Securities".
Through the course of negotiations with the Willis Group and MCM, and
through discussions with Bradford, the Company reached terms on the Transactions
with the Willis Group and MCM. The terms of the Transactions are described in
greater detail below. See "--The Switch Acquisition", "--The Merger Acquisition"
and "--The Stock Sale".
On several occasions in November 1997, the Board of Directors discussed
with management the progress of negotiations and the Transactions. On November
21, 1997, the Board of Directors held a meeting with management and
representatives of Bradford. Management presented the Transactions and the
Agreements to the Board of Directors, and the directors discussed and evaluated
the merits of the Transactions and the Agreements with Bradford. On November 26,
1997, Bradford presented to the Board of Directors its opinion to the effect
that the Transactions were fair, from a financial point of view, to the Company,
a copy of which opinion, as subsequently updated to the date hereof, is attached
hereto as ANNEX E. On December 1, 1997, the Board of Directors unanimously
approved the Transactions and the execution and delivery of the Agreements and
directed that the Transactions be submitted to the shareholders of the Company
for their approval.
On December 2, 1997, the Agreements were executed and delivered. On
December 19, 1997, the Agreements were amended to extend the termination date
therein to March 31, 1998.
On February 12, 1998, after consultation with Bradford, the Board approved
amendments to the Agreements, and such amendments were executed, to (i) decrease
the conversion price for the Series A Preferred and the conversion price of
warrants to be issued in connection with the Transactions, as described below,
and (ii) increase the number of shares to be issued in connection with the
Switch Acquisition and provide for the issuance of warrants in exchange for a
partial guarantee of debt to be incurred by the Company in connection therewith.
On the date hereof, Bradford updated its opinion regarding the Transactions. The
descriptions set forth below give effect to all amendments to the Agreements.
THE SWITCH ACQUISITION
The Transactions include the acquisition by the Company of nine Siemens
Stromberg-Carlson ("Siemens") telecommunications switches located in California,
Florida, Georgia, Illinois, Missouri, New York, Texas and Washington (the
"Switches") from the Willis Group pursuant to a Switch Agreement dated December
2, 1997, as amended (the "Switch Agreement"), between EqualNet Holding Corp. and
the Willis Group. The Switches formerly were leased by TNT from Siemens. The
Willis Group acquired rights under these leases in connection with TNT's
bankruptcy and subsequently purchased the Switches from Siemens for $5.9
million.
It should be noted that the Switch Agreement provides very limited
representations and warranties on behalf of the Willis Group regarding the
condition of the Switches. Although the Company
4
<PAGE>
believes that the Switches are of significant value to it and to its planned
future operations, there can be no assurance that the Company will be able to
realize the full benefit of the Switches or that the Company will not have to
expend substantial additional resources to realize such benefits. Although the
Company believes it is familiar with the Switches and the condition of the
Switches, there can be no assurance to that effect. Furthermore, if the Switches
do not operate to the expectations of the Company, the Company will have no
recourse against the Willis Group.
As consideration for the Switches, the Company will pay $5.9 million in
cash, which it anticipates financing through a loan from an unaffiliated third
party (the "Lender"), which loan is expected to be secured by the Switches and
other assets of the Company (the "Switch Loan"). The Company will also issue to
the Willis Group 1,400,000 shares of Common Stock and a warrant for the purchase
of an additional 400,000 shares of Common Stock at $1.00 per share (the "Switch
Warrant"). If Proposal 1 is not approved by the Company's shareholders, the
Company will not have sufficient authorized capital to permit exercise of all of
the warrants issuable in the Transactions. In that event, the Company has agreed
to use its best efforts to cause its authorized capital to be increased to
permit full exercise of such warrants, which increase would require shareholder
approval. If the Company does not increase its authorized capital by May 31,
1998, the Willis Group will have the right to reacquire the Switches from the
Company for approximately $5.9 million and return of all shares and warrants
issued under the Switch Agreement, except for 400,000 shares of Common Stock and
the Switch Warrant, which the Willis Group would retain.
The Switch Warrant will be exercisable for five years. The Company is in
discussions with several potential Lenders regarding the Switch Loan. There can
be no assurance, however, that the Company will be able to obtain the Switch
Loan on favorable terms or at all. Additionally, the Willis Group may guarantee
a portion of the Switch Loan. If such a guarantee is required, the Company will
issue the Willis Group an additional warrant for the purchase of 500,000 shares
of Common Stock on the same terms as the Switch Warrant. If the Company is
unable to secure financing of the Switch Loan from a third party lender before
the consummation of the Transactions, the other parties to the Transactions will
not be obligated it consummate the Transactions. If the Company is unable to
obtain the Switch Loan or otherwise secure suitable financing and the other
parties to the Transactions refuse to close the Transactions, the Company may be
forced to seek protection under the United States bankruptcy laws.
The Switch Agreement also provides that the Company will be responsible
for any sales taxes resulting from the Switch Acquisition.
Pursuant to the Switch Agreement, the Company also granted to the Willis
Group the same registration rights with respect to the shares to be issued
thereunder and under the Switch Warrant as it granted under the Note and October
Warrant described below. See "Proposal 3: To Ratify Previous Issuances of
Securities".
The closing of the Switch Acquisition is conditioned upon, among other
things, the election of the Nominees, the approval of the Transactions by the
shareholders of the Company, the continued listing of the Common Stock on the
Nasdaq National Market and the closing of the other Transactions.
A copy of the Switch Agreement is attached to this Proxy Statement as
ANNEX A. The foregoing is an accurate summary of the material provisions of the
Switch Agreement, but is not a complete description thereof and is qualified by
reference to ANNEX A.
THE MERGER ACQUISITION
In connection with the Transactions, the Company will acquire Netco
Acquisition Corp. a Delaware corporation ("Netco"), which holds certain
intangible rights and assets formerly held by TNT (the "Network Assets"). See
"--Background of the Transactions". The Company considers the Network Assets to
be of significant value, as they are necessary for the Company to become a
switch-based carrier and operate the Switches. See "--The Switch Acquisition"
and "--Reasons for the Transactions--Becoming a Switch-based Carrier".
Pursuant to an Agreement and Plan of Reorganization dated December 2,
1997, as amended (the "Merger Agreement"), between EqualNet, EQ Acquisition Sub,
Inc., a Delaware corporation and a wholly-owned subsidiary of the Company ("EQ
Sub"), Netco Acquisition, LLC, a Delaware limited liability Company ("Netco
LLC") and Netco, which is a wholly owned subsidiary of Netco LLC, the parties
thereto have agreed that EQ Sub will be merged with and into Netco, with Netco
being the surviving corporation and becoming a wholly-owned subsidiary of
EqualNet (the "Merger Acquisition").
5
<PAGE>
THE NETWORK ASSETS
The assets held by Netco that the Company will acquire as a result of the
Merger (the "Network Assets") consist of intangible rights to use certain
software and codes necessary to operate the Switches. It should be noted that
the Merger Agreement provides very limited representations and warranties on
behalf of Netco LLC regarding the Network Assets and the transferability
thereof. Although the Company believes that the Network Assets are of
significant value to it and to its planned future operations, there can be no
assurance that the Company will be able to realize the full benefit of the
Network Assets or that the Company will not have to expend substantial
additional resources to realize such benefits.
PAYMENT FOR THE NETWORK ASSETS
The members of Netco LLC are the Willis Group and MCM. In the Merger
Acquisition, Netco LLC will receive, in exchange for its shares of Netco, the
following:
(a) 2,081,633 shares of Common Stock;
(b) a number of shares of Common Stock equal to the working capital
loans made by the members of Netco LLC or their affiliates to Netco
prior to the closing (which amount is expected to be $1.5 million,
but could be as high as $3.0 million) divided by $1.00; and
(c) 2,000 shares of Series A Preferred.
SERIES A PREFERRED
A copy of the Statement of Resolution establishing the Series A Preferred
Stock, as filed with the Secretary of State of the State of Texas, is attached
to this Proxy Statement as ANNEX B. The following is an accurate summary of the
material provisions of the Series A Preferred, but is not a complete description
thereof and is qualified by reference to ANNEX B.
The Series A Preferred consists of 2,000 shares, all of which will be
issued in connection with the Transactions. Each share of Series A Preferred
will have a stated value of $1,000 and will be entitled to receive dividends at
the rate of $80.00 per year, payable quarterly. Dividends on the Series A
Preferred will be cumulative and, if not timely paid, will bear interest at the
rate of 12% per year until paid. Under the terms of the Series A 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 A Preferred (and any
interest thereon) have been paid.
Holders of Series A Preferred will have the right to convert their shares
into shares of Common Stock initially at the rate of 1,000 shares of Common
Stock per share of Series A Preferred (or the stated value divided by $1.00), or
an aggregate of 2,000,000 shares of Common Stock, subject to adjustment pursuant
to the anti-dilution provisions set forth in ANNEX B. The Company will have the
right to redeem the outstanding shares of Series A Preferred at a price of
$1,000 (plus any accrued and unpaid dividends and any interest thereon) per
share if at any time after 180 days from the date the Series A Preferred Stock
is issued the Market Price (as defined in ANNEX B) of the Common Stock exceeds
$5.00. If Proposal 1 is not approved by the Company's shareholders, the Company
will not have sufficient authorized capital to permit conversion of all of the
Series A Preferred issuable in the Transactions. In that event, the Company has
agreed to use its best efforts to cause its authorized capital to be increased
to permit full conversion of the Series A Preferred, which increase would
require shareholder approval.
If the Company were to be liquidated, the holders of the Series A
Preferred would be entitled to receive out of the assets of the Company $1,000
(plus any accrued and unpaid dividends and any interest thereon) per share of
Series A Preferred before any distributions would be made to holders of Common
Stock. The Series A Preferred will not have voting rights other than in
transactions involving an amendment or waiver of the rights of holders of Series
A Preferred or in the creation of a series of shares with rights equal to or
greater than the Series A Preferred.
OTHER TERMS OF THE MERGER AGREEMENT
Pursuant to the Merger Agreement, the Company also entered into a
Registration Rights Agreement with MCM and its parent granting them the right to
require the Company to register the resale of shares of Common Stock issuable
upon conversion of the Series A Preferred with the Securities and Exchange
Commission (the "Commission"). These registration rights provide that the
holders of Series A Preferred may require the Company, at the Company's expense,
to register such Common Stock
6
<PAGE>
on two occasions at the request of such holders. In addition, such holders may
require the Company to include such shares in any registration statement filed
with the Commission. In each case, these registration rights are subject to
certain customary limitations regarding the times at which they may be exercised
and the number of shares with respect to which they may be exercised.
The closing of the Merger Acquisition is conditioned upon, among other
things, the election of the Nominees, the approval of the Transactions by the
shareholders of the Company, the continued listing of the Common Stock on the
Nasdaq National Market and the closing of the other Transactions.
A copy of the Merger Agreement is attached to this Proxy Statement as
ANNEX C. The foregoing is an accurate summary of the material provisions of the
Merger Agreement, but is not a complete description thereof and is qualified by
reference to ANNEX C.
THE STOCK SALE
Pursuant to a Stock Purchase Agreement dated as of December 2, 1997, as
amended (the "Stock Purchase Agreement"), the Company has agreed, subject, among
other things, to the approval of its shareholders, to issue and sell to the
Willis Group 4,000,000 shares of Common Stock at a price of $1.00 per share in
cash (the "Stock Sale"). The Company expects that it will use the $4.0 million
proceeds resulting from the Stock Sale to address its liquidity shortage and for
general corporate purposes.
The Stock Purchase Agreement provides that the Board of Directors will
elect four new directors to be designated by the Willis Group. The Merger
Agreement (described below) provides that the Board of Directors will elect one
new director to be designated by MCM. Simultaneously, the Company expects that
Mr. Parker will resign from the Board of Directors. As a result, the Board of
Directors will comprise Michael L. Hlinak, Zane Russell, four designees of the
Willis Group and one designee of MCM, and will consequently be controlled by the
Willis Group.
Pursuant to the Stock Purchase Agreement, the Company also granted to the
Willis Group the same registration rights with respect to the shares to be
issued thereunder as it granted under the Note and October Warrant described
below. See "Proposal 3: To Ratify Previous Issuances of Securities".
The closing of the Stock Sale is conditioned upon, among other things, the
election of the Nominees, the approval of the Transactions by the shareholders
of the Company, the continued listing of the Common Stock on the Nasdaq National
Market and the closing of the other Transactions.
A copy of the Stock Purchase Agreement is attached to this Proxy Statement
as ANNEX D. The foregoing is an accurate summary of the material provisions of
the Stock Purchase Agreement, but is not a complete description thereof and is
qualified by reference to ANNEX D.
REASONS FOR THE TRANSACTIONS
BECOMING A SWITCH-BASED CARRIER
Long-distance companies can be categorized in different ways. One
distinction is between facilities-based companies and non-facilities-based
companies, or resellers. Facilities-based companies own transmission facilities,
such as fiber optic cable or digital microwave equipment. Profitability for
facilities-based carriers is dependent not only upon their ability to generate
revenues but also upon their ability to manage complex networking and
transmission costs. Substantially all of the first- and second-tier long
distance companies are facilities-based carriers and generally offer service
nationwide. Most facilities-based carriers in the third tier of the market
generally offer their service only in a limited geographic area. Some
facilities-based carriers contract with other facilities-based carriers to
provide transmission where they have geographic gaps in their facilities.
Similarly, non-facilities-based companies, such as the Company, contract with
facilities-based carriers to provide transmission of their customers'
long-distance traffic. Pricing in such contracts is typically either on a fixed
rate lease basis or a call volume basis. Profitability for non-facilities based
carriers is based primarily on their ability to generate and retain sufficient
revenue volume to negotiate attractive pricing with one or more facilities-based
carriers.
A second distinction among long-distance companies is that of switch-based
versus switchless carriers. Switch-based carriers have one or more switches,
computers that direct telecommunications traffic in accordance with programmed
instructions. All of the facilities-based carriers are switched carriers, as are
many non-facilities-based companies. Switchless carriers depend on one or more
7
<PAGE>
facilities-based carriers to provide both transmission capacity and switch
facilities. EqualNet currently is a switchless reseller.
In addition to strengthening the Company's current financial position, the
Transactions will strengthen EqualNet's operations and competitive position in
the industry. All switchless resellers of long distance telecommunications
services, including EqualNet, have been the victims of diminishing profit
margins as the rates at which they purchase long distance service from their
underlying carriers have become matched by the rates at which these same
carriers make long distance service available directly to the same customers.
Resellers have discovered that they can no longer compete for these customers
and retain any margin to cover expenses of bad debt, back office, billing and
customer service. The Company believes that prior to this year, the last time a
publicly-traded telecommunications company filed for protection under federal
bankruptcy laws was in 1984. This year, three such telecommunications companies
have filed for relief under the United States bankruptcy laws. The Transactions
will move EqualNet from the status of a reseller, dependent upon and unable to
compete with its underlying carriers, to that of a facilities-based carrier with
a nationwide network.
The Company believes that by becoming a switch-based carrier it can
increase its margins and cash flow. Although the implementation of the network
will result in additional fixed costs to the Company for equipment,
communications lines and technical personnel, owning the network should result
in a significant decrease in the variable cost per minute as the Company routes
traffic over its own network rather than routing calls over other carriers'
networks at full reseller's cost. If, through promoting its services by offering
competitive rates, the Company can generate the level of customer traffic that
will allow it to optimize the utilization of the network, the Company should be
able to decrease its cost of long distance service on a per minute basis.
Although there can be no assurance that the Company will be able to generate
that level of customer traffic, EqualNet believes that, as a facilities-based
carrier, it once again will be able to offer cost competitive services, thereby
attracting customers in its current market and in markets not previously
available to the Company. The Company plans to expend at least $2 million of the
proceeds from the equity investment portion of the transactions on sales and
marketing efforts which EqualNet believes will quickly result in new revenues,
increased gross margin and increased cash flow.
EqualNet began managing the network of the Switches in October 1997 under
an interim management agreement by deploying intermachine trunks and
outbound/back-haul lines connecting the Switches located across the United
States. This position has already provided a platform for the Company to conduct
preliminary discussions with several switchless and switch-based resellers
regarding possible business combinations. The Company believes that such
business combinations would provide significant opportunities to gain synergies
from converting switchless long-distance customers to a switch-based network and
to eliminate duplicative general and administrative expenses. However, there can
be no assurances that these expectations will be validated, and actual results
of the Transactions could differ materially from those projected here. For
factors that could cause such results to differ, see "--Possible Adverse
Consequences of the Transactions" and "Caution as to Forward-Looking
Statements".
ADDRESSING LIQUIDITY
For the reasons discussed above under "--Background of the Transactions",
and to assist the Company in covering additional costs associated with becoming
a switch-based provider, the Company is in need of an additional capital. The
Company believes that the Stock Sale is preferable to engaging in a further
public offering of Common Stock because the Company may be able to receive the
funds more quickly than it would be able to in a public offering and for lower
overall transaction costs. Further, the Company is not confident that a public
offering of this size would attract sufficient investor attention to justify the
costs that would be incurred in such an effort.
PRO-FORMA FINANCIAL INFORMATION
The Company believes that the Transactions will have a significant impact
on its financial position and would be material to investors in Common Stock. A
pro-forma balance sheet of the Company as of September 30, 1997, giving effect
to the Transactions is attached to this Proxy Statement as ANNEX F.
8
<PAGE>
POSSIBLE ADVERSE CONSEQUENCES OF THE TRANSACTIONS
The Transactions could have adverse consequences for holders of Common
Stock. The Company estimates that, upon completion of the Transactions, the
Willis Group will beneficially own approximately 9,581,633 shares of Common
Stock, which would represent approximately 60% of the outstanding Common Stock
if the Willis Group were to exercise all warrants and conversion rights it
holds. Additionally, upon consummation of the Transactions, the Board of
Directors of the Company will be controlled by the Willis Group.
Furthermore, under the Switch Agreement, the Company will incur additional
debt of approximately $5.9 million. 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 the
Switch Loan as they become due, the Lender could foreclose on the Switches,
which would have a material adverse effect on the Company, its business,
operations and cash flow.
Due in large part to the fact that the Willis Group and Netco acquired the
Switches and the Network Assets out of a bankruptcy proceeding, the
representations and warranties being provided by the Willis Group and Netco LLC
with respect to the validity of the transfer and the condition of the Switches
and the Network Assets are severely limited. The Willis Group has represented to
the Company only that it owns the Switches free and clear of any security
interest other than any security interest that encumbered the Switches at the
time the Willis Group purchased the Switches. The Company is not aware of any
such security interest and has no reason to believe that such a security
interest exists. Moreover, neither the Willis Group nor Netco has provided any
warranty as to the condition or fitness of any of the Switches or the Network
Assets. If the Company is not able to realize the benefits of the Network
Assets, or if the condition of the Switches makes them inoperable or
unprofitable, the Company will have no recourse to the Willis Group, Netco LLC
or MCM.
FAILURE TO APPROVE THE TRANSACTIONS
The Company has been notified by The Nasdaq Stock Market, Inc. that the
Common Stock will be delisted from the Nasdaq National Market (the "NNM") if the
Company is unable to demonstrate compliance with the continuing listing
requirements of the NNM. The Company expects that the Common Stock will be
delisted from Nasdaq if the Transactions are not consummated. In that event, the
liquidity of the Common Stock will be materially and adversely impacted, as
there can be no assurances that any alternative market for the Common Stock will
be available.
Furthermore, if the holders of a majority of the outstanding Common Stock
present and voting at the meeting do not vote in favor of approval of the
Transactions, then each of the Switch Agreement, the Merger Agreement and the
Stock Purchase Agreement will be terminable by the Company or the other parties
thereto, and the Company will have no further obligations thereunder. In that
event, the Company will be forced to continue to seek other sources of capital.
If the Company is not able to secure additional funds it may be forced to seek
protection under the United States bankruptcy laws.
Additionally, in connection with the execution of the Agreements, the
Company issued to Netco Acquisition a warrant for the purchase of 150,000 shares
of Common Stock at $1.00 per share. This warrant is not exercisable before
February 1, 1998. The closing of the Transactions will terminate these warrants.
Therefore, failure to approve the election of the Nominees and the Transactions
will result in additional dilution of the holders of the Company's Common Stock.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS
In connection with the Transactions, the Board of Directors has nominated
four designees of the Willis Group and one designee of MCM for election as
directors of the Company. See "Proposal 4: To Elect Six Directors". In
connection with the Transactions, the Willis Group will receive approximately
7,481,633 shares of Common Stock and a warrant for the purchase of an additional
400,000 shares of Common Stock (and may receive a warrant for the purchase of an
additional 500,000 shares of Common Stock) and MCM (or an affiliate of MCM) will
receive approximately 1,500,000 shares of Common Stock and 2,000 shares of
Series A Preferred (convertible in the aggregate into approximately 2,000,000
shares of Common Stock). See "--The Switch Acquisition", "--The Merger
Acquisition" and "--The Stock Sale".
9
<PAGE>
OPINION OF J.C. BRADFORD & CO.
EqualNet has retained Bradford to act as its financial advisor in
connection with the Transactions. EqualNet selected Bradford as its financial
advisor because Bradford is a nationally recognized investment banking firm,
which, as a part of its investment banking business, engages in the valuation of
securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for corporations or other purposes. EqualNet
also selected Bradford because of Bradford's familiarity with the
telecommunications industry generally. Representatives of Bradford participated
in the meeting of the Board of Directors on November 26, 1997 and rendered
Bradford's opinion that, as of the date of such opinion, the proposed
consideration for the Transactions was fair, from a financial point of view, to
the shareholder of EqualNet. Bradford subsequently updated that opinion with a
written opinion dated the date hereof. A copy of that opinion, which sets forth
the assumptions made, matters considered and limitations on the review
undertaken, is attached as ANNEX E hereto and should be read in its entirety.
In conducting its analysis and delivering its opinion, Bradford considered
such financial and other factors as it deemed appropriate and feasible under the
circumstances, including the following items that Bradford considers to be
material to its opinion: (i) draft copies of the Agreements; (ii) the historical
and current financial position and results of operations of EqualNet as set
forth in its periodic reports and proxy materials filed with the Securities and
Exchange Commission; (iii) certain internal operating data and financial
analyses and forecasts of EqualNet for the years beginning July 1, 1997 and
ending June 30, 2003 as prepared by its senior management; (iv) certain
financial and securities trading data of certain other companies, the securities
of which are publicly traded and that Bradford believed to be comparable to
EqualNet or relevant to the transactions; (v) the financial terms of other
transactions in the telecommunications industry that Bradford believed to be
relevant; and (vi) reported price and trading activity for EqualNet Common
Stock. Bradford also held discussions with members of the senior management of
EqualNet regarding the past and current business operations, financial
condition, and future prospects of EqualNet. In addition, Bradford took into
account its assessment of general economic, market and financial conditions and
its experience in other transactions as well as its experience in securities
valuation and its knowledge of the industries in which EqualNet operates
generally.
Bradford's opinions are necessarily based upon general economic, market,
financial, and other conditions as they existed on their respective dates and
the information made available to Bradford through such dates. Bradford relied
upon the accuracy and completeness of all of the financial and other information
reviewed for it for purposes of its opinions and did not assume any
responsibility for independent verification of such information. With respect to
the internal financial analyses and forecasts supplied to Bradford, Bradford has
assumed, and the managements of the companies have represented, that such
analyses and forecasts (including forecasted cost savings) were reasonably
prepared on bases reflecting the best currently available estimates and
judgments of such company's senior management as to the recent and likely future
performance of such company. In addition, Bradford was not asked to consider,
and its opinion does not address, the relative merits of the Transactions as
compared to any other transactions in which EqualNet might engage. Furthermore,
Bradford has not made an independent evaluation or appraisal of the assets and
liabilities of EqualNet and has not been furnished with any such evaluation or
appraisal. Bradford has not examined the fairness of the October 1997 loan from
the Willis Group to EqualNet and expressed no opinion with regard thereto.
Nothing in the opinion should be deemed to constitute a recommendation by
Bradford to any shareholder of EqualNet to vote in favor of the Transactions.
Bradford has consented to the attachment of the Opinion to this Proxy Statement
and to the descriptions thereof in this Proxy Statement.
In preparing its report to the Board of Directors, Bradford performed a
variety of financial and comparative analyses, including: (i) an evaluation of
EqualNet's current financial position and projected results of operations (ii)
pro forma merger analysis; (iii) relative contribution analysis; (iv) discounted
cash flow analysis; (v) comparable company analysis; and (vi) comparable
transaction analysis. The summary of Bradford's analyses set forth below does
not purport to be a complete description of the analyses underlying Bradford's
opinion. The preparation of a fairness opinion is a complex process involving
subjective judgments and is not necessarily susceptible to partial analysis or
summary description. In arriving at its opinion, Bradford did not attribute any
particular weight to any analysis or factor considered by it, but rather made
qualitative judgments as to the significance and relevance of each analysis and
factor. Accordingly, Bradford believes that its analyses must be considered as a
whole and that selecting portions of its analyses and the factors considered by
it, without considering all analyses and factors, could create a misleading or
incomplete view of the processes underlying such analyses and its opinions. With
respect to the comparable company and transaction analyses, no public
10
<PAGE>
company, acquisition or transaction utilized as a comparison is identical to
EqualNet or the Transactions and such analyses necessarily involve complex
considerations and judgments concerning the difference in financial and
operating characteristics of the companies and other factors that could affect
the acquisition or public trading values of the companies concerned. In
performing its analyses, Bradford made numerous assumptions with respect to
industry performance, general business, economic, market and financial
conditions, and other matters. The analyses performed by Bradford are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses.
The following are financial and comparative analyses which were performed
by Bradford, and which Bradford considers to be material, in arriving at its
opinion as to the fairness of the consideration received by EqualNet.
(a) VALUATION OF INDUSTRY TRENDS AND EQUALNET'S CURRENT FINANCIAL
POSITION. Bradford noted the recent trend among long distance providers to
enter into business combinations to achieve access to switch-based
networks, achieve greater mass and offer more services to customers. This
trend is the result of several factors including the enactment of the
Telecommunications Act of 1996. Recently completed or announced
transactions include Worldcom/MCI, Telco/Excel, Tel-Save/ACC and ACC/U.S.
Watts. Furthermore, Bradford also noted the increased number of switchless
and switch-based resellers who have reported poor financial results or
have entered into bankruptcy proceedings as a result of competitive and
other factors.
In this context, Bradford analyzed EqualNet's historical and projected
operating results through January 1998. Bradford noted that EqualNet had
not achieved positive cash flow from operations since May 1997 and that
management projected a continued deterioration in operating results
through January 1998 and beyond. Senior management of the Company advised
Bradford that, without an immediate infusion of capital in some form, the
Company would fail. Bradford also noted that it is generally well known
that the Company has been evaluating its strategic alternatives, including
raising capital, merging with another entity or selling the Company
(b) PRO FORMA TRANSACTIONS ANALYSIS. Bradford reviewed certain forecasted
pro forma financial information for EqualNet after the Transactions
(including forecasted cost savings), as provided by the management of
EqualNet. Bradford analyzed the impact of the Transactions on the
forecasted revenues, earnings before interest and taxes ("EBIT"), earnings
before interest, taxes, depreciation and amortization ("EBITDA"), net
income and earnings per share (the "EPS") of the combined company for the
fiscal years ending June 30, 1998 and 1999. The results of the pro forma
analysis suggest that the Transactions will result in positive EBITDA in
fiscal 1998 and will be accretive (non-dilutive) to the EPS of EqualNet in
each of the years analyzed, assuming specific cost savings and synergies
as provided by management that would be realized as part of the
combination. Again, Bradford noted that without consummation of the
Transactions or an immediate infusion of capital, the Company would fail.
The actual results achieved by the combined company may vary from
management's projected results and the variations may be material.
(c) DISCOUNTED CASH FLOW ANALYSIS. Using discounted cash flow analysis,
based on information obtained from management of EqualNet, Bradford
discounted to present value the projected future cash flows that EqualNet
is projected to produce on a stand-alone basis through 2003, under various
circumstances, assuming EqualNet performed in accordance with the earnings
forecast of management. Bradford calculated terminal values for EqualNet
(i.e., the values at the 2003 year end) by applying multiples of revenue
in the year 2003. The cash flow streams and terminal values were then
discounted to present values using different discount rates chosen to
reflect different assumptions regarding EqualNet's cost of capital. Based
on the above described analysis, the implied value of EqualNet was less
than zero compared to the stock price of EqualNet common stock on
September 23, 1997 (just prior to the announcement of initiation of
discussions with the Willis Group) of $1.00, on November 26, 1997 of
$1.625 and on February 11 of $1.375.
Bradford also discounted to present value the projected future cash flows
that EqualNet is projected to produce through 2003, under various
circumstances, assuming completion of the Transactions and assuming
EqualNet performs in accordance with the earnings forecast of its
management. Bradford calculated terminal values for EqualNet (i.e., the
values at the 2003 year end) by applying multiples of revenue in the year
2003. The cash flow streams and terminal values were then discounted to
present values using different discount rates chosen to reflect
11
<PAGE>
different assumptions regarding EqualNet's cost of capital. Based on the
above described analysis, the implied value per share of EqualNet ranged
from $1.73 to $3.66, with an average value of equity of $2.61 per share.
Bradford noted that these values exceeded the then current trading price
of the Common Stock as well as the negative implied value derived from the
stand alone discounted cash flow analysis described above.
(d) COMPARABLE COMPANY ANALYSIS. Using publicly available information,
Bradford reviewed selected financial data, including revenues, historical
and projected earnings and EBITDA for several publicly traded companies
engaged in businesses similar to EqualNet's including long distance
companies, second tier switch based carriers and switchless resellers of
long distance. Bradford noted that the revenue multiples for switchless
resellers (which ranged from 0.33x to 0.85x, with an average multiple of
0.56x) are significantly lower than the multiples of the second tier
switch-based carriers (which ranged from 1.28x to 2.63x, with an average
multiple of 2.07x). EqualNet's annualized revenue multiple is 0.71x. Thus,
EqualNet's multiple is within the range of multiples for switchless
resellers. Furthermore, while Bradford does not project how the
marketplace will react to the Transactions or project at what level the
Common Stock will trade after consummation of the Transactions, Bradford
noted that, in effect, the Transactions will establish EqualNet as a
second tier switch-based carrier.
Pursuant to an engagement letter dated October 2, 1997, Bradford has
earned fees totaling $75,000 for its services as financial advisor to the Board
of Directors in connection with the Transactions, including delivery of the
opinion. In addition, if this Proposal 2 is approved and the Transactions are
consummated, Bradford will receive, upon the closing of the Transactions, an
additional $75,000 in cash and warrants for the purchase of 50,000 shares of
Common Stock at a price per share equal to the market price of Common Stock on
the date of the closing of the Transactions. EqualNet has also agreed to
indemnify Bradford against certain liabilities arising out of or in connection
with the services rendered by Bradford in connection with the engagement. This
compensation arrangement was determined by the Company through arm's-length
negotiations with Bradford.
Bradford acted as the lead underwriter in the Company's initial public
offering in March 1995, for which Bradford received usual and customary
underwriting discounts and compensation. On occasion during the past several
years, Bradford has advised the Company in connection with the Company's review
of potential acquisition candidates. However, no transaction on which such
advice was rendered has resulted in an acquisition, and the Company has not paid
or become obligated to pay Bradford any amount in the past two years other than
amounts to be paid in connection with the Transactions and Bradford's opinion
thereon.
Bradford has issued EqualNet with a consent to use their opinion in this
Proxy Statement, a copy of which is included herewith as ANNEX E.
Those statements made above that project possible future results of
operations of EqualNet and possible future values of Common Stock are
forward-looking statements. These statements are made for the purpose of
describing certain aspects of the analysis done by Bradford in arriving at its
opinion and should not be taken as statements by the Company relating to
potential outcomes or results with or without the consummation of the
Transactions. For factors that may cause actual results to differ materially
from those described above, see "Caution as to Forward-Looking Statements".
REQUIRED VOTE
The closing of the Transactions is conditioned upon, among other things,
the approval of the holders of a majority of the Common Stock 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 under "--Background of the Transactions" and
"--Reasons for the Transactions", and giving consideration to the opinion of
Bradford attached hereto as ANNEX E, the Board of Directors believes the
Transactions are 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 TRANSACTIONS.
12
<PAGE>
PROPOSAL 3: TO RATIFY PREVIOUS ISSUANCES OF SECURITIES
On October 1, 1997, the Company issued to the Willis Group a $1,000,000
Convertible Secured Note, bearing interest at the rate of 12% per year and
maturing April 1, 1998 (the "Note"), and a warrant for the purchase of up to
200,000 shares of Common Stock at an exercise price of $1.00 per share, subject
to adjustment (the "October Warrant"). The October Warrant is exercisable for
five years. The outstanding balance of the Note is convertible at any time into
a number of shares of Common Stock determined by dividing the outstanding
balance by the lesser of $1.00 or 85% of the market price of the Common Stock.
The Company has reserved an aggregate of 1,200,000 shares of Common Stock for
issuance upon conversion of the Note and the October Warrant. The Company
received $1.0 million from the Willis Group in exchange for the Note and the
warrant. The Note is secured by a lien on substantially all of the Company's
assets.
In connection with the issuance of the Note and the October Warrant, the
Company also granted the Willis Group the right to require the Company to
register the resale of shares of Common Stock issuable upon conversion of the
Note or exercise of the October Warrant with the Commission. These registration
rights provide that the holders of such shares may require the Company, at the
Company's expense, to register such Common Stock on two occasions at the request
of such holders. In addition, such holders may require the Company to include
such shares in any registration statement filed with the Commission. In each
case, these registration rights are subject to certain customary limitations
regarding the times at which they may be exercised and the number of shares with
respect to which they may be exercised. These same rights will be extended to
the Willis Group to cover any shares of Common Stock it acquires in connection
with the Transactions.
The Company believes the issuance of the Note and the October Warrant was
necessary for it to meet its immediate capital needs. The Board of Directors
unanimously approved the issuance of the Note and the October Warrant. THE BOARD
OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE RATIFICATION OF THE
ISSUANCE OF THE NOTE AND OCTOBER WARRANT.
PROPOSAL 4: TO ELECT SIX DIRECTORS
The Company currently has four directors, the term of one of whom, Mr.
Walter V. Klemp, will expire at the Meeting. Mr. Klemp has been nominated for
re-election at the Meeting, but has indicated that if he is reelected he will
resign upon consummation of the Transactions. Another of the Company's
directors, Mr. Terry S. Parker, has resigned from the Board of Directors
conditioned upon the successful closing of the Transactions. Upon the closing of
the Transactions, the Board of Directors will automatically be expanded to eight
members. The director nominees listed below other than Mr. Klemp have been
nominated subject to the approval of the Transactions by the Company's
shareholders and, if elected, will become directors only upon consummation of
the Transactions. If the Transactions are not consummated, the Board of
Directors will not be expanded, but will remain at four members, including the
current directors Messrs. Russell, Hlinak and Parker (as Mr. Parker's
resignation will then be ineffective), and, if elected, Mr. Klemp. If all of the
director nominees are approved but the Transactions are not consummated, Messrs.
Bodian, Epley, Willis and Harris and Dr. Salazar will not become directors.
At the meeting, six directors are to be elected (the election of five of
whom is conditioned upon the successful closing of the Transactions),
constituting a majority of the Board of Directors. The Company's Articles of
Incorporation provide that the Board of Directors of the Company will be divided
into three classes, each class to be composed as equally as possible. The term
of one class expires at each annual meeting of shareholders and each class
serves three-year terms.
DIRECTOR NOMINEES
The Board of directors has nominated the following persons (the
"Nominees") to be elected directors at the Meeting: Mr. James T. Harris
(three-year term), Mr. Mark A. Willis (three-year term), Mr. John Isaac "Ike"
Epley (two-year term), Mr. Mitchell H. Bodian (one-year term), Dr. Ronald J.
Salazar (one-year term) and Mr. Walter V. Klemp (one-year term). Messrs. Epley,
Willis and Harris and Dr. Salazar are designees of the Willis Group, a party to
the transactions described in "Proposal 2: To Approve the Transactions" and
"Proposal 3: To Ratify Previous Issuances of Securities". Mr. Bodian is a
designee of MCM, a party to the transactions described in "Proposal 2: To
Approve the Transactions".
13
<PAGE>
The following table sets forth certain information with respect to the
Company's continuing directors and the Nominees as of the Record Date.
TERM AS
DIRECTOR
WILL
NAME AGE POSITION WITH THE COMPANY EXPIRE(1)
- ---- --- ------------------------- ---------
Zane Russell 32 Chairman of the Board and Chief Executive 1999
Officer, President and Director
Michael L. Hlinak 48 Senior Vice President, Chief Operating 1998
Officer and Director
Mitchell H. Bodian 46 Director Nominee 1998
John Isaac "Ike" Epley 32 Director Nominee 1999
James T. Harris 39 Director Nominee 2000
Walter V. Klemp (2) 38 Director Nominee 1998
Terry S. Parker (3) 52 Director (resigned) 1998
Ronald J. Salazar, Ph.D. 50 Director Nominee 1998
Mark A. Willis 29 Director Nominee 2000
(1) Director's terms of office are scheduled to expire at the annual meeting
of shareholders to be held at the end of the year indicated.
(2) Mr. Klemp has indicated that if elected he will resign upon consummation
of the Transactions.
(3) Mr. Parker has resigned contingent upon consummation of the Transactions.
BACKGROUND OF DIRECTORS AND NOMINEES
ZANE RUSSELL co-founded EqualNet in July 1990 and served as President and
director since that time until November 1994 when he assumed the position of
Chairman of the Board and Chief Executive Officer. He has also served as the
President of the Company since January 1996. Prior to the formation of EqualNet,
from January to July 1990, he was a commercial accounts manager for American
Telco Long Distance. From November 1989 to November 1990, Mr. Russell served as
project manager for Natkin Mechanical, a construction company.
MICHAEL L. HLINAK has served as a director of EqualNet since July 1991 and
as Chief Financial Officer since June 1994, becoming Senior Vice President in
November 1994 and Chief Operating Officer in May 1996. Mr. Hlinak, a certified
public accountant, is President and sole owner of Cardinal Interests, Inc., a
diversified Houston investment company which he founded in 1985. He also is the
President of Partners Management Company, a management services company, a
position that he has held since 1986.
MITCHELL H. BODIAN has been the Managing Director of Bodian Associates, an
investment banking firm providing financial advisory services to middle market
companies, since 1990. Bodian Associates specializes in providing merger and
acquisition services to niche telecommunications services providers. For the
last year, Mr. Bodian has served as Chapter 11 Trustee for Conectco, a
switchless reseller that sold telephone debit cards and provided one plus
telecommunications services, and that filed for protection under the United
States bankruptcy laws in August 1996. Mr. Bodian has approximately twenty years
of experience in management consulting and investment banking with Kearney
Management Consultants, Warburg Paribas Becker and Merrill Lynch. Mr. Bodian
holds an MBA from Stanford Business School.
JOHN ISAAC "IKE" EPLEY has been a Managing Director of Omni Ventures,
L.L.C., a venture capital land investment banking firm, since August 1995. He
also has been a Managing Director of Omni Securities, L.L.C., a registered
broker/dealer, since its inception in November 1997. He is a registered
Principal and General Securities Representative. Mr. Epley served as
Vice-President of Alex Brown & Sons in Houston from January 1993 to 1995.
14
<PAGE>
JAMES T. HARRIS, C.P.A. has specialized in assisting high net worth
individuals as well as small and medium sized business owners through his own
firm since 1992. Mr. Harris is the Treasurer of the Willis Group. Before
beginning his own firm, Mr. Harris served as Manager of Management Consulting
with the firm of Hein + Associates, where he specialized in consulting in the
areas of profit improvement, management, mergers and acquisitions, incentive
plans, systems and implementation, financial planning and tax planning and
compliance.
WALTER V. KLEMP has served as a director of the Company since April 1995.
He has served as Chairman of the Board and Co-Chief Executive Officer of Drypers
Corporation, which manufactures and markets disposable diapers, since January
1995 and has also been a director since its formation in 1987. He served as the
Managing Director-Finance of Drypers Corporation from its formation until
December 1994. In 1984, Mr. Klemp participated in the formation of VMG Holdings
Corp., a disposable diaper manufacturer, and in 1987, the formation of Drypers
Corporation. From February 1984 to April 1986, he served as Chief Financial
Officer of VMG Holdings Corp. Prior to 1984, Mr. Klemp, a certified public
accountant, specialized in consulting to development stage businesses with the
accounting firm of Coopers & Lybrand L.L.P.
TERRY S. PARKER has served as a director of EqualNet since November 1995.
Mr. Parker also serves on the Boards of Directors of CellStar Corporation
("CellStar") and Highway Master Communications, Inc. Mr. Parker was the
president and chief operating officer of CellStar, a major supplier of cellular
telecommunications products, from April 1995 until July of 1996. Prior to
joining CellStar, Mr. Parker was with GTE Corporation, where he served as
president of GTE Telecommunications Products and Services from 1990 to 1993 and
served as both senior vice president of GTE Corporation and president of GTE
Personal Communications Services from April 1993 to March of 1995.
RONALD J. SALAZAR, PH.D. received his Ph.D. in business administration
from the University of Texas in 1990 in the area of Strategic Management and
Competitive Strategy. Since 1995, Dr. Salazar has been a partner in a management
consulting firm of Palladian Analysis & Consulting, LLC in Houston, Texas. Prior
to that Dr. Salazar was an assistant professor at the University of Houston and
Idaho State University since 1988 teaching management courses. He is a
researcher at the Institute for Constructive Capitalism in Austin, Texas and was
honored with a research fellowship with the Center for International
Competitiveness at the Instituto Tecnologico y De Estudios Superiores De
Monterrey. His published research concentrates on industry and competitive
dynamics. He has advised executives from Europe, Africa, Latin America and the
United States as well as taught in English and Spanish in the areas of strategy,
business development, positioning and US and global economies.
MARK A. WILLIS founded the Willis Group, an investment fund, in 1997 and
serves as its President. The fund has made investments in industries such as
offshore oil platform equipment, geophysical services, oil and gas production, a
cigar bar, telecommunications, and an aircraft parts supplier. Before forming
the Willis Group, Mr. Willis worked at Eagle USA Airfreight for two and a half
years, where he rose to the position of Regional Sales & Marketing Manager.
Before that, Mr. Willis served as a marketing and sales rep for Talent Tree.
COMMITTEES OF THE BOARD OF DIRECTORS AND MEETING ATTENDANCE
During the fiscal year ended June 30, 1997, the Board of Directors held
eight meetings. Each director attended at least 75% of the total combined number
of meetings held by the Board and by the committees on which each director
served.
The Board of Directors has an audit committee and compensation committee
that each comprises Walter V. Klemp and Terry S. Parker. The Board of Directors
has not established an executive or nominating committee. Board of Director
nominees are proposed by management.
The audit committee is charged with recommending to the Board of Directors
the appointment of the Company's independent public accountants, reviewing their
fees, ensuring that proper guidelines are established for the dissemination of
financial information, meeting periodically with the independent public
accountants, the Board of Directors and certain officers of the Company and its
subsidiaries to ensure the adequacy of internal controls and reporting,
reviewing consolidated financial statements and performing any other duties or
functions deemed appropriate by the Board of Directors. The audit committee held
three meetings during the fiscal year ended June 30, 1997.
15
<PAGE>
The compensation committee awards options and stock awards pursuant to the
Company's stock option and restricted stock award plans, determines the terms
and conditions of such options and awards, including (i) the persons to whom
such options and stock awards will be granted and (ii) the form, terms and
provisions of any agreement pursuant to which such options or stock awards are
awarded. This committee is also responsible for consideration of compensation
matters for the named executive officers. The compensation committee held three
meetings during the fiscal year ended June 30, 1997.
COMPENSATION OF DIRECTORS
Each non-employee director is paid $10,000 per year, plus $500 for each
meeting of the Board which he personally attends, $350 for each meeting of a
committee of the Board which he personally attends and $100 for each meeting in
which he participates by telephone. All non-employee directors of the Company
are reimbursed for ordinary and necessary expenses incurred in attending Board
or committee meetings. The Company has adopted the Company's 1995 Non-Employee
Director Stock Option Plan (the "Director Plan"), pursuant to which each
non-employee director receives options to purchase 5,000 shares of Common Stock
on the date of his election as a director and options to purchase 1,000 shares
of Common Stock on the day following each annual meeting of the Company's
shareholders. These options have an exercise price equal to the closing price on
the day before the date of grant and vest over three years in 33-1/3%
increments. In fiscal 1997, each of Messrs. Klemp and Parker received an option
for the purchase of 1,000 shares of Common Stock at $2.125 per share, which
options vest over three years in 33-1/3% increments. Employee directors of the
Company do not receive any additional compensation from the Company for their
services as directors.
REQUIRED VOTE AND RECOMMENDATION OF THE BOARD OF DIRECTORS
A shareholder entitled to vote for the election of directors may withhold
authority to vote for any or all of the Nominees. Nominees receiving at least
the votes of the holders of a plurality of the shares of Common Stock present in
person or by proxy at the meeting and voting for the position for which such
Nominee has been nominated will be elected as directors. Abstentions and broker
non-votes will not be treated as a vote for or against any of the Nominees and
will have no effect on the outcome of the elections.
The persons named in the proxies for the holders of Common Stock enclosed
with this Proxy Statement intend to vote the proxies in favor of the election of
the Nominees. The Company does not anticipate that any of the Nominees will
become unavailable for any reason, but if that occurs the proxies will be voted
for another nominee to be selected by management, which nominee may be
designated by the Willis Group or MCM. Any vacancies that occur during the year
may be filled by an individual appointed by the Board of Directors to serve for
the remainder of the term of that director position.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE ELECTION
OF EACH OF THE NOMINEES.
16
<PAGE>
EXECUTIVE OFFICERS AND COMPENSATION
The following table sets forth the names, ages and titles of the Company's
executive officers as of the Record Date.
Year Term
As Director
Name Age Position(s) Will Expire
Zane Russell 32 Chairman of the Board, 1999
Chief Executive Officer,
President and Director
Michael L. Hlinak 48 Executive Vice President, 1998
Chief Financial Officer,
Chief Operating Officer
and Director
Dean H. Fisher 47 Senior Vice President,
General Counsel and Secretary
For further information regarding the background of Messrs. Russell and
Hlinak, see "Directors".
DEAN H. FISHER became Vice President and General Counsel of EqualNet in
May 1993, Senior Vice President in November 1994 and Secretary in January 1995.
He has also served as director of EqualNet Corporation, a wholly-owned
subsidiary of the Company, since July 1991. From May 1976 to June 1993, Mr.
Fisher was engaged in the private practice of law in Houston, Texas, serving as
President of Fisher & Readhimer, P.C. from April 1985 to June 1993.
All officers of the Company hold office until the regular meeting of
directors following the annual meeting of shareholders and until their
respective successors are elected and qualify or their earlier resignation or
removal.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors (the "Committee"),
which is composed of non-employee Directors and performs the duties described on
page 3 of this Proxy Statement, has furnished the following report on executive
compensation with respect to fiscal 1997.
EqualNet's compensation philosophy is designed to benefit the
Company's shareholders by creating a flexible compensation package that
provides a variety of incentive compensation opportunities to senior
management and executive officers of the Company. The compensation plan
consists of base salary, annual cash incentive compensation and stock
reward plans (stock options and restricted stock awards).
BASE SALARY. The base salaries of the Company's executive officers
were determined in 1995 before the Company's initial public offering and
in anticipation of that offering. At that time, salaries were targeted to
be within the 50th to 75th percentile for similar positions in other high
technology companies with similar revenues ($40 million to $99 million),
based on a published survey of such companies. The survey relied upon in
setting those salaries did not specify which companies were included in
the survey, and the Company therefore did not attempt to use those
companies to determine its peer group for purposes of its comparative
performance presentation. Further, the Company believes that its most
direct competitors for executive talent are not necessarily those included
in the peer group used by the Company to compare shareholder returns. See
"--Performance Presentation". Thus, the group of high technology companies
by which the Company measured executive compensation in 1995 are not the
same as those included in the Company's peer group index in its Five Year
Cumulative Total Return graph included in this Proxy Statement. Since
1995, the Committee has not significantly increased the salary applicable
to any of its senior executive positions in view of the Company's results
of operations for those fiscal years.
17
<PAGE>
The Committee evaluates the Chief Executive Officer's performance,
recommends changes to his annual compensation level for future years to
the Board and reviews and approves changes to compensation levels for all
executive officers. The Chief Executive Officer's employment agreement
provides that the Company may not reduce his salary during the term of
that agreement. See "--Employment Agreements". The Committee did not
believe it was appropriate to increase the salary structure for the Chief
Executive Officer in fiscal 1997. Mr. Hlinak's salary for fiscal 1997 was
increased in connection with his promotion to the office of Chief
Operating Officer and the additional attendant responsibilities; however,
the amount paid to Mr. Hlinak in 1997 was less than the amount paid to the
Company's previous Chief Operating Officer in fiscal 1996. The salary of
Mr. Fisher for fiscal 1997 was increased slightly in fiscal 1997 to
compensate for a decrease in certain health care benefits previously
provided by the Company. No merit increases were awarded for fiscal 1997.
ANNUAL INCENTIVE COMPENSATION. The Company's executive officers and
other management employees are eligible to receive annual cash bonus
awards which are linked directly to the Company's pre-tax income. The
annual bonus for the named executive officers, other than the Chairman of
the Board and Chief Executive Officer, is 2% each of the amount that the
Company's pre-tax income exceeds $2.0 million for fiscal year 1995 and 2%
each of the increase in pre-tax income from the previous fiscal year to
the current fiscal year thereafter. The maximum bonus received in any
fiscal year cannot exceed a fixed percentage of the officer's base salary,
53% to 75% depending upon the position held. The Chairman of the Board and
Chief Executive Officer of the Company is entitled to receive a bonus in
an amount equal to 4% of the amount by which the Company's pre-tax and
pre-bonus income exceeds $2.0 million. See "--Employment Agreements". None
of the executive officers received a bonus for the fiscal year ended June
30, 1997.
STOCK INCENTIVE PROGRAMS. The Committee believes that compensation
in the form of stock provides incentive for management to increase
shareholder value by closely aligning management compensation with the
performance of the Company's common stock. The Company has adopted the
Employee Plan, pursuant to which the Committee may authorize the grants of
stock options and restricted stock awards. During fiscal year 1997, no
shares of restricted stock were awarded to members of senior management.
In 1997, options were granted to certain key employees as incentives to
retain the services of those employees. In determining the number of
options to be granted to each key employee, the Committee determined
several factors, including (i) the Committee's perceived value to the
Company of the continued service of those employees and the risk that such
employees would be recruited away from the Company, (ii) the fact that no
options had been granted under the Employee Plan in any previous fiscal
year, (iii) the fact that generally the Company was not offering increases
in salary in fiscal 1997 and had not awarded bonuses in respect of fiscal
1996 and (iv) the stock price at the time of the grant and the potential
for stock price appreciation.
DISCUSSION OF CHIEF EXECUTIVE OFFICER COMPENSATION. In fiscal 1997,
the Committee did not increase the salary of the Chief Executive Officer,
nor did the Chief Executive Officer receive a bonus in respect of fiscal
1997. The Committee made these determinations in light of the Company's
financial performance and depreciation in stock price as well as the
Company's liquidity problems. On July 11, 1996, the Committee granted
options to purchase 45,000 shares of Common Stock to the Chief Executive
Officer at $4.25 per share (which was $1.00 above the fair market value of
the Common Stock on the date of grant), which options vested July 11,
1997. As the Chief Executive Officer had received no bonus in respect of
fiscal 1996, the Committee intended these options to be a further
incentive to increase future performance. On January 20, 1997, the
Committee granted options to purchase an additional 45,000 shares of
Common Stock to the Chief Executive Officer at $2.50 per share (which was
the fair market value of the Common Stock on the date of grant), which
options will vest on July 11, 1998.
Walter V. Klemp
Terry S. Parker
18
<PAGE>
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").
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
COMMON
STOCK ALL OTHER
NAME AND FISCAL UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR SALARY BONUS(1) OPTIONS (2)
-------------------- ------ -------- -------- ---------- ------------
<S> <C> <C> <C> <C>
Zane Russell 1997 $178,000 - 90,000 $ 3,498
Chairman of the Board and Chief 1996 178,000 - - 4,249
Executive Officer and President 1995 175,000 $69,025 - 7,107
Michael L. Hlinak
Executive Vice President, Chief 1997 155,000 - 90,000 3,607
Financial Officer and Chief 1996 128,000 - - 6,576
Operating Officer 1995 125,000 34,513 - 2,409
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.
19
<PAGE>
OPTION GRANTS IN FISCAL 1997
The following table summarizes options to purchase shares of the Company's
Common Stock that were granted to the Named Executive Officers during fiscal
1997. No Options were exercised by any of the Named Executive Officers during
fiscal 1997.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES
OF STOCK PRICE
SHARES OF PERCENT OF TOTAL APPRECIATION FOR
COMMON STOCK OPTIONS EXERCISE OPTION TERM (1)
UNDERLYING GRANTED TO PRICE PER -------------------
NAME OPTIONS 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 $354,409
45,000(2) 9.1 2.50 1/20/07 70,750 208,476
Michael L. H 45,000 9.1 4.25 7/11/06 120,276 354,409
45,000(2) 9.1 2.50 1/20/07 70,750 208,476
Dean H. Fish 17,500 3.5 4.25 7/11/06 46,774 137,826
17,500(2) 3.5 2.50 1/20/07 27,514 81,074
</TABLE>
- ------------
(1) The potential realizable value of the options, if any, granted in fiscal
1997 to each of the Named Executive Officers was calculated by multiplying
the number of shares of Common Stock underlying such options by the excess
of (a) the assumed value, at the date of expiration of such option, of the
Company's Common Stock if the value of the Company's Common Stock were to
appreciate at a compounded annual rate of 5% or 10% from the date of the
grant of the option until the date of expiration of the option over (b) the
exercise price shown. The 5% and 10% appreciation rates are set forth in
regulations promulgated by the Commission, and no representation is made
that the Common Stock will appreciate at these assumed rates or at all.
(2) Exercisable on or after July 11, 1998.
The following table sets forth information regarding the value of
unexercised options held by the Named Executive Officers. None of the Named
Executive Officers exercised any options in fiscal 1997.
NUMBER OF
SECURITIES UNDERLYING
UNEXERCISED OPTIONS VALUE OF UNEXERCISED
AT JUNE 30, 1997 IN-THE-MONEY OPTIONS AT
(# SHARES) JUNE 30, 1997 ($)(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-------- ----------- ------------- ----------- -------------
Zane Russell 45,000 45,000 - -
Michael L. Hlinak 45,000 45,000 - -
Dean H. Fisher 17,500 17,500 - -
- ------------
(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.
20
<PAGE>
PERFORMANCE PRESENTATION
The following performance graph compares the performance of the Common Stock
on an indexed basis to the Center for Research in Security Prices ("CRSP") Index
for The Nasdaq Stock Market (US Companies) and a CRSP index of Nasdaq Stock
Market telephone communications companies (SIC codes 4810 through 4819).
Information with respect to the Common Stock, the CRSP Index for The Nasdaq
Stock Market (US Companies) and a CRSP index of Nasdaq Stock Market telephone
communications companies (SIC codes 4810 through 4819) is from March 9, 1995,
the date on which the Common Stock first began public trading. The graph assumes
that the value of the investment in the Common Stock and each index was $100 at
March 9, 1995, and that all dividends were reinvested. The Company will provide
the names of the companies included in the telephone communications index (SIC
codes 4810 through 4819) upon written request to the Investor Relations
Department of the Company.
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
MARCH 9, JUNE 30, JUNE 30, JUNE 30,
1995 1995 1996 1997
---- ---- ---- ----
EqualNet Holding Corp. 100.0 134.8 34.8 18.5
Nasdaq Stock Market 100.0 117.3 150.8 183.4
Nasdaq Stock Market Telephone 100.0 108.3 150.0 181.4
Communications Companies
(SIC 4810-4819 US Companies)
Note:
The indices are reweighed daily, using the market capitalization on the previous
trading day.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement (the "Employment
Agreement") with Zane Russell. The Employment Agreement provides for an annual
salary of $175,000 during the term of the Employment Agreement, which terminates
February 1, 1998, with month-to-month renewals thereafter. In addition, if the
Company's audited consolidated income, before taxes and bonuses paid to senior
executive officers, exceeds $2 million in each fiscal year covered by the
Employment Agreement, Mr. Russell will receive a bonus in an amount equal to 4%
of the amount by which the Company's pre-tax and pre-bonus income exceeds $2
million. However, such bonus shall not exceed 75% of Mr. Russell's
21
<PAGE>
salary in any fiscal year. The Employment Agreement also provides for certain
employee benefits, vacation and reimbursement of expenses.
The Employment Agreement may be terminated by the Company (i) for cause (as
hereinafter defined), (ii) upon notice to the Company by Mr. Russell of his
intention to terminate the Employment Agreement, (iii) upon the death of Mr.
Russell or (iv) upon disability of Mr. Russell. Under the Employment Agreement,
cause is defined to mean (i) if Mr. Russell is guilty of willful misconduct or
neglect in the discharge of his duties under the Employment Agreement after
notice thereof has been given, (ii) if Mr. Russell is convicted of or pleads
guilty or nolo contendere to any act involving moral turpitude, other than an
offense that in the opinion of the Board of Directors does not affect Mr.
Russell's position as an employee or (iii) if Mr. Russell violates any material
part of the Employment Agreement regarding confidentiality or the solicitation
of Company employees. Mr. Russell may be removed as an officer at any time by
the Company without cause, but such removal will not affect his right to a
salary or his right to remain covered by the Company's medical insurance
policies throughout the remaining term of the Employment Agreement. Upon such
removal, all other benefits will cease, including any right to receive any
variable bonus.
Mr. Russell has agreed that for the term of his Employment Agreement and for
a period of two years after termination for whatever reason, he will not,
directly or indirectly, engage or participate in any business engaged in the
sale or marketing of long-distance service within the United States, employ any
of the Company's employees or induce any of the Company's employees to leave
their employment with the Company.
The Company has also entered into an employment agreement (the "Hlinak
Employment Agreement") with Michael L. Hlinak. The Hlinak Employment Agreement
provides for an annual salary of $170,000 during the term of the Hlinak
Employment Agreement which terminates March 31, 1999. In addition the Hlinak
Employment Agreement provides that Mr. Hlinak will be offered an annual
performance bonus based on the Company's performance, in an amount not to exceed
33-1/3% of Mr. Hlinak's base pay. The Hlinak Employment Agreement also provides
for certain employee benefits (including medical, dental, and life insurance),
vacation, and reimbursement of expenses.
The Hlinak Employment Agreement may be terminated by the Company (i) for
cause (as hereinafter defined), (ii) upon notice to the Company by Mr. Hlinak of
his intention to terminate the Hlinak Employment Agreement, (iii) upon the death
of Mr. Hlinak or (iv) upon disability of Mr. Hlinak. Under the Hlinak Employment
Agreement, cause is defined to mean (i) if Mr. Hlinak is guilty of willful
misconduct or neglect in the discharge of his duties under the Hlinak Employment
Agreement after notice thereof has been given, (ii) if Mr. Hlinak is convicted
of or pleads guilty or nolo contendere to any act involving moral turpitude,
other than an offense that in the opinion of the Board of Directors does not
affect Mr. Hlinak's position as an employee or (iii) if Mr. Hlinak violates any
material part of the Hlinak Employment Agreement regarding confidentiality or
the solicitation of Company employees. Mr. Hlinak may be removed as an officer
at any time by the Company without cause, but upon such removal he would be
entitled to a severance payment equal to 18 months salary and bonus as well as
continued coverage under the Company's medical insurance policies throughout the
remaining term of the Hlinak Employment Agreement. Upon such removal, all other
benefits will cease, including any right to receive any variable bonus.
Mr. Hlinak has agreed that for the term of the Hlinak Employment Agreement
and for a period of two years after termination for whatever reason, he will
not, directly or indirectly, engage or participate in any business engaged in
the sale or marketing of long-distance service within the United States, employ
any of the Company's employees or induce any of the Company's employees to leave
their employment with the Company.
22
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In February 1997, the Company issued to Furst (i) a subordinated note in the
principal amount of $3 million, bearing interest at 10% per annum, due December
31, 1998 (the "Furst Note"), (ii) warrants exercisable for the purchase of 1.5
million shares of Common Stock at $2.00 per share (the "Furst Warrants") and
(iii) a Right in the Event of a Change of Control (the "Furst Right"), all for
an aggregate consideration of approximately $2,210,000 in cash and $790,000 in
credit towards the purchase of long-distance services from Sprint Communications
Company, L.P. ("Sprint"). In connection with this transaction, the Company began
utilizing, effective November 1, 1996, Furst's contract with Sprint for the
purchase of long-distance services. During fiscal 1997, the Company purchased
approximately $1.5 million of long-distance services from Sprint under this
contract. The Furst Note is secured by all of the accounts and general
intangibles of the Company. The Furst Right provides that Furst will receive
approximately 11.5% of the fair market value of consideration provided in the
event EqualNet engages in certain significant transactions within two years of
the date of the Furst Right. Transactions that would trigger the Furst Right
include EqualNet's consolidation with, or merger with or into another person
other than Furst and the sale by EqualNet or its subsidiaries of a significant
portion of the Company's assets. The Transactions do not trigger the Furst
Right.
The Company has also entered into certain transactions with the Willis Group
and MCM, which are described under the headings "Proposal 2: To Approve the
Transactions" and "Proposal 3: To Ratify Previous Issuances of Securities". In
connection with the execution of the Agreements, the Company issued to Netco
Acquisition, a limited liability company of which the Willis Group is a member,
a warrant to purchase 150,000 shares of Common Stock at $1.00 per share. This
warrant will terminate upon consummation of the Transactions.
23
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information 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
---- ------ -------
The Furst Group, Inc.(2) .......................... 1,500,000 19.3%
459 Oakshade Road
Shamong, New Jersey 08088
James D. Kaylor(2) ................................ 1,500,000 19.3
916 P Street, Suite 200
Lincoln, Nebraska 68508
John S. Streep(2) ................................. 1,500,000 19.3
15841 Kilmarnock Drive
Ft. Myers, Florida 33912
Willis Group, LLC(3)............................... 1,350,000 17.7
5005 Woodway, Suite 350
Houston, Texas 77056
Michael T. Willis(3)............................... 1,350,000 17.7
5005 Woodway, Suite 350
Houston, Texas 77056
Mark A. Willis(3).................................. 1,350,000 17.7
5005 Woodway, Suite 350
Houston, Texas 77056
James T. Harris(3)................................. 1,350,000 17.7
5005 Woodway, Suite 350
Houston, Texas 77056
Zane Russell(4).................................... 1,012,556 16.0
1250 Wood Branch Park Drive
Houston, Texas 77079
Marc R. Smith(5)................................... 967,556 15.4
2500 City West, Suite 300
Houston, Texas 77042
Massachusetts Financial Services Company(6)........ 520,400 8.3
500 Boylston Street
Boston, Massachusetts 02116
Michael L. Hlinak(4)............................... 312,973 4.9
Dean H. Fisher(7).................................. 246,982 3.9
Walter V. Klemp(8)................................. 4,334 *
Terry S. Parker(9)................................. 1,667 *
Current directors and executive officers as a group
(5 persons)(10)................................... 1,578,512 24.7
- ------------
* 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) Information relating to ownership by Furst, Mr. Kaylor and Mr. Streep is
based on reports on Schedule 13D filed with the Commission on March 6,
1997. According to those reports, Furst holds directly a warrant for the
purchase of 1,500,000 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.
24
<PAGE>
(3) Information relating to ownership by the Willis Group and Messrs. Michael
T. Willis, Mark A. Willis and Harris is based on reports on Schedule 13D
filed with the Commission on October 10 and 14, 1997. According to those
reports, the Willis Group holds a convertible promissory note convertible
into approximately 1,000,000 shares of Common Stock (which conversion is
based on the price of the Common Stock and may increase or decrease). The
Willis Group also holds a warrant for the purchase of 200,000 shares of
Common Stock. The Willis Group also beneficially holds, through Netco and
Netco Acquisition, a warrant to purchase 150,000 shares of Common Stock,
which warrant will become exercisable on February 1, 1998 if the
Transactions are not consummated before then. None of such shares were
outstanding as of the Record Date. 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. Mike Willis, Mark
Willis and Harris have shared voting and dispositive power with respect to
such shares.
(4) Excludes 45,000 shares of Common Stock issuable upon exercise of stock
options awarded under the Company's Employee Stock Option and Restricted
Stock Plan (the "Employee Plan") that are not exercisable within sixty
days.
(5) Information relating to ownership by Mr. Smith is based solely on a report
on Schedule 13G filed with the Commission on February 14, 1996. According
to that report, Mr. Smith has sole investment discretion and sole voting
authority with respect to all 967,556 shares of Common Stock.
(6) Information relating to ownership by Massachusetts Financial Services
Company, an institutional investment manager ("MFS"), is based solely on a
report on Schedule 13G/A filed with the Commission on February 11, 1997.
According to that report, MFS has sole investment discretion and sole
voting authority with respect to all of such shares. According to this
report on Schedule 13G, MFS Series Trust II - MFS Emerging Growth Fund is
also a beneficial owner of all of such shares.
(7) Excludes 17,500 shares of Common Stock issuable upon exercise of stock
options awarded under the Employee Plan that are not exercisable within
sixty days. 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.
(8) Includes 4,334 shares of Common Stock issuable upon exercise of stock
options awarded under the Director Plan, which options will be exercisable
within sixty days. Excludes 2,666 shares of Common Stock issuable upon
exercise of stock options awarded under the Director Plan that are not
exercisable within sixty days. Mr. Klemp's term as a director of the
Company expires at the Meeting. Mr. Klemp is not running for re-election.
(9) Includes 1,667 shares of Common Stock issuable upon exercise of stock
options awarded under the Director Plan, which options will be exercisable
within sixty days. Excludes 4,333 shares of Common Stock issuable upon
exercise of stock options awarded under the Director Plan that are not
exercisable within sixty days. Mr. Parker is expected to resign upon
consummation of the Transactions.
(10) See notes (4) and (7) through (9) above.
CHANGE OF CONTROL
The consummation of the Transactions could result in a change of control of
the Company. The Company estimates that, upon completion of the Transactions,
the Willis Group will beneficially own approximately 9,581,633 shares of Common
Stock, which would represent approximately 60% of the outstanding Common Stock
if the Willis Group were to exercise all warrants and conversion rights it
holds. Additionally, upon consummation of the Transactions, the Board of
Directors of the Company will be controlled by the Willis Group.
25
<PAGE>
RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS
Ernst & Young LLP served as the Company's principal independent public
accountants for the 1997 fiscal year and has been recommended by the audit
committee to so serve for the current year. Representatives of Ernst & Young LLP
are expected to be present at the annual meeting of shareholders, will have the
opportunity to make a statement if they so desire and will be available to
respond to appropriate questions.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers, directors and persons who own more than 10% of a registered class of
the Company's equity securities to file Form 3, Form 4 and Form 5 reports of
ownership and changes in ownership with the Commission. Officers, directors and
greater than 10% shareholders are required by the regulation to furnish the
Company with copies of all Section 16(a) reports they file.
Based solely on a review of reports on Forms 3 and 4 and amendments thereto
furnished to the Company during its most recent fiscal year and written
representations from certain reporting persons that no report on Form 5 was
required, the Company believes that during the fiscal year ended June 30, 1997,
all officers, directors and greater than 10% shareholders complied with all
filing requirements applicable to them, except that The Furst Group, Inc. failed
to file a Form 3 on a timely basis to report its acquisition of beneficial
ownership of 1,500,000 shares of Common Stock upon issuance of the Furst Warrant
and Michael L. Hlinak failed to file a Form 5 on a timely basis to report the
grant to him of options to purchase 90,000 shares of Common Stock and his
acquisition of an aggregate of approximately 1,400 shares of Common Stock
through monthly payroll deductions under the Company's Employee Stock Purchase
Plan.
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 1997 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.
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 Company has engaged the services of Corporate Investor Communications
("CIC") to assist in the solicitation of proxies for the Meeting. The cost of
solicitation of proxies in the accompanying form will be paid by the Company.
The Company estimates that the cost of CIC's services will be approximately
$5,500. In addition to solicitation by use of the mails, CIC and 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
26
<PAGE>
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, and Quarterly
Report on Form 10-Q for the Quarterly Period Ended September 30, 1997. 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 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 fiscal quarter ended September 30,
1997.
3. Quarterly Report on Form 10-Q for the fiscal quarter ended December 31,
1997.
27
<PAGE>
ANNEX A--SWITCH AGREEMENT
SWITCH AGREEMENT
BETWEEN
EQUALNET HOLDING CORP.,
EQ ACQUISITION SUB, INC.
AND
WILLIS GROUP, LLC
December 2, 1997
1
<PAGE>
TABLE OF CONTENTS
1. Definitions............................................................1
2. The Acquisition........................................................5
(a) Basic Transaction................................................5
(b) Acquisition Consideration........................................6
(c) The Closing......................................................6
(d) Deliveries at the Closing........................................6
3. Representations and Warranties of EqualNet and Sub.....................6
(a) Organization, Qualification, and Corporate Power.................6
(b) Authorization of Transaction.....................................7
(c) Brokers' Fees....................................................7
(d) No Violation.....................................................7
(e) Consents.........................................................7
(f) Financial Information............................................7
(g) Liabilities......................................................8
(h) Litigation.......................................................8
(i) Compliance with ERISA............................................8
(j) Taxes; Governmental Charges......................................8
(k) Defaults.........................................................9
(l) Compliance with the Law..........................................9
(m) Investment Company Act...........................................9
(n) Public Utility Holding Company Act...............................9
(o) Disclosure.......................................................9
(p) Structure; Capitalization........................................9
(q) Environmental Matters...........................................10
(r) Intellectual Property and Other Intangible Assets...............11
(s) Insurance Coverage..............................................12
4. Representations and Warranties of TWG.................................12
(a) Company Existence...............................................12
(b) Corporate Power and Authorization...............................12
(c) Binding Obligations.............................................12
(d) Brokers' Fees...................................................13
(e) Investment......................................................13
(f) Title...........................................................13
5. Pre-Closing Covenants.................................................13
(a) General.........................................................13
(b) Inspection......................................................13
(c) Notices and Consents............................................13
(d) Notice of Developments..........................................14
(e) Ordinary Course.................................................14
i
<PAGE>
(f) Changes in Employment Arrangements..............................16
(g) Severance.......................................................16
(h) Other Actions...................................................16
(i) Valid Issuance..................................................16
(j) Government Regulations..........................................16
(k) ERISA...........................................................17
(l) Corporate Existence; Maintenance of Properties..................17
(m) Insurance.......................................................17
(n) Further Assurances..............................................17
(o) Notices of Certain Events.......................................17
(p) Environmental Laws..............................................18
(q) Registration Rights.............................................18
(r) Shareholder Approval; Preparation of Proxy Statements...........18
(s) No Solicitation.................................................19
(t) Listing of Common Stock.........................................20
(u) Acquisition Loan................................................21
6. Conditions to Obligation to Close.....................................21
(a) Conditions to Obligation of TWG.................................21
(b) Conditions to Obligation of EqualNet and Sub....................22
7. Termination...........................................................23
(a) Termination of Agreement........................................23
(b) Effect of Termination...........................................24
8. Remedies for Breaches of This Agreement...............................24
(a) Survival of Representations and Warranties......................24
(b) Indemnification Provisions for Benefit of TWG...................24
(c) Indemnification Provisions for Benefit of EqualNet..............24
(d) Matters Involving Third Parties.................................24
(e) Claims for Indemnification......................................25
(f) Determination of Adverse Consequences...........................26
(g) Other Indemnification Provisions................................26
9. Miscellaneous.........................................................26
(a) Press Releases and Public Announcements.........................26
(b) No Third-Party Beneficiaries....................................26
(c) Succession and Assignment.......................................26
(d) Counterparts....................................................26
(e) Notices.........................................................27
(f) Governing Law...................................................27
(g) Amendments and Waivers..........................................27
(h) Severability....................................................28
(i) Expenses........................................................28
(j) Construction....................................................28
(k) Incorporation of Exhibits, Annexes, and Schedules...............28
ii
<PAGE>
SWITCH AGREEMENT
This Switch Agreement is entered into as of December 2, 1997, by and
between EqualNet Holding Corp., a Texas corporation ("EqualNet"), EQ Acquisition
Sub, Inc., a Delaware corporation and a wholly owned subsidiary of EqualNet
("Sub"), and Willis Group, LLC, a Texas limited liability company ("TWG").
EqualNet, Sub and TWG are referred to collectively herein as the "PARTIES."
RECITALS
This Agreement contemplates a transaction in which the Sub will purchase
the Switches (the "Acquisition").
Now, therefore, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the Parties agree as follows:
1. DEFINITIONS.
"ACCREDITED INVESTOR" has the meaning set forth in Regulation D
promulgated under the Securities Act.
"ACQUISITION LOAN" has the meaning set forth in Section 5(v).
"ADVERSE CONSEQUENCES" means all actions, suits, proceedings,
hearings, investigations, charges, complaints, claims, demands,
injunctions, judgments, orders, decrees, rulings, damages, dues,
penalties, fines, costs, amounts paid in settlement, Liabilities,
obligations, Taxes, liens, losses, expenses and fees, including court
costs and reasonable attorneys' fees and expenses.
"APPLICABLE RATE" means the corporate base rate or prime rate of
interest publicly announced from time to time by Texas Commerce Bank,
National Association, Houston, Texas plus 5.0% per annum.
"BASIS" means any past or present fact, situation, circumstance,
status, condition, activity, practice, plan, occurrence, event, incident,
action, failure to act, or transaction that forms or could form the basis
for any specified consequences.
"BUSINESS DAY" means any day that is not a Saturday, a Sunday, or a
day that is a banking holiday under United States or Texas Law.
"CAPITALIZED LEASE OBLIGATIONS" shall mean all rental obligations
which, under GAAP in effect on the day such obligation is incurred, are
required to be capitalized on the books of EqualNet or any Subsidiary, in
each case taken at the amount thereof accounted for as indebtedness (net
of interest expense) in accordance with such principles.
1
<PAGE>
"CLOSING" has the meaning set forth in Section 2(c).
"CLOSING DATE" has the meaning set forth in Section 2(c).
"COMMISSION" shall mean the United States Securities and Exchange
Commission.
"CURRENT INDEBTEDNESS" shall mean any obligation for borrowed money
(including notes payable and drafts accepted representing extensions of
credit whether or not representing obligations for borrowed money) payable
on demand or within a period of one year from the date of creation
thereof; provided, any obligation shall be treated as Funded Indebtedness,
regardless of its term, if such obligation is renewable pursuant to the
terms thereof or of a revolving credit or similar agreement effective for
more than one year after the date of the creation of such obligation, or
may be payable out of the proceeds of a similar obligation pursuant to the
terms of such obligation or of any such agreement. Any obligation secured
by a Lien on, or payable out of the proceeds of production from, property
of EqualNet or any Subsidiary shall be deemed to be Funded or Current
Indebtedness, as the case may be, of EqualNet or such Subsidiary even
though such obligation shall not be assumed by EqualNet or such
Subsidiary.
"EQUALNET COMMON SHARE" means any share of the common stock of
EqualNet, $.01 par value per share.
"ENVIRONMENTAL LAW" shall mean any judgment, decree, order, law,
license, rule, regulation or private agreement (such as covenants,
conditions, and restrictions), of any federal, state or local executive,
legislative, judicial, regulatory or administrative agency, board, or
authority designed to protect the environment, air, surface, water,
groundwater or soil, control pollution, or regulate the exploration,
manufacturing, processing, distributing, use, storage, transport or
handling of Hazardous Materials, including, without limitation, the
Comprehensive Environmental Response, Compensation, and Liability Act (42
U.S.C. ss. 9601 ET SEQ.) ("CERCLA"), the Oil Pollution Act (33 U.S.C. ss.
2701 ET SEQ.) ("OPA"), the Resource Conservation and Recovery Act (42
U.S.C. ss. 6901 ET SEQ.) ("RCRA"), and the Federal Water Pollution Control
Act (33 U.S.C. ss. 1251 ET SEQ.) ("CWA"), as such laws have been or
hereafter may be amended or supplemented, and any and all analogous
present and future federal, state, and local laws in jurisdictions where
EqualNet and its Subsidiaries do business.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time. Section references to ERISA are to
ERISA as in effect at the date of this Agreement and any subsequent
provisions of ERISA amendatory thereof, supplemental thereto or
substituted therefor.
"ERISA AFFILIATE" shall mean each trade or business (whether or not
incorporated) which together with EqualNet or a Subsidiary of EqualNet
would be deemed to be a "single employer" within the meaning of Section
4001 of ERISA immediately following the acquisition.
2
<PAGE>
"FUNDED INDEBTEDNESS" shall mean and include without duplication any
obligation payable more than one year from the date of the creation
thereof (including the current portion of Funded Indebtedness), which
under generally accepted accounting principles is shown on the balance
sheet as a liability (including, without limitation, Capitalized Lease
Obligations and excluding reserves for deferred income taxes and other
reserves to the extent that such reserves do not constitute an
obligation).
"GAAP" shall mean generally accepted accounting principles
consistently applied throughout the period or periods in question.
"GOVERNMENTAL AUTHORITY" shall mean any foreign or domestic federal,
state, county, municipal, or other governmental or regulatory authority,
agency, board, body, commission, instrumentality, court, or any political
subdivision thereof.
"GOVERNMENTAL REQUIREMENT" shall mean any law, statute, code,
ordinance, order, rule, regulation, judgment, decree, injunction,
franchise, permit, certificate, license, authorization, or other direction
or requirement (including but not limited to any of the foregoing which
relate to Environmental Laws, energy regulations and occupational, safety
and health standards or controls) of any Governmental Authority.
"HAZARDOUS MATERIALS" shall mean, collectively, (i) those substances
included within the definition of or identified as "hazardous substances,"
"hazardous materials," "toxic substances," or "solid waste" in or pursuant
to, without limitation, CERCLA, OPA, RCRA, and the Occupational Health and
Safety Act, and in the regulations promulgated pursuant to said laws, all
as amended; (ii) any material, waste or substance which is or contains (A)
petroleum, including crude oil or any fraction thereof, natural gas, or
synthetic gas usable for fuel or any mixture thereof; (B) asbestos; (C)
polychlorinated biphenyls; (D) designated as a "hazardous substance"
pursuant to Section 307 or 311 of the CWA; (E) flammable explosives; or
(F) radioactive materials; and (iii) any such other substances, materials
and wastes which are or become regulated as hazardous or toxic under
applicable local, state or federal law, or which are currently classified
as hazardous or toxic under local, state or federal laws or regulations.
"INDEBTEDNESS" shall mean Funded Indebtedness and/or Current
Indebtedness.
"INDEMNIFIED PARTY" has the meaning set forth in Section 9(d).
"INDEMNIFYING PARTY" has the meaning set forth in Section 9(d).
"LIABILITY" means any liability (whether known or unknown, whether
asserted or unasserted, whether absolute or contingent, whether accrued or
unaccrued, whether liquidated or unliquidated, and whether due or to
become due).
"MATERIAL ADVERSE EFFECT" or "MATERIAL ADVERSE CHANGE" means any
material and adverse effect on, or change to, (i) the assets, liabilities,
financial condition, business, or operations of EqualNet and its
Subsidiaries on a consolidated basis, or (ii) the ability of
3
<PAGE>
EqualNet and its Subsidiaries on a consolidated basis to carry out their
business as of September 30, 1997.
"NASDAQ" shall mean the National Association of Securities Dealers
Automated Quotations system.
"NOTE AND WARRANT PURCHASE AGREEMENT" shall mean that certain
agreement by and among TWG, EqualNet and its Subsidiaries dated as of
October 1, 1997.
"PARTY" has the meaning set forth in the preface above.
"PBGC" shall mean the Pension Benefit Guaranty Corporation
established pursuant to Section 4002 of ERISA, or any successor entity
thereto.
"PENSION PLAN" shall mean any multiemployer plan or single-employer
plan, as defined in Section 4001 of ERISA and subject to Title IV of
ERISA, which is maintained after the Acquisition for employees of
EqualNet, any of its Subsidiaries or any ERISA Affiliates.
"PERMITS" shall mean all licenses, permits, exceptions, franchises,
accreditations, privileges, rights, variances, waivers, approvals and
other authorizations (including, without limitation, those relating to
environmental matters) of, by or from Governmental Authorities necessary
for the conduct of the business of EqualNet and its Subsidiaries
immediately prior to the Closing and as proposed to be conducted by
EqualNet and its Subsidiaries after the Closing.
"PERSON" shall mean and include an individual, a partnership, a
joint venture, a corporation, a limited liability company, a trust, an
unincorporated organization and a government or any department or agency
thereof.
"RELEASE" shall mean release, spill, emission, leaking, pumping,
injection, deposit, disposal, discharge, dispersal, leaching or migration
into the environment or into or out of any property, including the
movement of Hazardous Materials through or in the air, surface water, or
groundwater.
"REMEDIAL ACTION" shall mean any action required by any federal,
state or judicial body or administration or agency acting under an
Environmental Law to (i) clean up, remove or treat Hazardous Materials in
the environment; (ii) prevent a Release or threat of Release or minimize
the further Release of Hazardous Materials so they do not migrate or
endanger or threaten to endanger public health or the environment; (iii)
perform post-remedial monitoring and care; or (iv) cure a violation of any
Environmental Law.
"REORGANIZATION AGREEMENT" means the Agreement and Plan of
Reorganization of even date herewith among EqualNet, Sub, Netco
Acquisition, LLC and Netco Acquisition Corp.
4
<PAGE>
"REPORTABLE EVENT" shall mean an event described in Section 4043(b)
of ERISA with respect to which the 30-day notice requirement has not been
waived by the PBGC.
"SECURITY INTEREST" means any mortgage, pledge, lien, encumbrance,
charge, or other security interest, other than (a) mechanic's,
materialmen's, and similar liens, (b) liens for taxes not yet due and
payable or for taxes that the taxpayer is contesting in good faith through
appropriate proceedings diligently conducted and with respect to which
adequate reserves have been set aside on the books of the taxpayer, and
(c) purchase money liens and liens securing rental payments under capital
lease arrangements.
"SHARES" means the EqualNet Common Shares to be issued by EqualNet
pursuant to Section 2.
"SINGLE-EMPLOYER PENSION PLAN" shall mean a Pension Plan which is a
"single-employer plan" as defined in Section 4001 of ERISA.
"STOCK PURCHASE AGREEMENT" means the Stock Purchase Agreement of
even date herewith between EqualNet and TWG.
"SUBSIDIARY" shall mean any corporation or similar entity a majority
of the stock of every class of which, except directors' qualifying shares,
shall, at the time as of which any determination is being made, be owned
by EqualNet, either directly or indirectly.
"SWITCHES" means the telecommunications equipment described in
Exhibit A attached hereto.
"THIRD PARTY CLAIM" has the meaning set forth in Section 9(d).
"WARRANT" has the meaning set forth in Section 2(d).
2. THE ACQUISITION.
(a) BASIC TRANSACTION. On and subject to the terms and conditions of this
Agreement, at the Closing TWG will sell to Sub and Sub will purchase from TWG
the Switches. EXCEPT FOR THE REPRESENTATIONS SET FORTH IN SECTION 4, THE
SWITCHES SHALL BE SOLD TO SUB AS-IS, WHERE-IS AND WITHOUT REPRESENTATION OR
WARRANTY BY TWG AND TWG HEREBY EXPRESSLY DISCLAIMS ALL REPRESENTATIONS AND
WARRANTIES REGARDING THE SWITCHES INCLUDING, WITHOUT LIMITATION, REGARDING THE
MERCHANTABILITY OF THE SWITCHES OR THE FITNESS OF THE SWITCHES FOR ANY
PARTICULAR PURPOSE.
(b) ACQUISITION CONSIDERATION. The consideration payable to TWG for the
sale of the Switches shall consist of the following:
(i) if the Acquisition Loan has not been obtained pursuant to
Section 5(v), $5,850,000 in cash;
5
<PAGE>
(ii) if the Acquisition Loan has been obtained, the assumption of
the Acquisition Loan and a cash amount equal to $5,850,000 less the
original principal amount of plus accrued and unpaid interest on the
Acquisition Loan;
(iii) 400,000 shares of EqualNet Common Shares; and
(iv) A warrant issued by EqualNet to TWG for 400,000 EqualNet Common
Shares exercisable at $1.50 per share, such warrant to be in the form of
Exhibit B (the "Warrant").
The purchase price for the Switches does not includes sales taxes that may
be triggered by the sale of the Switches, and any such taxes shall be paid by
Sub or EqualNet.
(c) THE CLOSING. Subject to the satisfaction of the conditions set forth
herein, the closing of the transaction contemplated by this Agreement (the
"CLOSING") shall take place on a Business Day mutually agreeable to EqualNet and
TWG within ten Business Days following the satisfaction of the conditions set
forth in Section 6(a)(iii) (the actual date on which the Closing occurs being
referred to herein as the "Closing Date").
(d) DELIVERIES AT THE CLOSING. At the Closing, (i) EqualNet and Sub will
deliver to TWG the various certificates, instruments and documents referred to
in Section 6(a), (ii) TWG will deliver to EqualNet the various certificates,
instruments and documents referred to in Section 6(b), (iii) EqualNet will
deliver to TWG the stock certificates for the Shares, the Warrant, any cash
consideration required pursuant to Section 2(b), and (if applicable) assumption
documents whereby EqualNet and Sub assume the Acquisition Loan (such documents
to be in form and content satisfactory to the lender of the Acquisition Loan and
TWG); and (iv) TWG will execute and deliver to Sub a bill of sale covering the
Switches.
3. REPRESENTATIONS AND WARRANTIES OF EQUALNET AND SUB. EqualNet and Sub
represent and warrant to TWG that the statements contained in this Section 3 are
correct and complete as of the date of this Agreement and will be correct and
complete as of the Closing Date (as though made throughout this Section 3),
except as set forth in the disclosure schedule delivered by EqualNet to TWG on
the date hereof and initialed by authorized representatives of EqualNet, Sub and
TWG (the "Disclosure Schedule").
(a) ORGANIZATION, QUALIFICATION, AND CORPORATE POWER. EqualNet and Sub are
corporations duly organized, validly existing, and in good standing under the
laws of the states of Texas and Delaware, respectively. Each of EqualNet and Sub
has the requisite corporate power and authority and all licenses, permit and
authorizations necessary to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it except where the failure to
do so would not have a Material Adverse Effect.
(b) AUTHORIZATION OF TRANSACTION. The boards of directors of EqualNet and
Sub have duly approved this Agreement and the transactions contemplated hereby,
and each of EqualNet and the Sub has requisite corporate power and authority to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of EqualNet
and Sub, enforceable in accordance with its terms and conditions except to the
extent
6
<PAGE>
that enforceability may be limited by bankruptcy, insolvency and other similar
laws affecting the enforcement of creditors' rights generally and except for the
application of general principles of equity. Except as disclosed in Schedule
3(b) of the Disclosure Schedule, neither EqualNet nor the Sub needs to give any
notice to, make any filing with, or obtain any authorization, consent or
approval of any Governmental Authority or any other Person in order to
consummate the transactions contemplated by this Agreement.
(c) BROKERS' FEES. Neither EqualNet nor Sub has any Liability or
obligation to pay any fees or commissions to any broker, finder, or agent with
respect to the transactions contemplated by this Agreement for which TWG could
become liable or obligated, and neither EqualNet nor Sub has any Liability or
obligation to pay any fees or commissions to any broker, finder, or agent with
respect to the transactions contemplated by this Agreement.
(d) NO VIOLATION. Except as disclosed in Schedule 3(d) of the Disclosure
Schedule, neither the execution and delivery of this Agreement, the consummation
of the transactions provided for herein or contemplated hereby nor the
fulfillment by EqualNet or Sub of the terms hereof will (i) violate any
provision of the Articles of Incorporation or the by-laws of EqualNet or the
Certificate of Incorporation of bylaws of Sub, (ii) result in a default, give
rise to any right of termination, cancellation, acceleration or imposition of
any Indebtedness or Security Interest, or require any consent or approval (other
than any consent or approval that has previously been obtained), under any of
the terms, conditions or provisions of any of the Permits or any note, bond,
mortgage, indenture, loan, distribution agreement, license, agreement, lease or
instrument or obligation to which EqualNet or Sub is a party or by which
EqualNet or Sub may be bound (except where the failure to obtain such consent or
approval will not have a Material Adverse Effect), or (iii) violate any law,
judgment, order, writ, injunction, decree, statute, rule, or regulation of any
Governmental Authority applicable to EqualNet or Sub (except where such
violation will not have a Material Adverse Effect).
(e) CONSENTS. Except as disclosed in Section 3(e) of the Disclosure
Schedule, all consents, approvals, qualifications, orders, or authorizations of,
or filings with, any Governmental Authority, and all consents under any material
contracts, agreements, or instruments by which EqualNet or Sub is bound or to
which it is subject, which are required in connection with EqualNet's or Sub's
valid execution, delivery, or performance of this Agreement and the offer, sale
and delivery of the Shares have been obtained or made.
(f) FINANCIAL INFORMATION.
(i) The audited consolidated balance sheet of EqualNet and its
Subsidiaries as at June 30, 1997, and the related consolidated statements
of operations, shareholders' equity and cash flows for the 12-month period
then ended, including in each case the related schedules and notes,
reported on by Ernst & Young LLP, are complete and correct and fairly
present in all material respects the consolidated financial position of
EqualNet and its Subsidiaries as at the date thereof and the consolidated
results of operations and changes in cash flows for such period, in
accordance with GAAP.
(ii) The unaudited consolidated balance sheet of EqualNet and its
Subsidiaries as at September 30, 1997, and the related unaudited
consolidated statements of operations,
7
<PAGE>
shareholders' equity and cash flows for the three-month period then ended,
as included in EqualNet's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1997, true copies of which have been previously
delivered to TWG, are complete and correct and fairly present in all
material respects the consolidated financial position of EqualNet and its
Subsidiaries as at the date thereof and the consolidated results of
operations and changes in cash flows for such period in conformity with
GAAP, subject only to normal year-end audit adjustments.
(iii) Since September 30, 1997, there has been no Material Adverse
Effect.
(g) LIABILITIES. Except for liabilities incurred in the ordinary course of
business, none of EqualNet or any of its Subsidiaries has any material
(individually or in the aggregate) liabilities, direct or contingent (including
but not limited to liability with respect to any Plan) except as disclosed or
referred to in Section 3(g) of the Disclosure Schedule or in the financial
statements referred to in Section 3(f). Neither EqualNet nor any of its
Subsidiaries has any Funded Indebtedness other than Indebtedness disclosed in
Section 3(g) of the Disclosure Schedule.
(h) LITIGATION. Except as disclosed in Section 3(h) of the Disclosure
Schedule or as described in any report filed by EqualNet with the Commission and
delivered to TWG, there is no action, suit, or proceeding, or any governmental
investigation or any arbitration, in each case pending or, to the knowledge of
EqualNet, threatened against EqualNet or any of its Subsidiaries or any material
property of any thereof before any court or arbitrator or any governmental or
administrative body, agency or official (i) which challenges the validity of
this Agreement; or (ii) which, if adversely determined, would have a Material
Adverse Effect.
(i) COMPLIANCE WITH ERISA. Each Plan is in substantial compliance with
ERISA, no Plan has an accumulated or waived funding deficiency within the
meaning of Section 412 or Section 418(B) of the Code, no proceedings have been
instituted to terminate any Plan, and except as disclosed in Section 3(i) of the
Disclosure Schedule, none of EqualNet or any of its Subsidiaries nor any ERISA
Affiliate has incurred any material liability to or on account of a Plan under
ERISA, and except as disclosed in Section 3(i) of the Disclosure Schedule, no
condition exists which presents a material risk to EqualNet or any of its
Subsidiaries of incurring such a liability.
(j) TAXES; GOVERNMENTAL CHARGES. Each of EqualNet and its Subsidiaries has
filed all tax returns and reports required to be filed and has paid all taxes,
assessments, fees, and other governmental charges levied upon any of them or
upon any of their respective properties or income which are due and payable,
including interest and penalties, or has provided adequate reserves for the
payment thereof, except where the failure to so file, pay, or reserve would not
have a Material Adverse Effect.
(k) DEFAULTS. Except as disclosed in Section 3(k) of the Disclosure
Schedule, none of EqualNet or any of its Subsidiaries is in default, nor has any
event or circumstance occurred which, but for the passage of time or the giving
of notice, or both, would constitute a default (in any respect which may have a
Material Adverse Effect) under any loan or credit agreement, indenture,
mortgage, deed of trust, security agreement, or other instrument or agreement
evidencing or pertaining to any Indebtedness of EqualNet or any Subsidiary, or
under any material agreement or instrument to which
8
<PAGE>
EqualNet or any Subsidiary is a party or by which EqualNet or any Subsidiary is
bound. No default hereunder has occurred and is continuing.
(l) COMPLIANCE WITH THE LAW. None of EqualNet or any of its Subsidiaries
(i) is in violation of any Governmental Requirement or (ii) has failed to obtain
any license, permit, franchise or other governmental authorization necessary to
the ownership of any of their respective properties or the conduct of their
respective business, which violation or failure would have (in the event that
such a violation or failure were asserted by any Person through appropriate
action) a Material Adverse Effect.
(m) INVESTMENT COMPANY ACT. None of EqualNet or any of its Subsidiaries is
an "investment company" or a company "controlled" by an "investment company,"
within the meaning of the Investment Company Act of 1940, as amended.
(n) PUBLIC UTILITY HOLDING COMPANY ACT. None of EqualNet or any of its
Subsidiaries is a "holding company," or a "subsidiary company" of a "holding
company," or an "affiliate" of a "holding company" or of a "subsidiary company"
of a "holding company," or a "public utility" within the meaning of the Public
Utility Holding Company Act of 1935, as amended.
(o) DISCLOSURE. EqualNet's filings made pursuant to the Securities
Exchange Act of 1934, as amended and listed on Section 3(o) of the Disclosure
Schedule hereto as of their respective dates, did not contain any untrue
statement of a material fact and did not omit to state any material fact
necessary in order to make the statements contained therein not misleading in
the light of the circumstances under which they were made.
(p) STRUCTURE; CAPITALIZATION.
(i) Section 3(p) of the Disclosure Schedule contains (except as
noted therein) a complete and correct list of EqualNet's Subsidiaries,
showing, as to each Subsidiary, the correct name thereof, the jurisdiction
of its organization, and the percentage of shares of each class of its
capital stock or similar equity interests outstanding owned by EqualNet
and each other Subsidiary.
(ii) All of the outstanding shares of capital stock or similar
equity interests of each Subsidiary shown in Section 3(p) of the
Disclosure Schedule as being owned by EqualNet and its Subsidiaries have
been validly issued, are fully paid and nonassessable, and are owned by
EqualNet or such other Subsidiaries free and clear of any Security
Interest (except as otherwise disclosed in Section 3(p) of the Disclosure
Schedule).
(iii) No Subsidiary of EqualNet is a party to, or otherwise subject
to any legal restriction of any agreement (other than this Agreement and
customary limitations imposed by corporate law statutes) restricting the
ability of such Subsidiary to pay dividends out of profits or make any
other similar distributions of profits to EqualNet or any of its
Subsidiaries that owns outstanding shares of capital stock or similar
equity interests of such Subsidiary.
9
<PAGE>
(iv) As of the Closing Date and after giving effect to the
transactions contemplated in this Agreement, the Stock Purchase Agreement
and the Reorganization Agreement (i) EqualNet's authorized capital stock
will consist of 55,000,000 shares, of which 50,000,000 will be designated
EqualNet Common Shares and 5,000,000 shares are designated as preferred
stock (2,000 of which will be designated as Series A Convertible Preferred
Stock, $.01 par value per share); (ii) 14,269,357 of EqualNet Common
Shares, issued and outstanding and 5,450,677 shares are or will be
reserved for issuance in connection with EqualNet's outstanding warrants
and stock options all of which, when issued in accordance with the terms
of such warrants and stock options, will be validly issued, fully paid,
and non-assessable; (iii) no shares are owned or held by or for the
account of EqualNet or any of its Subsidiaries (except as disclosed in the
financial statements described in Section 3(f)); (iv) except as disclosed
on Section 3(p) of the Disclosure Schedule, neither EqualNet nor any of
its Subsidiaries has outstanding any stock or other securities convertible
into or exchangeable for any shares of capital stock, any rights to
subscribe for or to purchase or any options for the purchase of, or any
agreements providing for the issuance (contingent or otherwise) of, or any
calls, commitments or claims of any other character relating to the
issuance of, any capital stock, or any stock or securities convertible
into or exchangeable for any capital stock which have not been waived
(other than as contemplated by this Agreement); and (v) except as
disclosed in Section 3(p) of the Disclosure Schedule, neither EqualNet nor
any of its Subsidiaries is subject to any obligation (contingent or
otherwise) to repurchase or otherwise acquire or retire any shares of
capital stock.
(q) ENVIRONMENTAL MATTERS.
(i) Neither any property of any of EqualNet or any of its
Subsidiaries nor the operations conducted thereon violate any order of any
court or Governmental Authority or Environmental Laws which violations
could reasonably be expected to result in liability in excess of $250,000
or which could reasonably be expected to result in obligations in excess
of $250,000 for required Remedial Action, assuming disclosure to the
applicable Governmental Authority of all relevant facts, conditions and
circumstances, if any, pertaining to the relevant property.
(ii) Without limitation of clause (i) above, no property of any of
EqualNet or any of its Subsidiaries nor the operations currently conducted
thereon or by any prior owner or operator of such property or operation,
are in violation of or subject to any existing, pending or, to the
knowledge of EqualNet, threatened action, suit, investigation, inquiry or
proceeding by or before any court or Governmental Authority or to any
obligations for required Remedial Action under Environmental Laws which
could reasonably be expected to result in liability in excess of $250,000,
or which could reasonably be expected to result in obligations for
required Remedial Action in excess of $250,000 assuming disclosure to the
applicable Governmental Authority of all relevant facts, conditions and
circumstances, if any, pertaining to the relevant property.
(iii) All notices, permits, licenses or similar authorizations, if
any, required to be obtained or filed in connection with the operation or
use of any and all property of EqualNet and its Subsidiaries, including
but not limited to past or present treatment, storage, disposal
10
<PAGE>
or release of Hazardous Materials into the environment, have been duly
obtained or filed, except where the failure to so obtain or file would not
have a Material Adverse Effect.
(r) INTELLECTUAL PROPERTY AND OTHER INTANGIBLE ASSETS.
(i) EqualNet and its Subsidiaries (i) own or have the right to use,
free and clear of all liens, claims, and restrictions, all patents,
trademarks, service marks, trade names, and copyrights, and all
applications, licenses, and rights with respect to the foregoing, and all
trade secrets, including know-how, inventions, designs, processes, works
of authorship, computer programs, and technical data and information
(collectively, "Intellectual Property") used and sufficient for use in the
conduct of its business as now conducted and/or as presently proposed to
be conducted (including, without limitation, the development, manufacture,
operation, and sale of all products and services sold or proposed to be
sold by EqualNet and its Subsidiaries during the next 24 months following
the date of this Agreement) without infringing upon or violating any
right, lien, or claim of others, including, without limitation, former
employees and former employers of its past and present employees, and (ii)
except as described in Section 3(r) of the Disclosure Schedule, is not
obligated or under any liability whatsoever to make any payments by way of
royalties, fees, or otherwise to any owner or licensee of, or other
claimant to, any patent, trademark, service mark, trade name, copyright,
or other intangible asset, with respect to the use thereof or in
connection with the conduct of its business or otherwise.
(ii) Any and all Intellectual Property of any kind, relating to the
business of EqualNet and its Subsidiaries currently being developed, or
developed in the future, by any employee of EqualNet and its Subsidiaries
while in the employ of EqualNet and its Subsidiaries shall be the property
solely of EqualNet and its Subsidiaries. EqualNet and its Subsidiaries
have taken security measures to protect the secrecy, confidentiality, and
value of all Intellectual Property, which measures are reasonable and
customary in the industry in which EqualNet and its Subsidiaries operate.
EqualNet and its Subsidiaries' employees and other persons who, either
alone or in concert with others, developed, invented, discovered, derived,
programmed, or designed the Intellectual Property (the "Technical
Employees"), or who have knowledge of or access to information about the
Intellectual Property, have entered into a written agreement with EqualNet
or its Subsidiaries, in form and substance satisfactory to EqualNet's
management (the "Proprietary Information Agreement") regarding ownership
and treatment of the Intellectual Property.
(iii) Except as described in Section 3(r) of the Disclosure
Schedule, none of EqualNet or its Subsidiaries has received any
communications alleging that EqualNet or such Subsidiary has violated, or
by conducting its business as proposed would violate, any of the patents,
trademarks, service marks, trade names, copyrights, or trade secrets or
other proprietary rights of any other Person or entity. None of EqualNet's
and its Subsidiaries' employees is obligated under any contract (including
licenses, covenants, or commitments of any nature) or other agreement, or
subject to any judgment, decree, or order of any court or administrative
agency, that would interfere with the use of such employee's best efforts
to promote the interests of EqualNet or its Subsidiaries or that would
conflict with EqualNet's or its Subsidiaries' business as presently
conducted and as proposed to be conducted. Neither
11
<PAGE>
the execution nor delivery of this Agreement, nor the carrying on of
EqualNet's or its Subsidiaries' business by the employees of EqualNet and
its Subsidiaries, nor the conduct of EqualNet's or its Subsidiaries'
business as proposed to be conducted, will conflict with or result in a
breach of the terms, conditions, or provisions of, or constitute a default
under, any contract, covenant, or instrument under which any of such
employees is now obligated. It is not, and will not become, necessary to
utilize any inventions of any of EqualNet's or its Subsidiaries' employees
(or people EqualNet and its Subsidiaries currently intends to hire) made
prior to their employment by EqualNet and its Subsidiaries other than
those that have been assigned to EqualNet and its Subsidiaries pursuant to
the Proprietary Information Agreement signed by such employee.
(s) INSURANCE COVERAGE. The properties of EqualNet and its Subsidiaries
are insured in amounts deemed adequate by EqualNet's management against risks
usually insured against by Persons operating businesses similar to those of
EqualNet and its Subsidiaries in the localities where such properties are
located.
4. REPRESENTATIONS AND WARRANTIES OF TWG.
TWG represents and warrants to EqualNet that the statements contained in
this Section 4 are correct and complete as of the date of this Agreement and
will be correct and complete as of the Closing Date (as though made then and as
though the Closing Date was substituted for the date of this Agreement
throughout this Section 4).
(a) COMPANY EXISTENCE. TWG is a limited liability company duly organized,
legally existing, and in good standing under the laws of the State of Texas. TWG
is duly qualified as a limited liability company (or other legal entity) in all
jurisdictions in which the nature of its business activities or its ownership or
leasing of property makes such qualification necessary, except where the failure
to so qualify will not have a Material Adverse Effect.
(b) CORPORATE POWER AND AUTHORIZATION. TWG has the requisite corporate
power and authority to execute, deliver and perform its obligations under this
Agreement and to consummate the transactions contemplated hereby. All action on
TWG's part requisite for the due execution, delivery, and performance of this
Agreement has been duly and effectively taken.
(c) BINDING OBLIGATIONS. This Agreement is enforceable in accordance with
its terms (except that enforcement may be subject to (i) any applicable
bankruptcy, insolvency or similar laws generally affecting the enforcement of
creditors' rights and (ii) general principles in equity regardless of whether
such enforcement is sought in a proceeding in equity or at law).
(d) BROKERS' FEES. TWG has no Liability or obligation to pay any fees or
commissions to any broker, finder, or agent with respect to the transactions
contemplated by this Agreement for which EqualNet or Sub could become liable or
obligated, and TWG has no any Liability or obligation to pay any fees or
commissions to any broker, finder, or agent with respect to the transactions
contemplated by this Agreement.
12
<PAGE>
(e) INVESTMENT. TWG (i) understands that the Shares when issued at the
Closing and the shares issued in connection with an exercise of the Warrant will
not be registered under the Securities Act, or under any state securities laws,
and are being offered and sold in reliance upon federal and state exemptions for
transactions not involving any public offering, (ii) is acquiring the Shares and
Warrant when issued at the Closing solely for its own account for investment
purposes and not with a view to the distribution thereof, (iii) is a
sophisticated investor with knowledge and experience in business and financial
matters, (iv) has received certain information concerning EqualNet and has had
the opportunity to obtain additional information as desired in order to evaluate
the merits and the risks inherent in holding the Shares and the Warrant, (v) is
able to bear the economic risk and lack of liquidity inherent in holding the
Shares and the Warrant, and (vi) is an Accredited Investor.
(f) TITLE. TWG owns the Switches free and clear of any Security Interest
other than any Security Interest (if any) that encumbered the Switches at the
time the same were sold to TWG pursuant to the instrument attached as Exhibit A.
5. PRE-CLOSING COVENANTS.
The Parties agree as follows with respect to the period between the
execution of this Agreement (or such earlier time as may be indicated) and the
earlier to occur of the Closing or the termination of this Agreement pursuant to
Section 7:
(a) GENERAL. Each of the Parties will use commercially reasonable best
efforts to take all actions and to do all things necessary, proper or advisable
in order to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions set
forth in Section 6).
(b) INSPECTION. EqualNet and TWG each agree to permit the other, and its
officers, directors, employees, accountants, counsel and other authorized
representatives, during normal business hours, to inspect its records and to
consult with its officers, employees, attorneys, and agents for the purpose of
determining the accuracy of the representations and warranties hereinabove made
and the compliance with covenants contained in this Agreement. EqualNet and TWG
each agrees that it and its officers and representatives shall hold all data and
information obtained with respect to the other party hereto in confidence and
each further agrees that it will not use such data or information or disclose
the same to others, except to the extent such data or information either are, or
become, published or a matter of public knowledge.
(c) NOTICES AND CONSENTS. To the extent, if any, noted in Section 3(c) of
the Disclosure Schedule as being required, EqualNet will give any notices to
third parties, and will use and cause EqualNet to use all reasonable efforts to
obtain the required consent of its shareholders and any third-parties.
(d) NOTICE OF DEVELOPMENTS. Each Party will give prompt written notice to
the other of any material adverse development causing a breach of or
constituting an intervening event with respect to any of its own representations
and warranties in Sections 3 and 4. No disclosure by any Party pursuant to this
Section 5(d), however, shall be deemed to amend or supplement the Disclosure
Schedule or to prevent or cure any misrepresentation, breach of warranty, or
breach of covenant.
13
<PAGE>
(e) ORDINARY COURSE. Except for transactions to which TWG is a party or as
otherwise specifically contemplated by the terms of this Agreement, EqualNet
shall and shall cause its Subsidiaries to carry on their respective businesses
in the usual, regular and ordinary course in substantially the same manner as
heretofore conducted and, to the extent consistent therewith, use all reasonable
efforts to preserve intact their current officers and employees and preserve
their relationships with customers, suppliers, licensors, licensees,
distributors and others having business dealings with them, in each case
consistent with past practice, to the end that their goodwill and ongoing
businesses shall be unimpaired to the fullest extent possible at the Closing
Date. Without limiting the generality of the foregoing, and except as otherwise
expressly contemplated by this Agreement, EqualNet shall not, and shall not
permit any of its Subsidiaries to:
(i) (A) declare, set aside or pay any dividends on, or make any
other distributions in respect of, any of its capital stock, other than
dividends and distributions by any direct or indirect wholly owned
Subsidiary of EqualNet to EqualNet or to another direct or indirect wholly
owned Subsidiary of EqualNet, (B) split, combine or reclassify any of its
capital stock or issue or authorize the issuance of any other securities
in respect of, in lieu of or in substitution for shares of its capital
stock or (C) purchase, redeem or otherwise acquire any shares of capital
stock of EqualNet or any of its Subsidiaries or any other securities
thereof or any rights, warrants or options to acquire any such shares or
other securities other than in connection with the exercise of outstanding
stock options and satisfaction of withholding obligations under
outstanding stock options and restricted stock;
(ii) issue, deliver, sell, pledge or otherwise encumber any shares
of its capital stock, any other voting securities or any securities
convertible into, or any rights, warrants or options to acquire, any such
shares, voting securities or convertible securities other than, in the
case of EqualNet, the issuance of EqualNet Common Shares upon the exercise
of stock options outstanding on the date of this Agreement in accordance
with their current terms;
(iii) amend its Articles of Incorporation, By-laws or other
comparable charter or organizational document;
(iv) acquire or agree to acquire (A) by merging or consolidating
with, or by purchasing a substantial portion of the stock or assets of, or
by any other manner, any business or any corporation, partnership,
association, joint venture, limited liability company or other entity or
division thereof or (B) any assets that, in each case, would be material,
individually or in the aggregate, to EqualNet and its Subsidiaries taken
as a whole, except purchases in the ordinary course of business consistent
with past practice;
(v) sell, lease, mortgage, pledge, grant a Security Interest in or
otherwise encumber or dispose of any of its properties or assets, except
(A) sales or leases in the ordinary course of business consistent with
past practice and (B) other immaterial transactions not in excess of
$250,000 in the aggregate;
(vi) (A) incur indebtedness for borrowed money or guarantee any such
indebtedness of another Person, issue or sell any debt securities or
warrants or other rights to acquire any debt securities of EqualNet or any
of its Subsidiaries, guarantee any debt
14
<PAGE>
securities of another Person, enter into any "keep well" or other
agreement to maintain any financial statement condition of another Person
or enter into any arrangement having the economic effect of any of the
foregoing, except for working capital borrowings under currently existing
revolving credit facilities incurred in the ordinary course of business,
or (B) make any loans, advances or capital contributions to, or
investments in, any other Person that would be material, individually or
in the aggregate, to EqualNet and its Subsidiaries taken as a whole, other
than by EqualNet to any direct or indirect wholly owned Subsidiary of
EqualNet;
(vii) make or incur any new capital expenditure, which, singly or in
the aggregate with all other capital expenditures, would exceed $100,000;
(viii) make any material election relating to Taxes or settle or
compromise any material tax liability;
(ix) pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction, in the
ordinary course of business consistent with past practice or in accordance
with their terms, of liabilities reflected or reserved against in, or
contemplated by, the most recent consolidated financial statements (or the
notes thereto) of EqualNet included in the Commission Documents or
incurred in the ordinary course of business consistent with past practice;
(x) waive the benefits of, or agree to modify in any manner, any
confidentiality, standstill or similar agreement to which EqualNet or any
of its Subsidiaries is a party;
(xi) adopt a plan of complete or partial liquidation or resolutions
providing for or authorizing such a liquidation or a dissolution, merger,
consolidation, restructuring, recapitalization or reorganization;
(xii) enter into any new collective bargaining agreement;
(xiii) change any material accounting principle used by it, except
as required by regulations promulgated by the Commission;
(xiv) settle or compromise any litigation (whether or not commenced
prior to the date of this Agreement) other than settlements or
compromises: (A) of litigation where the amount paid in settlement or
compromise does not exceed $100,000, or (B) in consultation and
cooperation with TWG, and, with respect to any such settlement, with the
prior written consent of TWG, which consent shall not be unreasonably
withheld;
(xv) except for those contracts and agreements entered into in the
ordinary course of business or with the prior written consent of TWG,
which consent shall not be unreasonably withheld, enter into any joint
venture or partnership contract or agreement; or
(xvi) authorize any of, or commit or agree to take any of, the
foregoing actions.
15
<PAGE>
(f) CHANGES IN EMPLOYMENT ARRANGEMENTS. Neither EqualNet nor any of its
Subsidiaries shall adopt or amend (except as may be required by law) any bonus,
profit sharing, compensation, stock option, pension, retirement, deferred
compensation, employment or other employee benefit plan, agreement, trust, fund
or other arrangement for the benefit or welfare of any employee, director or
former director or employee, increase the compensation or fringe benefits of any
officer of EqualNet or any of its Subsidiaries, or, except as provided in an
existing benefit plan or in the ordinary course of business consistent with past
practice, increase the compensation or fringe benefits of any employee or former
employee or pay any benefit not required by any existing plan, arrangement or
agreement.
(g) SEVERANCE. Neither EqualNet nor any of its Subsidiaries shall grant
any new or modified severance or termination arrangement or increase or
accelerate any benefits payable under its severance or termination pay policies
in effect on the date hereof.
(h) OTHER ACTIONS. EqualNet shall not, and shall not permit any of its
Subsidiaries to, take any action that would, or that could reasonably be
expected to, result (i) in any of the representations and warranties of EqualNet
set forth in this Agreement becoming untrue or (ii) in any of the covenants
contained in this Agreement becoming unperformable. Pending the Closing,
EqualNet will promptly advise TWG of any action or event of which it becomes
aware which has the effect of making incorrect any of such representations or
warranties or which has the effect of rendering unperformable any of such
covenants.
(i) VALID ISSUANCE. EqualNet covenants that the EqualNet Common Shares to
be issued by EqualNet pursuant to Section 2(b) and by EqualNet pursuant to an
exercise of the Warrant will, upon issuance and upon delivery of certificates
representing such shares, be validly issued, fully paid and nonassessable and
free from all taxes, liens and charges with respect to the issuance thereof.
(j) GOVERNMENT REGULATIONS. EqualNet covenants that it will comply, and
will cause each of its Subsidiaries to comply, with all applicable governmental
restrictions and regulations, the failure to comply with which would have a
material adverse effect on the business or financial condition of EqualNet and
its Subsidiaries taken as a whole, and obtain and maintain in good standing all
licenses, permits and approvals from any and all governments, governmental
commissions, boards or agencies of jurisdictions in which it or any of its
Subsidiaries carries on business required in respect of the operations of
EqualNet or any of its Subsidiaries, the failure to comply with which would have
a Material Adverse Effect.
(k) ERISA. Promptly (and in any event within 30 days) after EqualNet or
any of its Subsidiaries knows or has reason to know that a Reportable Event with
respect to any Pension Plan has occurred, that any Pension Plan is or may be
terminated, reorganized, partitioned or declared insolvent under Title IV of
ERISA or that EqualNet or any of its Subsidiaries will or may incur any
liability to or on account of a Pension Plan under Sections 4062, 4063, 4064,
4201 or 4204 of ERISA, EqualNet will deliver to TWG a certificate of the chief
financial officer of EqualNet setting forth information as to such occurrence
and what action, if any, EqualNet is required or proposes to take with respect
thereto, together with any notices concerning such occurrences which are (a)
required to be filed by EqualNet or the plan administrator of any such Pension
Plan controlled by EqualNet or its Subsidiaries, with the PBGC or (b) received
by EqualNet or its Subsidiaries from any
16
<PAGE>
plan administrator of a multiemployer or other Pension Plan not under their
control. EqualNet shall furnish to TWG a copy of each annual report (Form 5500
Series) of any Pension Plan received or prepared by EqualNet or any of its
Subsidiaries. Each annual report and any notice required to be delivered
hereunder shall be delivered no later than 10 days after the later of the date
such report or notice is filed with the Internal Revenue Service or the PBGC or
the date such report or notice is received by EqualNet or any of its
Subsidiaries, as the case may be.
(l) CORPORATE EXISTENCE; MAINTENANCE OF PROPERTIES. EqualNet covenants
that it (i) will do or cause to be done all things reasonably necessary to
preserve and keep in full force and effect the corporate existence and material
rights of EqualNet and all of its Subsidiaries, (ii) will cause its properties
and the properties of its Subsidiaries used or useful in the conduct of their
respective businesses to be maintained and kept in good condition, repair and
working order and will use commercially reasonable efforts to cause to be made
all necessary repairs, renewals, replacements, betterments and improvements
thereto, and (iii) will, and will cause each of its Subsidiaries to, qualify and
remain qualified to conduct business in each jurisdiction where the nature of
the business or the ownership of property by EqualNet or such Subsidiary may
require such qualification and where the failure to so qualify would have a
Material Adverse Effect.
(m) INSURANCE. EqualNet covenants that it will maintain, and will cause
each of its Subsidiaries to maintain, with financially sound and reputable
insurance companies, funds or underwriters, insurance for EqualNet and its
Subsidiaries of the kinds, covering the risks and in the relative proportionate
amounts usually carried by companies conducting business activities similar to
those of EqualNet and its Subsidiaries.
(n) FURTHER ASSURANCES. EqualNet covenants that it shall cooperate with
TWG and execute such further instruments and documents as TWG shall reasonably
request to carry out to the satisfaction of TWG the transactions contemplated by
this Agreement.
(o) NOTICES OF CERTAIN EVENTS. EqualNet shall promptly give notice to TWG
(i) of any default or event of default that has not been cured within any
applicable grace period under any (y) Indebtedness of EqualNet or any of its
Subsidiaries, or (z) contractual obligation of EqualNet or any of its
Subsidiaries or (ii) of any pending or threatened litigation, investigation or
proceeding to which EqualNet or any of its Subsidiaries is or is threatened to
be a party and of which EqualNet has been given notice; provided that any such
default as specified in clause (z) above, litigation, investigation or
proceeding would have a Material Adverse Effect. Any notice delivered pursuant
to this Section 5(o) shall be accompanied by an officer's certificate specifying
the details of the occurrence referred to therein and stating what action
EqualNet proposes to take with respect thereto.
(p) ENVIRONMENTAL LAWS. EqualNet and its Subsidiaries shall comply with
all applicable Environmental Laws the failure to comply with which would have a
Material Adverse Effect. If EqualNet or any Subsidiary shall receive written
notice that there exists a violation of Environmental Law with respect to its
operations or any real property owned, formerly owned, used, or leased thereby,
which violation could have a Material Adverse Effect, EqualNet shall immediately
notify in writing TWG. Furthermore, if EqualNet or any Subsidiary shall receive
written notice that there exists a violation of Environmental Law with respect
to its operations or any real property owned, formerly owned, used or leased
thereby, which violation could have a Material Adverse Effect,
17
<PAGE>
EqualNet shall within the time period permitted by the applicable governmental
authority (unless otherwise contested by EqualNet in good faith) remove or
remedy such violation in accordance with all applicable Environmental Laws
unless the Board of Directors of EqualNet makes a good faith determination that
it would be in the best interest of EqualNet to delay the remedy of such
violation, so long as no Material Adverse Effect is suffered by EqualNet or its
Subsidiaries during such delay.
(q) REGISTRATION RIGHTS. EqualNet hereby grants to TWG the same rights to
cause EqualNet to register the EqualNet Common Shares to be issued pursuant to
Section 2(b) and pursuant to an exercise of the Warrant under state and federal
securities laws and all such other rights as set forth in Section 4.1.11 of the
Note and Warrant Purchase Agreement at any time from and after the Closing Date;
provided, such registration rights shall be effective immediately upon the
Closing Date notwithstanding whether or not the Note or Warrants under the Note
and Warrant Purchase Agreement have been converted or exercised, as the case may
be.
(r) SHAREHOLDER APPROVAL; PREPARATION OF PROXY STATEMENTS.
(i) EqualNet shall, as soon as practicable following the execution
and delivery of this Agreement duly call, give notice of, convene and hold
a meeting of EqualNet's shareholders (the "Shareholders Meeting") for the
following purposes: (i) approving this Agreement, the issuance of the
Shares and the transactions contemplated hereby, (ii) ratifying the Note
and Warrant Purchase Agreement and the transactions contemplated thereby,
(iii) approving the Stock Purchase Agreement and the issuance of EqualNet
Common Shares thereunder, (iv) approving Reorganization Agreement, (v)
approving the increase in authorized shares of EqualNet Common Shares to
55,000,000 and (vi) approving the other related transactions. EqualNet
will, through its officers and its Board of Directors, unanimously
recommend to its shareholders the approval and adoption of the foregoing
transactions.
(ii) Promptly following the date of this Agreement, EqualNet shall
prepare and file with the Commission a proxy statement relating to the
Shareholders Meeting (such proxy statement as amended or supplemented from
time to time, the "Proxy Statement"). TWG shall have the right to review
and approve the Proxy Statement prior to EqualNet filing the Proxy
Statement with the Commission. EqualNet will use all commercially
reasonable efforts to cause the Proxy Statement to be mailed to EqualNet's
shareholders as promptly as practicable. EqualNet will notify TWG promptly
of the receipt of any written or oral comments from the Commission or its
staff and of any request by the Commission or its staff for amendments or
supplements to the Proxy Statement or for additional information and will
supply TWG with copies of all correspondence between EqualNet or any of
its representatives, on the one hand, and the Commission or its staff, on
the other hand, with respect to the Proxy Statement.
(iii) EqualNet agrees to cause all shares of capital stock, if any,
owned by it or any other Subsidiary or its officers and directors to be
voted in favor of the approval and adoption of this Agreement, the Note
and Warrant Purchase Agreement, the Stock Purchase Agreement, the
Reorganization Agreement and the other related transactions.
18
<PAGE>
(iv) EqualNet will cause its transfer agent to make stock transfer
records relating to EqualNet available to the extent reasonably necessary
to effectuate the intent of this Agreement.
(s) NO SOLICITATION. (i) EqualNet shall not, nor shall it permit any of
its Subsidiaries to, nor shall it authorize or permit any officer, director or
employee of EqualNet or any investment banker, attorney or other advisor, agent
or representative of EqualNet or any of its Subsidiaries to, directly or
indirectly, (1) solicit, initiate or encourage the submission of any takeover
proposal, (2) enter into any agreement (other than confidentiality and
standstill agreements in accordance with the immediately following proviso) with
respect to any takeover proposal, or (3) participate in any discussions or
negotiations regarding, or furnish to any Person any information with respect
to, or take any other action to facilitate any inquiries or the making of any
proposal that constitutes, or may be reasonably be expected to lead to, any
takeover proposal; provided, in the case of this clause (3), that prior to the
vote of shareholders of EqualNet for approval of the matters referred to in
Section 5(s) (and not thereafter if such matters are approved thereby) to the
extent required by the fiduciary obligations of the Board of Directors of
EqualNet, determined in good faith by a majority of the disinterested members
thereof based on the advice of outside counsel, EqualNet, in response to an
unsolicited superior proposal and a request for information pursuant thereto,
may furnish information to any person or "group" within the meaning of Section
13(d)(3) of the Exchange Act pursuant to a confidentiality agreement. Without
limiting the foregoing, it is understood that any violation of the restrictions
set forth in the preceding sentence by any officer, director or employee of
EqualNet or any of its Subsidiaries or any investment banker, attorney or other
advisor, agent or representative of EqualNet, whether or not such Person is
purporting to act on behalf of EqualNet or otherwise, shall be deemed to be a
material breach of this Agreement by EqualNet. For purposes of this Section
5(t), "takeover proposal" means (x) any proposal, other than a proposal by TWG
or any of its Affiliates, for a merger or other business combination involving
EqualNet, (y) any proposal or offer, other than a proposal or offer by TWG or
any of its Affiliates, to acquire from EqualNet or any of its Affiliates in any
manner, directly or indirectly, an equity interest in EqualNet or any
Subsidiary, any voting securities of EqualNet or any Subsidiary or a material
amount of the assets of EqualNet and its Subsidiaries, taken as a whole, or (z)
any proposal or offer, other than a proposal or offer by TWG or any of its
Affiliates, to acquire from the shareholders of EqualNet by tender offer,
exchange offer or otherwise more than 20% of the outstanding shares of Common
Shares.
(ii) Neither the Board of Directors of EqualNet nor any committee
thereof shall, except in connection with the termination of this Agreement
pursuant to Section 7, (1) withdraw or modify, or propose to withdraw or modify,
in a manner adverse to TWG the approval or recommendation by the Board of
Directors of EqualNet or any such committee thereof of this Agreement or take
any action having such effect; provided, a statement by the Board of Directors
of EqualNet to its shareholders as contemplated by Rule 14e-2(a) of the Exchange
Act following TWG's receipt of a Notice of Superior Proposal (defined below)
shall not be deemed to constitute a withdrawal or modification of its
recommendation of this Agreement, or (2) approve or recommend, or propose to
approve or recommend, any takeover proposal. Notwithstanding the foregoing, in
the event that the Board of Directors of EqualNet receives a takeover proposal
that, in the exercise of its fiduciary obligations (as determined in good faith
by a majority of the disinterested members thereof based on the advice of
outside counsel), it determines to be a superior proposal, the Board of
Directors of EqualNet may withdraw or modify its approval or recommendation of
this
19
<PAGE>
Agreement and may (subject to the following sentence) terminate this Agreement,
in each case at any time after midnight on the fifth Business Day following
TWG's receipt of written notice (a "Notice of Superior Proposal") advising TWG
that the Board of Directors of EqualNet has received a takeover proposal that it
has determined to be a superior proposal, specifying the material terms and
conditions of such superior proposal (including the proposed financing for such
proposal and a copy of any documents conveying such proposal) and identifying
the Person making such superior proposal. EqualNet may terminate this Agreement
pursuant to the preceding sentence only if the shareholders of EqualNet have not
yet voted upon the matters set forth in Section 5(s). Any of the foregoing to
the contrary notwithstanding, EqualNet may engage in discussions with any Person
or group that has made an unsolicited takeover proposal for the limited purpose
of determining whether such proposal is a superior proposal. Nothing contained
herein shall prohibit EqualNet from taking and disclosing to its shareholders a
position contemplated by Rule 14e-2(a) following TWG's receipt of a Notice of
Superior Proposal.
(iii) For purposes of this Section 5(t), a "superior proposal" means
any BONA FIDE takeover proposal to acquire, directly or indirectly, for
consideration consisting of cash, securities or a combination thereof, all of
the EqualNet Common Shares then outstanding or all or substantially all of the
assets of EqualNet and its Subsidiaries, and otherwise on terms that a majority
of the disinterested members of the Board of Directors of EqualNet determines in
its good faith reasonable judgment (based on the advice of a financial advisor
of nationally recognized reputation, a copy of which shall be provided to TWG)
to be more favorable to EqualNet's shareholders than the transactions
contemplated by this Agreement, the Stock Purchase Agreement and the
Reorganization Agreement.
(iv) In addition to the obligations of EqualNet set forth in clause
(ii) above, EqualNet shall promptly advise TWG orally and in writing of any
takeover proposal or any inquiry with respect to or which could lead to any
takeover proposal, the material terms and conditions of such inquiry or takeover
proposal (including the financing for such proposal and a copy of such documents
conveying such proposal), and the identity of the Person making any such
takeover proposal or inquiry.
(t) LISTING OF COMMON STOCK. EqualNet warrants and agrees for the benefit
of the TWG that it will use commercially reasonable efforts to cause the
EqualNet Common Shares to be issued pursuant to Section 2 and pursuant to the
Warrant to be approved for listing, subject to official notice of issuance, on
the NASDAQ National Market as of the Closing Date.
(u) ACQUISITION LOAN. TWG may elect to obtain financing for the Switches
from a bank or other third party lender, such financing to be in a principal
amount not to exceed the $5,850,000 purchase price paid by TWG for the Switches.
Any such financing shall be secured by a first priority lien and security
interest on the Switches and otherwise on terms satisfactory to TWG and EqualNet
(the "Acquisition Loan"). If a guarantee is required to obtain such loan, then
such guarantee shall be satisfactory to TWG in its sole discretion. Among other
conditions that may be applicable, any such guarantee provided by or arranged
for by TWG shall be conditioned upon EqualNet agreeing to pay TWG a guarantee
fee on the outstanding balance of the Acquisition Loan. The loan documents shall
provide that if the closing of the transaction contemplated by this Agreement
occurs,
20
<PAGE>
then the Sub and EqualNet shall assume (or otherwise become liable on) the
Acquisition Loan and TWG shall be released from any liability on the Acquisition
Loan effective as of such closing.
6. CONDITIONS TO OBLIGATION TO CLOSE.
(a) CONDITIONS TO OBLIGATION OF TWG. The obligation of TWG to consummate
the transactions to be performed by it in connection with the Closing is subject
to satisfaction of the following conditions:
(i) The representations and warranties set forth in Section 3 shall
be true and correct in all material respects at and as of the Closing
Date.
(ii) EqualNet and Sub shall have performed and complied with all of
their respective covenants hereunder in all material respects through the
Closing.
(iii) EqualNet shall have procured all of the consents of third
parties required in connection with the consummation of the transactions
contemplated by this Agreement, and EqualNet shall have procured the
approval of its shareholders at the Shareholders Meeting for the matters
set forth in Section 5(r).
(iv) The closing under that certain Stock Purchase Agreement dated
November 21, 1997, between EqualNet and TWG and under the Reorganization
Agreement shall have occurred or be occurring simultaneous with the
Closing hereunder.
(v) The issuance of the EqualNet Common Shares and Warrant under
this Agreement shall have complied with all applicable requirements of
federal and state securities laws.
(vi) Subsequent to the date hereof, no legislation, order, rule,
ruling or regulation shall have been enacted or made by or on behalf of
any governmental body, department or agency of the United States, nor
shall any legislation have been introduced and favorably reported for
passage to either House of Congress by any committee of either such House
to which such legislation has been referred for consideration, nor shall
any decision of any court of competent jurisdiction within the United
States have been rendered which would materially and adversely affect an
investment in the EqualNet Common Shares. There shall be no action, suit,
investigation or proceeding pending, or to EqualNet's knowledge,
threatened, against or affecting EqualNet or any of its Subsidiaries, or
any of their respective properties or rights, or any of their affiliates,
associates, officers or directors, before any court, arbitrator or
administrative or governmental body which (i) seeks to restrain, enjoin,
prevent the consummation of or otherwise adversely affect the transactions
contemplated by this Agreement or (ii) questions the validity or legality
of any such transaction or seeks to recover damages or to obtain other
relief in connection with any such transaction, and to EqualNet's
knowledge there shall be no valid basis for any such action, proceeding or
investigation.
(vii) EqualNet shall have duly received all authorizations,
consents, approvals, licenses, franchises, permits and certificates by or
of all federal, state and local governmental
21
<PAGE>
authorities, by any third parties pursuant to the terms of any agreement
to which EqualNet is a party or by the National Association of Securities
Dealers, Inc. or any other body or agency with jurisdiction, by contract
or otherwise, over EqualNet, necessary for the issuance of the Shares and
the Warrant by EqualNet and the consummation of the transactions
contemplated hereby, and all thereof shall be in full force and effect at
the time of the Closing.
(viii)There shall not have occurred any Material Adverse Change with
respect to EqualNet and its Subsidiaries since the date hereof.
(ix) EqualNet shall have delivered to TWG a certificate to the
effect that each of the conditions specified above in Section 6(a)(i)-(ix)
is satisfied in all respects.
(x) TWG shall have received from Fulbright & Jaworski, L.L.P.,
counsel to EqualNet and Sub, an opinion in form and substance as set forth
in Exhibit C attached hereto, addressed to TWG and dated as of Closing
Date.
(xi) EqualNet shall have delivered to TWG the original stock
certificates specified in Section 2(b) representing the Shares and the
original Warrant.
(xii) The EqualNet Common Shares issued pursuant to Section 2 and to
be issued pursuant to the Warrant shall have been approved for listing,
subject to official notice, on the NASDAQ National Market as of the
Closing Date.
All actions to be taken by EqualNet in connection with consummation of the
transactions contemplated hereby and all certificates, opinions, instruments,
and other documents required to effect the transactions contemplated hereby will
be reasonably satisfactory in form and substance to TWG. TWG may waive any
condition specified in this Section 6(a) if it executes a writing so stating at
or prior to the Closing.
(b) CONDITIONS TO OBLIGATION OF EQUALNET AND SUB. The obligations of
EqualNet and Sub to consummate the transactions to be performed by it in
connection with the Closing are subject to satisfaction of the following
conditions:
(i) The representations and warranties set forth in Section 4 shall
be true and correct in all material respects at and as of the Closing
Date.
(ii) TWG shall have performed and complied with all of its covenants
hereunder in all material respects through the Closing.
(iii) EqualNet shall have obtained the approval of its shareholders
at the Shareholders Meeting for the matters set forth in Section 5(s).
(iv) There shall be no action, suit, investigation or proceeding
pending, or to EqualNet's knowledge, threatened, against or affecting
EqualNet or any of its Subsidiaries, or any of their respective properties
or rights, or any of their affiliates, associates, officers or directors,
before any court, arbitrator or administrative or governmental body which
(i) seeks
22
<PAGE>
to restrain, enjoin, prevent the consummation of or otherwise adversely
affect the transactions contemplated by this Agreement or (ii) questions
the validity or legality of any such transaction or seeks to recover
damages or to obtain other relief in connection with any such transaction.
(v) TWG shall have delivered to EqualNet a certificate to the effect
that each of the conditions specified above in Section 6(b)(i)-(ii) is
satisfied in all respects.
(vi) EqualNet shall have received from Vinson & Elkins L.L.P.,
counsel to TWG, an opinion in form and substance as set forth in Exhibit D
attached hereto, addressed to EqualNet and dated as of the Closing Date.
All actions to be taken by TWG in connection with consummation of the
transactions contemplated hereby and all certificates, opinions, instruments,
and other documents required to effect the transactions contemplated hereby will
be reasonably satisfactory in form and substance to EqualNet. EqualNet may waive
any condition specified in this Section 6(b) if it executes a writing so stating
at or prior to the Closing.
7. TERMINATION.
(a) TERMINATION OF AGREEMENT. This Agreement may be terminated only as
provided below:
(i) EqualNet, Sub and TWG may terminate this Agreement by mutual
written consent at any time prior to the Closing;
(ii) Either EqualNet, Sub and TWG may terminate this Agreement by
giving written notice to the other parties prior to the Closing if the
shareholders of EqualNet fail to give any required approval of this
Agreement and the transactions contemplated hereby upon a vote at the
Shareholders meeting or at any adjournment thereof;
(iii) TWG may terminate this Agreement by giving written notice to
EqualNet and Sub at any time prior to the Closing (A) in the event
EqualNet or Sub has breached any representation, warranty or covenant on
their part contained in this Agreement in any material respect, TWG
notified EqualNet or Sub of the breach or occurrence, and the breach or
occurrence has continued without cure for a period until the earlier of 15
days after the notice of breach or the scheduled Closing Date or (B) if
the Closing shall not have occurred on or before February 1, 1998, by
reason of the failure of any condition precedent under Section 6(a)
(unless the failure results primarily from TWG breaching any
representation, warranty or covenant on its part contained in this
Agreement); and
(iv) EqualNet and Sub may terminate this Agreement by giving written
notice to TWG at any time prior to the Closing (A) in the event TWG has
breached any representation, warranty or covenant on its part contained in
this Agreement in any material respect, EqualNet has notified TWG of the
breach, and the breach has continued without cure for a period until the
earlier of 15 days after the notice of breach or the scheduled Closing
Date or
23
<PAGE>
(B) if the Closing shall not have occurred on or before February 1, 1998,
by reason of the failure of any condition precedent under Section 6(b)
(unless the failure results primarily from EqualNet or Sub breaching any
representation, warranty or covenant on his part contained in this
Agreement).
(b) EFFECT OF TERMINATION. If this Agreement is terminated pursuant to
Section 7(a), all rights and obligations of the Parties hereunder shall
terminate without any Liability of any Party to any other Party (except for any
Liability of any Party for any breach of a covenant or for any knowing and
willful breach of any representation or warranty).
8. REMEDIES FOR BREACHES OF THIS AGREEMENT.
(a) SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All of the representations
and warranties of the Parties contained in Sections 3 and 4 shall survive the
Closing hereunder.
(b) INDEMNIFICATION PROVISIONS FOR BENEFIT OF TWG. If any representation
or warranty set forth in Section 3 or any covenant or agreement set forth herein
made by EqualNet or Sub is breached, then EqualNet agrees to indemnify TWG from
and against any Adverse Consequences that TWG may suffer through and after the
date of the claim for indemnification to the extent resulting from, arising out
of, relating to, or caused by such breach. In addition, Sub assumes and Equal
and Sub agree to indemnify TWG from and against any and all sales taxes due in
connection with the sale and transfer of the Switches from TWG to the Sub.
(c) INDEMNIFICATION PROVISIONS FOR BENEFIT OF EQUALNET. If TWG breaches
any of its representations and warranties in Section 4 or any covenant or
agreement set forth herein made by TWG, then TWG agree to indemnify EqualNet
from and against any Adverse Consequences EqualNet may suffer through and after
the date of the claim for indemnification to the extent resulting from, arising
out of, relating to, or caused by such breach.
(d) MATTERS INVOLVING THIRD PARTIES.
(i) If any third party shall notify any Party (the "Indemnified
Party") with respect to any matter (a "Third Party Claim") that may give
rise to a claim for indemnification against any other Party (the
"Indemnifying Party") under this Section 8, then the Indemnified Party
shall promptly notify the Indemnifying Party thereof in writing; provided,
no delay on the part of the Indemnified Party in notifying the
Indemnifying Party shall relieve the Indemnifying Party from any
obligation hereunder unless (and then solely to the extent) the
Indemnifying Party thereby is prejudiced.
(ii) The Indemnifying Party will have the right to defend the
Indemnified Party against the Third Party Claim with counsel of the
former's choice reasonably satisfactory to the Indemnified Party so long
as (1) the Indemnifying Party notifies the Indemnified Party in writing
within 15 days after the Indemnified Party has give notice of the Third
Party Claim that the Indemnifying Party will indemnify the Indemnified
Party from and against the entirety of any Adverse Consequences the
Indemnified Party may suffer resulting from, arising out of, relating to,
in the nature of, or caused by the Third Party Claim, (2) the Indemnifying
Party
24
<PAGE>
provides the Indemnified Party with evidence reasonably acceptable to the
Indemnified Party that the Indemnifying Party will have the financial
resources to defend against the Third Party Claim and fulfill its
indemnification obligations hereunder, (3) the Third Party Claim involves
only money damages and does not seek an injunction or other equitable
relief, (4) settlement of, or an adverse judgment with respect to, the
Third Party Claim is not in the good faith judgment of the Indemnified
Party, likely to establish a precedential custom or practice materially
adverse to the continuing business interests of the Indemnified Party, and
(5) the Indemnifying Party conducts the defense of the Third Party Claim
actively and diligently.
(iii) So long as the Indemnifying Party is conducting the defense of
the Third Party Claim in accordance with Section 8(d)(ii), (1) the
Indemnified Party may retain separate co-counsel at its sole cost and
expense and participate in the defense of the Third Party Claim, (2) the
Indemnified Party will not consent to the entry of any judgment or enter
into any settlement with respect to the Third Party Claim without the
prior written consent of the Indemnifying Party (not to be withheld
unreasonably), and (3) the Indemnifying Party will not consent to the
entry of any judgment or enter into any settlement with respect to the
Third Party Claim without the prior written consent of the Indemnified
Party (not to be withheld unreasonably).
(iv) In the event any of the conditions in Section 8(d)(ii) is or
becomes unsatisfied, however, (1) the Indemnified Party may defend
against, and consent to the entry of any judgment or enter into any
settlement with respect to, the Third Party Claim in any manner it
reasonably may deem appropriate (and the Indemnified Party need not
consult with, or obtain any consent from, the Indemnifying Party in
connection therewith), (2) the Indemnifying Party will reimburse the
Indemnified Party promptly and periodically for the costs of defending
against the Third Party Claim (including reasonable attorneys' fees and
expenses), and (3) the Indemnifying Party will remain responsible for any
Adverse Consequences the Indemnified Party may suffer resulting from,
arising out of, relating to, in the nature of, or caused by the Third
Party Claim to the fullest extent provided in this Section 8.
(e) CLAIMS FOR INDEMNIFICATION.
(i) Whenever any claim shall arise for indemnification under Section
8(b) or 8(c), the Indemnified Party shall describe such claim in a written
notice ("Notice of Claim") to the Indemnifying Party (and for purposes of
this Section 9(e), a notice given pursuant to Section 9(d) shall
constitute a "Notice of Claim") and, when known, specify the facts
constituting the basis for such claim and the amount or an estimate of the
amount of such claim.
(ii) Following the receipt by the Indemnifying Party of each Notice
of Claim, the Indemnifying Party may give the Indemnified Party written
notice ("Notice of Objection") (1) attaching a copy of such Notice of
Claim, (2) stating that, in the opinion of the Indemnifying Party, the
claim described in such Notice of Claim is invalid (either in whole or in
specified part), (3) giving the reasons for the alleged invalidity, and
(4) stating that, based on such alleged invalidity, the Indemnifying Party
objects to the payment of any portion of the amount claimed pursuant to
such Notice of Claim. If a Notice of Objection alleges that
25
<PAGE>
a Notice of Claim is only partially invalid, the Indemnifying Party within
30 days of the receipt of such Notice of Claim, agrees to deliver to the
Indemnified Party that portion of the amount claimed pursuant to such
Notice of Claim as to which no objection is made.
(f) DETERMINATION OF ADVERSE CONSEQUENCES. There shall be taken into
account the time cost of money (using the Applicable Rate as the discount rate)
and appropriate adjustments shall be made for tax consequences and insurance in
determining Adverse Consequences for purposes of this Section 8.
(g) OTHER INDEMNIFICATION PROVISIONS. The foregoing indemnification
provisions are in addition to, and not in derogation of, any statutory,
equitable, or common law remedy any Party may have for breach of this Agreement.
9. MISCELLANEOUS.
(a) PRESS RELEASES AND PUBLIC ANNOUNCEMENTS. No Party shall issue any
press release or make any public announcement relating to the subject matter of
this Agreement prior to the Closing without the prior written approval of TWG
and EqualNet; provided, either Party may make any public disclosure it believes
in good faith is required by applicable law or the requirements of NASDAQ.
(b) NO THIRD-PARTY BENEFICIARIES. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
(c) SUCCESSION AND ASSIGNMENT. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns. No Party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of other Parties.
(d) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
(e) NOTICES. All notices, requests, demands, claims, and other
communications hereunder shall be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be sent by (i) personal delivery
(including courier service), (ii) telecopier during normal business hours to the
number indicated, or (iii) registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended recipient as set forth
below (any communication shall be deemed given upon receipt):
26
<PAGE>
IF TO EQUALNET OR SUB:
1250 Wood Branch Park Drive
Houston, TX 77079-1212
Attention: General Counsel
Telecopier No.: 281-529-4686
WITH A COPY TO:
Fulbright & Jaworski L.L.P.
1301 McKinney, Suite 5100
Houston, Texas 77010
Attention: Robert F. Gray, Jr.
Telecopier No.: 713-651-5246
IF TO TWG:
5005 Woodway, Suite 350
Houston, Texas 77056
Attention: Mark Willis and Jim Harris
Telecopier No.: 713-626-8333
WITH A COPY TO:
Vinson & Elkins L.L.P.
1001 Fannin, Suite 2300
Houston, Texas 77002-6760
Attention: Rell Tipton
Telecopier No.: 713-615-5553
Any Party may change its telecopier number or its address to which notices,
requests, demands, claims, and other communications hereunder are to be
delivered by giving the other Party notice in the manner herein set forth.
(f) GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas.
(g) AMENDMENTS AND WAIVERS. No amendments of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by the
Parties. No waiver by any Party of any default, misrepresentation, or breach of
warranty or covenant hereunder, whether intentional or not, shall be deemed to
extend to any prior or subsequent default, misrepresentation, or breach of
warranty or covenant hereunder or affect in any way any rights arising by virtue
of any prior or subsequent such occurrence.
(h) SEVERABILITY. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms
27
<PAGE>
and provisions hereof or the validity or enforceability of the offending term or
provision in any other situation or in any other jurisdiction.
(i) EXPENSES. Each of the Parties will bear its own costs and expenses
(including legal fees and expenses) incurred in connection with this Agreement
and the transactions contemplated hereby.
(j) CONSTRUCTION. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties, and no presumption or burden of proof shall arise
favoring or disfavoring either Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance.
(k) INCORPORATION OF EXHIBITS, ANNEXES, AND SCHEDULES. The Exhibits,
Annexes, and Schedules identified in this Agreement are incorporated herein by
reference and made a part hereof.
28
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
EQUALNET HOLDING CORP.
By: /s/ ZANE RUSSELL
Name: ZANE RUSSELL
Title: CEO
EQ ACQUISITION SUB, INC.
By: /s/ MICHAEL HLINAK
Name: MICHAEL HLINAK
Title: COO
WILLIS GROUP, LLC
By: /s/ MARK WILLIS
Name: MARK WILLIS
Title: PRES.
[signature page to Switch Agreement]
29
<PAGE>
AMENDMENT TO
SWITCH AGREEMENT
This Amendment to that certain Switch Agreement (the "Agreement") dated
December 2, 1997 by and among EqualNet Holding Corp., EQ Acquisition Sub, Inc.
and Willis Group, LLC, is entered into as of December 19, 1997 for the following
purposes:
Whereas, subparagraphs 7.(a)(iii) and 7.(a)(iv) of the Agreement allow
each party certain rights to terminate the Agreement of the conditions for
closing of the transactions contemplated in such agreement are not completed by
February 1, 1998; and
Whereas the parties hereto desire to change such date,
Whereas the parties hereto agree as follows: the date "February 1, 1998"
contained in subparagraphs 7.(a)(iii) and 7.(a)(iv) of the Agreement is hereby
changed and amended in each instance to "March 31, 1998".
No other change, amendment or modification of the Agreement is hereby
made. This Amendment is signed effective December 19, 1997. This Amendment may
be executed in multiple counterpart originals, all of which taken together shall
constitute one document. A facsimilie signature of any of the undersigned shall
have the same force and effect as an original signature.
EqualNet Holding Corp. EQ Acquisitions Sub, Inc.
By:/s/ MICHAEL L. HLINAK By:/s/ MICHAEL HLINAK
Michael L. Hlinak, C.O.O. Michael Hlinak, President
Willis Group, LLC
By:/s/ MARK WILLIS
Mark Willis, President
<PAGE>
AMENDMENT TO SWITCH AGREEMENT
This Amendment to Switch Agreement ("Amendment") is entered into
between EQUALNET HOLDING CORP. ("EqualNet"), EQ ACQUISITION SUB, INC.
("Sub"), and WILLIS GROUP, LLC ("TWG") effective as of February 12, 1998.
RECITALS
Each of the entities described in the preamble are parties to a Switch
Agreement dated December 2, 1997 (the "Agreement"). The parties desire to amend
the Agreement in accordance with the terms of this Amendment. Any capitalized
term used but not defined herein shall have the meaning ascribed to such term in
the Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein, the Parties agree as follows:
1. Section 2(b) of the Agreement is amended as follows:
(a) Deletion of the word "and" at the end of clause (iii)
thereof;
(b) Insertion of the following as a new clause (iv):
(iv) subject to the terms of Section 2(e), 1,000,000 of
EqualNet Common Shares; and,
(c) Renumbering the existing clause (iv) to "(v)" and amending
such clause by replacing the reference therein to "$1.50
per share" with "$1.00 per share".
2. Section 2 of the Agreement is amended by adding the following as
subsection (e):
<PAGE>
(E) AUTHORIZED SHARES. (i) If the Closing occurs and as of the
Closing Date the number of EqualNet Common Shares authorized under
EqualNet's Articles of Incorporation is not sufficient to permit the
issuance of all or any part of the 1,000,000 shares referred to in Section
2(b)(iv) (the "Unauthorized Shares"), then at the Closing in lieu of
issuing such Unauthorized Shares EqualNet shall execute and deliver to TWG
a warrant the ("Unauthorized Shares Warrant") for the number of shares
constituting the Unauthorized Shares, such warrant to have a term of ten
years, to have an exercise price of $0.01 per share, and to be otherwise
substantially similar to the form of Warrant attached as Exhibit B;
provided, the Unauthorized Share Warrant shall contain a covenant on the
part of EqualNet that it will use its best efforts to cause the unreserved
authorized number of EqualNet Common Shares to be increased to permit the
full exercise of the Unauthorized Share Warrant and a limitation on the
holder of the Unauthorized Share Warrant to the effect that the obligation
of EqualNet to issue shares upon an exercise of
<PAGE>
the Unauthorized Share Warrant in whole or in part shall be conditioned
upon EqualNet having a number of unreserved authorized EqualNet Common
Shares at such time sufficient to cover the number of shares relating to
the exercise.
(ii) If by May 31, 1998, the number of EqualNet Common Shares
authorized under EqualNet's Articles of Incorporation has not been
increased to permit a full exercise of the Unauthorized Share Warrant,
then TWG shall have the right and option to repurchase the Switches from
Sub for $5,850,000 in cash by giving written notice of such exercise to
EqualNet and Sub. If such notice is given, then EqualNet and Sub agree
that Sub will convey good title to the Switches to TWG free and clear of
any liens or security interests (other than liens and security interests,
if any, that may encumber the Switches immediately prior to the Closing),
and contemporaneous with such conveyance TWG (x) shall return the
Unauthorized Share Warrant to EqualNet which shall be cancelled and (y)
TWG shall return any shares issued to TWG pursuant to Section 2(b)(iv). In
connection with any such repurchase, TWG shall retain the EqualNet Common
Shares issued to it pursuant to Section 2(b)(iii). During the period from
the Closing Date until the aforementioned May 31, 1998 date, EqualNet and
Sub agree that Sub shall not convey or encumber the Switches, or grant any
options or rights to purchase the Switches, except for liens and security
interests securing any financing used by Sub to acquire the Switches.
(iii) TWG agrees to affirmatively vote all EqualNet Common
Shares issued to TWG pursuant to this Agreement or any other agreement for
such increase in the authorized number of EqualNet Common Shares.
3. Section 5(u) of the Agreement is amended by adding the following
paragraph at the end of such Section:
If the Closing occurs and if necessary for EqualNet to obtain
financing for the acquisition of the Switches, TWG will guarantee
not more than 40% of the principal amount of such financing. No such
guaranty shall impose any obligation or liability on the part of any
member of TWG and TWG shall not be required to pledge any collateral
or provide any other credit enhancement with respect to such
guaranty. The terms of any such guaranty shall be satisfactory to
TWG. If the Closing occurs and TWG gives such guaranty, as
consideration for such guaranty EqualNet shall issue to TWG at the
Closing a warrant (the "Guaranty Warrant") for 500,000 EqualNet
Common Shares exercisable at $1.00 per share, such warrant to have a
term of ten years and to be otherwise substantially similar to the
form of warrant attached as Exhibit B; provided, if at the Closing
the number of EqualNet Common Shares that are authorized under
EqualNet's Articles of Incorporation is not sufficient to permit a
full exercise of the Guaranty Warrant, then the Guaranty Warrant
shall contain a covenant on the part of EqualNet that it will use
its best efforts to cause
2
<PAGE>
such unreserved authorized number of shares to be increased to
permit the full exercise of the Guaranty Warrant and a limitation on
the holder of the Guaranty Warrant to the effect that the obligation
of EqualNet to issue shares upon an exercise of the Guaranty Warrant
in whole or in part shall be conditioned upon EqualNet having a
number of unreserved authorized EqualNet Common Shares at such time
sufficient to cover the number of shares relating to the exercise.
4. If the Closing occurs and as of the Closing Date the number of EqualNet
Common Shares authorized under EqualNet's Articles of Incorporation is not
sufficient to permit the issuance of all or any part of the EqualNet Common
Shares covered by the Warrant attached as Exhibit B to the Agreement, then as of
the Closing such Warrant shall be amended to include a covenant on the part of
EqualNet that it will use its best efforts to cause such unreserved authorized
number of shares to be increased to permit the full exercise of the Warrant and
a limitation on the holder of the Warrant to the effect that the obligation of
EqualNet to issue shares upon an exercise of the Warrant in whole or in part
shall be conditioned upon EqualNet having a number of unreserved authorized
EqualNet Common Shares at such time sufficient to cover the number of shares
relating to the exercise.
By entering into this Amendment, TWG does not waive by implication or
otherwise any of the conditions set forth in Section 6.1(a) of the Agreement.
This Amendment contains the entire understanding and agreement between the
Parties with respect to the subject matter of this Amendment and supersedes any
prior or contemporaneous statements, understandings or agreements with respect
to such subject matter.
EQUALNET HOLDING CORP.
By: /s/ MICHAEL L. HLINAK
Name: Michael L. Hlinak
Title: Senior Vice President
EQ ACQUISITION SUB, INC.
By: /s/ MICHAEL L. HLINAK
Name: Michael L. Hlinak
Title: President
WILLIS GROUP, LLC
By: /s/ MARK A. WILLIS
Name: Mark A. Willis
Title: President
3
<PAGE>
ANNEX B
EQUALNET HOLDING CORP.
Statement of Resolution
Establishing Series of Shares
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 ____, 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 A Convertible
Preferred Stock," and the number of shares constituting the Series A Convertible
Preferred Stock shall be 2,000, and shall not be subject to increase.
Section 2. Dividends and Distributions.
(a) The holders of outstanding shares of Series A 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 $80.00
per annum per share, and no more, which shall be fully cumulative, shall accrue
without interest (except as otherwise provided herein as to dividends in
arrears) from the date of original issuance and shall be payable quarterly on
January 1, April 1, July 1, and October 1 of each year,
<PAGE>
commencing April 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 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. Dividends on the Series A Convertible Preferred
Stock shall be paid in cash. The amount of the dividends payable per share of
Series A 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. Dividends not paid on a payment date, whether or not such
dividends have been declared, will bear interest at the rate of 12% per annum
until paid. 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 A 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 and unpaid dividends on the Series A
Convertible Preferred Stock and interest on dividends in arrears at the rate
specified herein 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 A Convertible Preferred Stock (the "Parity Dividend
Stock") for any period unless all accrued but unpaid dividends (and interest on
dividends in arrears at the rate specified herein) have been, or
contemporaneously are, paid or declared and set apart for such payment on the
Series A Convertible Preferred Stock. No full dividends shall be paid or
declared and set apart for payment on the Series A 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 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 A Convertible Preferred Stock and the Parity Dividend Stock, all
dividends paid or declared and set apart for payment upon shares of Series A
Convertible Preferred Stock (and interest on dividends in arrears at the rate
specified herein) 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 A 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 A
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% 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 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 A Convertible Preferred Stock at the time
of such redemption, repurchase or acquisition the same percentage of such
holder's shares of Series A 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
2
<PAGE>
redeemed, repurchased or acquired at a purchase price per share of Series A
Convertible Preferred Stock equal to the greater of (i) the sum of (1) $1,000,
(2) an amount equal to the accrued but unpaid dividends on such share of Series
A Convertible Preferred Stock, plus (3) an amount equal to the accrued and
unpaid interest on dividends in arrears (determined as provided in Section 2)
with respect to such share of Series A Convertible Preferred Stock through the
date of purchase pursuant to this Section 2(c), or (ii) an amount equal to the
product of (x) the number of shares of Common Stock which would, but for the
purchase pursuant to this Section 2(c), be issuable on conversion in accordance
with Section 6(a) of one share of Series A Convertible Preferred Stock and any
accrued and unpaid dividends thereon and any accrued and unpaid interest on
dividends thereon in arrears if a Conversion Notice were given by the holder of
such share of Series A Convertible Preferred Stock on the date of purchase
pursuant to this Section 2(b) and (y) the arithmetic average of the Market Price
(as defined in Section 5) of the Common Stock for the Measurement Period (as
defined in Section 6) with respect to the date of purchase pursuant to this
Section 2(c).
(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 A Convertible Preferred Stock to purchase for cash
at the time of purchase in such Tender Offer the same percentage of shares of
Series A 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 A Convertible Preferred Stock equal to the
greater of (i) the sum of (1) $1,000, (2) an amount equal to the accrued but
unpaid dividends on such share of Series A Convertible Preferred Stock, and (3)
an amount equal to the accrued and unpaid interest on dividends in arrears
(determined as provided in Section 2) with respect to such share of Series A
Convertible Preferred Stock through the date of purchase pursuant to this
Section 2(c), or (ii) an amount equal to the product of (x) the number of shares
of Common Stock which would, but for the purchase pursuant to this Section 2(d),
be issuable on conversion in accordance with Section 6(a) of one share of Series
A Convertible Preferred Stock and any accrued and unpaid dividends thereon and
any accrued and unpaid interest on dividends thereon in arrears if a Conversion
Notice were given by the holder of such share of Series A Convertible Preferred
Stock on the date of purchase pursuant to this Section 2(c) and (y) the price
per share of Common Stock offered in such Tender Offer.
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 A
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 A Convertible Preferred Stock equal to the
sum of (i) all dividends accrued and unpaid thereon to the date of final
distribution to such holders, (ii) accrued and unpaid interest on dividends in
arrears (computed in accordance with Section 2(a)) thereon to the date of
distribution, and (iii) $1,000.00 (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 A
Convertible Preferred Stock (collectively, the "Junior Liquidation Stock");
provided, however, that such rights shall accrue to the holders of Series A
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 A
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 A Convertible Preferred
Stock and any other class or series of the Corporation's capital stock having
parity as to liquidation rights with the Series A Convertible Preferred Stock
(the "Parity Liquidation Stock") in proportion to the respective
3
<PAGE>
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 A 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 A Convertible Preferred Stock shall not be subject to
the operation of a purchase, retirement, or sinking fund.
Section 5. Optional Redemption.
If at any time after 180 days after the Issuance Date (as defined in
Section 6(b)), the Market Price (as defined below) of the Corporation's Common
Stock shall have been in excess of $5.00 and (i) so long as the Corporation is
in compliance in all material respects with all of its obligations to the
holders of shares of Series A Convertible Preferred Stock and (ii) the
Corporation's Common Stock is traded on a national securities exchange or the
Nasdaq National Market the Corporation shall have the right, exercisable on not
less than 15 days or more than 30 days written notice to the holders of record
of the shares of Series A Convertible Preferred Stock to be redeemed, at any
time on or after 180 days after the Issuance Date to redeem all, and from time
to time to redeem any part of not less than 50 shares (or such lesser number of
shares of Series A Convertible Preferred Stock as shall remain outstanding at
the time of exercise of such redemption right), of Series A 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 A 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 A 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 A Convertible Preferred Stock pursuant to this Section 5, (2) the number
of shares of Series A 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 A Convertible Preferred Stock, determined in accordance
herewith, and (4) the date of redemption of such shares of Series A 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 A 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 A 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 A Convertible Preferred Stock the Corporation shall
make payment to the holders of the shares of Series A Convertible Preferred
Stock to be redeemed in respect of each share of Series A 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 A 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 A
Convertible Preferred Stock that have not been redeemed. Only whole shares of
Series A Convertible Preferred Stock may be redeemed. If the Corporation
exercises its right to redeem less than all outstanding shares of Series A
Convertible Preferred Stock, then such redemption shall be made, as nearly as
practical, pro rata among the holders of record of the Series A Convertible
Preferred Stock. No share of Series A 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
4
<PAGE>
exercise of such conversion right, regardless of whether 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 A 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
fourth business day prior to the Redemption Date for such shares. Shares of
Series A 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 set 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 A 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 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 A 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 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 in this resolution, "Redemption Price" means the sum of (1)
$1,000, (2) an amount equal to the accrued but unpaid dividends on such share of
Series A Convertible Preferred Stock, and (3) an amount equal to the accrued and
unpaid interest on dividends in arrears (determined as provided in Section 2)
thereon through the Redemption Date.
Section 6. Conversion.
(a) The holders of the Series A Convertible Preferred Stock may
convert any or all of their shares of Series A 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, subject to paragraph (c)(4) of this Section 6, each share of
Series A Convertible Preferred Stock may be converted at the office of the
conversion agent for the Series A Convertible Preferred Stock that was appointed
prior to issuance of the shares of Series A 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, (ii)
accrued but unpaid dividends to the applicable Conversion Date on the share of
Series A Convertible Preferred Stock being converted, and (iii) accrued but
5
<PAGE>
unpaid interest on the dividends in arrears on the share of Series A Convertible
Preferred Stock being converted to the applicable Conversion Date at the rate
provided in Section 2 by (y) $1.00 (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" 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 7(a).
As used herein, "Issuance Date" means the first date of original issuance
of any shares of Series A Convertible Preferred Stock.
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 A Convertible
Preferred Stock are at the time convertible.
(2) The holders of shares of Series A Convertible Preferred
Stock at the close of business on the record date for any dividend payment to
holders of Series A Convertible Preferred Stock who have surrendered shares of
Series A 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 A 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 A 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 A Convertible Preferred
Stock. Except as provided above, no adjustment shall be made in respect of cash
dividends on Common Stock or Series A Convertible Preferred Stock that may be
accrued and unpaid at the date of surrender of shares of Series A Convertible
Preferred Stock.
(3) To convert shares of Series A Convertible Preferred Stock
into Common Stock, the holder thereof shall (i) surrender the certificate or
certificates for such shares of Series A 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
6
<PAGE>
(the "Conversion Notice") to the Corporation at such office that such holder
elects to convert shares of Series A 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 A 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 A
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 A 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 A 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 A
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 A 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 A 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 A Convertible Preferred Stock, (A) the right of the
holders of Series A 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
7
<PAGE>
shall make appropriate provision or cause appropriate provision to be made so
that each holder of shares of Series A Convertible Preferred Stock then
outstanding shall have the right thereafter to convert such shares of Series A
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 A 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 A 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 A Convertible Preferred Stock the right to elect the
securities, cash, or other assets into which the Series A 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 A 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 A 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 A
Convertible Preferred Stock, rescind such conversion, whereupon such holder
shall have the right to convert such shares of Series A Convertible Preferred
Stock thereafter in accordance herewith.
(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
<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 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.
(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
9
<PAGE>
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 A 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)(5), the holder of any Series A 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 A 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 A 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)(5) 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 A 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) 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.
10
<PAGE>
Except as otherwise required by law or expressly provided herein, shares
of Series A 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 A 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 A
Convertible Preferred Stock, (2) the waiver of any preference, right, privilege
or power of the Series A 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 A Convertible Preferred Stock except as otherwise required by
law.
Section 8. Outstanding Shares.
For purposes of this resolution, all shares of Series A Convertible
Preferred Stock shall be deemed outstanding except (i) from the date of receipt
by the Corporation of a Conversion Notice requesting that Series A Convertible
Preferred Stock be converted into Common Stock, all shares of Series A
Convertible Preferred Stock that are so converted into Common Stock; (ii) from
the date of registration of transfer, all shares of Series A 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 A
Convertible Preferred Stock that are redeemed, so long as the Redemption Price
of such shares of Series A 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 A
Convertible Preferred Stock no shares of Series A 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 A
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 its President this ______ day of
March, 1998.
EqualNet Holding Corp.
By:
Zane Russell, President
11
<PAGE>
ANNEX C--MERGER AGREEMENT
AGREEMENT OF MERGER AND PLAN OF REORGANIZATION
BETWEEN
EQUALNET HOLDING CORP.,
EQ ACQUISITION SUB, INC.
NETCO ACQUISITION, LLC
AND
NETCO ACQUISITION CORP.
December 2, 1997
<PAGE>
TABLE OF CONTENTS
1. Definitions......................................................1
2. The Merger.......................................................6
(a) Basic Transaction..........................................6
(b) Conversion of Shares.......................................6
(c) Consummation of the Merger.................................6
(d) Certificate of Incorporation; Bylaws.......................7
(e) Directors and Officers.....................................7
(f) Exchange of Securities.....................................7
(g) Exchange of Certificates...................................7
(h) Terms of the Preferred Stock..............................8
(i) Tax Effect of Transaction..................................8
(j) The Closing................................................8
(k) Deliveries at the Closing..................................8
3. Representations and Warranties of EqualNet and Sub...............9
(a) Organization, Qualification, and Corporate Power...........9
(b) Authorization of Transaction...............................9
(c) Brokers' Fees..............................................9
(d) No Violation...............................................9
(e) Consents..................................................10
(f) Financial Information.....................................10
(g) Liabilities...............................................10
(h) Litigation................................................10
(i) Compliance with ERISA.....................................11
(j) Taxes; Governmental Charges...............................11
(k) Defaults..................................................11
(l) Compliance with the Law...................................11
(m) Investment Company Act....................................11
(n) Public Utility Holding Company Act........................11
(o) Disclosure................................................11
(p) Structure; Capitalization.................................12
(q) Environmental Matters.....................................13
(r) Intellectual Property and Other Intangible Assets.........13
(s) Insurance Coverage........................................14
4. Representations and Warranties of Netco Acquisition.............14
(a) Corporate Existence.......................................15
(b) Corporate Power and Authorization.........................15
(c) Brokers' Fees. ..........................................15
(d) No Violation. ...........................................15
(e) Consents..................................................15
(f) Financial Information. ..................................16
(g) Compliance with the Law. ................................16
(h) Investment Company Act. .................................16
(i) Public Utility Holding Company Act........................16
-i-
<PAGE>
(j) Investment................................................16
(k) Title.....................................................17
5. Pre-Closing Covenants...........................................17
(a) General...................................................17
(b) Inspection................................................18
(c) Notices and Consents......................................18
(d) Notice of Developments....................................18
(e) Ordinary Course...........................................18
(f) Changes in Employment Arrangements........................20
(g) Severance.................................................20
(h) Other Actions.............................................20
(i) Valid Issuance............................................21
(j) Government Regulations....................................21
(k) ERISA.....................................................21
(l) Corporate Existence; Maintenance of Properties............21
(m) Insurance.................................................22
(n) Further Assurances........................................22
(o) Notices of Certain Events.................................22
(p) Board Nominees............................................22
(q) Environmental Laws........................................22
(r) Registration Rights.......................................23
(s) Shareholder Approval; Preparation of Proxy Statements.....23
(t) No Solicitation...........................................23
(u) Listing of Common Stock...................................25
(v) Netco Matters.............................................25
6. Conditions to Obligation to Close...............................26
(a) Conditions to Obligation of Netco Acquisition and Netco...26
(b) Conditions to Obligation of EqualNet......................27
7. Termination.....................................................28
(a) Termination of Agreement..................................28
(b) Effect of Termination.....................................29
8. Remedies for Breaches of This Agreement.........................29
(a) Survival of Representations and Warranties................29
(b) Indemnification Provisions for Benefit of Netco
Acquisition, its members and ADV..........................29
(c) Indemnification Provisions for Benefit of EqualNet........30
(d) Matters Involving Third Parties...........................30
(e) Claims for Indemnification................................31
(f) Determination of Adverse Consequences.....................31
(g) Other Indemnification Provisions..........................31
9. Miscellaneous...................................................32
(a) Press Releases and Public Announcements...................32
(b) No Third-Party Beneficiaries..............................32
(c) Succession and Assignment.................................32
-ii-
<PAGE>
(d) Counterparts..............................................32
(e) Notices...................................................32
(f) Governing Law.............................................33
(g) Amendments and Waivers....................................33
(h) Severability..............................................33
(i) Expenses..................................................33
(j) Construction..............................................34
(k) Incorporation of Exhibits, Annexes, and Schedules.........34
(l) Warrant...................................................34
(m) Certain Shareholders......................................34
-iii-
<PAGE>
AGREEMENT OF MERGER AND PLAN OF REORGANIZATION
This Agreement of Merger and Plan of Reorganization is entered into as of
December 2, 1997, by and between EqualNet Holding Corp., a Texas corporation
("EqualNet"), EQ Acquisition Sub, Inc., a Delaware corporation and a wholly
owned subsidiary of EqualNet ("Sub"), Netco Acquisition, LLC, a Delaware limited
liability company ("Netco Acquisition"), and Netco Acquisition Corp., a Delaware
corporation and a wholly owned subsidiary of Netco Acquisition ("Netco").
EqualNet, Sub, Netco Acquisition and Netco are each referred to herein as a
"Party" and collectively as the "PARTIES."
RECITALS
This Agreement contemplates a transaction in which Sub will merge with and
into Netco, with Netco being the surviving corporation (the "Merger").
Now, therefore, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the Parties agree as follows:
1. DEFINITIONS.
"ACCREDITED INVESTOR" has the meaning set forth in Regulation D
promulgated under the Securities Act.
"ADDITIONAL WORKING CAPITAL LOANS" has the meaning assigned to such
term in the Limited Liability Company Agreement referenced in the
definition of "Working Capital Loans".
"ADV" means Advantage Fund, Ltd., a British Virgin Islands Company.
"ADVERSE CONSEQUENCES" means all actions, suits, proceedings,
hearings, investigations, charges, complaints, claims, demands,
injunctions, judgments, orders, decrees, rulings, damages, dues,
penalties, fines, costs, amounts paid in settlement, Liabilities,
obligations, taxes, liens, losses, expenses and fees, including court
costs and reasonable attorneys' fees and expenses.
"APPLICABLE RATE" means the corporate base rate or prime rate of
interest publicly announced from time to time by Texas Commerce Bank,
National Association, Houston, Texas plus 5.0% per annum.
"ASSIGNMENT" means the Assignment and Bill of Sale dated effective
as of September 24, 1997, by and among Randy Williams, Trustee of the
Estate of Total National Communications, Inc. and TWG.
"BUSINESS DAY" means any day that is not a Saturday, a Sunday, or a
day that is a banking holiday under United States or Texas Law.
-1-
<PAGE>
"CAPITALIZED LEASE OBLIGATIONS" means all rental obligations which,
under GAAP in effect on the day such obligation is incurred, are required
to be capitalized on the books of EqualNet or any Subsidiary, in each case
taken at the amount thereof accounted for as indebtedness (net of interest
expense) in accordance with such principles.
"CLOSING" has the meaning set forth in Section 2(f).
"CLOSING DATE" has the meaning set forth in Section 2(f).
"COMMISSION" shall mean the United States Securities and Exchange
Commission.
"CURRENT INDEBTEDNESS" means any obligation for borrowed money
(including notes payable and drafts accepted representing extensions of
credit whether or not representing obligations for borrowed money) payable
on demand or within a period of one year from the date of creation
thereof; provided, any obligation shall be treated as Funded Indebtedness,
regardless of its term, if such obligation is renewable pursuant to the
terms thereof or of a revolving credit or similar agreement effective for
more than one year after the date of the creation of such obligation, or
may be payable out of the proceeds of a similar obligation pursuant to the
terms of such obligation or of any such agreement. Any obligation secured
by a Lien on, or payable out of the proceeds of production from, property
of EqualNet or any Subsidiary shall be deemed to be Funded or Current
Indebtedness, as the case may be, of EqualNet or such Subsidiary even
though such obligation shall not be assumed by EqualNet or such
Subsidiary.
"DGL" means the General Corporation Law of the State of
Delaware.
"EQUALNET COMMON SHARE" means any share of the common stock of
EqualNet, $.01 par value per share.
"EQUALNET PREFERRED SHARES" means 2,000 shares of EqualNet Preferred
Stock.
"EQUALNET PREFERRED STOCK" means the Series A Convertible Preferred
Stock, $.01 par value per share, $1,000 stated value per share, of
EqualNet referenced in Section 2(d).
"ENVIRONMENTAL LAW" means any judgment, decree, order, law, license,
rule, regulation or private agreement (such as covenants, conditions, and
restrictions), of any federal, state or local executive, legislative,
judicial, regulatory or administrative agency, board, or authority
designed to protect the environment, air, surface, water, groundwater or
soil, control pollution, or regulate the exploration, manufacturing,
processing, distributing, use, storage, transport or handling of Hazardous
Materials, including, without limitation, the Comprehensive Environmental
Response, Compensation, and Liability Act (42 U.S.C. ss. 9601 ET SEQ.)
("CERCLA"), the Oil Pollution Act (33 U.S.C. ss. 2701 ET
-2-
<PAGE>
SEQ.) ("OPA"), the Resource Conservation and Recovery Act (42 U.S.C. ss.
6901 ET SEQ.) ("RCRA"), and the Federal Water Pollution Control Act (33
U.S.C. ss. 1251 ET SEQ.) ("CWA"), as such laws have been or hereafter may
be amended or supplemented, and any and all analogous present and future
federal, state, and local laws in jurisdictions where EqualNet and its
Subsidiaries do business.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended from time to time. Section references to ERISA are to ERISA as
in effect at the date of this Agreement and any subsequent provisions of
ERISA amendatory thereof, supplemental thereto or substituted therefor.
"ERISA AFFILIATE" means each trade or business (whether or not
incorporated) which together with EqualNet or a Subsidiary of EqualNet
would be deemed to be a "single employer" within the meaning of Section
4001 of ERISA immediately following the acquisition.
"FUNDED INDEBTEDNESS" means and include without duplication any
obligation payable more than one year from the date of the creation
thereof (including the current portion of Funded Indebtedness), which
under GAAP is shown on the balance sheet as a liability (including,
without limitation, Capitalized Lease Obligations and excluding reserves
for deferred income taxes and other reserves to the extent that such
reserves do not constitute an obligation).
"GAAP" means generally accepted accounting principles consistently
applied throughout the period or periods in question.
"GOVERNMENTAL AUTHORITY" shall mean any foreign or domestic federal,
state, county, municipal, or other governmental or regulatory authority,
agency, board, body, commission, instrumentality, court, or any political
subdivision thereof.
"GOVERNMENTAL REQUIREMENT" means any law, statute, code, ordinance,
order, rule, regulation, judgment, decree, injunction, franchise, permit,
certificate, license, authorization, or other direction or requirement
(including but not limited to any of the foregoing which relate to
Environmental Laws, energy regulations and occupational, safety and health
standards or controls) of any Governmental Authority.
"HAZARDOUS MATERIALS" means, collectively, (i) those substances
included within the definition of or identified as "hazardous substances,"
"hazardous materials," "toxic substances," or "solid waste" in or pursuant
to, without limitation, CERCLA, OPA, RCRA, and the Occupational Health and
Safety Act, and in the regulations promulgated pursuant to said laws, all
as amended; (ii) any material, waste or substance which is or contains (A)
petroleum, including crude oil or any fraction thereof, natural gas, or
synthetic gas usable for fuel or any mixture thereof; (B) asbestos; (C)
polychlorinated biphenyls; (D) designated as a "hazardous substance"
pursuant to Section 307 or 311 of the CWA; (E) flammable explosives; or
(F) radioactive materials; and (iii) any such other
-3-
<PAGE>
substances, materials and wastes which are or become regulated as
hazardous or toxic under applicable local, state or federal law, or which
are currently classified as hazardous or toxic under local, state or
federal laws or regulations.
"INDEBTEDNESS" means Funded Indebtedness and/or Current
Indebtedness.
"INDEMNIFIED PARTY" has the meaning set forth in Section 8(d).
"INDEMNIFYING PARTY" has the meaning set forth in Section 8(d).
"LIABILITY" means any liability (whether known or unknown, whether
asserted or unasserted, whether absolute or contingent, whether accrued or
unaccrued, whether liquidated or unliquidated, and whether due or to
become due).
"MATERIAL ADVERSE EFFECT" or "MATERIAL ADVERSE CHANGE" means any
material and adverse effect on, or change to, (i) the assets, liabilities,
financial condition, business, or operations of EqualNet and its
Subsidiaries on a consolidated basis, or (ii) the ability of EqualNet and
its Subsidiaries on a consolidated basis to carry out their business as at
the date of this Agreement.
"MCM" means MCM Partners, a Washington limited partnership.
"NASDAQ" means The Nasdaq Stock Market, Inc.
"NETCO" means Netco Acquisition Corp., a Delaware corporation.
"NETCO ACQUISITION" means Netco Acquisition, LLC, a Delaware limited
liability company.
"NETCO ASSETS" means those assets described on Exhibit A.
"NETCO MATERIAL ADVERSE EFFECT" means any material and adverse
effect on, or change to, the assets, liabilities or financial condition of
Netco.
"NOTE AND WARRANT PURCHASE AGREEMENT" means that certain note and
warrant purchase agreement by and among TWG, EqualNet and its Subsidiaries
dated as of October 1, 1997.
"PARTY" has the meaning set forth in the preface above.
"PBGC" means the Pension Benefit Guaranty Corporation established
pursuant to Section 4002 of ERISA, or any successor entity thereto.
"PENSION PLAN" means any multiemployer plan or single-employer plan,
as defined in Section 4001 of ERISA and subject to Title IV of ERISA,
which is maintained after the Acquisition for employees of EqualNet, any
of its Subsidiaries or any ERISA Affiliates.
-4-
<PAGE>
"PERMITS" means all licenses, permits, exceptions, franchises,
accreditations, privileges, rights, variances, waivers, approvals and
other authorizations (including, without limitation, those relating to
environmental matters) of, by or from Governmental Authorities necessary
for the conduct of the business of EqualNet and its Subsidiaries
immediately prior to the Closing and as proposed to be conducted by
EqualNet and its Subsidiaries after the Closing.
"PERSON" means and include an individual, a partnership, a joint
venture, a corporation, a limited liability company, a trust, an
unincorporated organization and a government or any department or agency
thereof.
"REGISTRATION AGREEMENT" means the Registration Rights Agreement in
the form of Exhibit A.
"RELEASE" means release, spill, emission, leaking, pumping,
injection, deposit, disposal, discharge, dispersal, leaching or migration
into the environment or into or out of any property, including the
movement of Hazardous Materials through or in the air, surface water, or
groundwater.
"REMEDIAL ACTION" means any action required by any federal, state or
judicial body or administration or agency acting under an Environmental
Law to (i) clean up, remove or treat Hazardous Materials in the
environment; (ii) prevent a Release or threat of Release or minimize the
further Release of Hazardous Materials so they do not migrate or endanger
or threaten to endanger public health or the environment; (iii) perform
post-remedial monitoring and care; or (iv) cure a violation of any
Environmental Law.
"REPORTABLE EVENT" means an event described in Section 4043(b) of
ERISA with respect to which the 30-day notice requirement has not been
waived by the PBGC.
"SECURITY INTEREST" means any mortgage, pledge, lien, encumbrance,
charge, or other security interest, other than (a) mechanic's,
materialmen's, and similar liens, (b) liens for taxes not yet due and
payable or for taxes that the taxpayer is contesting in good faith through
appropriate proceedings diligently conducted and with respect to which
adequate reserves have been set aside on the books of the taxpayer, and
(c) purchase money liens and liens securing rental payments under capital
lease arrangements.
"SHARES" means the EqualNet Common Shares and EqualNet Preferred
Shares.
"SINGLE-EMPLOYER PENSION PLAN" means a Pension Plan which is a
"single-employer plan" as defined in Section 4001 of ERISA.
"STOCK PURCHASE AGREEMENT" means the Stock Purchase Agreement dated
of even date herewith between EqualNet and TWG.
-5-
<PAGE>
"SUBSIDIARY" means any corporation or similar entity a majority of
the stock of every class of which, except directors' qualifying shares,
shall, at the time as of which any determination is being made, be owned
by EqualNet, either directly or indirectly.
"THIRD PARTY CLAIM" has the meaning set forth in Section 8(d).
"TWG" means Willis Group, LLC, a Texas limited liability company.
"WORKING CAPITAL LOANS" has the meaning attributed to such term in
Article 4 of the Limited Liability Company Agreement of Netco Acquisition,
LLC dated as of October 1, 1997.
2. THE MERGER.
(a) BASIC TRANSACTION. On and subject to the terms and conditions of this
Agreement, at the Closing Sub will be merged with and into Netco with Netco
being the surviving corporation (the "Merger"). As a result of the Merger, the
separate corporate existence of Sub shall cease and Netco shall continue as the
surviving corporation (sometimes referred to herein as the "Surviving
Corporation"), and all the properties, rights, privileges, powers and franchises
of Netco and Sub shall vest in the Surviving Corporation, without any transfer
or assignment having occurred, and all debts, liabilities and duties of Netco
and Sub shall attach to the Surviving Corporation, all in accordance with the
DGCL.
(b) CONVERSION OF SHARES. Upon consummation of the Merger, all of the
outstanding shares of Netco shall be transferred to EqualNet in exchange for:
(i) 2,081,633 shares of EqualNet Common Shares;
(ii) the number of EqualNet Common Shares equal to (A) the sum of
the outstanding principal and accrued interest on all Working Capital
Loans and the Additional Working Capital Loan, if any, existing as of the
Closing Date divided by (B) $1.00; and
(iii) the EqualNet Preferred Shares.
(c) CONSUMMATION OF THE MERGER. As soon as practicable on or after the
Closing, the parties will cause the Merger to be consummated by filing with the
Secretary of State of Delaware a certificate of merger or other documents in
such form as required by, and executed in accordance with, the relevant
provisions of the DGCL. The "Effective Time" of the Merger as that term is used
in this Agreement shall mean such time as the certificate of merger is duly
filed with the Secretary of State of Delaware. The Merger shall have the effects
set forth in the applicable provisions of the DGCL.
(d) CERTIFICATE OF INCORPORATION; BYLAWS. The Certificate of Incorporation
and bylaws of Sub, as in effect immediately prior to the Effective Time, shall
be the Certificate of Incorporation and bylaws of the Surviving Corporation and
thereafter
-6-
<PAGE>
shall continue to be its Certificate of Incorporation and bylaws until amended
as provided therein and under the DGCL.
(e) DIRECTORS AND OFFICERS. The directors of Sub immediately prior to the
Effective Time shall be the directors of the Surviving Corporation at and after
the Effective Time, each to hold office in accordance with the Certificate of
Incorporation and bylaws of the Surviving Corporation, and the officers of Sub
immediately prior to the Effective Time shall be the officers of the Surviving
Corporation at and after the Effective Time, in each case until their respective
successors are duly elected or appointed and qualified.
(f) EXCHANGE OF SECURITIES. Subject to the terms and conditions of this
Agreement, at the Effective Time, by virtue of the Merger and without any action
on the part of Netco or Sub, all of the shares of Netco capital stock issued and
outstanding immediately prior to the Effective Time shall be transferred by
Netco Acquisition to EqualNet in exchange for the EqualNet Common Shares and the
EqualNet Preferred Shares.
(g) EXCHANGE OF CERTIFICATES.
(i) As soon as practicable after the Effective Time, Netco
Acquisition, as the holder of the Netco capital stock certificate, shall be
entitled upon surrender thereof to EqualNet or its transfer agent to receive in
exchange therefor (i) a certificate or certificates representing the shares
comprising the EqualNet Common Shares into which the shares of Netco capital
stock so surrendered shall have been converted as aforesaid, in such
denominations and registered in such names as such holder may request, and (ii)
a certificate or certificates representing the 2,000 shares comprising the
EqualNet Preferred Shares into which the shares of Netco capital stock so
surrendered shall have been exchanged as aforesaid, in such denominations and
registered in such names as such holder may request. Unless and until such
certificate shall be so surrendered and exchanged, no dividends or other
distributions payable to the holders of EqualNet Common Shares or EqualNet
Preferred Shares, as of any time on or after the Effective Time, shall be paid
on any certificate representing any of the Shares; provided, upon any such
surrender and exchange of such certificate, there shall be paid to the record
holders of the certificates issued and exchanged therefor the amount, without
interest thereon, of dividends and other distributions, if any, that theretofore
were declared and became payable after the Effective Time with respect to the
number of shares of EqualNet Common Shares or EqualNet Preferred Shares issued
to such holder.
(ii) All EqualNet Common Shares and EqualNet Preferred Shares issued
upon the surrender for exchange of the certificate for shares of Netco capital
stock in accordance with the terms hereof shall be deemed to have been issued in
full satisfaction of all rights pertaining to such shares. At and after the
Effective Time, except for the transfer there shall be no further registration
of transfers on the stock transfer books of the Surviving Corporation of the
shares of Netco capital stock that were outstanding immediately prior to the
Effective Time. If, after the Effective Time, certificates which prior to the
Effective Time represented shares of Netco capital stock
-7-
<PAGE>
are presented to the Surviving Corporation for any reason, they shall be
canceled and exchanged as provided in this Section 2(g).
(iii) If any certificate for any of the EqualNet Common Shares or
EqualNet Preferred Shares is to be issued in a name other than that in which the
certificate surrendered in exchange therefor is registered, it shall be a
condition of the issuance thereof that the certificate so surrendered shall be
properly endorsed and otherwise in proper form for transfer and that the person
requesting such exchange shall have paid to EqualNet or its transfer agent any
transfer or other taxes required by reason of the issuance of a certificate for
any of the EqualNet Common Shares or EqualNet Preferred Shares in any name other
than that of the registered holder of the certificate surrendered, or
established to the satisfaction of EqualNet or its transfer agent that such tax
has been paid or is not payable. Netco Acquisition shall designate at the
Closing that number of the EqualNet Common Shares to be registered in each of
TWG's and ADV's name and all of the EqualNet Preferred Shares to be registered
in the name of MCM.
(iv) None of EqualNet, Sub, Netco, the Surviving Corporation or
their transfer agents shall be liable to a holder of any shares of Netco capital
stock for any amount properly paid to a public official pursuant to applicable
property, escheat or similar laws.
(h) TERMS OF THE PREFERRED STOCK. The rights, preferences, terms and
provisions of the EqualNet Preferred Stock shall be as provided in the Statement
of Resolution Establishing the Series A Convertible Preferred Stock, a copy of
which is attached hereto as Exhibit B (the "Series A Statement of Resolution").
(i) TAX EFFECT OF TRANSACTION. It is the intention of the parties that the
transaction contemplated by this Agreement constitute a reorganization within
the meaning of Sections 368(a) of the Code. The parties agree to file all of
their respective tax returns and reports in a manner consistent with such
intention, and to not take any filing position inconsistent with such intention
unless compelled to do so by court order or administrative decree; provided,
each party shall be permitted to disclose all information required pursuant to
Treas. Reg.ss. 1.368(a). Each party agrees to furnish such information and take
such action as may be reasonably requested of the other party in connection with
the foregoing (which action shall not include any change in the commercial terms
of this Agreement and the other transactions incident thereto). In no event,
however, shall EqualNet be required to incur any out-of-pocket expenses in
defending such position or providing such information or taking such action, nor
shall the foregoing constitute a warranty or guaranty that the transactions
contemplated by this Agreement will, in fact, constitute such a reorganization.
(j) THE CLOSING. Subject to the satisfaction of the conditions set forth
herein, the closing of the transaction contemplated by this Agreement (the
"Closing") shall take place on a Business Day mutually agreeable to EqualNet and
Netco Acquisition within ten Business Days following the satisfaction of the
conditions set forth in Section 6(a)(iii) (the "Closing Date").
-8-
<PAGE>
(k) DELIVERIES AT THE CLOSING. At the Closing, (i) EqualNet and Sub will
deliver to Netco Acquisition and Netco the various certificates, instruments and
documents referred to in Section 6(a), (ii) Netco Acquisition and Netco will
deliver to EqualNet and Sub the various certificates, instruments and documents
referred to in Section 6(b), and (iii) EqualNet will deliver to Netco
Acquisition the stock certificates for the Shares registered in the name of the
members or creditor of Netco Acquisition as designated by Netco Acquisition
pursuant to Section 2(g).
3. REPRESENTATIONS AND WARRANTIES OF EQUALNET AND SUB. EqualNet and Sub
represent and warrant to Netco Acquisition as of the date of this Agreement and
as of the Closing Date (as though made throughout this Section 3), except as set
forth in the disclosure schedule delivered by EqualNet to Netco Acquisition on
the date hereof and initialed by authorized representatives of EqualNet, Sub and
Netco Acquisition (the "Disclosure Schedule"). The representations and
warranties of EqualNet and Sub set forth in this Section 3 shall inure to the
benefit of and may be relied upon by each member or creditor of Netco
Acquisition that becomes the holder of any of the Shares (such members or
creditor being The Willis Group, LLC, MCM Partners and Advantage Fund, Ltd.).
(a) ORGANIZATION, QUALIFICATION, AND CORPORATE POWER. EqualNet and Sub are
corporations duly organized, validly existing, and in good standing under the
laws of the states of Texas and Delaware, respectively. Each of EqualNet and Sub
has the requisite corporate power and authority and all licenses, permits,
qualifications and authorizations necessary to carry on the businesses in which
it is engaged and to own and use the properties owned and used by it except
where the failure to do so would not have a Material Adverse Effect.
(b) AUTHORIZATION OF TRANSACTION. The boards of directors of EqualNet and
Sub have duly approved this Agreement and the transactions contemplated hereby,
and each of EqualNet and the Sub has requisite corporate power and authority to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of EqualNet
and Sub, enforceable in accordance with its terms and conditions except to the
extent that enforceability may be limited by bankruptcy, insolvency and other
similar laws affecting the enforcement of creditors' rights generally and except
for the application of general principles of equity. Except as disclosed in
Schedule 3(b) of the Disclosure Schedule, neither EqualNet nor the Sub needs to
give any notice to, make any filing with, or obtain any authorization, consent
or approval of any Governmental Authority or any other Person in order to
consummate the transactions contemplated by this Agreement.
(c) BROKERS' FEES. Neither EqualNet nor Sub has any Liability or
obligation to pay any fees or commissions to any broker, finder, or agent with
respect to the transactions contemplated by this Agreement for which Netco
Acquisition or Netco could become liable or obligated, and neither EqualNet nor
Sub has any Liability or obligation to pay any fees or commissions to any
broker, finder, or agent with respect to the transactions contemplated by this
Agreement.
(d) NO VIOLATION. Except as disclosed in Schedule 3(d) of the Disclosure
Schedule, neither the execution and delivery of this Agreement, the consummation
of
-9-
<PAGE>
the transactions provided for herein or contemplated hereby nor the fulfillment
by EqualNet or Sub of the terms hereof will (i) violate any provision of the
Articles of Incorporation or the by-laws of EqualNet or the Certificate of
Incorporation of bylaws of Sub, (ii) result in a default, give rise to any right
of termination, cancellation, acceleration or imposition of any Indebtedness or
Security Interest, or require any consent or approval (other than any consent or
approval that has previously been obtained), under any of the terms, conditions
or provisions of any of the Permits or any note, bond, mortgage, indenture,
loan, distribution agreement, license, agreement, lease or instrument or
obligation to which EqualNet or Sub is a party or by which EqualNet or Sub may
be bound (except where the failure to obtain such consent or approval will not
have a Material Adverse Effect), or (iii) violate any law, judgment, order,
writ, injunction, decree, statute, rule, or regulation of any Governmental
Authority applicable to EqualNet or Sub (except where such violation will not
have a Material Adverse Effect).
(e) CONSENTS. Except as disclosed in Section 3(e) of the Disclosure
Schedule, all consents, approvals, qualifications, orders, or authorizations of,
or filings with, any Governmental Authority, and all consents under any material
contracts, agreements, or instruments by which EqualNet or Sub is bound or to
which it is subject, which are required in connection with EqualNet's or Sub's
valid execution, delivery, or performance of this Agreement and the offer, sale
and delivery of the Shares have been obtained or made.
(f) FINANCIAL INFORMATION.
(i) The audited consolidated balance sheet of EqualNet and its
Subsidiaries as at June 30, 1997, and the related consolidated statements
of operations, shareholders' equity and cash flows for the 12-month period
then ended, including in each case the related schedules and notes,
reported on by Ernst & Young LLP, are complete and correct and fairly
present in all material respects the consolidated financial position of
EqualNet and its Subsidiaries as at the date thereof and the consolidated
results of operations and changes in cash flows for such period, in
accordance with GAAP.
(ii) The unaudited consolidated balance sheet of EqualNet and its
Subsidiaries as at September 30, 1997, and the related unaudited
consolidated statements of operations, shareholders' equity and cash flows
for the three-month period then ended, as included in EqualNet's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1997,
true copies of which have been previously delivered to Netco Acquisition,
are complete and correct and fairly present in all material respects the
consolidated financial position of EqualNet and its Subsidiaries as at the
date thereof and the consolidated results of operations and changes in
cash flows for such period in conformity with GAAP, subject only to normal
year-end audit adjustments.
(iii) Since September 30, 1997, there has been no Material Adverse
Effect.
-10-
<PAGE>
(g) LIABILITIES. Except for liabilities incurred in the ordinary course of
business, none of EqualNet or any of its Subsidiaries has any material
(individually or in the aggregate) liabilities, direct or contingent (including
but not limited to liability with respect to any Plan) except as disclosed or
referred to in Section 3(g) of the Disclosure Schedule or in the financial
statements referred to in Section 3(f). Neither EqualNet nor any of its
Subsidiaries has any Funded Indebtedness other than Indebtedness disclosed in
Section 3(g) of the Disclosure Schedule.
(h) LITIGATION. Except as disclosed in Section 3(h) of the Disclosure
Schedule or as described in any report filed by EqualNet with the Commission and
delivered to Netco, there is no action, suit, or proceeding, or any governmental
investigation or any arbitration, in each case pending or, to the knowledge of
EqualNet, threatened against EqualNet or any of its Subsidiaries or any material
property of any thereof before any court or arbitrator or any governmental or
administrative body, agency or official (i) which challenges the validity of
this Agreement; or (ii) which, if adversely determined, would have a Material
Adverse Effect.
(i) COMPLIANCE WITH ERISA. Each Plan is in substantial compliance with
ERISA, no Plan has an accumulated or waived funding deficiency within the
meaning of Section 412 or Section 418(B) of the Code, no proceedings have been
instituted to terminate any Plan, and except as disclosed in Section 3(i) of the
Disclosure Schedule, none of EqualNet or any of its Subsidiaries nor any ERISA
Affiliate has incurred any material liability to or on account of a Plan under
ERISA, and except as disclosed in Section 3(i) of the Disclosure Schedule, no
condition exists which presents a material risk to EqualNet or any of its
Subsidiaries of incurring such a liability.
(j) TAXES; GOVERNMENTAL CHARGES. Each of EqualNet and its Subsidiaries has
filed all tax returns and reports required to be filed and has paid all taxes,
assessments, fees, and other governmental charges levied upon any of them or
upon any of their respective properties or income which are due and payable,
including interest and penalties, or has provided adequate reserves for the
payment thereof, except where the failure to so file, pay, or reserve would not
have a Material Adverse Effect.
(k) DEFAULTS. Except as disclosed in Section 3(k) of the Disclosure
Schedule, none of EqualNet or any of its Subsidiaries is in default, nor has any
event or circumstance occurred which, but for the passage of time or the giving
of notice, or both, would constitute a default (in any respect which may have a
Material Adverse Effect) under any loan or credit agreement, indenture,
mortgage, deed of trust, security agreement, or other instrument or agreement
evidencing or pertaining to any Indebtedness of EqualNet or any Subsidiary, or
under any material agreement or instrument to which EqualNet or any Subsidiary
is a party or by which EqualNet or any Subsidiary is bound. No default hereunder
has occurred and is continuing.
(l) COMPLIANCE WITH THE LAW. None of EqualNet or any of its Subsidiaries
(i) is in violation of any Governmental Requirement or (ii) has failed to obtain
any license, permit, franchise or other governmental authorization necessary to
the ownership of any of their respective properties or the conduct of their
respective business, which violation or failure would have (in the event that
such a violation or
-11-
<PAGE>
failure were asserted by any Person through appropriate action) a Material
Adverse Effect.
(m) INVESTMENT COMPANY ACT. None of EqualNet or any of its Subsidiaries is
an "investment company" or a company "controlled" by an "investment company,"
within the meaning of the Investment Company Act of 1940, as amended.
(n) PUBLIC UTILITY HOLDING COMPANY ACT. None of EqualNet or any of its
Subsidiaries is a "holding company," or a "subsidiary company" of a "holding
company," or an "affiliate" of a "holding company" or of a "subsidiary company"
of a "holding company," or a "public utility" within the meaning of the Public
Utility Holding Company Act of 1935, as amended.
(o) DISCLOSURE. EqualNet's filings made pursuant to the Securities
Exchange Act of 1934, as amended and listed on Section 3(o) of the Disclosure
Schedule hereto as of their respective dates, did not contain any untrue
statement of a material fact and did not omit to state any material fact
necessary in order to make the statements contained therein not misleading in
the light of the circumstances under which they were made.
(p) STRUCTURE; CAPITALIZATION.
(i) Section 3(p) of the Disclosure Schedule contains (except as
noted therein) a complete and correct list of EqualNet's Subsidiaries,
showing, as to each Subsidiary, the correct name thereof, the jurisdiction
of its organization, and the percentage of shares of each class of its
capital stock or similar equity interests outstanding owned by EqualNet
and each other Subsidiary.
(ii) All of the outstanding shares of capital stock or similar
equity interests of each Subsidiary shown in Section 3(p) of the
Disclosure Schedule as being owned by EqualNet and its Subsidiaries have
been validly issued, are fully paid and nonassessable, and are owned by
EqualNet or such other Subsidiaries free and clear of any Security
Interest (except as otherwise disclosed in Section 3(p) of the Disclosure
Schedule).
(iii) No Subsidiary of EqualNet is a party to, or otherwise subject
to any legal restriction of any agreement (other than this Agreement and
customary limitations imposed by corporate law statutes) restricting the
ability of such Subsidiary to pay dividends out of profits or make any
other similar distributions of profits to EqualNet or any of its
Subsidiaries that owns outstanding shares of capital stock or similar
equity interests of such Subsidiary.
(iv) As of the Closing Date and after giving effect to the
transactions contemplated in this Agreement, the Stock Purchase Agreement
and the Switch Agreement (i) EqualNet's authorized capital stock will
consist of 55,000,000 shares, of which 50,000,000 will be designated
EqualNet Common Shares and 5,000,000 shares are designated as preferred
stock (2,000 of which will be designated as Series A Convertible Preferred
Stock, $.01 par value per share); (ii) 14,269,357 of EqualNet Common
Shares, issued and outstanding and
-12-
<PAGE>
5,450,677 shares are or will be reserved for issuance in connection with
EqualNet's outstanding warrants and stock options all of which, when
issued in accordance with the terms of such warrants and stock options,
will be validly issued, fully paid, and non-assessable; (iii) no shares
are owned or held by or for the account of EqualNet or any of its
Subsidiaries (except as disclosed in the financial statements described in
Section 3(f)); (iv) except as disclosed on Section 3(p) of the Disclosure
Schedule", neither EqualNet nor any of its Subsidiaries has outstanding
any stock or other securities convertible into or exchangeable for any
shares of capital stock, any rights to subscribe for or to purchase or any
options for the purchase of, or any agreements providing for the issuance
(contingent or otherwise) of, or any calls, commitments or claims of any
other character relating to the issuance of, any capital stock, or any
stock or securities convertible into or exchangeable for any capital stock
which have not been waived (other than as contemplated by this Agreement);
and (v) except as disclosed in Section 3(p) of the Disclosure Schedule",
neither EqualNet nor any of its Subsidiaries is subject to any obligation
(contingent or otherwise) to repurchase or otherwise acquire or retire any
shares of capital stock.
(q) ENVIRONMENTAL MATTERS.
(i) Neither any property of any of EqualNet or any of its
Subsidiaries nor the operations conducted thereon violate any order of any
court or Governmental Authority or Environmental Laws which violations
could reasonably be expected to result in liability in excess of $250,000
or which could reasonably be expected to result in obligations in excess
of $250,000 for required Remedial Action, assuming disclosure to the
applicable Governmental Authority of all relevant facts, conditions and
circumstances, if any, pertaining to the relevant property.
(ii) Without limitation of clause (i) above, no property of any of
EqualNet or any of its Subsidiaries nor the operations currently conducted
thereon or by any prior owner or operator of such property or operation,
are in violation of or subject to any existing, pending or, to the
knowledge of EqualNet, threatened action, suit, investigation, inquiry or
proceeding by or before any court or Governmental Authority or to any
obligations for required Remedial Action under Environmental Laws which
could reasonably be expected to result in liability in excess of $250,000,
or which could reasonably be expected to result in obligations for
required Remedial Action in excess of $250,000 assuming disclosure to the
applicable Governmental Authority of all relevant facts, conditions and
circumstances, if any, pertaining to the relevant property.
(iii) All notices, permits, licenses or similar authorizations, if
any, required to be obtained or filed in connection with the operation or
use of any and all property of EqualNet and its Subsidiaries, including
but not limited to past or present treatment, storage, disposal or release
of Hazardous Materials into the environment, have been duly obtained or
filed, except where the failure to so obtain or file would not have a
Material Adverse Effect.
-13-
<PAGE>
(r) INTELLECTUAL PROPERTY AND OTHER INTANGIBLE ASSETS.
(i) EqualNet and its Subsidiaries (i) own or have the right to use,
free and clear of all liens, claims, and restrictions, all patents,
trademarks, service marks, trade names, and copyrights, and all
applications, licenses, and rights with respect to the foregoing, and all
trade secrets, including know-how, inventions, designs, processes, works
of authorship, computer programs, and technical data and information
(collectively, "Intellectual Property") used and sufficient for use in the
conduct of its business as now conducted and/or as presently proposed to
be conducted (including, without limitation, the development, manufacture,
operation, and sale of all products and services sold or proposed to be
sold by EqualNet and its Subsidiaries during the next 24 months following
the date of this Agreement) without infringing upon or violating any
right, lien, or claim of others, including, without limitation, former
employees and former employers of its past and present employees, and (ii)
except as described in Section 3(r) of the Disclosure Schedule", is not
obligated or under any liability whatsoever to make any payments by way of
royalties, fees, or otherwise to any owner or licensee of, or other
claimant to, any patent, trademark, service mark, trade name, copyright,
or other intangible asset, with respect to the use thereof or in
connection with the conduct of its business or otherwise.
(ii) Any and all Intellectual Property of any kind, relating to the
business of EqualNet and its Subsidiaries currently being developed, or
developed in the future, by any employee of EqualNet and its Subsidiaries
while in the employ of EqualNet and its Subsidiaries shall be the property
solely of EqualNet and its Subsidiaries. EqualNet and its Subsidiaries
have taken security measures to protect the secrecy, confidentiality, and
value of all Intellectual Property, which measures are reasonable and
customary in the industry in which EqualNet and its Subsidiaries operate.
EqualNet and its Subsidiaries' employees and other persons who, either
alone or in concert with others, developed, invented, discovered, derived,
programmed, or designed the Intellectual Property (the "Technical
Employees"), or who have knowledge of or access to information about the
Intellectual Property, have entered into a written agreement with EqualNet
or its Subsidiaries, in form and substance satisfactory to EqualNet's
management (the "Proprietary Information Agreement") regarding ownership
and treatment of the Intellectual Property.
(iii) Except as described in Section 3(r) of the Disclosure
Schedule, none of EqualNet or its Subsidiaries has received any
communications alleging that EqualNet or such Subsidiary has violated, or
by conducting its business as proposed would violate, any of the patents,
trademarks, service marks, trade names, copyrights, or trade secrets or
other proprietary rights of any other Person or entity. None of EqualNet's
and its Subsidiaries' employees is obligated under any contract (including
licenses, covenants, or commitments of any nature) or other agreement, or
subject to any judgment, decree, or order of any court or administrative
agency, that would interfere with the use of such employee's best efforts
to promote the interests of EqualNet or its Subsidiaries or that would
conflict with EqualNet's or its Subsidiaries' business as presently
-14-
<PAGE>
conducted and as proposed to be conducted. Neither the execution nor
delivery of this Agreement, nor the carrying on of EqualNet's or its
Subsidiaries' business by the employees of EqualNet and its Subsidiaries,
nor the conduct of EqualNet's or its Subsidiaries' business as proposed to
be conducted, will conflict with or result in a breach of the terms,
conditions, or provisions of, or constitute a default under, any contract,
covenant, or instrument under which any of such employees is now
obligated. It is not, and will not become, necessary to utilize any
inventions of any of EqualNet's or its Subsidiaries' employees (or people
EqualNet and its Subsidiaries currently intends to hire) made prior to
their employment by EqualNet and its Subsidiaries other than those that
have been assigned to EqualNet and its Subsidiaries pursuant to the
Proprietary Information Agreement signed by such employee.
(s) INSURANCE COVERAGE. The properties of EqualNet and its Subsidiaries
are insured in amounts deemed adequate by EqualNet's management against risks
usually insured against by Persons operating businesses similar to those of
EqualNet and its Subsidiaries in the localities where such properties are
located.
4. REPRESENTATIONS AND WARRANTIES OF NETCO ACQUISITION.
Netco Acquisition represents and warrants to EqualNet that the statements
contained in this Section 4 are correct and complete as of the date of this
Agreement and will be correct and complete as of the Closing Date (as though
made then and as though the Closing Date was substituted for the date of this
Agreement throughout this Section 4).
(a) CORPORATE EXISTENCE. Netco is a corporation duly organized, validly
existing, and in good standing under the laws of the State of Delaware. Netco
Acquisition is a limited liability company duly organized, legally existing, and
in good standing under the laws of the State of Delaware. Netco Acquisition is
duly authorized to conduct business and is in good standing under the laws of
each jurisdiction in which the nature of its business activities or its
ownership or leasing of property makes such qualification necessary.
(b) CORPORATE POWER AND AUTHORIZATION. Netco's board of directors and
stockholders have duly approved this Agreement and the transactions contemplated
hereby. Netco Acquisition's members have duly approved this Agreement and the
transactions contemplated hereby. Netco has the requisite corporate power and
authority to execute, deliver and perform its obligations under this Agreement
and to consummate the transactions contemplated hereby. Netco Acquisition has
the requisite limited liability company power and authority to execute, deliver
and perform its obligations under this Agreement and to consummate the
transactions contemplated hereby. All action on Netco's and Netco Acquisition's
part requisite for the due execution, delivery, and performance of this
Agreement has been duly and effectively taken. This Agreement constitutes the
valid and legally binding obligation of Netco Acquisition and Netco, enforceable
in accordance with its terms and conditions except to the extent that
enforceability may be limited by bankruptcy, insolvency and other similar laws
affecting the enforcement of creditor's rights generally and except for the
application of general principles of equity. Neither Netco Acquisition nor Netco
needs
-15-
<PAGE>
to give any notice to, make any filing with, or obtain any authorization,
consent or approval of any Governmental Authority or any other Person in order
to consummate the transactions contemplated by this Agreement.
(c) BROKERS' FEES. Neither Netco nor Netco Acquisition has any Liability
or obligation to pay any fees or commissions to any broker, finder, or agent
with respect to the transactions contemplated by this Agreement for which
EqualNet or Sub could become liable or obligated, and neither Netco nor Netco
Acquisition has any Liability or obligation to pay any fees or commissions to
any broker, finder, or agent with respect to the transactions contemplated by
this Agreement.
(d) NO VIOLATION. Neither the execution and delivery of this Agreement,
the consummation of the transactions provided for herein or contemplated hereby
nor the fulfillment by Netco or Netco Acquisition of the terms hereof will (i)
violate any provision of the Certificate of Incorporation or bylaws of Netco or
the Certificate of Formation or Limited Liability Company Agreement of Netco
Acquisition, (ii) result in a default, give rise to any right of termination,
cancellation, acceleration or imposition of any Indebtedness or Security
Interest, or (iii) violate any law, judgment, order, writ, injunction, decree,
statute, rule or regulation of any Governmental Authority applicable to Netco
Acquisition or Netco (except where the failure to obtain such consent or
approval will not have a Netco Material Adverse Effect and except such consents,
approvals, permits and licenses as are required to effectively transfer or
required to use or operate the Netco Assets).
(e) CONSENTS. All consents, approvals, qualifications, orders or
authorizations of, or filings with, any Governmental Authority, and all consents
under any material contracts, agreements or instruments by which Netco
Acquisition or Netco is bound or to which either is subject, which are required
in connection with Netco Acquisition and Netco's valid execution, delivery or
performance of this Agreement and the consummation of the transactions
contemplated hereby have been obtained or made, except such consents, approvals,
permits and licenses as are required to effectively transfer or operate the
Netco Assets.
(f) FINANCIAL INFORMATION. Netco holds the Netco Assets. Netco has no
indebtedness for borrowed monies or other Liabilities other than Liabilities
(excluding indebtedness for borrowed monies) described in Schedule 4(f).
(g) COMPLIANCE WITH THE LAW. Neither Netco Acquisition nor Netco (i) is in
violation of any Governmental Requirement, except such consents, approvals,
permits and licenses as are required to effectively transfer or required to use
or operate the Netco Assets or (ii) has failed to obtain any license, permit,
franchise or other governmental authorization necessary to the ownership of any
of their respective properties or the conduct of their respective business,
which violation or failure would have (in the event that such violation or
failure were asserted by any Person through appropriate action) a Netco Material
Adverse Effect; provided, Netco Acquisition makes no representation regarding
whether any violation of any Governmental Requirement has occurred with respect
to the ownership, use or the operation of the Netco Assets by Netco or any other
entity or whether any license, permit, franchise or other governmental
authorization is required for the ownership or operation of the Netco
-16-
<PAGE>
Assets (none of which have been obtained nor are intended to be obtained prior
to the Closing by Netco or Netco Acquisition).
(h) INVESTMENT COMPANY ACT. Neither Netco Acquisition nor Netco is an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940, as amended.
(i) PUBLIC UTILITY HOLDING COMPANY ACT. Neither Netco Acquisition nor
Netco is a "holding company" or a "subsidiary company" of a "holding company" or
an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding
company" within the meaning of the Public Utility Holding Company Act of 1935,
as amended.
(j) INVESTMENT. As referenced on the signature pages to this Agreement,
TWG, MCM and ADV are joining in this Agreement solely for the purpose of making
the representations, covenants and agreements set forth in this Section 4(j) and
the additional agreements set forth on such signature pages.
(i) The Shares are being acquired by each of Netco Acquisition, TWG,
MCM and ADV for its own account and not with a view to the public resale
or distribution of all or any part thereof in any transaction which would
constitute a "distribution" within the meaning of the Securities Act.
(ii) Each of Netco Acquisition, TWG, MCM and ADV acknowledges that
the Shares have not been registered under the Securities Act.
(iii) Each of Netco Acquisition, TWG, MCM and ADV is an "accredited
investor" within the meaning of Rule 501 under Regulation D promulgated
under the Securities Act, is experienced in evaluating investments in
companies such as EqualNet, has such knowledge and experience in financial
and business matters as to be capable of evaluating the merits and risks
of its investment and has the ability to bear the entire economic risk of
its investment. Each of Netco Acquisition, TWG, MCM and ADV has made its
own evaluation of its investment in the Shares, based upon such
information as is available to it and without reliance upon EqualNet or
any other person or entity, and each of Netco Acquisition, TWG, MCM and
ADV agrees that neither EqualNet nor any other person or entity has any
obligation to furnish any additional information to Netco Acquisition
except as expressly set forth herein.
(d) Each of Netco Acquisition, TWG, MCM and ADV acknowledges that
the Shares may not be sold, transferred, pledged, hypothecated, or
otherwise disposed of without registration under the Securities Act or an
exemption therefrom, and that in the absence of an effective registration
statement covering the Shares or an available exemption from registration
under the Securities Act, the Shares must be held indefinitely.
(e) Each of Netco Acquisition, TWG, MCM and ADV agrees that the
Shares shall bear legends in substantially the following form:
-17-
<PAGE>
"THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT
AND MAY NOT BE SOLD OR OFFERED FOR SALE OR OTHERWISE TRANSFERRED,
EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT, OR (ii) AN APPLICABLE EXEMPTION FROM REGISTRATION
UNDER THE SECURITIES ACT. ANY SALE PURSUANT TO CLAUSE (ii) OF THE
PRECEDING SENTENCE MUST BE ACCOMPANIED BY AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO THE COMPANY TO THE EFFECT THAT SUCH
EXEMPTION FROM REGISTRATION IS AVAILABLE IN CONNECTION WITH SUCH
SALE."
(k) TITLE. Netco owns the Netco Assets free and clear of any Security
Interest except for any Security Interest in favor of or created by EqualNet or
any Affiliate of EqualNet and any prior assignment, transfer or lease of any of
the Netco Assets to or by EqualNet or any Affiliate to EqualNet.
5. PRE-CLOSING COVENANTS.
The Parties agree as follows with respect to the period between the
execution of this Agreement (or such earlier time as may be indicated) and the
earlier to occur of the Closing or the termination of this Agreement pursuant to
Section 7:
(a) GENERAL. Each of the Parties will use commercially reasonable efforts
to take all actions and to do all things necessary, proper or advisable in order
to consummate and make effective the transactions contemplated by this Agreement
(including satisfaction, but not waiver, of the closing conditions set forth in
Section 6).
(b) INSPECTION. EqualNet and Netco Acquisition each agree to permit the
other, and its officers, directors, employees, accountants, counsel and other
authorized representatives, during normal business hours, to inspect its records
and to consult with its officers, employees, attorneys, and agents for the
purpose of determining the accuracy of the representations and warranties
hereinabove made and the compliance with covenants contained in this Agreement;
provided, however, that any non-public information obtained regarding EqualNet
shall be protected and treated as strictly confidential. EqualNet and Netco
Acquisition each agrees that it and its officers and representatives shall hold
all data and information obtained with respect to the other party hereto in
confidence and each further agrees that it will not use such data or information
or disclose the same to others, except to the extent such data or information
either are, or become, published or a matter of public knowledge.
(c) NOTICES AND CONSENTS. To the extent, if any, noted in Section 3(c) of
the Disclosure Schedule as being required, EqualNet will give any notices to
third parties, and will use and cause EqualNet to use all reasonable efforts to
obtain the required consent of its shareholders and any third-parties.
-18-
<PAGE>
(d) NOTICE OF DEVELOPMENTS. Each Party will give prompt written notice to
the other of any material adverse development causing a breach of or
constituting an intervening event with respect to any of its own representations
and warranties in Sections 3 and 4. No disclosure by any Party pursuant to this
Section 5(c), however, shall be deemed to amend or supplement the Disclosure
Schedule or to prevent or cure any misrepresentation, breach of warranty, or
breach of covenant.
(e) ORDINARY COURSE. Except as set forth in Schedule 5(e) hereof and
except for transactions to which Netco Acquisition and Netco or their affiliates
are a party or as otherwise specifically contemplated by the terms of this
Agreement, EqualNet shall and shall cause its Subsidiaries to carry on their
respective businesses in the usual, regular and ordinary course in substantially
the same manner as heretofore conducted and, to the extent consistent therewith,
use commercially reasonable efforts to preserve intact their current officers
and employees and preserve their relationships with customers, suppliers,
licensors, licensees, distributors and others having business dealings with
them, in each case consistent with past practice, to the end that their goodwill
and ongoing businesses shall be unimpaired to the fullest extent possible at the
Closing Date. Without limiting the generality of the foregoing, and except as
otherwise expressly contemplated by this Agreement and the Schedules hereto,
EqualNet shall not, and shall not permit any of its Subsidiaries to:
(i) (A) declare, set aside or pay any dividends on, or make any
other distributions in respect of, any of its capital stock, other than
dividends and distributions by any direct or indirect wholly owned
Subsidiary of EqualNet to EqualNet or to another direct or indirect wholly
owned Subsidiary of EqualNet, (B) split, combine or reclassify any of its
capital stock or issue or authorize the issuance of any other securities
in respect of, in lieu of or in substitution for shares of its capital
stock or (C) purchase, redeem or otherwise acquire any shares of capital
stock of EqualNet or any of its Subsidiaries or any other securities
thereof or any rights, warrants or options to acquire any such shares or
other securities other than in connection with the exercise of outstanding
stock options and warrants and satisfaction of withholding obligations
under outstanding stock options and restricted stock;
(ii) issue, deliver, sell, pledge or otherwise encumber any shares
of its capital stock, any other voting securities or any securities
convertible into, or any rights, warrants or options to acquire, any such
shares, voting securities or convertible securities other than, in the
case of EqualNet, the issuance of shares of Common Stock upon the exercise
of stock options and warrants outstanding on the date of this Agreement in
accordance with their current terms;
(iii) amend its Articles of Incorporation, By-laws or other
comparable charter or organizational document other than as contemplated
in the Stock Purchase Agreement;
(iv) acquire or agree to acquire (A) by merging or consolidating
with, or by purchasing a substantial portion of the stock or assets of, or
by any other manner, any business or any corporation, partnership,
association, joint venture, limited liability company or other entity or
division thereof or (B) any assets
-19-
<PAGE>
that, in each case, would be material, individually or in the aggregate,
to EqualNet and its Subsidiaries taken as a whole, except purchases in the
ordinary course of business consistent with past practice;
(v) sell, lease, mortgage, pledge, grant a Security Interest in or
otherwise encumber or dispose of any of its properties or assets, except
(A) sales or leases in the ordinary course of business consistent with
past practice and (B) other immaterial transactions not in excess of
$250,000 in the aggregate;
(vi) (A) incur indebtedness for borrowed money or guarantee any such
indebtedness of another Person, issue or sell any debt securities or
warrants or other rights to acquire any debt securities of EqualNet or any
of its Subsidiaries, guarantee any debt securities of another Person,
enter into any "keep well" or other agreement to maintain any financial
statement condition of another Person or enter into any arrangement having
the economic effect of any of the foregoing, except for working capital
borrowings under currently existing revolving credit facilities incurred
in the ordinary course of business, or (B) make any loans, advances or
capital contributions to, or investments in, any other Person that would
be material, individually or in the aggregate, to EqualNet and its
Subsidiaries taken as a whole, other than by EqualNet to any direct or
indirect wholly owned Subsidiary of EqualNet;
(vii) make or incur any new capital expenditure, which, singly or in
the aggregate with all other capital expenditures, would exceed $250,000;
(viii) make any material election relating to Taxes or settle or
compromise any material tax liability;
(ix) pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction, in the
ordinary course of business consistent with past practice or in accordance
with their terms, of liabilities reflected or reserved against in, or
contemplated by, the most recent consolidated financial statements (or the
notes thereto) of EqualNet included in the Commission Documents or
incurred in the ordinary course of business consistent with past practice;
(x) waive the benefits of, or agree to modify in any manner, any
confidentiality, standstill or similar agreement to which EqualNet or any
of its Subsidiaries is a party;
(xi) adopt a plan of complete or partial liquidation or resolutions
providing for or authorizing such a liquidation or a dissolution, merger,
consolidation, restructuring, recapitalization or reorganization;
(xii) enter into any new collective bargaining agreement;
(xiii) change any material accounting principle used by it, except
as required by regulations promulgated by the Commission or as mandated by
the
-20-
<PAGE>
American Institute of Certified Public Accountants or similar accounting
boards or bodies;
(xiv) settle or compromise any litigation (whether or not commenced
prior to the date of this Agreement) other than settlements or
compromises: (A) of litigation where the amount paid in settlement or
compromise does not exceed $100,000, or (B) in consultation and
cooperation with Netco, and, with respect to any such settlement, with the
prior written consent of Netco Acquisition, which consent shall not be
unreasonably withheld;
(xv) except for those contracts and agreements entered into in the
ordinary course of business or with the prior written consent of Netco
Acquisition, which consent shall not be unreasonably withheld or delayed,
enter into any joint venture or partnership contract or agreement; or
(xvi) authorize any of, or commit or agree to take any of, the
foregoing actions.
(f) CHANGES IN EMPLOYMENT ARRANGEMENTS. Neither EqualNet nor any of its
Subsidiaries shall adopt or amend (except as may be required by law) any bonus,
profit sharing, compensation, stock option, pension, retirement, deferred
compensation, employment or other employee benefit plan, agreement, trust, fund
or other arrangement for the benefit or welfare of any employee, director or
former director or employee, increase the compensation or fringe benefits of any
officer of EqualNet or any of its Subsidiaries, or, except as provided in an
existing benefit plan or in the ordinary course of business consistent with past
practice, increase the compensation or fringe benefits of any employee or former
employee or pay any benefit not required by any existing plan, arrangement or
agreement.
(g) SEVERANCE. Neither EqualNet nor any of its Subsidiaries shall grant
any new or modified severance or termination arrangement or increase or
accelerate any benefits payable under its severance or termination pay policies
in effect on the date hereof.
(h) OTHER ACTIONS. EqualNet shall not, and shall not permit any of its
Subsidiaries to, take any action that would, or that could reasonably be
expected to, result (i) in any of the representations and warranties of EqualNet
set forth in this Agreement becoming untrue or (ii) in any of the covenants
contained in this Agreement becoming unperformable. Pending the Closing,
EqualNet will promptly advise Netco Acquisition and Netco of any action or event
of which it becomes aware which has the effect of making incorrect any of such
representations or warranties or which has the effect of rendering unperformable
any of such covenants.
(i) VALID ISSUANCE. EqualNet covenants that the Shares to be issued by
EqualNet pursuant to Section 2(b) will, upon the effectiveness of the Merger in
accordance with the terms hereof and upon delivery of certificates representing
such Shares, be validly issued, fully paid and nonassessable and free from all
taxes, liens and charges with respect to the issuance thereof.
-21-
<PAGE>
(j) GOVERNMENT REGULATIONS. EqualNet covenants that it will comply, and
will cause each of its Subsidiaries to comply, with all applicable governmental
restrictions and regulations, the failure to comply with which would have a
material adverse effect on the business or financial condition of EqualNet and
its Subsidiaries taken as a whole, and obtain and maintain in good standing all
licenses, permits and approvals from any and all governments, governmental
commissions, boards or agencies of jurisdictions in which it or any of its
Subsidiaries carries on business required in respect of the operations of
EqualNet or any of its Subsidiaries, the failure to comply with which would have
a Material Adverse Effect.
(k) ERISA. Promptly (and in any event within 30 days) after EqualNet or
any of its Subsidiaries knows or has reason to know that a Reportable Event with
respect to any Pension Plan has occurred, that any Pension Plan is or may be
terminated, reorganized, partitioned or declared insolvent under Title IV of
ERISA or that EqualNet or any of its Subsidiaries will or may incur any
liability to or on account of a Pension Plan under Sections 4062, 4063, 4064,
4201 or 4204 of ERISA, EqualNet will deliver to Netco Acquisition and Netco a
certificate of the chief financial officer of EqualNet setting forth information
as to such occurrence and what action, if any, EqualNet is required or proposes
to take with respect thereto, together with any notices concerning such
occurrences which are (a) required to be filed by EqualNet or the plan
administrator of any such Pension Plan controlled by EqualNet or its
Subsidiaries, with the PBGC or (b) received by EqualNet or its Subsidiaries from
any plan administrator of a multiemployer or other Pension Plan not under their
control. EqualNet shall furnish to Netco Acquisition and Netco a copy of each
annual report (Form 5500 Series) of any Pension Plan received or prepared by
EqualNet or any of its Subsidiaries. Each annual report and any notice required
to be delivered hereunder shall be delivered no later than 10 days after the
later of the date such report or notice is filed with the Internal Revenue
Service or the PBGC or the date such report or notice is received by EqualNet or
any of its Subsidiaries, as the case may be.
(l) CORPORATE EXISTENCE; MAINTENANCE OF PROPERTIES. EqualNet covenants
that it (i) will do or cause to be done all things reasonably necessary to
preserve and keep in full force and effect the corporate existence and material
rights of EqualNet and all of its Subsidiaries, (ii) will cause its properties
and the properties of its Subsidiaries used or useful in the conduct of their
respective businesses to be maintained and kept in good condition, repair and
working order and will use commercially reasonable efforts to cause to be made
all necessary repairs, renewals, replacements, betterments and improvements
thereto, and (iii) will, and will cause each of its Subsidiaries to, qualify and
remain qualified to conduct business in each jurisdiction where the nature of
the business or the ownership of property by EqualNet or such Subsidiary may
require such qualification and where the failure to so qualify would have a
Material Adverse Effect.
(m) INSURANCE. EqualNet covenants that it will maintain, and will cause
each of its Subsidiaries to maintain, with financially sound and reputable
insurance companies, funds or underwriters, insurance for EqualNet and its
Subsidiaries of the kinds, covering the risks and in the relative proportionate
amounts usually carried by companies conducting business activities similar to
those of EqualNet and its Subsidiaries.
-22-
<PAGE>
(n) FURTHER ASSURANCES. EqualNet covenants that it shall cooperate with
Netco Acquisition and Netco and execute such further instruments and documents
as Netco Acquisition and Netco shall reasonably request to carry out to the
satisfaction of Netco Acquisition and Netco the transactions contemplated by
this Agreement.
(o) NOTICES OF CERTAIN EVENTS. EqualNet shall promptly give notice to
Netco Acquisition and Netco (i) of any default or event of default that has not
been cured within any applicable grace period under any (y) Indebtedness of
EqualNet or any of its Subsidiaries, or (z) contractual obligation of EqualNet
or any of its Subsidiaries or (ii) of any pending or threatened litigation,
investigation or proceeding to which EqualNet or any of its Subsidiaries is or
is threatened to be a party and of which EqualNet has been given notice;
provided that any such default as specified in clause (z) above, litigation,
investigation or proceeding would have a Material Adverse Effect. Any notice
delivered pursuant to this Section 5(o) shall be accompanied by an officer's
certificate specifying the details of the occurrence referred to therein and
stating what action EqualNet proposes to take with respect thereto.
(p) BOARD NOMINEES. Effective as of the Closing, in addition to the
covenant in Section 5.J of the Stock Purchase Agreement, the directors of
EqualNet shall elect one new director who shall have been nominated by MCM
Partners, a Washington limited partnership, subject to the directors of EqualNet
approving the individual so nominated by MCM Partners, and if such approval is
not given, then MCM Partners shall have the right to nominate additional
individuals to serve as such director until such approval is obtained.
EqualNet's board of directors shall not unreasonably withhold or delay the
approval of the individual(s) so nominated by MCM Partners. Such director shall
serve a term expiring at the next shareholders meeting of EqualNet applicable to
the class to which such director is elected.
(q) ENVIRONMENTAL LAWS. EqualNet and its Subsidiaries shall comply with
all applicable Environmental Laws the failure to comply with which would have a
Material Adverse Effect. If EqualNet or any Subsidiary shall receive written
notice that there exists a violation of Environmental Law with respect to its
operations or any real property owned, formerly owned, used, or leased thereby,
which violation could have a Material Adverse Effect, EqualNet shall immediately
notify in writing Netco Acquisition and Netco. Furthermore, if EqualNet or any
Subsidiary shall receive written notice that there exists a violation of
Environmental Law with respect to its operations or any real property owned,
formerly owned, used or leased thereby, which violation could have a Material
Adverse Effect, EqualNet shall within the time period permitted by the
applicable governmental authority (unless otherwise contested by EqualNet in
good faith) remove or remedy such violation in accordance with all applicable
Environmental Laws unless the Board of Directors of EqualNet makes a good faith
determination that it would be in the best interest of EqualNet to delay the
remedy of such violation, so long as no Material Adverse Effect is suffered by
EqualNet or its Subsidiaries during such delay.
(r) REGISTRATION RIGHTS. At the Closing EqualNet will grant to MCM and ADV
certain registration rights pursuant to the Registration Agreement.
-23-
<PAGE>
(s) SHAREHOLDER APPROVAL; PREPARATION OF PROXY STATEMENTS.
(i) EqualNet shall, as soon as practicable following the execution
and delivery of this Agreement duly call, give notice of, convene and hold
a meeting of EqualNet's shareholders (the "Shareholders Meeting") for the
following purposes: (i) approving this Agreement, the issuance of the
Shares and the transactions contemplated hereby, (ii) ratifying the Note
and Warrant Purchase Agreement and the transactions contemplated thereby,
(iii) approving the Stock Purchase Agreement and the issuance of EqualNet
Common Shares thereunder, (iv) approving the Switch Agreement, (v)
approving an amendment to the Company's Articles of Incorporation to
increase the aggregate number of authorized EqualNet Common Shares to
55,000,000, and (vi) approving the other related transactions. EqualNet
will, through its officers and its Board of Directors, unanimously
recommend to its shareholders the approval and adoption of the foregoing
transactions.
(ii) Promptly following the date of this Agreement, EqualNet shall
prepare and file with the Commission a proxy statement relating to the
Shareholders Meeting (such proxy statement as amended or supplemented from
time to time, the "Proxy Statement"). Netco Acquisition and Netco shall
have the right to review and approve the Proxy Statement prior to EqualNet
filing the Proxy Statement with the Commission, which approval shall not
be unreasonably withheld. EqualNet will use commercially reasonable
efforts to cause the Proxy Statement to be mailed to EqualNet's
shareholders as promptly as practicable. EqualNet will notify Netco
Acquisition and Netco promptly of the receipt of any written or oral
comments from the Commission or its staff and of any request by the
Commission or its staff for amendments or supplements to the Proxy
Statement or for additional information and will supply Netco Acquisition
and Netco with copies of all correspondence between EqualNet or any of its
representatives, on the one hand, and the Commission or its staff, on the
other hand, with respect to the Proxy Statement.
(iii) EqualNet will cause its transfer agent to make stock transfer
records relating to EqualNet available to the extent reasonably necessary
to effectuate the intent of this Agreement.
(t) NO SOLICITATION. (i) EqualNet shall not, nor shall it permit any of
its Subsidiaries to, nor shall it authorize or permit any officer, director or
employee of EqualNet or any investment banker, attorney or other advisor, agent
or representative of EqualNet or any of its Subsidiaries to, directly or
indirectly, (1) solicit, initiate or encourage the submission of any takeover
proposal, (2) enter into any agreement (other than confidentiality and
standstill agreements in accordance with the immediately following proviso) with
respect to any takeover proposal, or (3) participate in any discussions or
negotiations regarding, or furnish to any Person any information with respect
to, or take any other action to facilitate any inquiries or the making of any
proposal that constitutes, or may be reasonably be expected to lead to, any
takeover proposal; provided, in the case of this clause (3), that prior to the
vote of shareholders of EqualNet for approval of the matters referred to in
Section 5(s) (and not thereafter if such matters are approved thereby) to the
extent required by the fiduciary obligations
-24-
<PAGE>
of the Board of Directors of EqualNet, determined in good faith by a majority of
the disinterested members thereof based on the advice of outside counsel,
EqualNet, in response to an unsolicited superior proposal and a request for
information pursuant thereto, may furnish information to any person or "group"
within the meaning of Section 13(d)(3) of the Exchange Act pursuant to a
confidentiality agreement. Without limiting the foregoing, it is understood that
any violation of the restrictions set forth in the preceding sentence by any
officer, director or employee of EqualNet or any of its Subsidiaries or any
investment banker, attorney or other advisor, agent or representative of
EqualNet, whether or not such Person is purporting to act on behalf of EqualNet
or otherwise, shall be deemed to be a material breach of this Agreement by
EqualNet. For purposes of this Section 5(t), "takeover proposal" means (x) any
proposal, other than a proposal by TWG or any of its Affiliates, for a merger or
other business combination involving EqualNet, (y) any proposal or offer, other
than a proposal or offer by TWG or any of its Affiliates, to acquire from
EqualNet or any of its Affiliates in any manner, directly or indirectly, an
equity interest in EqualNet or any Subsidiary, any voting securities of EqualNet
or any Subsidiary or a material amount of the assets of EqualNet and its
Subsidiaries, taken as a whole, or (z) any proposal or offer, other than a
proposal or offer by TWG or any of its Affiliates, to acquire from the
shareholders of EqualNet by tender offer, exchange offer or otherwise more than
20% of the outstanding shares of Common Shares.
(ii) Neither the Board of Directors of EqualNet nor any committee
thereof shall, except in connection with the termination of this Agreement
pursuant to Section 7, (1) withdraw or modify, or propose to withdraw or modify,
in a manner adverse to Netco Acquisition or Netco the approval or recommendation
by the Board of Directors of EqualNet or any such committee thereof of this
Agreement or take any action having such effect; provided, a statement by the
Board of Directors of EqualNet to its shareholders as contemplated by Rule
14e-2(a) of the Exchange Act following Netco Acquisition's and Netco's receipt
of a Notice of Superior Proposal (defined below) shall not be deemed to
constitute a withdrawal or modification of its recommendation of this Agreement,
or (2) approve or recommend, or propose to approve or recommend, any takeover
proposal. Notwithstanding the foregoing, in the event that the Board of
Directors of EqualNet receives a takeover proposal that, in the exercise of its
fiduciary obligations (as determined in good faith by a majority of the
disinterested members thereof based on the advice of outside counsel), it
determines to be a superior proposal, the Board of Directors of EqualNet may
withdraw or modify its approval or recommendation of this Agreement and may
(subject to the following sentence) terminate this Agreement, in each case at
any time after midnight on the fifth Business Day following Netco Acquisition's
and Netco's receipt of written notice (a "Notice of Superior Proposal") advising
Netco Acquisition and Netco that the Board of Directors of EqualNet has received
a takeover proposal that it has determined to be a superior proposal, specifying
the material terms and conditions of such superior proposal (including the
proposed financing for such proposal and a copy of any documents conveying such
proposal) and identifying the Person making such superior proposal. EqualNet may
terminate this Agreement pursuant to the preceding sentence only if the
shareholders of EqualNet have not yet voted upon the matters set forth in
Section 5(s). Any of the foregoing to the contrary notwithstanding, EqualNet may
engage in discussions with any Person or group that has made an unsolicited
takeover proposal for the limited purpose of determining whether such proposal
is a superior
-25-
<PAGE>
proposal. Nothing contained herein shall prohibit EqualNet from taking and
disclosing to its shareholders a position contemplated by Rule 14e-2(a)
following Netco Acquisition and Netco's receipt of a Notice of Superior
Proposal.
(iii) For purposes of this Section 5(t), a "superior proposal" means
any BONA FIDE takeover proposal to acquire, directly or indirectly, for
consideration consisting of cash, securities or a combination thereof, all of
the EqualNet Common Shares then outstanding or all or substantially all of the
assets of EqualNet and its Subsidiaries, and otherwise on terms that a majority
of the disinterested members of the Board of Directors of EqualNet determines in
its good faith reasonable judgment (based on the advice of a financial advisor
of nationally recognized reputation, a copy of which shall be provided to Netco
Acquisition and Netco) to be more favorable to EqualNet's shareholders than the
transactions contemplated by this Agreement, the Stock Purchase Agreement and
the Switch Agreement.
(iv) In addition to the obligations of EqualNet set forth in clause
(ii) above, EqualNet shall promptly advise Netco Acquisition and Netco orally
and in writing of any takeover proposal or any inquiry with respect to or which
could lead to any takeover proposal, the material terms and conditions of such
inquiry or takeover proposal (including the financing for such proposal and a
copy of such documents conveying such proposal), and the identity of the Person
making any such takeover proposal or inquiry.
(u) LISTING OF COMMON STOCK. EqualNet warrants to and agrees with Netco
Acquisition that it will use commercially reasonable efforts to cause the
EqualNet Common Shares to be issued pursuant to the Merger or upon conversion of
the EqualNet Preferred Shares to be approved for listing, subject to official
notice of issuance, on the NASDAQ National Market as of the Closing Date.
(v) NETCO MATTERS. Netco Acquisition shall not permit Netco to:
(i) amend its Certificate of Incorporation or bylaws;
(ii) declare, set aside or pay any dividends on, or make any other
distributions in respect of any of Netco's capital stock, or split, combine or
reclassify any of Netco's capital stock or issue or authorize the issuance of
any other securities in respect of, in lieu of or in substitution for Netco's
capital stock;
(iii) issue, sell, pledge or otherwise encumber any shares of
Netco's capital stock;
(iv) Netco shall not acquire any assets other than the Netco Assets;
(v) Netco shall not incur any Liabilities other than in connection
with the transfer, operation or use of the Netco Assets;
(vi) Netco shall not sell, lease, mortgage, pledge, grant a Security
Interest in or otherwise encumber or dispose of any of the Netco Assets, other
than any lease or assignment of the Netco Assets to EqualNet or any Affiliate of
EqualNet;
-26-
<PAGE>
(vii) Netco shall not incur any indebtedness for borrowed money or
guarantee any indebtedness of another Person;
(viii) Netco shall not make or incur any capital expenditure other
than in connection with the maintenance, operation or use of the Netco Assets;
(ix) Netco shall not adopt a plan of complete or partial liquidation
or take any other action that would prevent it from consummating the
transactions contemplated by this Agreement; and
(x) Netco shall not engage any employees.
6. CONDITIONS TO OBLIGATION TO CLOSE.
(a) CONDITIONS TO OBLIGATION OF NETCO ACQUISITION AND NETCO. The
obligation of Netco Acquisition and Netco to consummate the transactions to be
performed by them in connection with the Closing is subject to satisfaction of
the following conditions:
(i) The representations and warranties set forth in Section 3 shall
be true and correct in all material respects at and as of the Closing
Date.
(ii) EqualNet and Sub shall have performed and complied with all of
their respective covenants hereunder in all material respects through the
Closing.
(iii) EqualNet shall have procured all of the consents of third
parties required in connection with the consummation of the transactions
contemplated by this Agreement, and EqualNet shall have procured the
approval of its shareholders at the Shareholders Meeting for the matters
set forth in Section 5(r).
(iv) The closing under that certain Stock Purchase Agreement dated
November 21, 1997, between EqualNet and TWG, and the closing under that
certain Switch Agreement dated November 21, 1997, between TWG, EqualNet
and Sub, shall have occurred or be occurring simultaneous with the Closing
hereunder.
(v) The offering and sale of the Shares under this Agreement shall
have complied with all applicable requirements of federal and state
securities laws.
(vi) Subsequent to the date hereof, no legislation, order, rule,
ruling or regulation shall have been enacted or made by or on behalf of
any governmental body, department or agency of the United States, nor
shall any legislation have been introduced and favorably reported for
passage to either House of Congress by any committee of either such House
to which such legislation has been referred for consideration, nor shall
any decision of any court of competent jurisdiction within the United
States have been rendered which would materially
-27-
<PAGE>
and adversely affect an investment in the Shares. There shall be no
action, suit, investigation or proceeding pending, or to EqualNet's or
Netco Acquisition's knowledge, threatened, against or affecting EqualNet
or any of its Subsidiaries or Netco Acquisition or any of its members, or
any of their respective properties or rights, or any of their affiliates,
associates, officers or directors, before any court, arbitrator or
administrative or governmental body which (i) seeks to restrain, enjoin,
prevent the consummation of or otherwise adversely affect the transactions
contemplated by this Agreement or (ii) questions the validity or legality
of any such transaction or seeks to recover damages or to obtain other
relief in connection with any such transaction, and to EqualNet's or Netco
Acquisition's knowledge there shall be no valid basis for any such action,
proceeding or investigation.
(vii) EqualNet shall have duly received all authorizations,
consents, approvals, licenses, franchises, permits and certificates by or
of all federal, state and local governmental authorities, by any third
parties pursuant to the terms of any agreement to which EqualNet is a
party or by the National Association of Securities Dealers, Inc. or any
other body or agency with jurisdiction, by contract or otherwise, over
EqualNet, necessary for the issuance of the Shares by EqualNet and the
consummation of the transactions contemplated hereby, and all thereof
shall be in full force and effect at the time of the Closing.
(viii) The nominee designated by MCM Partners pursuant to Section
5(p) shall have been appointed to EqualNet's Board of Directors effective
upon the Closing.
(ix) There shall not have occurred any Material Adverse Change with
respect to EqualNet and its Subsidiaries since the date hereof.
(x) EqualNet shall have delivered to Netco Acquisition and Netco a
certificate to the effect that each of the conditions specified above in
Section 6(a)(i)-(ix) is satisfied in all respects.
(xi) Netco Acquisition and Netco shall have received from Fulbright
& Jaworski, L.L.P., counsel to EqualNet and Sub, an opinion in form and
substance as set forth in Exhibit C attached hereto, addressed to Netco
Acquisition, and dated as of Closing Date.
(xii) MCM and ADV shall have been delivered the Registration
Agreement executed by EqualNet.
(xiii) The EqualNet Common Shares issued pursuant to the Merger or
upon the conversion of the EqualNet Preferred Shares shall have been
approved for listing, subject to official notice of issuance, on the
NASDAQ National Market as of the Closing Date.
All actions to be taken by EqualNet in connection with consummation of the
transactions contemplated hereby and all certificates, opinions, instruments,
and other documents required to effect the transactions contemplated hereby will
be reasonably
-28-
<PAGE>
satisfactory in form and substance to Netco Acquisition and Netco. Netco
Acquisition and Netco may waive any condition specified in this Section 6(a) if
it executes a writing so stating at or prior to the Closing.
(b) CONDITIONS TO OBLIGATION OF EQUALNET. The obligations of EqualNet and
Sub to consummate the transactions to be performed by it in connection with the
Closing are subject to satisfaction of the following conditions:
(i) The representations and warranties set forth in Section 4 shall
be true and correct in all material respects at and as of the Closing
Date.
(ii) Netco Acquisition and Netco shall have performed and complied
with all of its covenants hereunder in all material respects through the
Closing.
(iii) EqualNet shall have obtained the approval of its shareholders
at the Shareholders Meeting for the matters set forth in Section 5(s).
(iv) The closing under that certain Stock Purchase Agreement dated
November 21, 1997, between EqualNet and TWG, and the closing under that
certain Switch Agreement dated November 21, 1997, between EQ Acquisition
Sub, Inc., EqualNet, TWG and Sub, shall have occurred or be occurring
simultaneous with the Closing hereunder.
(v) There shall be no action, suit, investigation or proceeding
pending, or to EqualNet's or Netco Acquisition's knowledge, threatened,
against or affecting EqualNet or any of its Subsidiaries or Netco
Acquisition or any of its members, or any of their respective properties
or rights, or any of their affiliates, associates, officers or directors,
before any court, arbitrator or administrative or governmental body which
(i) seeks to restrain, enjoin, prevent the consummation of or otherwise
adversely affect the transactions contemplated by this Agreement or (ii)
questions the validity or legality of any such transaction or seeks to
recover damages or to obtain other relief in connection with any such
transaction.
(vi) Netco Acquisition and Netco shall have delivered to EqualNet a
certificate to the effect that each of the conditions specified above in
Section 6(b)(i)-(ii) is satisfied in all respects.
(vii) EqualNet shall have received from Vinson & Elkins L.L.P.,
counsel to Netco Acquisition and Netco, an opinion in form and substance
as set forth in Exhibit D attached hereto, addressed to EqualNet and dated
as of the Closing Date.
(viii) Netco Acquisition and Netco shall have executed and delivered
to EqualNet the Merger Agreement.
All actions to be taken by Netco Acquisition and Netco in connection with
consummation of the transactions contemplated hereby and all certificates,
opinions, instruments, and other documents required to effect the transactions
contemplated
-29-
<PAGE>
hereby will be reasonably satisfactory in form and substance to EqualNet.
EqualNet may waive any condition specified in this Section 6(b) if it executes a
writing so stating at or prior to the Closing.
7. TERMINATION.
(a) TERMINATION OF AGREEMENT. This Agreement may be terminated only as
provided below:
(i) EqualNet, Sub, Netco Acquisition and Netco may terminate this
Agreement by mutual written consent at any time prior to the Closing;
(ii) Either EqualNet, Sub, Netco Acquisition or Netco may terminate
this Agreement by giving written notice to the other parties prior to the
Closing if the shareholders of EqualNet fail to give any required approval
of this Agreement and the transactions contemplated hereby upon a vote at
the Shareholders Meeting or at any adjournment thereof;
(iii) Netco Acquisition and Netco may terminate this Agreement by
giving written notice to EqualNet and Sub at any time prior to the Closing
(A) in the event EqualNet or Sub has breached any representation, warranty
or covenant on their part contained in this Agreement in any material
respect, Netco Acquisition and Netco have notified EqualNet or Sub of the
breach or occurrence, and the breach or occurrence has continued without
cure for a period until the earlier of 15 days after the notice of breach
or the scheduled Closing Date or (B) if the Closing shall not have
occurred on or before February 1, 1998, by reason of the failure of any
condition precedent under Section 6(a) (unless the failure results
primarily from Netco Acquisition or Netco breaching any representation,
warranty or covenant on its part contained in this Agreement); and
(iv) EqualNet and Sub may terminate this Agreement by giving written
notice to Netco Acquisition or Netco at any time prior to the Closing (A)
in the event Netco Acquisition or Netco has breached any representation,
warranty or covenant on their part contained in this Agreement in any
material respect, EqualNet has notified Netco Acquisition and Netco of the
breach, and the breach has continued without cure for a period until the
earlier of 15 days after the notice of breach or the scheduled Closing
Date or (B) if the Closing shall not have occurred on or before February
1, 1998, by reason of the failure of any condition precedent under Section
6(b) (unless the failure results primarily from EqualNet or Sub breaching
any representation, warranty or covenant on his part contained in this
Agreement).
(b) EFFECT OF TERMINATION. If this Agreement is terminated pursuant to
Section 7(a), all rights and obligations of the Parties hereunder shall
terminate without any Liability of any Party to any other Party (except for any
Liability of any Party for any breach of a covenant or for any knowing and
willful breach of any representation or warranty).
-30-
<PAGE>
8. REMEDIES FOR BREACHES OF THIS AGREEMENT.
(a) SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All of the representations
and warranties of the Parties contained in Sections 3 and 4 shall survive the
Closing hereunder for a period of four years from the date of this Agreement.
(b) INDEMNIFICATION PROVISIONS FOR BENEFIT OF NETCO ACQUISITION, ITS
MEMBERS AND ADV. If any representation or warranty set forth in Section 3 or any
covenant or agreement set forth herein made by EqualNet or Sub is breached, then
EqualNet agrees to indemnify Netco Acquisition and any member of Netco
Acquisition or ADV that becomes a holder of any of the Shares from and against
any Adverse Consequences that Netco Acquisition and each such member or ADV may
suffer through and after the date of the claim for indemnification to the extent
resulting from, arising out of, relating to, or caused by such breach.
(c) INDEMNIFICATION PROVISIONS FOR BENEFIT OF EQUALNET. If Netco
Acquisition or Netco breaches any of its representations and warranties in
Section 4 or any covenant or agreement set forth herein made by Netco
Acquisition and Netco, then Netco Acquisition agrees to indemnify EqualNet from
and against any Adverse Consequences EqualNet may suffer through and after the
date of the claim for indemnification to the extent resulting from, arising out
of, relating to, or caused by such breach.
(d) MATTERS INVOLVING THIRD PARTIES.
(i) If any third party shall notify any Party (the "Indemnified
Party") with respect to any matter (a "Third Party Claim") that may give
rise to a claim for indemnification against any other Party (the
"Indemnifying Party") under this Section 8, then the Indemnified Party
shall promptly notify the Indemnifying Party thereof in writing; provided,
no delay on the part of the Indemnified Party in notifying the
Indemnifying Party shall relieve the Indemnifying Party from any
obligation hereunder unless (and then solely to the extent) the
Indemnifying Party thereby is prejudiced.
(ii) The Indemnifying Party will have the right to defend the
Indemnified Party against the Third Party Claim with counsel of the
former's choice reasonably satisfactory to the Indemnified Party so long
as (1) the Indemnifying Party notifies the Indemnified Party in writing
within 15 days after the Indemnified Party has give notice of the Third
Party Claim that the Indemnifying Party will indemnify the Indemnified
Party from and against the entirety of any Adverse Consequences the
Indemnified Party may suffer resulting from, arising out of, relating to,
in the nature of, or caused by the Third Party Claim, (2) the Indemnifying
Party provides the Indemnified Party with evidence reasonably acceptable
to the Indemnified Party that the Indemnifying Party will have the
financial resources to defend against the Third Party Claim and fulfill
its indemnification obligations hereunder, (3) the Third Party Claim
involves only money damages and does not seek an injunction or other
equitable relief, (4) settlement of, or an adverse judgment with respect
to, the Third Party Claim is not in the good faith judgment of the
Indemnified Party, likely to establish a
-31-
<PAGE>
precedential custom or practice materially adverse to the continuing
business interests of the Indemnified Party, and (5) the Indemnifying
Party conducts the defense of the Third Party Claim actively and
diligently.
(iii) So long as the Indemnifying Party is conducting the defense of
the Third Party Claim in accordance with Section 8(d)(ii), (1) the
Indemnified Party may retain separate co-counsel at its sole cost and
expense and participate in the defense of the Third Party Claim, (2) the
Indemnified Party will not consent to the entry of any judgment or enter
into any settlement with respect to the Third Party Claim without the
prior written consent of the Indemnifying Party (not to be withheld
unreasonably), and (3) the Indemnifying Party will not consent to the
entry of any judgment or enter into any settlement with respect to the
Third Party Claim without the prior written consent of the Indemnified
Party (not to be withheld unreasonably).
(iv) In the event any of the conditions in Section 8(d)(ii) is or
becomes unsatisfied, however, (1) the Indemnified Party may defend
against, and consent to the entry of any judgment or enter into any
settlement with respect to, the Third Party Claim in any manner it
reasonably may deem appropriate (and the Indemnified Party need not
consult with, or obtain any consent from, the Indemnifying Party in
connection therewith), (2) the Indemnifying Party will reimburse the
Indemnified Party promptly and periodically for the costs of defending
against the Third Party Claim (including reasonable attorneys' fees and
expenses), and (3) the Indemnifying Party will remain responsible for any
Adverse Consequences the Indemnified Party may suffer resulting from,
arising out of, relating to, in the nature of, or caused by the Third
Party Claim to the fullest extent provided in this Section 8.
(e) CLAIMS FOR INDEMNIFICATION.
(i) Whenever any claim shall arise for indemnification under Section
8(b) or 8(c), the Indemnified Party shall describe such claim in a written
notice ("Notice of Claim") to the Indemnifying Party (and for purposes of
this Section 9(e), a notice given pursuant to Section 9(d) shall
constitute a "Notice of Claim") and, when known, specify the facts
constituting the basis for such claim and the amount or an estimate of the
amount of such claim.
(ii) Following the receipt by the Indemnifying Party of each Notice
of Claim, the Indemnifying Party may give the Indemnified Party written
notice ("Notice of Objection") (1) attaching a copy of such Notice of
Claim, (2) stating that, in the opinion of the Indemnifying Party, the
claim described in such Notice of Claim is invalid (either in whole or in
specified part), (3) giving the reasons for the alleged invalidity, and
(4) stating that, based on such alleged invalidity, the Indemnifying Party
objects to the payment of any portion of the amount claimed pursuant to
such Notice of Claim. If a Notice of Objection alleges that a Notice of
Claim is only partially invalid, the Indemnifying Party within 30 days of
the receipt of such Notice of Claim, agrees to deliver to the Indemnified
Party that portion of the amount claimed pursuant to such Notice of Claim
as to which no objection is made.
-32-
<PAGE>
(f) DETERMINATION OF ADVERSE CONSEQUENCES. There shall be taken into
account the time cost of money (using the Applicable Rate as the discount rate)
and appropriate adjustments shall be made for tax consequences and insurance in
determining Adverse Consequences for purposes of this Section 8.
(g) OTHER INDEMNIFICATION PROVISIONS. The foregoing indemnification
provisions are in addition to, and not in derogation of, any statutory,
equitable, or common law remedy any Party may have for breach of this Agreement.
9. MISCELLANEOUS.
(a) PRESS RELEASES AND PUBLIC ANNOUNCEMENTS. No Party shall issue any
press release or make any public announcement relating to the subject matter of
this Agreement prior to the Closing without the prior written approval of Netco
Acquisition and EqualNet; provided, either Party may make any public disclosure
it believes in good faith is required by applicable law or the requirements of
NASDAQ.
(b) NO THIRD-PARTY BENEFICIARIES. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns except for the members of Netco Acquisition and
ADV with respect to and as contemplated by Sections 3 and 8.
(c) SUCCESSION AND ASSIGNMENT. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns. No Party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of other Parties.
(d) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
(e) NOTICES. All notices, requests, demands, claims, and other
communications hereunder shall be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be sent by (i) personal delivery
(including courier service), (ii) telecopier during normal business hours to the
number indicated, or (iii) registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended recipient as set forth
below (any communication shall be deemed given upon receipt):
IF TO EQUALNET OR SUB:
1250 Wood Branch Park Drive
Houston, TX 77079-1212
Attention: General Counsel
Telecopier No.: 281-529-4686
-33-
<PAGE>
WITH A COPY TO:
Fulbright & Jaworski L.L.P.
1301 McKinney, Suite 5100
Houston, Texas 77010
Attention: Robert F. Gray, Jr.
Telecopier No.: 713-651-5246
IF TO NETCO OR NETCO ACQUISITION:
5005 Woodway, Suite 350
Houston, Texas 77056
Attention: Mark Willis and Jim Harris
Telecopier No.: 713-626-8333
WITH A COPY TO:
MCM Partners
10500 NE 8th, Suite 1920
Bellevue, Washington 98004-4332
Attention: Chris Purrier and Howard Coleman
Telecopier No.: 425-462-4645
AND:
Vinson & Elkins L.L.P.
1001 Fannin, Suite 2300
Houston, Texas 77002-6760
Attention: Rell Tipton
Telecopier No.: 713-615-5553
Any Party may change its telecopier number or its address to which notices,
requests, demands, claims, and other communications hereunder are to be
delivered by giving the other Party notice in the manner herein set forth.
(f) GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware.
(g) AMENDMENTS AND WAIVERS. No amendments of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by the
Parties. No waiver by any Party of any default, misrepresentation, or breach of
warranty or covenant hereunder, whether intentional or not, shall be deemed to
extend to any prior or subsequent default, misrepresentation, or breach of
warranty or covenant hereunder or affect in any way any rights arising by virtue
of any prior or subsequent such occurrence.
(h) SEVERABILITY. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforce-
-34-
<PAGE>
ability of the offending term or provision in any other situation or in any
other jurisdiction.
(i) EXPENSES. Each of the Parties will bear its own costs and expenses
(including legal fees and expenses) incurred in connection with this Agreement
and the transactions contemplated hereby.
(j) CONSTRUCTION. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties, and no presumption or burden of proof shall arise
favoring or disfavoring either Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance.
(k) INCORPORATION OF EXHIBITS, ANNEXES, AND SCHEDULES. The Exhibits,
Annexes, and Schedules identified in this Agreement are incorporated herein by
reference and made a part hereof.
(l) WARRANT. Contemporaneous with the execution hereof, EqualNet shall
execute and deliver to Netco Acquisition the Warrant Agreement in the form of
Exhibit G attached hereto and a duly completed Warrant Certificate in the form
attached as Exhibit A to the such Warrant Agreement.
(m) CERTAIN SHAREHOLDERS. By December 10, 1997, EqualNet shall deliver to
Netco Acquisition the form of agreement attached as Exhibit H hereto duly
executed by the indicated shareholders.
-35-
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
EQUALNET HOLDING CORP.
By: /s/ ZANE RUSSELL
Name: ZANE RUSSELL
Title: CEO
EQ ACQUISITION SUB, INC.
By: /s/ MICHAEL L. HLINAK
Name: MICHAEL L. HLINAK
Title: COO
NETCO ACQUISITION CORP.
By: /s/ MARK WILLIS
Name: MARK WILLIS
Title: PRES.
NETCO ACQUISITION, LLC
By: /s/ JAMES T. HARRIS
Name: JAMES T. HARRIS
Title: SECRETARY
[signature page to Agreement of Merger and Plan of Reorganization]
-36-
<PAGE>
x x x x x x x x x x x x
TWG, MCM and ADV are joining in this Agreement solely for the purpose of
making the representations and agreements set forth in Section 4(j) and the
agreements set forth in the following provisions of this paragraph. As to each
representation and agreement set forth in Section 4(j), each of TWG, MCM and ADV
hereby (a) make such representation only as to itself and (where applicable) the
Shares acquired by it and (b) make such agreements only as to itself and (where
applicable) the Shares acquired by it. As an inducement to EqualNet and Sub to
enter into this Agreement, ADV agrees to make to Netco Acquisition and Netco the
Working Capital Loans and Additional Working Capital Loan contemplated and as
required on its part by Section 4.03 of the Limited Liability Company Agreement
of Netco Acquisition (up to an aggregate principal amount of $1,500,000), and at
the Closing ADV agrees to convert such Working Capital Loans and Additional
Working Capital Loan made by ADV into and in exchange for the EqualNet Common
Shares to be issued pursuant to Section 2(b)(ii) of this Agreement with respect
to the Working Capital Loans and Additional Working Capital Loan made by ADV. As
an inducement to EqualNet and Sub to enter into this Agreement, TWG agrees to
make to Netco Acquisition the Working Capital Loans contemplated and required on
its part by Section 4.03 of the Limited Liability Company Agreement of Netco
Acquisition (up to an aggregate principal amount of $1,500,000), and at the
Closing TWG agrees to convert such Working Capital Loans made by TWG into and in
exchange for the EqualNet Common Shares to be issued pursuant to Section
2(b)(ii) of this Agreement with respect to the Working Capital Loans made by
TWG.
WILLIS GROUP, LLC
By: /s/ MARK WILLIS
Name: MARK WILLIS
Title: PRES.
[signature page to Agreement of Merger and Plan of Reorganization]
-37-
<PAGE>
MCM PARTNERS
By: /s/ DONALD R. MORKEN
Name: DONALD R. MORKEN
Title: GENERAL PARTNER OF MCM PARTNERS
ADVANTAGE FUND, LTD.
By: /s/ ARNO DE GROOT
Name: ARNO DE GROOT
Title: PRESIDENT
[signature page to Agreement of Merger and Plan of Reorganization]
-38-
<PAGE>
AMENDMENT TO
AGREEMENT OF MERGER AND PLAN OF REORGANIZATION
This Amendment to that certain Agreement of Merger and Plan of
Reorganization (the "Agreement") dated December 2, 1997 by and among EqualNet
Holding Corp., EQ Acquisition Sub, Inc., Netco Acquisition, LLC, Netco
Acquisition Corp. Willis Group, LLC, MCM Partners, and Advantage Fund, Ltd., is
entered into as of December 19, 1997 for the following purposes:
Whereas, subparagraphs 7.(a)(iii) and 7.(a)(iv) of the Agreement allow
each party certain rights to terminate the Agreement if the conditions for
closing of the transactions contemplated in such agreement are not completed by
February 1, 1998; and
Whereas the parties herto desire to change such date,
Now, therefore, the parties hereto agree as follows: the date "February
1, 1998" contained in subaragraphs 7.(a)(iii) and 7.(a)(iv) of the Agreement is
hereby changed and amended in each instance to "March 31, 1998".
No other change, amendment or modification of the Agreement is hereby
made. This Amendment is signed effective December 19, 1997. This Amendment may
be executed in multiple counterpart originals, all of which taken together shall
constitute one document. A facsimile signature of any of the undersigned shall
have the same force and effect as an original signature.
EqualNet Holding Corp. EQ Acquisition Sub, Inc.
By: /s/ MICHAEL L. HLINAK By: /s/ MICHAEL L. HLINAK
Michael L. Hlinak, C.O.O Michael L. Hlinak, President
Netco Acquisition, LLC Netco Acquisition Corp.
By: /s/ MARK WILLIS By: /s/ MARK WILLIS
Mark Willis, President Mark Willis, President
Page 1 of Amendment
<PAGE>
Willis Group, LLC MCM Partners
By: /s/ MARK WILLIS By: /s/ DONALD R. MORKEN
Mark Willis, President Donald R. Morken, General
Partner
Advantage Fund, Ltd.
By: /s/ ARNO DE GROOT
Arno De Groot, President
Page 2 of Amendment
<PAGE>
AMENDMENT TO AGREEMENT OF MERGER
AND PLAN OF REORGANIZATION
This Amendment to Agreement of Merger and Plan of Reorganization
("Amendment") is entered into as of February 12, 1998, by and between
EqualNet Holding Corp. ("EqualNet"), EQ Acquisition Sub, Inc. ("Sub"), Netco
Acquisition, LLC ("Netco Acquisition"), and Netco Acquisition Corp. ("Netco").
RECITALS
Each of the parties referenced in the preamble to this Amendment is a
party to an Agreement of Merger and Plan of Reorganization dated December 2,
1997 (the "Agreement"). Any capitalized term used but not defined herein shall
have the meaning ascribed to such term in the Agreement or in the below
referenced Statement of Resolutions establishing Series of Shares, as
applicable.
The Parties desire to amend the Agreement in accordance with the terms of
this Amendment.
NOW, THEREFORE, in and for the covenants and agreements set forth herein,
the Parties agree as follows:
1. Exhibit B to the Agreement (Statement of Resolutions establishing
Series of Shares) shall be amended by replacing the reference to "$1.20" in
Section 6(a) thereof with "$1.00".
2. Exhibit B to the Agreement is generally amended to include a covenant
on the part of EqualNet that it will use its best efforts to cause the number of
shares of EqualNet Common Stock authorized under EqualNet's Articles of
Incorporation to be increased to permit the full conversion of the Series A
Convertible Preferred Stock and a limitation on the holder of the Series A
Convertible Preferred Stock to the effect that the obligation of EqualNet to
issue shares upon the conversion of the Series A Convertible Preferred Stock in
whole or in part shall be conditioned upon EqualNet having a number of
unreserved authorized shares of EqualNet Common Stock at such time sufficient to
cover the number of shares relating to the conversion. Netco Acquisition and
Netco agree to cause the holders of any EqualNet Common Shares issued by
EqualNet pursuant to the Agreement to affirmatively vote such shares for such
increase in the unreserved authorized number of EqualNet Common Shares.
By entering into this Amendment, neither Netco Acquisition nor Netco
waives by implication or otherwise any of the conditions set forth in Section
6.1(a) of the Agreement. This Amendment contains the entire understanding and
agreement between the Parties with respect to the subject matter of this
Amendment and supersedes any prior or contemporaneous statements, understandings
or agreements with respect to such subject matter.
<PAGE>
EQUALNET HOLDING CORP.
By: /s/ MICHAEL L. HLINAK
Name: Michael L. Hlinak
Title: Senior Vice President
EQ ACQUISITION SUB, INC.
By: /s/ MICHAEL L. HLINAK
Name: Michael L. Hlinak
Title: President
NETCO ACQUISITION, LLC
By: /s/ JAMES T. HARRIS
Name: James T. Harris
Title: Vice President
NETCO ACQUISITION CORP.
By: /s/ JAMES T. HARRIS
Name: James T. Harris
Title: Vice President
-2-
<PAGE>
ANNEX D--STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT
By and Among
THE WILLIS GROUP, LLC
and
EQUALNET HOLDING CORP.
Dated as of December 2, 1997
<PAGE>
TABLE OF CONTENTS
Page
1. Definitions. .........................................................1
2. Purchase and Sale of Common Stock; Closing.............................4
2A. Purchase and Sale of Common Stock...............................4
2B. Closing.........................................................5
3. Purchaser's Conditions of Closing......................................5
3A. Opinion of the Company's Counsel................................5
3B. Representations and Warranties..................................5
3C. Charter Documents and By-Laws...................................5
3D. Purchase Permitted by Applicable Laws...........................5
3E. Letter of Accountants; Accompanying Officer's Certificate.......5
3F. Shareholder Approval............................................6
3G. Compliance with Securities Laws.................................6
3H. No Adverse U.S. Legislation, Action or Decision.................6
3I. Approvals and Consents..........................................6
3J. Board Nominees..................................................6
3K. No Material Adverse Change. There shall not have occurred
any Material Adverse Change with respect to the Company since
the date hereof.................................................6
3L. Network Transactions............................................6
4. Company's Conditions of Closing........................................7
4A. Representations and Warranties..................................7
4B. Purchase of Shares..............................................7
4C. Shareholder Approval............................................7
4D. No Adverse Action or Decision...................................7
4E. Network Transactions............................................7
5. Affirmative Covenants..................................................7
5A. Conduct of Business of the Company..............................7
5B. Valid Issuance.................................................10
5C. Government Regulations.........................................10
5D. ERISA..........................................................10
5E. Corporate Existence; Maintenance of Properties.................11
5F. Insurance......................................................11
5G. Further Assurances.............................................11
5H. Securities Act Registration Statements.........................11
5I. Notices of Certain Events......................................12
5J. Board Nominees.................................................12
(i)
<PAGE>
5K. Environmental Laws.............................................12
5L. Registration Rights............................................12
5M. Shareholder Approval; Preparation of Proxy Statements..........13
5N. No Solicitation................................................13
5O. Listing of Common Stock........................................15
6. Representations and Warranties........................................15
6A. Corporate Existence............................................15
6B. Corporate Power and Authorization..............................15
6C. Board Recommendation...........................................15
6D. Binding Obligations............................................16
6E. No Violation...................................................16
6F. Consents.......................................................16
6G. Financial Information..........................................16
6H. Liabilities....................................................17
6I. Litigation.....................................................17
6J. Compliance with ERISA..........................................17
6K. Taxes; Governmental Charges....................................17
6L. Defaults.......................................................17
6M. Compliance with the Law........................................18
6N. Investment Company Act.........................................18
6O. Public Utility Holding Company Act.............................18
6P. Fees and Commissions...........................................18
6Q. Disclosure.....................................................18
6R. Structure; Capitalization......................................18
6S. Environmental Matters..........................................19
6T. Intellectual Property and Other Intangible Assets..............20
6U. Insurance Coverage.............................................21
7. Representations and Warranties of Purchaser...........................21
7A. Purchase for Investment........................................21
7B. Authorization; No Conflict.....................................22
8. Termination, Amendment and Waiver.....................................22
8A. Termination....................................................22
8B. Effect of Termination..........................................23
9. Miscellaneous.........................................................23
9A. Fees and Expenses..............................................23
9B. Amendment......................................................23
9C. Extension; Waiver..............................................23
9D. Assignment.....................................................24
9E. Survival of Representations and Warranties.....................24
9F. Successors and Assigns; No Third Party.........................24
9G. Notices........................................................24
9H. Descriptive Headings...........................................24
9I. Satisfaction Requirement.......................................24
(ii)
<PAGE>
9J. Governing Law; Consent to Jurisdiction.........................25
9K. Remedies.......................................................25
9L. Entire Agreement...............................................25
9M. Severability...................................................25
9N. Counterparts...................................................25
9O. Brokerage......................................................25
(iii)
<PAGE>
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT (this "Agreement") is made as of December
2, 1997, by and among WILLIS GROUP, LLC, a Texas limited liability company (the
"Purchaser"), and EQUALNET HOLDING CORP., a Texas corporation (the "Company").
RECITALS
Purchaser desires to purchase from the Company, and the Company desires
to issue and sell to Purchaser, subject to the terms and conditions set forth
herein, 4,000,000 shares of Common Stock (as hereinafter defined) of the
Company.
AGREEMENTS
In consideration of the recitals and the mutual covenants herein
contained and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto hereby agree as follows:
1. DEFINITIONS. For the purpose of this Agreement, and in addition to
terms defined elsewhere in this Agreement, the following terms shall have the
following meanings. In addition, all terms of an accounting character not
specifically defined herein shall have the meanings assigned thereto by
accounting principles generally accepted in the United States of America.
"AFFILIATE" shall mean, with respect to any Person, a Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person, except a Subsidiary of such Person. A Person shall be
deemed to control a corporation if such Person possesses, directly or
indirectly, the power to direct or cause the direction of the management and
policies of such corporation, whether through the ownership of voting
securities, by contract or otherwise.
"BUSINESS DAY" shall mean any day which is not a Saturday, Sunday or day
on which banks are authorized by law to close in the States of New York and
Texas.
"CAPITALIZED LEASE OBLIGATIONS" shall mean all rental obligations which,
under GAAP in effect on the day such obligation is incurred, are required to be
capitalized on the books of the Company or any Subsidiary, in each case taken at
the amount thereof accounted for as indebtedness (net of interest expense) in
accordance with such principles.
"CODE" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
"COMMISSION" shall mean the United States Securities and Exchange
Commission.
"CURRENT INDEBTEDNESS" shall mean any obligation for borrowed money
(including notes payable and drafts accepted representing extensions of credit
whether or not representing obligations for borrowed money) payable on demand or
within a period of one year from the date of creation thereof; PROVIDED that any
obligation shall be treated as Funded Indebtedness, regardless of its term, if
such obligation is renewable pursuant to the terms thereof or of a revolving
credit or similar agreement effective for more than one year after the date of
the creation of such obligation, or may
1
<PAGE>
be payable out of the proceeds of a similar obligation pursuant to the terms of
such obligation or of any such agreement. Any obligation secured by a Lien on,
or payable out of the proceeds of production from, property of the Company or
any Subsidiary shall be deemed to be Funded or Current Indebtedness, as the case
may be, of the Company or such Subsidiary even though such obligation shall not
be assumed by the Company or such Subsidiary.
"ENVIRONMENTAL LAW" shall mean any judgment, decree, order, law,
license, rule, regulation or private agreement (such as covenants, conditions,
and restrictions), of any federal, state or local executive, legislative,
judicial, regulatory or administrative agency, board, or authority designed to
protect the environment, air, surface, water, groundwater or soil, control
pollution, or regulate the exploration, manufacturing, processing, distributing,
use, storage, transport or handling of Hazardous Materials, including, without
limitation, the Comprehensive Environmental Response, Compensation, and
Liability Act (42 U.S.C. ss. 9601 ET SEQ.) ("CERCLA"), the Oil Pollution Act (33
U.S.C. ss. 2701 ET SEQ.) ("OPA"), the Resource Conservation and Recovery Act (42
U.S.C. ss. 6901 ET SEQ.) ("RCRA"), and the Federal Water Pollution Control Act
(33 U.S.C. ss. 1251 ET SEQ.) ("CWA"), as such laws have been or hereafter may be
amended or supplemented, and any and all analogous present and future federal,
state, and local laws in jurisdictions where the Company and its Subsidiaries do
business.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time. Section references to ERISA are to ERISA as in
effect at the date of this Agreement and any subsequent provisions of ERISA
amendatory thereof, supplemental thereto or substituted therefor.
"ERISA AFFILIATE" shall mean each trade or business (whether or not
incorporated) which together with the Company or a Subsidiary of the Company
would be deemed to be a "single employer" within the meaning of Section 4001 of
ERISA immediately following the acquisition.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
"FUNDED INDEBTEDNESS" shall mean and include without duplication any
obligation payable more than one year from the date of the creation thereof
(including the current portion of Funded Indebtedness), which under GAAP is
shown on the balance sheet as a liability (including, without limitation,
Capitalized Lease Obligations and excluding reserves for deferred income taxes
and other reserves to the extent that such reserves do not constitute an
obligation).
"GAAP" shall mean generally accepted accounting principles consistently
applied throughout the period or periods in question.
"GOVERNMENTAL AUTHORITY" shall mean any foreign or domestic federal,
state, county, municipal, or other governmental or regulatory authority, agency,
board, body, commission, instrumentality, court, or any political subdivision
thereof.
"GOVERNMENTAL REQUIREMENT" shall mean any law, statute, code,
ordinance, order, rule, regulation, judgment, decree, injunction, franchise,
permit, certificate, license, authorization, or other direction or requirement
(including but not limited to any of the foregoing which relate to
2
<PAGE>
Environmental Laws, energy regulations and occupational, safety and health
standards or controls) of any Governmental Authority.
"HAZARDOUS MATERIALS" shall mean, collectively, (i) those substances
included within the definition of or identified as "hazardous substances,"
"hazardous materials," "toxic substances," or "solid waste" in or pursuant to,
without limitation, CERCLA, OPA, RCRA, and the Occupational Health and Safety
Act, and in the regulations promulgated pursuant to said laws, all as amended;
(ii) any material, waste or substance which is or contains (A) petroleum,
including crude oil or any fraction thereof, natural gas, or synthetic gas
usable for fuel or any mixture thereof; (B) asbestos; (C) polychlorinated
biphenyls; (D) designated as a "hazardous substance" pursuant to Section 307 or
311 of the CWA; (E) flammable explosives; or (F) radioactive materials; and
(iii) any such other substances, materials and wastes which are or become
regulated as hazardous or toxic under applicable local, state or federal law, or
which are currently classified as hazardous or toxic under local, state or
federal laws or regulations.
"INDEBTEDNESS" shall mean Funded Indebtedness and/or Current
Indebtedness.
"LIEN" shall mean any mortgage, pledge, security interest, encumbrance,
lien or charge of any kind (including any agreement to give any of the
foregoing, any conditional sale or other title retention agreement, any lease in
the nature thereof, and the filing of or agreement to give any financing
statement or like instrument under the laws of any jurisdiction).
"MATERIAL ADVERSE EFFECT" or "MATERIAL ADVERSE CHANGE" means any
material and adverse effect on, or change to, (i) the assets, liabilities,
financial condition, business, or operations of the Company and its Subsidiaries
on a Consolidated basis, or (ii) the ability of the Company and its Subsidiaries
on a Consolidated basis to carry out their business as at the date of this
Agreement.
"NASDAQ" shall mean the Nasdaq Stock Market, Inc., National Market
System.
"NETWORK AGREEMENT AND PLAN OF REORGANIZATION" shall mean that certain
agreement by and among the Company, EQ Acquisition Sub, Inc., Netco Acquisition,
L.L.C. and Netco Acquisition Co., dated as of the date of this Agreement.
"SWITCH AGREEMENT" shall mean that certain agreement by and among the
Company, EQ Acquisition Sub, Inc. and the Purchaser dated as of the date of this
Agreement.
"NOTE AND WARRANT PURCHASE AGREEMENT" shall mean that certain agreement
by and among the Purchaser, the Company and its Subsidiaries dated as of October
1, 1997.
"OFFICER'S CERTIFICATE" shall mean a certificate signed in the name of
the delivering party, by its President, one of its Vice Presidents, its
Treasurer or other authorized officer so designated by the receiving party.
"PBGC" shall mean the Pension Benefit Guaranty Corporation established
pursuant to Section 4002 of ERISA, or any successor entity thereto.
3
<PAGE>
"PENSION PLAN" shall mean any multiemployer plan or single-employer
plan, as defined in Section 4001 of ERISA and subject to Title IV of ERISA,
which is maintained after the Acquisition for employees of the Company, any of
its Subsidiaries or any ERISA Affiliates.
"PERMITS" shall mean all licenses, permits, exceptions, franchises,
accreditations, privileges, rights, variances, waivers, approvals and other
authorizations (including, without limitation, those relating to environmental
matters) of, by or from Governmental Authorities necessary for the conduct of
the business of the Company and its Subsidiaries immediately prior to the
Closing and as proposed to be conducted by the Company and its Subsidiaries
after the Closing.
"PERSON" shall mean and include an individual, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization, a limited
liability company and a government or any department or agency thereof.
"RELEASE" shall mean release, spill, emission, leaking, pumping,
injection, deposit, disposal, discharge, dispersal, leaching or migration into
the environment or into or out of any property, including the movement of
Hazardous Materials through or in the air, surface water, or groundwater.
"REMEDIAL ACTION" shall mean any action required by any federal, state
or judicial body or administration or agency acting under an Environmental Law
to (i) clean up, remove or treat Hazardous Materials in the environment; (ii)
prevent a Release or threat of Release or minimize the further Release of
Hazardous Materials so they do not migrate or endanger or threaten to endanger
public health or the environment; (iii) perform post-remedial monitoring and
care; or (iv) cure a violation of any Environmental Law.
"REPORTABLE EVENT" shall mean an event described in Section 4043(b) of
ERISA with respect to which the 30-day notice requirement has not been waived by
the PBGC.
"RESPONSIBLE OFFICER" shall mean the President, any Vice President (of
whatever designation), the Treasurer or the Secretary or any officers performing
functions similar to those performed by the persons who at the time shall be
such officers.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended.
"SINGLE-EMPLOYER PENSION PLAN" shall mean a Pension Plan which is a
"single-employer plan" as defined in Section 4001 of ERISA.
"SUBSIDIARY" shall mean any corporation or similar entity a majority of
the stock of every class of which, except directors' qualifying shares, shall,
at the time as of which any determination is being made, be owned by the
Company, either directly or indirectly.
2. PURCHASE AND SALE OF COMMON STOCK; CLOSING.
2A. PURCHASE AND SALE OF COMMON STOCK. The Company, subject to the terms
and conditions herein set forth, hereby agrees to sell to the Purchaser and,
subject to the terms and conditions herein set forth, the Purchaser agrees to
purchase from the Company, 4,000,000 shares (the "Shares") of the Company's
Common Stock, par value $.01 per share (the "Common Stock")
4
<PAGE>
at a purchase price of $1.00 per share, which will represent approximately 41%,
together with other Common Stock, warrants and convertible notes which will be
held by Purchaser on the Closing Date, of the Company's outstanding Common Stock
on a fully diluted basis on the Closing Date.
2B. CLOSING. The purchase and delivery of the Shares shall take place at
a closing (the "Closing") at the offices of Vinson & Elkins L.L.P., Houston,
Texas, at 10:00 a.m., local time, on January 28, 1998, or at such other time and
place or on such other business day thereafter as the parties hereto may agree
(herein called the "Closing Date"). On the Closing Date, the Company will
deliver the Shares in definitive form, and in such authorized denominations as
the Purchaser may request (such request to be in writing and delivered to the
Company at least forty-eight hours prior to the Closing), against receipt of the
purchase price therefor by wire transfer of immediately available funds, to the
Company, or by such other payment method as is mutually agreed to by the
Purchaser and the Company.
3. PURCHASER'S CONDITIONS OF CLOSING. The Purchasers' obligation to
purchase and pay for the Shares is subject to the satisfaction or waiver, on or
before the Closing Date, of the conditions contained in Paragraphs 3A through
3L.
3A. OPINION OF THE COMPANY'S COUNSEL. The Purchaser shall have received
from Fulbright & Jaworski L.L.P., special counsel for the Company, a legal
opinion addressed to the Purchaser and dated the Closing Date substantially in
the form attached hereto as Exhibit A.
3B. REPRESENTATIONS AND WARRANTIES. The representations and warranties
contained in Paragraph 6 hereof shall be true in all material respects on and as
of the Closing Date, except to the extent of changes caused by the transactions
herein contemplated; and the Company shall have delivered to the Purchaser an
Officer's Certificate, dated the Closing Date, to such effect.
3C. CHARTER DOCUMENTS AND BY-LAWS. The Purchaser shall have received a
certificate, dated the Closing Date, of the Secretary of the Company attaching
(i) a true and complete copy of the Company's Articles of Incorporation with all
amendments thereto, as filed with the Secretary of State of the State of Texas,
(ii) a true and complete copy of the Company's By-Laws in effect as of such
date, (iii) certificates of good standing of the appropriate officials of the
jurisdiction of incorporation of the Company, and (iv) resolutions of the Board
of Directors of the Company authorizing the execution and delivery of this
Agreement and the issuance of the Shares.
3D. PURCHASE PERMITTED BY APPLICABLE LAWS. The purchase of and payment
for the Shares shall not be prohibited by any applicable law or governmental
regulation (including, without limitation, Regulations G, T and X of the Board
of Governors of the Federal Reserve System) and such purchase and payment shall
not in and of themselves subject the Purchaser to any material tax, penalty,
liability or other materially onerous condition under or pursuant to any
applicable law or governmental regulation.
3E. LETTER OF ACCOUNTANTS; ACCOMPANYING OFFICER'S CERTIFICATE. The
Purchaser shall have received a certificate from the chief financial officer or
chief executive officer of the Company, dated the Closing Date, to the effect
that the interim financial statements at or for the period ended September 30,
1997, have been prepared using the same accounting policies as those used in
preparing the financial statements for the year ended June 30, 1997 (except as
such policies were
5
<PAGE>
otherwise required to be changed or modified by the Company during the interim
period by an appropriate Governmental Authority or the American Institute of
Certified Public Accountants ("AICPA") or similar accounting boards or bodies),
and that since June 30, 1997, such policies have been used in maintaining the
Company's accounting books and records.
3F. SHAREHOLDER APPROVAL. The Company shall have obtained the approval
of its shareholders at the Shareholders Meeting (as defined herein) for the
matters set forth in Paragraph 5M.
3G. COMPLIANCE WITH SECURITIES LAWS. The offering and sale of the Shares
under this Agreement shall have complied with all applicable requirements of
federal and state securities laws.
3H. NO ADVERSE U.S. LEGISLATION, ACTION OR DECISION. Subsequent to the
date hereof, no legislation, order, rule, ruling or regulation shall have been
enacted or made by or on behalf of any governmental body, department or agency
of the United States, nor shall any legislation have been introduced and
favorably reported for passage to either House of Congress by any committee of
either such House to which such legislation has been referred for consideration,
nor shall any decision of any court of competent jurisdiction within the United
States have been rendered which would materially and adversely affect an
investment in the Shares. There shall be no action, suit, investigation or
proceeding pending, or to the Company's knowledge, threatened, against or
affecting the Company or any of its Subsidiaries, or any of their respective
properties or rights, or any of their affiliates, associates, officers or
directors, before any court, arbitrator or administrative or governmental body
which (i) seeks to restrain, enjoin, prevent the consummation of or otherwise
adversely affect the transactions contemplated by this Agreement or (ii)
questions the validity or legality of any such transaction or seeks to recover
damages or to obtain other relief in connection with any such transaction, and
to the Company's knowledge there shall be no valid basis for any such action,
proceeding or investigation.
3I. APPROVALS AND CONSENTS. The Company shall have duly received all
authorizations, consents, approvals, licenses, franchises, permits and
certificates by or of all federal, state and local governmental authorities, by
any third parties pursuant to the terms of any agreement to which the Company is
a party or by the National Association of Securities Dealers, Inc. or any other
body or agency with jurisdiction, by contract or otherwise, over the Company,
necessary for the issuance of the Shares by the Company and the consummation of
the transactions contemplated hereby, and all thereof shall be in full force and
effect at the time of the Closing. The Company shall have delivered to the
Purchaser an Officer's Certificate, dated the Closing Date, to such effect.
3J. BOARD NOMINEES. The nominees designated by the Purchaser shall have
been appointed to the Company's Board of Directors effective upon the Closing.
3K. NO MATERIAL ADVERSE CHANGE. There shall not have occurred any
Material Adverse Change with respect to the Company since the date hereof.
3L. NETWORK TRANSACTIONS. The Company shall have simultaneously closed
the transactions pursuant to the Network Agreement and Plan of Reorganization
and the Switch Agreement.
6
<PAGE>
4. COMPANY'S CONDITIONS OF CLOSING. The Company's obligations to sell
the Shares hereunder is subject to the satisfaction or waiver, on or before the
Closing Date, of the conditions contained in Paragraphs 4A through 4E.
4A. REPRESENTATIONS AND WARRANTIES. The representations and warranties
contained in Paragraph 7 hereof shall be true in all material respects on and as
of the Closing Date; and the Purchaser shall have delivered to the Company an
Officer's Certificate, dated the Closing Date, to such effect.
4B. PURCHASE OF SHARES. The Purchaser shall have purchased and paid for
the Shares.
4C. SHAREHOLDER APPROVAL. The Company shall have obtained the approval
of its shareholders at the Shareholders Meeting (as defined herein) for the
matters set forth in Paragraph 5M.
4D. NO ADVERSE ACTION OR DECISION. There shall be no action, suit,
investigation or proceeding pending, or to the Company's knowledge, threatened,
against or affecting the Company or any of its Subsidiaries, or any of their
respective properties or rights, or any of their affiliates, associates,
officers or directors, before any court, arbitrator or administrative or
governmental body which (i) seeks to restrain, enjoin, prevent the consummation
of or otherwise adversely affect the transactions contemplated by this Agreement
or (ii) questions the validity or legality of any such transaction or seeks to
recover damages or to obtain other relief in connection with any such
transaction.
4E. NETWORK TRANSACTIONS. The Company shall have simultaneously closed
the transactions pursuant to the Network Agreement and Plan of Reorganization
and the Network Switches Agreement and Plan of Reorganization.
4F. LISTING. The Shares shall have been approved for listing, subject
to official notice of issuance, on the NASDAQ National Market as of the Closing
Date.
5. AFFIRMATIVE COVENANTS. All covenants contained herein shall be given
independent effect.
5A. CONDUCT OF BUSINESS OF THE COMPANY.
(a) ORDINARY COURSE. Except as set forth in SCHEDULE 5(A)(a), during the
period from the date of this Agreement to the Closing Date (except for
transactions to which Purchaser or its affiliates are a party or as otherwise
specifically contemplated by the terms of this Agreement), the Company shall and
shall cause its Subsidiaries to carry on their respective businesses in the
usual, regular and ordinary course in substantially the same manner as
heretofore conducted and, to the extent consistent therewith, use commercially
reasonable efforts to preserve intact their current officers and employees and
preserve their relationships with customers, suppliers, licensors, licensees,
distributors and others having business dealings with them, in each case
consistent with past practice, to the end that their goodwill and ongoing
businesses shall be unimpaired to the fullest extent possible at the Closing
Date. Without limiting the generality of the foregoing, and except as otherwise
7
<PAGE>
expressly contemplated by this Agreement and the Schedules hereto, the Company
shall not, and shall not permit any of its Subsidiaries to:
(i) (A) declare, set aside or pay any dividends on, or make any
other distributions in respect of, any of its capital stock, other than
dividends and distributions by any direct or indirect wholly owned
Subsidiary of the Company to the Company or a wholly owned Subsidiary of
the Company, (B) split, combine or reclassify any of its capital stock
or issue or authorize the issuance of any other securities in respect
of, in lieu of or in substitution for shares of its capital stock or (C)
purchase, redeem or otherwise acquire any shares of capital stock of the
Company or any of its Subsidiaries or any other securities thereof or
any rights, warrants or options to acquire any such shares or other
securities other than in connection with the exercise of outstanding
stock options and warrants and satisfaction of withholding obligations
under outstanding stock options and restricted stock;
(ii) issue, deliver, sell, pledge or otherwise encumber any
shares of its capital stock, any other voting securities or any
securities convertible into, or any rights, warrants or options to
acquire, any such shares, voting securities or convertible securities
other than, in the case of the Company, the issuance of shares of Common
Stock upon the exercise of stock options and warrants outstanding on the
date of this Agreement in accordance with their current terms;
(iii) amend its Articles of Incorporation, By-laws or other
comparable charter or organizational document;
(iv) acquire or agree to acquire (A) by merging or consolidating
with, or by purchasing a substantial portion of the stock or assets of,
or by any other manner, any business or any corporation, partnership,
association, joint venture, limited liability company or other entity or
division thereof or (B) any assets that, in each case, would be
material, individually or in the aggregate, to the Company and its
Subsidiaries taken as a whole, except purchases in the ordinary course
of business consistent with past practice;
(v) sell, lease, mortgage, pledge, grant a Lien on or otherwise
encumber or dispose of any of its properties or assets, except (A) sales
or leases in the ordinary course of business consistent with past
practice and (B) other immaterial transactions not in excess of $250,000
in the aggregate;
(vi) (A) incur indebtedness for borrowed money or guarantee any
such indebtedness of another Person, issue or sell any debt securities
or warrants or other rights to acquire any debt securities of the
Company or any of its Subsidiaries, guarantee any debt securities of
another Person, enter into any "keep well" or other agreement to
maintain any financial statement condition of another Person or enter
into any arrangement having the economic effect of any of the foregoing,
except for working capital borrowings under currently existing revolving
credit facilities incurred in the ordinary course of business, or (B)
make any loans, advances or capital contributions to, or investments in,
any other Person that would be material, individually or in the
aggregate, to the Company and its Subsidiaries taken as a whole, other
than to the Company or any direct or indirect wholly owned Subsidiary of
the Company;
8
<PAGE>
(vii) make or incur any new capital expenditure (other than
purchases in the ordinary course of business), which, singly or in the
aggregate with all other expenditures, would exceed $100,000;
(viii) make any material election relating to Taxes or settle or
compromise any material Tax liability;
(ix) pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction, in the
ordinary course of business consistent with past practice or in
accordance with their terms, of liabilities reflected or reserved
against in, or contemplated by, the most recent consolidated financial
statements (or the notes thereto) of the Company included in the
Commission Documents or incurred in the ordinary course of business
consistent with past practice;
(x) waive the benefits of, or agree to modify in any manner, any
confidentiality, standstill or similar agreement to which the Company or
any of its Subsidiaries is a party;
(xi) adopt a plan of complete or partial liquidation or
resolutions providing for or authorizing such a liquidation or a
dissolution, merger, consolidation, restructuring, recapitalization or
reorganization;
(xii) enter into any new collective bargaining agreement;
(xiii) change any material accounting principle used by it,
except as required by regulations promulgated by the Commission or as
mandated by AICPA or similar accounting boards or bodies;
(xiv) settle or compromise any litigation (whether or not
commenced prior to the date of this Agreement) other than settlements or
compromises: (A) of litigation where the amount paid in settlement or
compromise does not exceed $100,000, or (B) in consultation and
cooperation with the Purchaser, and, with respect to any such
settlement, with the prior written consent of the Purchaser, which shall
not be unreasonably withheld or delayed;
(xv) except for those contracts and agreements entered into in
the ordinary course of business with the consent of the Purchaser, which
consent shall not be unreasonably withheld or delayed, enter into any
joint venture or partnership contract or agreement; or
(xvi) authorize any of, or commit or agree to take any of, the
foregoing actions.
(b) CHANGES IN EMPLOYMENT ARRANGEMENTS. During the period from the date
of this Agreement to the Closing Date, neither the Company nor any of its
Subsidiaries shall adopt or amend (except as may be required by law) any bonus,
profit sharing, compensation, stock option, pension, retirement, deferred
compensation, employment or other employee benefit plan, agreement, trust, fund
or other arrangement for the benefit or welfare of any employee, director or
former director or employee, increase the compensation or fringe benefits of any
officer of the Company or any of its Subsidiaries, or, except as provided in an
existing benefit plan or in the ordinary course of business
9
<PAGE>
consistent with past practice, increase the compensation or fringe benefits of
any employee or former employee or pay any benefit not required by any existing
plan, arrangement or agreement.
(c) SEVERANCE. During the period from the date of this Agreement to the
Closing Date, neither the Company nor any of its Subsidiaries shall grant any
new or modified severance or termination arrangement or increase or accelerate
any benefits payable under its severance or termination pay policies in effect
on the date hereof.
(d) OTHER ACTIONS. During the period from the date of this Agreement to
the Closing Date, the Company shall not, and shall not permit any of its
Subsidiaries to, take any action that would, or that could reasonably be
expected to, result (i) in any of the representations and warranties of the
Company set forth in this Agreement becoming untrue or (ii) in any of the
covenants contained in this Agreement becoming unperformable. Pending the
Closing, the Company will promptly advise the Purchaser of any action or event
of which they become aware which has the effect of making incorrect any of such
representations or warranties or which has the effect of rendering unperformable
any of such covenants.
5B. VALID ISSUANCE. The Company covenants that the Shares will, upon
issuance and upon full payment therefor in accordance with the terms hereof, be
validly issued, fully paid and nonassessable and free from all taxes, liens and
charges with respect to the issuance thereof.
5C. GOVERNMENT REGULATIONS. The Company covenants that it will comply,
and will cause each of its Subsidiaries to comply, with all applicable
governmental restrictions and regulations, the failure to comply with which
would have a material adverse effect on the business or financial condition of
the Company and its Subsidiaries taken as a whole, and obtain and maintain in
good standing all licenses, permits and approvals from any and all governments,
governmental commissions, boards or agencies of jurisdictions in which it or any
of its Subsidiaries carries on business required in respect of the operations of
the Company or any of its Subsidiaries, the failure to comply with which would
have a material adverse effect on the business or financial condition of the
Company and its Subsidiaries taken as a whole.
5D. ERISA. Promptly (and in any event within 30 days) after the Company
or any of its Subsidiaries knows or has reason to know that a Reportable Event
with respect to any Pension Plan has occurred, that any Pension Plan is or may
be terminated, reorganized, partitioned or declared insolvent under Title IV of
ERISA or that the Company or any of its Subsidiaries will or may incur any
liability to or on account of a Pension Plan under Sections 4062, 4063, 4064,
4201 or 4204 of ERISA, the Company will deliver to the Purchaser a certificate
of the chief financial officer of the Company setting forth information as to
such occurrence and what action, if any, the Company is required or proposes to
take with respect thereto, together with any notices concerning such occurrences
which are (a) required to be filed by the Company or the plan administrator of
any such Pension Plan controlled by the Company or its Subsidiaries, with the
PBGC or (b) received by the Company or its Subsidiaries from any plan
administrator of a multiemployer or other Pension Plan not under their control.
The Company shall furnish to the Purchaser a copy of each annual report (Form
5500 Series) of any Pension Plan received or prepared by the Company or any of
its Subsidiaries. Each annual report and any notice required to be delivered
hereunder shall be delivered no later than 10 days after the later of the date
such report or notice is filed with the Internal Revenue
10
<PAGE>
Service or the PBGC or the date such report or notice is received by the Company
or any of its Subsidiaries, as the case may be.
5E. CORPORATE EXISTENCE; MAINTENANCE OF PROPERTIES. The Company
covenants that it (i) will do or cause to be done all things reasonably
necessary to preserve and keep in full force and effect the corporate existence
and material rights of the Company and all of its Subsidiaries, (ii) will cause
its properties and the properties of its Subsidiaries used or useful in the
conduct of their respective businesses to be maintained and kept in good
condition, repair and working order and will use commercially reasonable efforts
to cause to be made all necessary repairs, renewals, replacements, betterments
and improvements thereto, and (iii) will, and will cause each of its
Subsidiaries to, qualify and remain qualified to conduct business in each
jurisdiction where the nature of the business or the ownership of property by
the Company or such Subsidiary may require such qualification and where the
failure to so qualify would have a material adverse effect on the business or
financial condition of the Company and its Subsidiaries taken as a whole.
5F. INSURANCE. The Company covenants that it will maintain, and will
cause each of its Subsidiaries to maintain, with financially sound and reputable
insurance companies, funds or underwriters, insurance for the Company and its
Subsidiaries of the kinds, covering the risks and in the relative proportionate
amounts usually carried by companies conducting business activities similar to
those of the Company and its Subsidiaries.
5G. FURTHER ASSURANCES. The Company covenants that it shall cooperate
with the Purchaser and execute such further instruments and documents as the
Purchaser shall reasonably request to carry out to the satisfaction of the
Purchaser the transactions contemplated by this Agreement.
5H. SECURITIES ACT REGISTRATION STATEMENTS. The Company covenants that
the Purchaser shall have the right, at any time when it may be deemed to be a
controlling person of the Company, to participate in the preparation of such
registration statement (regardless of whether or not the Purchaser will be a
selling security holder in connection with such registration statement) and to
request the insertion therein of material furnished to the Company in writing
which in the Purchaser's judgment should be included. In connection with any
registration statement referred to in this Paragraph 5H, the Company will
indemnify the Purchaser, its members, officers and directors and each person, if
any, who controls the Purchaser within the meaning of Section 15 of the
Securities Act, against all losses, claims, damages, liabilities and expenses
caused by any untrue statement or alleged untrue statement of a material fact
contained in any registration statement or prospectus or any amendment thereof
or supplement thereto or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except insofar as such losses, claims, damages, liabilities or
expenses are caused by any untrue statement or alleged untrue statement or
omission or alleged omission contained in written information furnished to the
Company by the Purchaser expressly for use in such registration statement. If,
in connection with any such registration statement, the Purchaser shall furnish
written information to the Company expressly for use in the registration
statement, the Purchaser will indemnify the Company, its directors, each of its
officers who signs such registration statement and each person, if any, who
controls the Company within the meaning of the Securities Act against all
losses, claims, damages, liabilities and expenses caused by any untrue statement
or alleged untrue statement of a material fact or any omission or
11
<PAGE>
alleged omission of a material fact required to be stated in the registration
statement or prospectus or any preliminary prospectus or any amendment thereto
or supplement thereto or necessary to make the statements therein not
misleading, but only to the extent that such untrue statement or alleged untrue
statement or such omission or alleged omission is contained in information so
furnished in writing by the Purchaser for use therein.
5I. NOTICES OF CERTAIN EVENTS. The Company shall promptly give notice to
the Purchaser (i) of any default or event of default that has not been cured
within any applicable grace period under any (y) Indebtedness of the Company or
any of its Subsidiaries, and (z) contractual obligation of the Company or any of
its Subsidiaries or (ii) of any pending or threatened litigation, investigation
or proceeding to which the Company or any of its Subsidiaries is or is
threatened to be a party and of which the Company has been given notice;
PROVIDED that any such default as specified in (z) above, litigation,
investigation or proceeding would have a material adverse effect on the business
or financial condition of the Company and its Subsidiaries taken as a whole. Any
notice delivered pursuant to this Paragraph 5I shall be accompanied by an
Officer's Certificate specifying the details of the occurrence referred to
therein and stating what action the Company proposes to take with respect
thereto.
5J. BOARD NOMINEES. Effective as of the Closing, the directors of the
Company shall elect four (4) new directors (representing a majority of the
Company's Board of Directors), three (3) of which shall have been designated by
the Purchaser, to the Company's Board of Directors. Such directors shall serve
terms expiring at the annual shareholders meeting of the Company applicable to
the class to which each such director is elected.
5K. ENVIRONMENTAL LAWS. The Company and its Subsidiaries shall comply
with all applicable Environmental Laws the failure to comply with which would
have a material adverse effect on the business or financial condition of the
Company and its Subsidiaries taken as a whole. If the Company or any Subsidiary
shall receive written notice that there exists a violation of Environmental Law
with respect to its operations or any real property owned, formerly owned, used,
or leased thereby, which violation could have a material adverse effect on the
business or financial condition of the Company and its Subsidiaries taken as a
whole, the Company shall immediately notify in writing the Purchaser.
Furthermore, if the Company or any Subsidiary shall receive written notice that
there exists a violation of Environmental Law with respect to its operations or
any real property owned, formerly owned, used or leased thereby, which violation
could have a material adverse effect on the business or financial condition of
the Company and its Subsidiaries taken as a whole, the Company shall within the
time period permitted by the applicable governmental authority (unless otherwise
contested by the Company in good faith) remove or remedy such violation in
accordance with all applicable Environmental Laws unless the Board of Directors
of the Company determines that it would be in the best interest of the Company
to delay the remedy of such violation, so long as no material adverse effect is
suffered by the Company during such delay.
5L. REGISTRATION RIGHTS. The Company hereby grants to the Purchaser (and
any transferees of the Shares) the same rights to cause the Company to register
the Shares, and all other shares of the Company's Common Stock acquired by the
Purchaser pursuant to the Switch Agreement or issued upon the exercise of the
warrant issued to Purchaser pursuant to the Switch Agreement, under state and
federal securities laws and all such other rights as set forth in SECTION 4.1.11
of the Note and Warrant Purchase Agreement at any time from and after the
Closing Date;
12
<PAGE>
PROVIDED, HOWEVER, that such registration rights shall be effective immediately
upon the Closing Date notwithstanding whether or not the Note or Warrants under
the Note and Warrant Purchase Agreement have been converted or exercised, as the
case may be.
5M. SHAREHOLDER APPROVAL; PREPARATION OF PROXY STATEMENTS.
(a) The Company shall, as soon as practicable following the
execution and delivery of this Agreement duly call, give notice of,
convene and hold a meeting of the Company's shareholders (the
"Shareholders Meeting") for the following purposes: (i) approving this
Agreement, the issuance of the Shares and the transactions contemplated
hereby, (ii) ratifying the Note and Warrant Purchase Agreement and the
transactions contemplated thereby, (iii) approving the acquisition, by
merger, of certain operating network assets (the "Network") from that
certain Network company, of which the Purchaser is an equity holder, for
consideration consisting of Common Stock, convertible preferred stock
and other securities of the Company as more fully described in the
Network Agreement and Plan of Reorganization relating to the purchase of
the Network, (iv) approving the acquisition, by merger, of certain
network switches relating to the Network (the "Network Switches") from
that certain Network Switches company, of which the Purchaser is an
equity holder, for consideration consisting of Common Stock, warrants to
purchase Common Stock and cash as more fully described in the Switch
Agreement, (v) approving an amendment to the Company's Articles of
Incorporation to increase the aggregate number of authorized shares of
Common Stock to 50,000,000, and (vi) approving the other related
transactions. The Company will, through its officers and its Board of
Directors, unanimously recommend to its shareholders the approval and
adoption of the foregoing transactions.
(b) Promptly following the date of this Agreement, the Company
shall prepare and file with the Commission a proxy statement relating to
the Shareholders Meeting (such proxy statement as amended or
supplemented from time to time, the "Proxy Statement"). The Purchaser
shall have the right to review and approve the Proxy Statement prior to
the Company filing the Proxy Statement with the Commission which
approval shall not be unreasonably withheld. The Company will use all
commercially reasonable efforts to cause the Proxy Statement to be
mailed to the Company's shareholders as promptly as practicable. The
Company will notify the Purchaser promptly of the receipt of any written
or oral comments from the Commission or its staff and of any request by
the Commission or its staff for amendments or supplements to the Proxy
Statement or for additional information and will supply the Purchaser
with copies of all correspondence between the Company or any of its
representatives, on the one hand, and the Commission or its staff, on
the other hand, with respect to the Proxy Statement.
(c) The Company will cause its transfer agent to make stock
transfer records relating to the Company available to the extent
reasonably necessary to effectuate the intent of this Agreement.
5N. NO SOLICITATION. (a) The Company shall not, nor shall it permit any
of its Subsidiaries to, nor shall it authorize or permit any officer, director
or employee of the Company or any investment banker, attorney or other advisor,
agent or representative of the Company or any of its Subsidiaries to, directly
or indirectly, (i) solicit, initiate or encourage the submission of any takeover
13
<PAGE>
proposal, (ii) enter into any agreement (other than confidentiality and
standstill agreements in accordance with the immediately following proviso) with
respect to any takeover proposal, or (iii) participate in any discussions or
negotiations regarding, or furnish to any Person any information with respect
to, or take any other action to facilitate any inquiries or the making of any
proposal that constitutes, or may be reasonably be expected to lead to, any
takeover proposal; PROVIDED, HOWEVER, in the case of this clause (iii), that
prior to the vote of shareholders of the Company for approval of the matters
referred to in Paragraph 5M hereof (and not thereafter if such matters are
approved thereby) to the extent required by the fiduciary obligations of the
Board of Directors of the Company, determined in good faith by a majority of the
disinterested members thereof based on the advice of outside counsel, the
Company, in response to an unsolicited superior proposal and a request for
information pursuant thereto, may furnish information to any person or "group"
within the meaning of Section 13(d)(3) of the Exchange Act pursuant to a
confidentiality agreement. Without limiting the foregoing, it is understood that
any violation of the restrictions set forth in the preceding sentence by any
officer, director or employee of the Company or any of its Subsidiaries or any
investment banker, attorney or other advisor, agent or representative of the
Company, whether or not such Person is purporting to act on behalf of the
Company or otherwise, shall be deemed to be a material breach of this Agreement
by the Company. For purposes of this Paragraph 5M, "takeover proposal" means (i)
any proposal, other than a proposal by the Purchaser or any of its Affiliates,
for a merger or other business combination involving the Company, (ii) any
proposal or offer, other than a proposal or offer by the Purchaser or any of its
Affiliates, to acquire from the Company or any of its Affiliates in any manner,
directly or indirectly, an equity interest in the Company or any Subsidiary, any
voting securities of the Company or any Subsidiary or a material amount of the
assets of the Company and its Subsidiaries, taken as a whole, or (iii) any
proposal or offer, other than a proposal or offer by the Purchaser or any of its
Affiliates, to acquire from the shareholders of the Company by tender offer,
exchange offer or otherwise more than 20% of the outstanding shares of Common
Stock.
(b) Neither the Board of Directors of the Company nor any committee
thereof shall, except in connection with the termination of this Agreement
pursuant to Paragraph 8A, (i) withdraw or modify, or propose to withdraw or
modify, in a manner adverse to the Purchaser the approval or recommendation by
the Board of Directors of the Company or any such committee thereof of this
Agreement or take any action having such effect; PROVIDED, HOWEVER, that a
statement by the Board of Directors of the Company to its shareholders as
contemplated by Rule 14e-2(a) of the Exchange Act following Purchaser's receipt
of a Notice of Superior Proposal (defined below) shall not be deemed to
constitute a withdrawal or modification of its recommendation of this Agreement,
or (ii) approve or recommend, or propose to approve or recommend, any takeover
proposal. Notwithstanding the foregoing, in the event that the Board of
Directors of the Company receives a takeover proposal that, in the exercise of
its fiduciary obligations (as determined in good faith by a majority of the
disinterested members thereof based on the advice of outside counsel), it
determines to be a superior proposal, the Board of Directors of the Company may
withdraw or modify its approval or recommendation of this Agreement and may
(subject to the following sentence) terminate this Agreement, in each case at
any time after midnight on the fifth Business Day following Purchaser's receipt
of written notice (a "Notice of Superior Proposal") advising Purchaser that the
Board of Directors of the Company has received a takeover proposal that it has
determined to be a superior proposal, specifying the material terms and
conditions of such superior proposal (including the proposed financing for such
proposal and a copy of any documents conveying such proposal) and identifying
the person making such superior proposal. The Company may terminate this
Agreement
14
<PAGE>
pursuant to the preceding sentence only if the shareholders of the Company have
not yet voted upon the matters set forth in Paragraph 5M hereof. Any of the
foregoing to the contrary notwithstanding, the Company may engage in discussions
with any Person or group that has made an unsolicited takeover proposal for the
limited purpose of determining whether such proposal is a superior proposal.
Nothing contained herein shall prohibit the Company from taking and disclosing
to its shareholders a position contemplated by Rule 14e-2(a) following
Purchaser's receipt of a Notice of Superior Proposal.
(c) For purposes of this Paragraph 5N, a "superior proposal" means any
BONA FIDE takeover proposal to acquire, directly or indirectly, for
consideration consisting of cash, securities or a combination thereof, all of
the shares of Common Stock then outstanding or all or substantially all of the
assets of the Company and its Subsidiaries, and otherwise on terms that a
majority of the disinterested members of the Board of Directors of the Company
determines in its good faith reasonable judgment (based on the advice of a
financial advisor of nationally recognized reputation, a copy of which shall be
provided to Purchaser) to be more favorable to the Company's shareholders than
the transactions contemplated by this Agreement, the Network Agreement and Plan
of Reorganization and the Switch Agreement.
(d) In addition to the obligations of the Company set forth in paragraph
(b), the Company shall promptly advise the Purchaser orally and in writing of
any takeover proposal or any inquiry with respect to or which could lead to any
takeover proposal, the material terms and conditions of such inquiry or takeover
proposal (including the financing for such proposal and a copy of such documents
conveying such proposal), and the identity of the Person making any such
takeover proposal or inquiry.
5O. LISTING OF COMMON STOCK. The Company warrants and agrees for the
benefit of the Purchaser that it will use commercially reasonable efforts to
cause the Shares to be approved for listing, subject to official notice of
issuance, on the NASDAQ National Market as of the Closing Date.
6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to the Purchaser as of the date hereof and as of the Closing Date
that:
6A. CORPORATE EXISTENCE. The Company is a corporation duly organized,
legally existing, and in good standing under the laws of the State of Texas.
6B. CORPORATE POWER AND AUTHORIZATION. The Company has the requisite
corporate power and authority to issue the Shares, to execute, deliver, and
perform its obligations under this Agreement and, subject to approval of this
Agreement by the holders of a majority of the shares of Common Stock as of the
record date for the Shareholders Meeting present in person or represented by
proxy, to consummate the transactions contemplated hereby. All action, except
for the approval by the shareholders of the Company, on the Company's part
requisite for the due issuance of the Shares and for the due execution,
delivery, and performance of this Agreement has been duly and effectively taken.
6C. BOARD RECOMMENDATION. The Board of Directors of the Company, at a
meeting duly called and held, has by vote of those directors present (i)
determined that this Agreement and the
15
<PAGE>
transactions contemplated hereby and by Section 5M hereof are fair to and in the
best interests of the shareholders of the Company and (ii) resolved to
unanimously recommend that the Company's shareholders approve this Agreement and
the transactions contemplated hereby and by Section 5M hereof.
6D. BINDING OBLIGATIONS. This Agreement is enforceable in accordance
with its terms (except that enforcement may be subject to (i) any applicable
bankruptcy, insolvency or similar laws generally affecting the enforcement of
creditors' rights (ii) general principles in equity regardless of whether such
enforcement is sought in a proceeding in equity or at law, and except to the
extent enforceability of the indemnification provisions may be limited under
applicable securities laws).
6E. NO VIOLATION. Except as disclosed in SCHEDULE 6E, neither the
execution and delivery of this Agreement, the consummation of the transactions
provided for herein or contemplated hereby nor the fulfillment by the Company of
the terms hereof will (a) violate any provision of the Articles of Incorporation
or the by-laws of the Company, (b) result in a default, give rise to any right
of termination, cancellation, acceleration or imposition of any Indebtedness or
Lien, or require any consent or approval (other than any consent or approval
that has previously been obtained), under any of the terms, conditions or
provisions of any of the Permits or any note, bond, mortgage, indenture, loan,
distribution agreement, license, agreement, lease, or instrument or obligation
to which the Company is a party or by which the Company may be bound (except
where the failure to obtain such consent or approval will not have a Material
Adverse Effect), or (c) violate any law, judgment, order, writ, injunction,
decree, statute, rule, or regulation of any Governmental Authority applicable to
the Company (except where such violation will not have a Material Adverse
Effect).
6F. CONSENTS. Except as disclosed in SCHEDULE 6F, all consents,
approvals, qualifications, orders, or authorizations of, or filings with, any
Governmental Authority, and all consents under any material contracts,
agreements, or instruments by which the Company is bound or to which it is
subject, and required in connection with the Company's valid execution,
delivery, or performance of this Agreement and the offer, sale, and delivery of
the Shares and the consummation of any other transaction contemplated on the
part of the Company have been obtained or made.
6G. FINANCIAL INFORMATION.
(a) The Consolidated balance sheet of the Company and its
Subsidiaries as at June 30, 1997, and the related Consolidated
statements of operations, shareholders' equity and cash flows for the
12-month period then ended, including in each case the related schedules
and notes, reported on by Ernst & Young LLP, are complete and correct
and fairly present in all material respects the Consolidated financial
position of the Company and its Subsidiaries as at the date thereof and
the Consolidated results of operations and changes in cash flows for
such period, in accordance with GAAP.
(b) The unaudited Consolidated balance sheet of the Company and
its Subsidiaries as at September 30, 1997, and the related unaudited
Consolidated statements of operations, shareholders' equity and cash
flows for the three-month period then ended, as included in the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1997, true copies of which have been previously delivered
to Purchaser, are complete and correct and fairly present in all
material respects the Consolidated financial position of the
16
<PAGE>
Company and its Subsidiaries as at the date thereof and the Consolidated
results of operations and changes in cash flows for such period in
conformity with GAAP, subject only to normal year-end audit adjustments.
(c) Since June 30, 1997, there has been no Material Adverse
Effect.
6H. LIABILITIES. Except for liabilities incurred in the ordinary course
of business, none of the Company or any of its Subsidiaries has any material
(individually or in the aggregate) liabilities, direct or contingent (including
but not limited to liability with respect to any Plan) except as disclosed or
referred to in SCHEDULE 6H or in the financial statements referred to in
Paragraph 6H. Neither the Company nor any of its Subsidiaries has any
Indebtedness other than Indebtedness disclosed in SCHEDULE 6H.
6I. LITIGATION. Except as disclosed in SCHEDULE 6I or as described in
any report filed by the Company with the Commission and delivered to Purchaser,
there is no action, suit, or proceeding, or any governmental investigation or
any arbitration, in each case pending or, to the knowledge of the Company,
threatened against the Company or any of its Subsidiaries or any material
property of any thereof before any court or arbitrator or any governmental or
administrative body, agency or official (i) which challenges the validity of
this Agreement; or (ii) which, if adversely determined, would have a Material
Adverse Effect.
6J. COMPLIANCE WITH ERISA. Each Plan is in substantial compliance with
ERISA, no Plan has an accumulated or waived funding deficiency within the
meaning of Section 412 or Section 418(B) of the Code, no proceedings have been
instituted to terminate any Plan, and except as disclosed in SCHEDULE 6J, none
of the Company or any of its Subsidiaries nor any ERISA Affiliate has incurred
any material liability to or on account of a Plan under ERISA, and except as
disclosed in SCHEDULE 6J, no condition exists which presents a material risk to
the Company or any of its Subsidiaries of incurring such a liability.
6K. TAXES; GOVERNMENTAL CHARGES. Each of the Company and its
Subsidiaries has filed all tax returns and reports required to be filed and has
paid all taxes, assessments, fees, and other governmental charges levied upon
any of them or upon any of their respective properties or income which are due
and payable, including interest and penalties, or has provided adequate reserves
for the payment thereof, except where the failure to so file, pay, or reserve
would not have a Material Adverse Effect.
6L. DEFAULTS. Except as disclosed in SCHEDULE 6L, none of the Company or
any of its Subsidiaries is in default, nor has any event or circumstance
occurred which, but for the passage of time or the giving of notice, or both,
would constitute a default (in any respect which may have a Material Adverse
Effect) under any loan or credit agreement, indenture, mortgage, deed of trust,
security agreement, or other instrument or agreement evidencing or pertaining to
any Indebtedness of the Company or any Subsidiary, or under any material
agreement or instrument to which the Company or any Subsidiary is a party or by
which the Company or any Subsidiary is bound. No default hereunder has occurred
and is continuing.
6M. COMPLIANCE WITH THE LAW. None of the Company or any of its
Subsidiaries (a) is in violation of any Governmental Requirement or (b) has
failed to obtain any license, permit, franchise,
17
<PAGE>
or other governmental authorization necessary to the ownership of any of their
respective properties or the conduct of their respective business, which
violation or failure would have (in the event that such a violation or failure
were asserted by any Person through appropriate action) a Material Adverse
Effect.
6N. INVESTMENT COMPANY ACT. None of the Company or any of its
Subsidiaries is an "investment company" or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended.
6O. PUBLIC UTILITY HOLDING COMPANY ACT. None of the Company or any of
its Subsidiaries is a "holding company," or a "Subsidiary company" of a "holding
company," or an "affiliate" of a "holding company" or of a "Subsidiary company"
of a "holding company," or a "public utility" within the meaning of the Public
Utility Holding Company Act of 1935, as amended.
6P. FEES AND COMMISSIONS. None of the Company or any of its Subsidiaries
nor, to the knowledge of any of the Company, their Affiliates has retained a
finder, broker, agent, financial advisor, or other intermediary (collectively,
an "INTERMEDIARY") in connection with the transactions contemplated by this
Agreement, and the Company agrees to pay and to indemnify and hold harmless
Purchaser from and against liability for any compensation to any Intermediary
and the fees and expenses of defending against such liability or alleged
liability.
6Q. DISCLOSURE. The Company's filings made pursuant to the Exchange Act
and listed on SCHEDULE 6Q hereto as of their respective dates, did not contain
any untrue statement of a material fact and did not omit to state any material
fact necessary in order to make the statements contained therein or herein not
misleading in the light of the circumstances under which they were made.
6R. STRUCTURE; CAPITALIZATION.
(a) SCHEDULE 6R contains (except has noted therein) a complete
and correct list of the Company's Subsidiaries, showing, as to each
Subsidiary, the correct name thereof, the jurisdiction of its
organization, and the percentage of shares of each class of its capital
stock or similar equity interests outstanding owned by the Company and
each other Subsidiary.
(b) All of the outstanding shares of capital stock or similar
equity interests of each Subsidiary shown in SCHEDULE 6R as being owned
by the Company and its Subsidiaries have been validly issued, are fully
paid and nonassessable, and are owned by the Company or such other
Subsidiaries free and clear of any Lien (except as otherwise disclosed
in SCHEDULE 6R.
(c) No Subsidiary of the Company is a party to, or otherwise
subject to any legal restriction of any agreement (other than this
Agreement and customary limitations imposed by corporate law statutes)
restricting the ability of such Subsidiary to pay dividends out of
profits or make any other similar distributions of profits to the
Company or any of its Subsidiaries that owns outstanding shares of
capital stock or similar equity interests of such Subsidiary.
(d) As of the Closing Date and after giving effect to the
transactions contemplated in this Agreement, the Network Agreement and
the Switch Agreement (i) the Company's
18
<PAGE>
authorized capital stock will consist of 55,000,000 shares, of which
50,000,000 are designated Common Stock and 5,000,000 shares are
designated preferred stock (2,000 of which will be designated as Series
A Convertible Preferred Stock, $.01 par value per share); (ii)
14,269,357 shares of Common Stock, issued and outstanding and 5,450,677
shares are or will be reserved for issuance in connection with the
Company's outstanding warrants and stock options all of which, when
issued in accordance with the terms of such warrants and stock options,
will be validly issued, fully paid, and non-assessable; (iii) no shares
of Common Stock are owned or held by or for the account of the Company
or any of its Subsidiaries (except as disclosed in the financial
statements described in Paragraph 6G); (iv) except as disclosed on
SCHEDULE 6R, neither the Company nor any of its Subsidiaries has
outstanding any stock or other securities convertible into or
exchangeable for any shares of capital stock, any rights to subscribe
for or to purchase or any options for the purchase of, or any agreements
providing for the issuance (contingent or otherwise) of, or any calls,
commitments or claims of any other character relating to the issuance
of, any capital stock, or any stock or securities convertible into or
exchangeable for any capital stock which have not been waived (other
than as contemplated by this Agreement); and (v) except as disclosed in
SCHEDULE 6R, neither the Company nor any of its Subsidiaries is subject
to any obligation (contingent or otherwise) to repurchase or otherwise
acquire or retire any shares of capital stock.
6S. ENVIRONMENTAL MATTERS.
(a) Neither any property of any of the Company or any of its
Subsidiaries nor the operations conducted thereon violate any order of
any court or Governmental Authority or Environmental Laws which
violations could reasonably be expected to result in liability in excess
of $250,000 or which could reasonably be expected to result in remedial
obligations in excess of $250,000, assuming disclosure to the applicable
Governmental Authority of all relevant facts, conditions and
circumstances, if any, pertaining to the relevant property.
(b) Without limitation of clause (a) above, no property of any
of the Company or any of its Subsidiaries nor the operations currently
conducted thereon or by any prior owner or operator of such property or
operation, are in violation of or subject to any existing, pending or,
to the knowledge of the Company, threatened action, suit, investigation,
inquiry or proceeding by or before any court or Governmental Authority
or to any remedial obligations under Environmental Laws which could
reasonably be expected to result in liability in excess of $250,000, or
which could reasonably be expected to result in remedial obligations in
excess of $250,000 assuming disclosure to the applicable Governmental
Authority of all relevant facts, conditions and circumstances, if any,
pertaining to the relevant property.
(c) All notices, permits, licenses or similar authorizations, if
any, required to be obtained or filed in connection with the operation
or use of any and all property of the Company and its Subsidiaries,
including but not limited to past or present treatment, storage,
disposal or release of Hazardous Materials into the environment, have
been duly obtained or filed, except where the failure to so obtain or
file would not have a Material Adverse Effect.
6T. INTELLECTUAL PROPERTY AND OTHER INTANGIBLE ASSETS.
19
<PAGE>
(a) The Company and its Subsidiaries (i) own or have the right
to use, free and clear of all liens, claims, and restrictions, all
patents, trademarks, service marks, trade names, and copyrights, and all
applications, licenses, and rights with respect to the foregoing, and
all trade secrets, including know-how, inventions, designs, processes,
works of authorship, computer programs, and technical data and
information (collectively, "INTELLECTUAL PROPERTY") used and sufficient
for use in the conduct of its business as now conducted and/or as
presently proposed to be conducted (including, without limitation, the
development, manufacture, operation, and sale of all products and
services sold or proposed to be sold by the Company and its Subsidiaries
during the next 24 months following the date of this Agreement) without
infringing upon or violating any right, lien, or claim of others,
including, without limitation, former employees and former employers of
its past and present employees, and (ii) except described in SCHEDULE
6T, is not obligated or under any liability whatsoever to make any
payments by way of royalties, fees, or otherwise to any owner or
licensee of, or other claimant to, any patent, trademark, service mark,
trade name, copyright, or other intangible asset, with respect to the
use thereof or in connection with the conduct of its business or
otherwise.
(b) Any and all Intellectual Property of any kind, relating to
the business of the Company and its Subsidiaries currently being
developed, or developed in the future, by any employee of the Company
and its Subsidiaries while in the employ of the Company and its
Subsidiaries shall be the property solely of the Company and its
Subsidiaries. The Company and its Subsidiaries have taken security
measures to protect the secrecy, confidentiality, and value of all
Intellectual Property, which measures are reasonable and customary in
the industry in which the Company and its Subsidiaries operate. The
Company and its Subsidiaries' employees and other persons who, either
alone or in concert with others, developed, invented, discovered,
derived, programmed, or designed the Intellectual Property (the
"TECHNICAL EMPLOYEES"), or who have knowledge of or access to
information about the Intellectual Property, have entered into a written
agreement with the Company or its Subsidiaries, in form and substance
satisfactory to the Company's management (the "PROPRIETARY INFORMATION
AGREEMENT") regarding ownership and treatment of the Intellectual
Property.
(c) Except as described in SCHEDULE 6T, none of the Company or
its Subsidiaries has received any communications alleging that the
Company or such Subsidiary has violated, or by conducting its business
as proposed would violate, any of the patents, trademarks, service
marks, trade names, copyrights, or trade secrets or other proprietary
rights of any other Person or entity. None of the Company's and its
Subsidiaries' employees is obligated under any contract (including
licenses, covenants, or commitments of any nature) or other agreement,
or subject to any judgment, decree, or order of any court or
administrative agency, that would interfere with the use of such
employee's best efforts to promote the interests of the Company or its
Subsidiaries or that would conflict with the Company's or its
Subsidiaries' business as presently conducted and as proposed to be
conducted. Neither the execution nor delivery of this Agreement, nor the
carrying on of the Company's or its Subsidiaries' business by the
employees of the Company and its Subsidiaries, nor the conduct of the
Company's or its Subsidiaries' business as proposed to be conducted,
will conflict with or result in a breach of the terms, conditions, or
provisions of, or constitute a default under, any contract, covenant, or
instrument under which any of such employees is now obligated.
20
<PAGE>
It is not, and will not become, necessary to utilize any inventions of
any of the Company's or its Subsidiaries' employees (or people the
Company and its Subsidiaries currently intends to hire) made prior to
their employment by the Company and its Subsidiaries other than those
that have been assigned to the Company and its Subsidiaries pursuant to
the Proprietary Information Agreement signed by such employee.
6U. INSURANCE COVERAGE. The properties of the Company and its
Subsidiaries are insured in amounts deemed adequate by the Company's management
against risks usually insured against by Persons operating businesses similar to
those of the Company and its Subsidiaries in the localities where such
properties are located.
7. REPRESENTATIONS AND WARRANTIES OF PURCHASER. To induce the Company to
enter into this Agreement, Purchaser represents and warrants to the Company
that:
7A. PURCHASE FOR INVESTMENT.
(a) Purchaser is acquiring the Shares for its own account and
not with a view to the public resale or distribution of all or any part
thereof in any transaction which would constitute a "distribution"
within the meaning of the Securities Act. Purchaser acknowledges that it
does not currently intend to assign its rights under this Agreement to
any third party prior to the Closing.
(b) Purchaser acknowledges that the Shares have not been
registered under the Securities Act.
(c) Purchaser is an "accredited investor" within the meaning of
Rule 501 under Regulation D promulgated under the Securities Act, is
experienced in evaluating investments in companies such as the Company,
has such knowledge and experience in financial and business matters as
to be capable of evaluating the merits and risks of its investment and
has the ability to bear the entire economic risk of its investment.
Purchaser has made its own evaluation of its investment in the Common
Stock, based upon such information as is available to it and without
reliance upon the Company or any other person or entity, and Purchaser
agrees that neither the Company nor any other person or entity has any
obligation to furnish any additional information to Purchaser except as
expressly set forth herein.
(d) Purchaser acknowledges that the Shares may not be sold,
transferred, pledged, hypothecated, or otherwise disposed of without
registration under the Securities Act or an exemption therefrom, and
that in the absence of an effective registration statement covering the
Shares or an available exemption from registration under the Securities
Act, the Shares must be held indefinitely.
(e) Purchaser agrees that the Shares shall bear legends in
substantially the following form:
"THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR
INVESTMENT AND MAY NOT BE SOLD OR OFFERED FOR SALE OR OTHERWISE
TRANSFERRED,
21
<PAGE>
EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT, OR (ii) AN APPLICABLE EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT. ANY SALE PURSUANT TO
CLAUSE (ii) OF THE PRECEDING SENTENCE MUST BE ACCOMPANIED BY AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY TO THE
EFFECT THAT SUCH EXEMPTION FROM REGISTRATION IS AVAILABLE IN
CONNECTION WITH SUCH SALE."
7B. AUTHORIZATION; NO CONFLICT. Purchaser has all requisite power and
authority to enter into this Agreement and to carry out and perform its
obligations under the terms of this Agreement. This Agreement is a legal, valid,
and binding obligation of Purchaser. The execution, delivery, and performance of
this Agreement by Purchaser and the consummation by Purchaser of the
transactions contemplated hereby will not conflict with or result in a default
under the terms of any material contract, agreement, obligation, commitment, or
organizational document applicable to Purchaser.
8. TERMINATION, AMENDMENT AND WAIVER.
8A. TERMINATION. This Agreement may be terminated at any time prior to
the Closing Date, whether before or after approval of matters presented in
connection with this Agreement by the shareholders of the Company:
(a) by mutual written consent of Purchaser and the Company;
(b) by either Purchaser or the Company;
(i) if the shareholders of the Company fail to give any
required approval of this Agreement and the transactions
contemplated hereby upon a vote at a duly held meeting of
shareholders of the Company or at any adjournment thereof;
(ii) if the transaction contemplated by this Agreement
shall not have been consummated on or before February 1, 1998,
unless the failure to consummate the transaction contemplated by
this Agreement is the result of a material breach of this
Agreement by the party seeking to terminate this Agreement; or
(iii) if any permanent injunction or other order of a
court or other competent authority preventing the consummation
of the transactions contemplated by this Agreement or the
Network Agreement and Plan of Reorganization or Network Switches
Agreement and Plan of Reorganization shall have become final and
nonappealable.
(c) by Purchaser, if the Company breaches any of its
representations or warranties herein or fails to perform in any material
respect any of its covenants, agreements or obligations under this
Agreement;
22
<PAGE>
(d) by the Company, if Purchaser breaches any of its
representations or warranties herein or fails to perform in any material
respect any of its covenants, agreements or obligations under this
Agreement; and
(e) by the Company to the extent permitted under Section 5N.
8B. EFFECT OF TERMINATION. In the event of termination of this Agreement
by either the Company or Purchaser as provided in Section 8A, this Agreement
shall forthwith become void and have no effect, without any liability or
obligation on the part of Purchaser or the Company, other than the provisions of
Section 9A.
9. MISCELLANEOUS.
9A. FEES AND EXPENSES.
(a) The Company agrees to pay Purchaser a fee in immediately
available funds of $500,000 (the "Termination Fee") promptly upon the
termination of the Agreement in the event this Agreement is terminated
by the Company as permitted by Section 5N. The Termination Fee shall be
payable promptly upon termination of this Agreement if the foregoing
events shall have occurred prior to termination.
(b) In addition, the Company agrees, in the event that the
transactions hereby contemplated shall be consummated to pay all
reasonable out-of-pocket expenses of the Purchaser arising in connection
with the transactions and other agreements and instruments contemplated
by this Agreement, including reasonable fees and expenses of counsel
incurred in connection with the preparation and negotiation of this
Agreement, any other agreement or instrument to be executed and
delivered in connection with this Agreement. The Company agrees to pay
the Purchaser and/or their counsel, as appropriate, all such fees and
expenses incurred up to and including the Closing, at the Closing.
9B. AMENDMENT. This Agreement may be amended by the parties hereto at
any time before or after any required approval of matters presented in
connection with the transaction contemplated by this Agreement by the
shareholders of the Company; provided, however, that after any such approval,
there shall be made no amendment that by law requires further approval by such
shareholders without the further approval of such shareholders. This Agreement
may not be amended except by an instrument in writing signed on behalf of each
of the parties.
9C. EXTENSION; WAIVER. At any time prior to the Closing Date, the
parties may, to the extent legally allowed, (a) extend the time for the
performance of any of the obligations or the other acts of the other parties,
(b) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto or (c) subject to the
proviso of Section 9B, waive compliance with any of the agreements or conditions
contained herein. Any agreement on the part of a party to any such extension or
waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party. The failure of any party to this Agreement to assert any
of its rights under this Agreement or otherwise shall not constitute a waiver of
such rights.
23
<PAGE>
9D. ASSIGNMENT. This Agreement shall not be assigned by operation of law
or otherwise before the Closing Date, and any attempt at assignment shall be
void; PROVIDED, HOWEVER, that the Purchaser shall be permitted to assign its
rights under this Agreement to a third party ("Purchaser Assignee") before the
Closing Date so long as (i) Purchaser retains its obligations under this
Agreement, (ii) such third party becomes a party to this Agreement and joins
Purchaser in the representations and warranties in Paragraph 7 of this
Agreement, and (iii) Purchaser first offers to assign its rights under this
Agreement to a third party designated by the Company ("Company Designee") on
substantially similar terms as offered by Purchaser Assignee and the Company
Designee shall fail to respond or purchase such rights during the offer period
(the term of which period the Parties hereto shall mutually agree).
9E. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and
warranties contained herein or made in writing by or on behalf of any party to
this Agreement in connection herewith shall survive the execution and delivery
of this Agreement, regardless of any investigation made by the Purchaser or on
their behalf, and shall terminate on the fourth anniversary of the Closing Date.
9F. SUCCESSORS AND ASSIGNS; NO THIRD PARTY. All covenants and agreements
in this Agreement contained by or on behalf of the parties hereto shall bind and
inure to the benefit of the respective successors and assigns of the parties
hereto and, to the extent provided in this Agreement, to the benefit of any
future holders of any Common Stock. Subject to the foregoing, nothing in this
Agreement shall confer upon any person or entity not a party to this Agreement,
or the legal representatives of such person or entity, any rights or remedies of
any nature or kind whatsoever under or by reason of this Agreement.
9G. NOTICES. All communications provided for hereunder shall be sent by
registered or certified mail and, if to the Purchaser, to the following: 5005
Woodway, Suite 350, Houston, Texas 77056, Attn: Mark Willis, with a copy to
Robert K. Hatcher, at Vinson & Elkins L.L.P., 1001 Fannin, Houston, Texas 77002;
if to the Company addressed to it at EqualNet Holding Corp., 1250 Wood Branch
Park Drive, Houston, Texas 77079-1212, Attn: General Counsel, with a copy to
Fulbright & Jaworski L.L.P., 1301 McKinney, Suite 5100, Houston, Texas 77010,
Attn: Robert F. Gray, Jr., or to such other address with respect to any party as
such party shall notify the other in writing; provided, however, that any such
communication to the Company may also, at the option of the Purchaser, be either
delivered to the Company at the Company's address set forth above or to any
officer of the Company. Within 5 Business Days after the date of such mailing
(save for any postal interruption) such communication shall be deemed to have
been received.
9H. DESCRIPTIVE HEADINGS. The descriptive headings of the several
Paragraphs of this Agreement are inserted for convenience only and do not
constitute a part of this Agreement.
9I. SATISFACTION REQUIREMENT. If any agreement, certificate or other
writing, or any action taken or to be taken, is by the terms of this Agreement
required to be satisfactory to the Purchaser, the determination of such
satisfaction shall be made by the Purchaser in its sole and exclusive reasonable
judgment exercised in good faith.
9J. GOVERNING LAW; CONSENT TO JURISDICTION. This Agreement shall be
construed and enforced in accordance with, and the rights of the parties shall
be governed by, the law of the State
24
<PAGE>
of Texas without giving effect to the choice of law or conflicts principles
thereof. Any legal action or proceeding with respect to this Agreement may be
brought in the courts of the State of Texas or of the United States of America
for the Southern District of Texas, and, by execution and delivery of this
Agreement, the Company hereby accepts for itself and in respect of its property,
generally and unconditionally, the jurisdiction of the aforesaid courts. The
Company irrevocably consents to the service of process out of any of the
aforementioned courts in any such action or proceeding by the mailing of copies
thereof by registered or certified mail, postage prepaid, to the Company at its
address set forth in Section 9G, such service to become effect 30 days after
such mailing. Nothing herein shall affect the right of the Purchaser to serve
process in any other manner permitted by law or to commence legal proceedings or
otherwise proceed against the Company in any other jurisdiction.
9K. REMEDIES. In case any one or more of the covenants and/or agreements
set forth in this Agreement shall have been breached by the Company or the
Purchaser, the Company or the Purchaser, as applicable, may proceed to protect
and enforce its or their rights either by suit in equity and/or by action at
law.
9L. ENTIRE AGREEMENT. This Agreement, including the Schedules hereto,
and the other writings referred to herein or delivered pursuant hereto contain
the entire agreement among the parties with respect to the subject matter hereof
and supersede all prior and contemporaneous arrangements or understandings with
respect thereto.
9M. SEVERABILITY. Any provisions of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
9N. COUNTERPARTS. This Agreement may be executed simultaneously in two
or more counterparts, each of which shall be deemed an original, but which
together shall constitute a single agreement.
9O. BROKERAGE. Each party hereto will indemnify and hold harmless the
others against and in respect of any claim for brokerage or other commissions
relative to this Agreement or to the transactions contemplated hereby, based in
any way on agreements, arrangements or understandings made or claimed to have
been made by such party with any third party.
25
<PAGE>
IN WITNESS WHEREOF, the parties hereto caused this Agreement to be duly
executed and delivered as of the date first above written.
EQUALNET HOLDING CORP.
By: /s/ ZANE RUSSELL
Name: ZANE RUSSELL
Title: CEO
WILLIS GROUP, LLC
By: /s/ MARK WILLIS
Name: MARK WILLIS
Title: PRES.
[signature page to Stock Purchase Agreement]
26
<PAGE>
AMENDMENT TO
STOCK PURCHASE AGREEMENT
This Amendment to that certain Stock Purchase Agreement (the
"Agreement") dated December 2,1997 by and among EqualNet Holding Corp., and
Willis Group, LLC, is entered into as of December 19, 1997:
Whereas, subparagraph 8A.(b)(ii) of the Agreement allows each party
certain rights to terminate the Agreement if the conditions for closing of the
transactions contemplated in such agreement are not completed by February 1,
1998; and
Whereas the parties hereto desire to change such date,
Now, therefore, the parties hereto agree as follows: the date "February
1, 1998" contained in subparagraphs 8A.(b)(ii) of the Agreement is hereby
changed and amended in each instance to "March 31, 1998".
No other change, amendment or modification of the Agreement is hereby
made. This Amendment is signed effective December 19, 1997. This Amendment may
be executed in multiple counterpart originals, all of which taken together shall
constitute one document. A facsimilie signature of any of the undersigned shall
have the same force and effect as an original signature.
EqualNet Holding Corp. Willis Group, LLC
By:/s/ MICHAEL L. HLINAK By: /s/ MARK WILLIS
Michael L. Hlinak, C.O.O. Mark Willis, President
<PAGE>
ANNEX E
J. C. BRADFORD & CO.
Corporate Finance
330 Commerce Street
Nashville, TN 37201
February 17, 1998
Board of Directors
EqualNet Holding Corp.
1250 Wood Branch Park Drive
Houston, Texas 77079-1212
Gentlemen:
You have requested our opinion as to the fairness, from a financial point
of view, to the holders of the outstanding common stock, par value $0.01 per
share (the "Common Stock") of EqualNet Holding Corp. (the "Company"), of the
consideration proposed to be received by the Company pursuant to (i) the
Agreement and Plan of Reorganization, dated December 2, 1997, by and between EQ
Acquisition Sub, Inc., a wholly owned subsidiary of the Company ("Sub"), Netco
Acquisition, LLC ("Netco Acquisition"), Netco Acquisition Corp., a wholly owned
subsidiary of Netco Acquisition ("Netco") and the Company, as amended December
19, 1997 and February 12, 1998 (the "Merger Agreement"); (ii) a Switch
Agreement, dated December 2, 1997, by and between the Company, Sub and Willis
Group, LLC ("TWG"), as amended December 19, 1997 and February 12, 1998 (the
"Switch Agreement"); and (iii) a Stock Purchase Agreement, dated December 2,
1997, by and between the Company and TWG, as amended December 19, 1997 and
February 12, 1998 (the "Stock Purchase Agreement") (together with the Merger
Agreement and the Switch Agreement, the "Agreements").
The Merger Agreement provides for a conversion of all issued and
outstanding shares of Netco into the right to receive 2,081,633 shares of Common
Stock and 2,000 shares of Series A Preferred Stock of the Company, par value
$0.01 per share, plus the issuance of an additional approximately 1,500,000
shares of Common Stock. The Merger Agreement further provides that Sub will be
merged with and into Netco. The terms and conditions of the conversion and
merger are more fully set forth in the Merger Agreement.
The Switch Agreement provides that TWG will sell certain
telecommunications equipment described in Exhibit A to the Switch Agreement (the
"Switches") to Sub for consideration of (i) assumption of a loan obtained by TWG
on behalf of the Company to finance the Switches (or borrow $5,850,000 in cash
if the loan has not been obtained) (the "Switch Financing"); (ii) 1,400,000
shares of Common Stock; and (iii) a warrant from the Company to TWG for 400,000
shares of Common Stock exercisable at $1.00 per share. We express no opinion as
to whether the Company can, in fact, effect the Switch Financing on terms
favorable to the Company. The terms and conditions of the sale of the Switches
are more fully set forth in the Switch Agreement.
The Stock Purchase Agreement provides that the Company will sell 4,000,000
shares of Common Stock to TWG for consideration of $1.00 per share. The terms
and
<PAGE>
Board of Directors
EqualNet Holding Corp.
February 17, 1998
Page 2
conditions of the sale of Common Stock are more fully set forth in the Stock
Purchase Agreement.
J.C. Bradford & Co., L.L.C., as part of its investment banking business,
engages in the valuation of businesses and securities in connection with mergers
and acquisitions, negotiated underwritings, secondary distributions of listed
and unlisted securities, private placements and valuations for estate, corporate
and other purposes. We have acted as financial advisor to the Board of Directors
of the Company in connection with the proposed transactions described in the
Agreements (the "Transactions") and will receive a fee from the Company for our
services, which fee will include warrants to acquire Common Stock.
In conducting our analysis and arriving at our opinion, we have considered
such financial and other information as we deemed appropriate including, among
other things, the following: (i) the Merger Agreement; (ii) the Switch
Agreement; (iii) the Stock Purchase Agreement; (iv) the historical and current
financial position and results of operations of the Company as set forth in its
periodic reports and proxy materials filed with the Securities and Exchange
Commission, (v) certain internal operating data of TWG; (vi) certain internal
operating data and financial analyses and forecasts of the Company for the
fiscal years beginning July 1, 1997 and ending June 30, 2003, prepared for the
Company by its senior management; (vii) certain financial and securities trading
data of certain other companies, the securities of which are publicly traded,
that we believed to be comparable to the Company or relevant to the
transactions; (viii) the financial terms of certain other transactions that we
believed to be relevant; (ix) reported price and trading activity for the Common
Stock; and (x) such other financial studies, analyses and investigations as we
deemed appropriate for purposes of our opinion. We also have held discussions
with members of the senior management of the Company regarding the past and
current business operations, financial condition and future prospects of the
Company.
We have taken into account our assessment of general economic, market and
financial and other conditions and our experience in other transactions, as well
as our experience in securities valuation and our knowledge of the industry in
which the Company operates generally. Our opinion is necessarily based upon the
information made available to us and conditions as they exist and can be
evaluated as of the date hereof. We have relied upon the accuracy and
completeness of all of the financial and other information reviewed by us for
purposes of our opinion and have not assumed any responsibility for, nor
undertaken an independent verification of, such information. In particular, we
have assumed that the financing of the Switches contemplated in the Transactions
is completed on terms provided us by senior management. With respect to the
internal operating data and financial analyses and forecasts supplied to us, we
have assumed that such data, analyses and forecasts were reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
Company's senior management as to the recent and likely future performance of
the Company. Accordingly, we express no opinion with respect to such analyses or
forecasts or the assumptions on which they are based.
<PAGE>
Board of Directors
EqualNet Holding Corp.
February 17, 1998
Page 3
We were not asked to consider and our opinion does not address the
relative merits of the proposed Transactions as compared to any alternative
business strategies that might exist for the Company or the effect of any other
transactions in which the Company might engage. Furthermore, we have not made an
independent evaluation or appraisal of the assets and liabilities of the Company
or any of its subsidiaries or affiliates and have not been furnished with any
such evaluation or appraisal. Finally, we note that the Company and TWG entered
into an agreement in October 1997, pursuant to which TWG purchased a warrant to
acquire Common Stock and made a loan to the Company evidenced by a note
convertible into Common Stock (the "Loan Transaction"). We express no opinion as
to the fairness of the Loan Transaction and the consideration received
thereunder.
The Company is entitled to reproduce this opinion, in whole but not in
part, in the Agreements, the Schedule 14D-9 and the Proxy Statement as required
by applicable law or as appropriate; provided, that any excerpt from or
reference to this opinion (including any summary thereof) in such documents must
be approved by us in advance in writing. Notwithstanding the foregoing, this
opinion does not constitute a recommendation to any holder of Common Stock to
vote in favor of the Transactions.
Based upon and subject to the foregoing, and based upon such other matters
as we consider relevant, it is our opinion that, as of the date hereof, the
consideration to be received by the Company in the Transactions is fair to
holders of Common Stock from a financial point of view.
Very truly yours,
/s/ J. C. BRADFORD & CO., L.L.C.
J. C. BRADFORD & CO., L.L.C.
<PAGE>
ANNEX F
EQUALNET HOLDING CORP.
PRO FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
TRANSACTION ADJUSTMENTS PRO-FORMA
9/30/97 --------------------------------- POST-TRANS
(UNAUDITED) DR. CR. 9/30/97
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash & Equivalents ............................... 786,437 6,500,000(A,E,F) 300,000(G) 6,986,437
Accounts Receivable (net) ........................ 7,337,583 -- -- 7,337,583
Receivable from Officers ......................... 28,367 -- -- 28,367
Due From Agents (net) ............................ 2,340,527 -- -- 2,340,527
Prepaid Expenses and Other ....................... 292,247 -- -- 292,247
Deferred Tax Asset ............................... -- -- -- --
Recoverable Federal Income Taxes ................. -- -- -- --
---------- ---------- -----------
-----------
Total Current Assets ............................. 10,785,161 6,500,000 300,000 16,985,161
Property & Equipment
Computer Equipment ............................... 3,485,542 12,081,633(D,E,G) -- 15,567,175
Office Furniture & Fixtures ...................... 1,209,032 -- -- 1,209,032
Leasehold Improvements ........................... 1,174,777 -- -- 1,174,777
----------- ---------- ---------- -----------
5,869,351 12,081,633 -- 17,950,984
Accumulated Depreciation & Amortization .......... (3,369,998) -- -- (3,369,998)
----------- ---------- ---------- -----------
2,499,352 12,081,633 -- 14,580,985
Customer Acquisition Costs (net of amort) ........ 982,673 -- -- 982,673
Deferred Tax Asset ............................... -- -- -- --
Other Assets ..................................... 982,261 -- -- 982,261
Goodwill (net of amort) .......................... 959,298 -- -- 959,298
=========== ========== ========== ===========
TOTAL ASSETS ..................................... 16,208,745 18,581,633 300,000 34,490,378
=========== ========== ========== ===========
SEE NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
<PAGE>
EQUALNET HOLDING CORP.
PRO FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1997
<CAPTION>
TRANSACTION ADJUSTMENTS PRO-FORMA
9/30/97 --------------------------- POST-TRANS
(UNAUDITED) DR. CR. 9/30/97
----------- --------- ---------- -----------
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities
Accounts Payable .......................................... 2,063,136 -- -- 2,063,136
Accrued Expenses .......................................... 1,579,341 -- -- 1,579,341
Accrued Sales Taxes ....................................... 489,952 -- -- 489,952
Brokerage Commissions Payable ............................. 114,105 -- -- 114,105
Payable to Providers of LD Services ....................... 7,657,008 -- -- 7,657,008
Current Maturities of Capital Lease Obligations ........... 30,000 -- -- 30,000
Notes Payable to LD Provider .............................. 1,183,059 -- -- 1,183,059
Note Payable to Willis Group .............................. -- 1,000,000(B) 1,000,000(A) --
Discount on Note .......................................... -- 42,740(A) 42,740(B) --
Contractual Obligation with Regards to Receivables ........ 3,418,647 -- -- 3,418,647
----------- --------- ---------- -----------
Total Current Liabilities ................................. 16,535,248 1,042,740 1,042,740 16,535,248
Long Term Debt ............................................ -- -- 5,850,000(D) 5,850,000
Subordinated Note Payable ................................. 2,886,261 2,886,261(C) -- --
Convertible Debt - TWG .................................... -- -- -- --
Long Term Obligations Under Capital Lease ................. -- -- -- --
Deferred Rent ............................................. 200,170 -- -- 200,170
Commitment & Contingencies ................................ -- -- -- --
Shareholders' Equity (Deficit)
Preferred Stock (non-voting), $0.01 par ................ -- -- 2,000,000(E) 2,000,000
value, 1,000,000 shares authorized and 0
shares outstanding (Pro Forma 5,000,000
shares authorized and 2,000 shares issued
and outstanding)
Common Stock, $0.01 par value, 20,000,000 .............. 66,828 -- -- 181,644
shares authorized and 6,682,718 shares issued
and outstanding at September 30, 1997
(Pro Forma 50,000,000 shares authorized and
14,269,357 shares issued and outstanding)
- Convert Willis Note ............... -- -- 10,000(B)
- Convert Furst Group Note .......... -- -- 15,000(C)
- Acquire Switches .................. -- -- 14,000(D)
- Acquire Network Assets ............ -- -- 35,816(E)
- TWG Share Purchase ................ -- -- 40,000(F)
Treasury Stock ......................................... (804,881) -- -- (804,881)
Additional Paid-In Capital ............................. 21,435,837 -- -- 34,338,915
- Issue Willis Note ................. -- -- 150,000(A)
- Convert Willis Note ............... -- -- 990,000(B)
- Convert Furst Group Note .......... -- -- 2,871,261(C)
- Acquire Switches .................. -- -- 1,386,000(D)
- Acquire Network Assets ............ -- -- 3,545,817(E)
- TWG Share Purchase ................ -- -- 3,960,000(F)
Stock Warrants ......................................... 368,000 -- -- 860,740
- Issue Willis Note ................. -- -- 42,740(A)
- Acquire Switches .................. -- -- 400,000(D)
- Closing Fees ...................... -- -- 50,000(G)
Deferred Compensation .................................. (223,327) -- -- (223,327)
Retained Deficit ....................................... (24,255,391) -- -- (24,448,131)
- Issue Willis Note ................. -- 150,000(A) --
- Convert Willis Note ............... -- 42,740(B) --
----------- --------- ---------- -----------
Total Shareholders' Equity (Deficit) ...................... (3,412,934) 192,740 15,510,634 11,904,960
=========== ========= ========== ===========
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY (DEFICIT) ........ 16,208,745 4,121,741 22,403,374 34,490,378
=========== ========= ========== ===========
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
<PAGE>
EQUALNET HOLDING CORP.
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
(1) BASIS OF PRESENTATION
The preceding table sets forth certain pro-forma balance sheet data of the
Company. The unaudited Pro Forma Balance Sheet gives effect to the completion of
the transactions described in Proposals 2, 3 and 4 of the Proxy Statement as if
these transactions had occurred on September 30, 1997. The pro forma information
set forth above is not necessarily indicative of the results that actually would
have been achieved had such transactions been consummated as of the dates
reflected or that may be achieved in the future. This information should be read
in conjunction with the Company's Management's Discussion and Analysis of
Financial Condition and Results of Operations and the Company's consolidated
financial statements and related notes thereto incorporated by reference into
the Proxy Statement.
(2) ADJUSTMENTS TO HISTORICAL FINANCIAL STATEMENTS The preceding pro forma
adjustments have been made to the unaudited September 30, 1997 balance sheet of
the Company to give effect to the proposed transactions as if they had occurred
on September 30, 1997.
(A) To reflect the issuance by the Willis Group of the $1,000,000 12%
Convertible Secured Note on October 1, 1997 and the issuance of 200,000
Warrants by the Company. The Convertible Secured Note is convertible at
any time at the option of the Willis Group. The Company will recognize an
interest cost associated with the terms that provide for the conversion of
the debt at a discount based on the market price of the stock on the date
that the terms were agreed to.
The value of the Warrants is calculated as the difference between the
present value of the Convertible Secured Note at the stated interest rate
(12%) and the present value of the Convertible Secured Note at a market
rate of interest (assumed to be approximately 20%).
(B) To reflect the conversion of the Willis Group $1,000,000 Convertible
Secured Note for 1,000,000 shares of Common Stock at an assumed price of
$1.00 per share at closing. The Willis Group has agreed to convert the
Note at closing of the proposed transactions.
(C) To reflect application of the Furst Group Note for $1,500,000 as the
purchase price for shares of Common Stock on exercise of a warrant at
closing of the proposed transactions. The Furst Group has agreed to
exercise a warrant by applying the Furst Group Note contemporaneously with
the closing of the proposed transactions.
(D) To reflect the acquisition of the Switches from the Willis Group by
the Company for $5,850,000 in cash, and 1,400,000 shares of Common Stock
(valued at $1,400,000 based on $1 per share), and Warrants to purchase
400,000 additional shares of Common Stock at $1.00 per share (valued at
$400,000).
The transaction is presented assuming that the cash portion of the
purchase price is financed through a loan from an unaffiliated third party
lender. There can be no assurance that the Company will be able to obtain
this financing on favorable terms, if at all. If the Company is unable to
secure this financing from a third party lender before the consummation of
the transaction, it expects that it will enter into an interim financing
agreement with Mr. Michael Willis pursuant to which Mr. Willis will loan
the Company $5.9 million to be secured by the switches. Mr. Willis has
committed to the Company to provide such financing on a 48 month
amortization at 12% interest in exchange for 500,000 warrants
excerciseable at $1.00 per share
<PAGE>
The Switches are carried at $7,650,000 which is the fair market value of
all consideration paid by the Company for the equipment and associated
software ($5,850,000 in cash; 1,400,000 shares of Common Stock at an
assumed value of $1 per share and 400,000 warrants at an assumed value of
$1 per share).
(E) To reflect the purchase of the Network Assets from Netco Acquisition
Corp. for 2,081,633 shares of Common Stock at $1.00 per share and 2,000
shares of Series A Preferred Stock at $1,000.00 per share. The Company has
an agreement with Netco Acquisition LLC to fund the implementation of the
network. The amount expected to be borrowed is $1.5 million. At closing ,
the amount expected to be advanced will be exchanged for Common Stock
based on a $1 per share conversion price which was the market price of the
stock at the time that the terms were agreed to. For the purposes of this
Pro Forma Balance Sheet it is estimated that the Netco Acquisition LLC
will fund an additional $1,500,000 for the implementation of the network
prior to closing.
The stated value of the Series A Preferred Stock is based on a negotiated
amount and not on a formal valuation. The Series A Preferred Stock is
convertible into Common Stock at a rate of 1,000.00 shares of Common Stock
per share of Series A Preferred, or an aggregate of 2,000,000 shares of
Common Stock. The exchange ratio was established based on the market value
of the Company's Common Stock on the date that the terms were agreed to.
The excess of the cash and value of the Network Assets over the par value
of the 3,581,633 shares issued in the transaction is allocated to
Additional Paid In Capital.
The Network Assets are carried at $4,081,633 which is the estimated fair
market value of all consideration paid by the Company for the assets
(2,000 shares of Preferred Stock at an assumed value of $1,000 per share
and 2,081,633 shares of Common Stock at an assumed value of $1 per share).
(F) To reflect the purchase by the Willis Group of 4,000,000 shares of
Common Stock (valued at $1 per share.
(G) To reflect the estimated closing costs of $300,000 cash and 50,000
warrants (valued at $50,000 based on $1 per share).
(3) DEPRECIATION AND AMORTIZATION
All equipment and intangibles associated with the Network are assumed to be
amortized over 5 years.
(4) ADDITIONAL PAID IN CAPITAL
The amount allocated to Additional Paid In Capital is determined by the excess
of cash paid or the fair value of stock sold or issued, respectively, over the
par value of $0.01 per share.
<PAGE>
(5) IMPACT ON PRO-FORMA EARNINGS
Had the proposed transactions taken place at the beginning of the respective
periods indicated below, the proposed transactions would have had the following
effect on selected results for the year ended June 30, 1997 and the quarter
ended September 30, 1997:
<TABLE>
<CAPTION>
YEAR ENDED 6/30/97 QUARTER ENDED 9/30/97
------------------ ---------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Depreciation & amortization $5,999,000 $8,416,200 $1,112,200 $1,716,300
Operating income (loss) ($10,746,300) (13,162,700) ($1,717,300) ($2,321,400)
Interest expense ($1,022,284) ($1,744,000) ($353,385) ($560,500)
Net income ($14,980,544) ($18,118,600) ($2,096,897) ($2,908,100)
Earnings per share ($2.46) ($1.28) ($0.33) ($0.20)
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
1. ELECTION OF DIRECTOR: FOR the nominees listed below |_|
Nominees: James T. Harris (three-year term)
Mark A. Willis (three-year term)
John Isaac "Ike" Epley (two-year term)
Mitchell H. Bodian (one-year term)
Walter V. Klemp (one-year term)
Ronald J. Salazar (one-year term)
2. APPROVAL OF AMENDMENT TO ARTICLES OF INCORPORATION:
FOR |_| AGAINST |_| ABSTAIN |_|
3. APPROVAL OF TRANSACTIONS DESCRIBED IN THE PROXY STATEMENT:
FOR |_| AGAINST |_| ABSTAIN |_|
4. RATIFICATION OF PREVIOUS ISSUANCES OF SECURITIES AS DESCRIBED IN THE PROXY
STATEMENT:
FOR |_| AGAINST |_| ABSTAIN |_|
PLEASE MARK, SIGN, DATE AND RETURN IMMEDIATELY.
---------------------------------
Special Note: to WITHHOLD AUTHORITY to vote for any of the
Nominees, write that Nominee's name below:
- -----------------------------------------------------------
- -----------------------------------------------------------
- -----------------------------------------------------------
- -----------------------------------------------------------
- -----------------------------------------------------------
- -----------------------------------------------------------
Change of Address or
Comments Mark Here |_|
NOTE: Please sign exactly as name appears hereon. Joint owners
should each sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as it appears hereon.
DATE: _______________________, 1998
-----------------------------------
SIGNATURE(S)
-----------------------------------
SIGNATURE(S)
VOTES MUST BE INDICATED (X) IN BLACK OR BLUE INK
================================================================================
<PAGE>
- --------------------------------------------------------------------------------
EQUALNET HOLDING CORP.
THIS PROXY FOR HOLDERS OF COMMON STOCK IS SOLICITED BY
THE BOARD OF DIRECTORS FOR THE ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD MARCH 5, 1998
The shareholder of EqualNet Holding Corp. (the "Company") whose
signature appears on the reverse side of this Proxy hereby appoints Zane Russell
and Dean H. Fisher, and each of them, attorneys and proxies of the undersigned,
with full power of substitution, to vote, as designated below, the number of
votes which the undersigned would be entitled to cast if personally present at
the Annual Meeting of Shareholders of the Company to be held at the Company's
headquarters, 1250 Wood Branch Park Drive, Houston, Texas, at 10:00 a.m.,
____day, March ___, 1998, and at any adjournment thereof.
1. PROPOSAL TO ELECT DIRECTOR--NOMINEES: James T. Harris (three-year
term), Mark A. Willis (three-year term), John Isaac "Ike" Epley
(two-year term), Walter V. Klemp (one-year term), Ronald J. Salazar
(one-year term), Mitchell H. Bodian (one-year term).
2. PROPOSAL TO APPROVE AN AMENDMENT TO THE COMPANY'S ARTICLES OF
INCORPORATION.
3. PROPOSAL TO APPROVE THE TRANSACTIONS DESCRIBED IN THE ACCOMPANYING
PROXY STATEMENT.
4. PROPOSAL TO RATIFY PREVIOUS ISSUANCES OF SECURITIES AS DESCRIBED IN THE
ACCOMPANYING PROXY STATEMENT.
5. 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 the election of the director nominees named in
Proposal 1 or, if any nominee becomes unavailable, FOR another nominee
to be selected by the Board of Directors, FOR the proposed amendment to the
Company's Articles of Incorporation, FOR the proposed Transactions and FOR the
ratification of the previous issuances of securities as described in the
accompanying proxy statement.
EQUALNET HOLDING CORP.
1250 WOOD BRANCH PARK DRIVE
HOUSTON, TEXAS 77079
SEE REVERSE SIDE
- --------------------------------------------------------------------------------
