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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1998 COMMISSION FILE NUMBER 0-025842
EQUALNET COMMUNICATIONS CORP.
A TEXAS IRS EMPLOYER
CORPORATION No. 76-0457803
1250 WOOD BRANCH PARK DRIVE
HOUSTON, TEXAS 77079
Telephone Number 281/529-4600
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.01 Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
Aggregate market value of the voting stock (common stock) held by
non-affiliates of registrant as of October 2, 1998 $2,536,016
Number of shares of registrant's common stock outstanding
as of October 2, 1998 18,385,832
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Item Page
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TABLE OF CONTENTS
PART I
1. BUSINESS................................................................ 1
2. PROPERTIES..............................................................10
3. LEGAL PROCEEDINGS.......................................................10
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....................14
PART II
5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.................................................................15
6. SELECTED FINANCIAL DATA.................................................18
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.....................................19
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..............37
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................37
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE..................................37
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......................38
11. EXECUTIVE COMPENSATION..................................................40
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT...................................................43
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........................45
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K.................................................48
ALL DEFINED TERMS UNDER RULE 4-10(A) OR REGULATION S-X SHALL HAVE THEIR
STATUTORILY PRESCRIBED MEANINGS WHEN USED IN THIS REPORT.
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SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). All statements other than statements of historical
facts included in this Annual Report on Form 10-K, including without 1imitation,
statements regarding the Company's (defined below) financial position, business
strategy, budgets and plans and objectives of management for future operations,
are forward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to be correct. There are
important factors that could cause actual results to differ materially from the
Company's expectations including without limitation, bankruptcy or court actions
or proceedings related to the bankruptcy of EqualNet Corporation and EqualNet
Wholesale Services, Inc., the Company's ability to obtain additional financing
and the assumptions, risks and uncertainties set forth below in "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Cautionary Statements", including without limitation, in
conjunction with the forward-looking statements in this Annual Report on
Form 10-K (collectively "Cautionary Statements"). All subsequent written and
oral forward-looking statements attributable to the Company, or persons acting
on its behalf, are expressly qualified in their entirety by the Cautionary
Statements.
PART I
ITEM 1. BUSINESS
GENERAL
Equalnet Communications Corp. (the "Company"), a corporation incorporated
in the state of Texas on January 20, 1995, and previously known as EqualNet
Holding Corp., is a holding company currently comprising three operating
subsidiaries, EqualNet Corporation ("EqualNet"), a long-distance telephone
company that provides services to generally smaller commercial and residential
accounts nationwide, Netco Acquisition Corp., ("Netco") the owner of nine
switches located in major U.S. cities and USC Telecom, Inc. ("USC Telecom")
formed in the first quarter of fiscal 1999 to acquire the assets purchased from
SA Telecommunications, Inc. ("SA Telecom") (see "SA Telecom Acquisition"). The
Company began fiscal 1998 as a switchless reseller of long distance services
through EqualNet. During the third quarter of fiscal 1998 the Company purchased,
through its wholly owned subsidiary Netco, nine switches and became a switch-
based reseller with leased line facilities (see "Industry Background, Structure
and Competition"). EqualNet principally utilizes AT&T Corp. ("AT&T"), Sprint
Communications Company, L.P. ("Sprint") through its arrangement with The Furst
Group, Inc. ("Furst") a privately-held reseller of long-distance and
telecommunications services, Frontier Communications and MCI WorldCom Inc. ("MCI
WorldCom") to provide transmission of its customers' traffic. Sales related to
services provided utilizing the AT&T and Sprint networks accounted for
approximately 78.15% and 17.44%, respectively, of the Company's revenues for the
year ended June 30, 1998.
EqualNet, one of the Company's subsidiaries, and EqualNet Wholesale
Services, Inc. ("Wholesale") a non-operating wholly owned subsidiary of
EqualNet, filed voluntary petitions for relief under Chapter 11 ("Chapter 11")
of the United States Bankruptcy Code (the "Bankruptcy Code") on September 10,
1998 (the "Petition Date") in the United States Bankruptcy Court for the
Southern District of Texas (the "Bankruptcy Court"), Houston, Texas. The cases
are pending in such court as Cases No. 98-39561-H5-11 and 98-39560-H4-11.
Pursuant to Sections 1107 and 1108 of the Bankruptcy Code,
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EqualNet, as debtor-in-possession, expects to continue to manage and operate
its assets and business pending the confirmation of a reorganization plan
subject to the supervision and orders of the Bankruptcy Court. At the time of
its bankruptcy filing, EqualNet reported total assets of $20.7 million and
total liabilities of $57.6 million. The largest individual creditor of EqualNet
as of the bankruptcy filing date was the Company, which was owed approximately
$33.0 million at the time of EqualNet's bankruptcy filing. On October 2, 1998
Wholesale filed its motion to convert its bankruptcy proceeding from a
Chapter 11 reorganization to a Chapter 7 liquidation.
EqualNet markets its services primarily to small business customers with
monthly long-distance bills of less than $500. For the year ended June 30, 1998,
the monthly long-distance bill of EqualNet's average customer was approximately
$41. As of June 30, 1998, EqualNet had over 30,000 long-distance customers.
EqualNet is one of the several hundred "tier three" long distance service
providers. See "-Industry Background Structure and Competition." EqualNet
historically has used independent marketing agents and an internal sales force
to sell its services. Revenues derived from EqualNet's customers introduced to
EqualNet by independent marketing agents constituted approximately 85% of
EqualNet's total revenue for the year ended June 30, 1998. The independent
marketing agents typically receive residual commissions based on billed revenue.
The Company'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 and to $24.9
million for the fiscal year ended June 30, 1998. Pre-tax losses for the fiscal
years ended June 30, 1996, 1997 and 1998 were $11.1 million, $12.6 million and
$17.9 million, respectively.
During fiscal year 1998, the Company continued to experience financial and
operational difficulties. During the second half of fiscal 1998 the Company
focused on transitioning from being a switchless reseller to becoming a national
switch-based carrier by purchasing nine telecommunications switches ("Switches")
on March 6, 1998 through its subsidiary, Netco. During the process of connecting
network facilities to the Switches, the Company realized it lacked adequate
capital to support a national switched approach. The Company is focusing upon a
regional reseller approach, utilizing those Switches of Netco located where the
Company has the greatest potential for concentration of traffic. In its effort
to generate additional cash flow from under utilized assets, the Company is
currently investigating the possibility of liquidating certain Switches or
partitioning or leasing Switches to other carriers. The Company plans to focus
on offering bundled services to its customers, mainly long-distance service,
local service, wireless and paging, internet access and web pages.
In October, 1998, the Company began to disconnect all of its Switches in
order to reduce fixed costs in areas in which the Company has little or no long-
distance traffic and simultaneously allow the Company to reconfigure its
circuits to increase its margins in areas where the Company has concentrations
of traffic. The Company intends to adopt a geographic focus in southern
California and the southwest where a significant portion of its customer base
currently resides. The Company believes that its Switches located in Houston and
Dallas, Texas and Los Angeles, California are well situated to service this
market area. The Company intends to seek to enter into wholesale agreements,
such as partitioning or leasing contracts, to turn its other Switches into
revenue generating assets.
INDUSTRY BACKGROUND, STRUCTURE AND COMPETITION
According to industry data, AT&T, together with MCI WorldCom and Sprint
constitute what generally is regarded as the first tier in the long distance
market. The second tier, generally defined as comprising companies generating
between $2 billion and $500 million in annual long distance revenue, such as
Frontier Corporation ("Frontier"), Cable & Wireless Communications, Inc. and
Qwest Communications, are believed to account for less than 5% of
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the more than $80 billion long-distance market cumulatively. The remaining
market share is held by several hundred smaller companies, known as third tier
carriers. Recent legislative and regulatory activity is designed to foster a
telecommunications industry that encourages greater competition among providers
of long-distance and local telecommunications services, as well as data and
network services.
Many first and second tier companies, most notably AT&T, Sprint, MCI
WorldCom and Frontier, have been providing long-distance products for resale for
a number of years to capture incremental traffic volume. In 1991, EqualNet
entered into the first of its agreements with AT&T to resell long distance
service over AT&T's network. In 1994, EqualNet entered into an agreement with
Sprint to resell long distance over Sprint's network. In 1996, EqualNet replaced
its direct contractual relationship with Sprint with its arrangement with
Furst to continue service to EqualNet's customers over Sprint's network.
Besides gross revenue, another significant distinction between long-
distance companies involves whether they maintain their own facilities.
Facilities-based companies own or lease transmission facilities, such as fiber
optic cable or digital microwave equipment. Profitability for facilities-based
carriers is highly dependent 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. Facilities-based carriers in the third tier of the market generally
have facilities in a focused geographic area or lease facilities from first
or second tier carriers. 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. Pricing in such contracts typically is correlated inversely to
minimum revenue or volume commitment levels and term.
EqualNet began fiscal 1998 as a reseller utilizing such contracts to
provide service for its customers' long distance services, and still utilizes
such contracts to provide services to its historical customer base. During
fiscal 1998, EqualNet became a leased facilities-based carrier as a result of
its acquisition of Netco and the build out of network facilities connecting
these switch sites. While Netco owns the Switches used for the routing of long
distance traffic, all of the network facilities are leased from other
providers.
Another 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 switch-based carriers, as
are many non-facilities-based companies. Switchless carriers depend on one or
more facilities-based carriers to provide both transmission capacity and switch
facilities. In addition, switchless resellers enjoy the benefit of offering
their service on a nationwide basis, assuming that their underlying carrier has
a nationwide network. Through fiscal 1997, EqualNet was a switchless reseller.
During the third quarter of fiscal 1998, Netco, a wholly owned subsidiary of the
Company, acquired the Switches and associated network assets for approximately
$13.2 million. EqualNet entered into an agreement with Netco to provide for
operation of the Switches and build out of network facilities in exchange for
the right to carry traffic over the network and as a result became a switch-
based carrier.
The $95 billion local telecommunications industry is dominated by the
regional Bell operating companies ("RBOC"s) and GTE Communications Corporation
("GTE"). The RBOCs and GTE have the authority to provide interLATA (geographic
areas created by the AT&T divestiture known as local access transport areas)
long-distance service outside their service regions. The Telecommunications Act
of 1996 (the "Act") established procedures whereby the RBOCs can apply for
authority to provide interLATA long-distance service inside their respective
service region. Similarly, certain of the requirements governing GTE's provision
of in-region long-distance service were removed by the Act.
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The nature of competition in the telecommunications industry is expected to
change significantly as legislative, regulatory and judicial activities
progress. As barriers are removed for the RBOCs to provide long distance
services inside their geographic areas, and as telecommunications mergers and
consolidations occur, the Company would expect an increase in competition for
long-distance services which could result in the further loss of market share,
more price competition and/or a further decrease in operating margins. The
Company expects additional industry wide downward price pressure as the RBOCs
begin to compete more aggressively in the long distance market.
The Company's ability to compete and grow is subject to changing industry
conditions. Legislation and the resulting regulatory and judicial action have
had a significant impact on the current industry environment. These changes are
expected to continue to alter the nature and degree of competition in both the
local and long-distance segments of the industry and could directly impact the
Company's future growth opportunities.
Competitive factors in the long distance industry affecting the Company's
market share include brand recognition, pricing, customer service, network
quality, value-added services and regulatory and judicial developments. Non-
facilities-based carriers typically receive rates from underlying carriers in
inverse correlation with the amount of traffic that they can commit to the
underlying carrier - the larger the commitment, the lower the cost of service.
Subject to contract restrictions and customer brand loyalty, resellers may
competitively bid their traffic among various national long-distance carriers to
lower their cost of service. Non-facilities-based switchless carriers devote
their resources entirely to marketing, operations and customer service, leaving
the costs of network maintenance and management to the underlying carrier.
Conversely, facilities-based carriers concentrates on maximizing network
efficiency. In order to operate efficiently, facilities based carriers require
concentrations of their customer traffic where they have facilities to attempt
to maximize their network utilization and reduce the effective cost per minute.
The relationship between resellers and the major underlying carriers is
predicated primarily upon the pricing strategies of the first tier companies,
which has resulted historically in higher rates for the small business customer
when compared to the rates paid by larger commercial customers. Small business
customers typically are not able to make the volume commitments necessary to
negotiate reduced rates under individualized contracts. The higher rates result
from the higher cost of credit, collection, billing and customer service per
revenue dollar associated with small billing level long-distance customers. By
committing to large volumes of traffic, the reseller is guaranteeing traffic to
the underlying carrier. The underlying carrier is also relieved of the
administrative burden of qualifying and servicing large numbers of relatively
small accounts. The successful reseller efficiently markets the long-distance
services, processes orders, verifies credit and provides customer service to
these large numbers of small accounts.
The Company believes that the rapid evolution of the communications
industry presents an opportunity for consolidation of third-tier companies in
general, and resellers and smaller, regionally focused switch based carriers, in
particular. Many of these companies are undercapitalized and may have difficulty
providing their services profitably, especially given that the level of price
competition among carriers has continued to increase. By growing through
consolidation, the Company believes that it can (i) generate increased margins
by securing better pricing from underlying carriers because of increased volume
commitments, (ii) justify the installation of switches in geographic areas with
concentrations of long distance traffic, and (iii) achieve economies of scale in
overhead allocation. Such economies are not certain and cannot be precisely
predicted. However, neither the amount of any increased margins nor the ability
to obtain such increased margins, nor the ability to concentrate customer
traffic of the Company, nor the economies of scale in overhead allocation, are
certain and cannot be precisely predicted.
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SA TELECOM ACQUISITION
On January 21, 1998, the Company signed an agreement with SA Telecom, a
switch-based, long-distance telecommunications carrier serving customers
primarily in Texas and southern California to acquire certain assets and
customer bases in exchange for a combination of shares of the Company's
convertible preferred stock, cash and assumption of certain liabilities. The
transaction was subject to certain conditions, including approval of the
bankruptcy court supervising the reorganization of SA Telecom under Chapter 11
of the Bankruptcy Code. On March 9, 1998, the Company won approval from the
bankruptcy court for the transaction. The purchase of SA Telecom was approved by
the Company's shareholders on June 30, 1998 and the acquisition closed on
July 22, 1998 for consideration of approximately $3.47 million in cash,
approximately $5.4 million in convertible preferred stock and the assumption of
approximately $4.0 million in debt payable to Greyrock Business Credit. The
Company's newly formed wholly owned subsidiary, USC Telecom, acquired the assets
of SA Telecom subject to final closing adjustments. Prior to the closing of this
transaction, EqualNet and SA Telecom entered into a management agreement
pursuant to which EqualNet managed the operations of SA Telecom until the
closing of the transaction. EqualNet assumed responsibility for any profits or
losses attributable to SA Telecom's operations between April 1, 1998 and the
closing of the transaction. SA Telecom has provided USC Telecom with notice that
it believes that the Company owes SA Telecom approximately $655,000 for
operating losses during the period the management agreement was in effect. The
determination of operating losses under the management agreement is subject to
interpretation and the Company has disputed the amount of operating losses as
alleged by SA Telecom. The Company estimates that the final amount of operating
losses under the management agreement are lower than SA Telecom's calculations.
Additionally, SA Telecom is disputing certain other elements of the final
purchase price settlement. It is most likely USC Telecom and SA Telecom will
settle these disputes at the same time and it is not possible to estimate the
outcome. Any additional amount paid by the Company, if any, is anticipated to be
recorded as additional purchase consideration. The Company has not included any
losses associated with SA Telecom operations in its Consolidated Statement of
Operations for the fiscal year 1998.
PRODUCTS AND SUPPLIERS
AT&T
EqualNet's principal provider of underlying outbound and inbound long-
distance services is AT&T. AT&T provides such services to EqualNet pursuant to a
long term contract which may be rejected by EqualNet in its pending Chapter 11
proceedings. In the event EqualNet rejects the AT&T contract, EqualNet could
seek to renegotiate an alternative contract with AT&T, subscribe for other
tariffed services or seek to acquire services on a wholesale basis from other
AT&T resellers. Under its existing contract, EqualNet has committed to purchase
a minimum amount in AT&T long distance each year. EqualNet entered into a new
agreement with AT&T effective May 1, 1997 for which the third minimum semi-
annual revenue commitment ("MSARC") period ends October 31, 1998. At June 30,
1998, the revenue generated by EqualNet under the AT&T contract was
substantially below the pro rata commitment of $15.0 million for this six month
period. The total shortfall for this MSARC is estimated to be $11.6 million.
Absent rejection or modification of its agreement with AT&T, EqualNet will most
probably continue to experience shortfalls in its MSARC obligations throughout
the remaining terms of the AT&T agreement which expires in April 2000.
Historically, EqualNet has been able to negotiate amendments to its carrier
agreement which have resulted in no penalty being incurred by EqualNet. No
assurances can be made that EqualNet will be able to reach a settlement with
AT&T should
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EqualNet not reject its contract and fail to meet its current commitment. If
either AT&T or EqualNet terminates the existing contract prior to the expiration
of the full term without execution of a new contract, EqualNet could be liable
for 100% of the unsatisfied MSARC for the period in which discontinuance occurs
and for half of the total amount of the remaining unsatisfied MSARC. The
Company's Statement of Operations for the year ended June 30, 1996, 1997 and
1998 do not include provisions for losses associated with MSARC to AT&T. Any
liabilities for MSARC relating to periods after the rejection date would likely
be treated in the bankruptcy as pre-petition unsecured indebtedness. Due to the
amount of EqualNet's secured indebtedness (approximately $16.0 million), it is
unlikely AT&T would realize significant benefits even if it does assert its
claim for additional MSARC payments.
Sprint
EqualNet began purchasing long-distance services effective November 1,
1996, under Furst's contract with Sprint. This long-distance product was
negotiated at a rate less than that of EqualNet's AT&T contract rate and has
been marketed as EqualNet's private brand economy-priced product. This long-
distance product is available to EqualNet's marketing network as an alternative
to the AT&T products. EqualNet's current agreement with Furst does not have a
term and may be canceled by either party at any time. No assurances can be made
that EqualNet will continue to be able to utilize Sprint through its contract
with Furst. Termination of the Furst contract could result in an increase in the
cost Sprint charges EqualNet to provide services. If EqualNet cannot use Furst's
contract with Sprint or negotiate its own agreement with Sprint, EqualNet could
transfer these customers to another carrier. Although EqualNet expects that such
a transfer would cause substantial one-time customer attrition, EqualNet would
not expect a termination of the agreement with Furst to have a material adverse
effect on EqualNet's results of operations.
Other Carriers
MCI WorldCom was one of the primary underlying carriers for SA Telecom.
EqualNet entered into an agreement with MCI WorldCom for the provision of
service in order to provide services over MCI WorldCom's network to new
customers located in an area not accessible by the Company's network.
In addition, the Company negotiated an agreement in August 1998 with
Frontier Communications for the transport of traffic on its network facilities
and switchless resale traffic requiring a minimum of $250,000 monthly usage
requirement after the contract's initial six month term. The pricing under this
contract is superior to that available under the AT&T and Sprint contracts and
can be utilized for customers who are in areas where use of the Company's
switches is not economically advantageous.
The Company's diversity of carrier relationships may provide further
flexibility and alternatives for the Company in the event it is not able to
continue to contract with any one of the currently underlying carriers that
provide services for its customers.
CUSTOMER SERVICE AND CUSTOMER MANAGEMENT SYSTEM
The Company's operating subsidiaries customer service function seeks to
develop long-term customer relationships by providing accurate billing
information and processing customer requests in a timely and efficient manner.
The responsibilities of the operations department include billing,
"provisioning" or processing orders with the underlying carriers, and supporting
independent marketing agents. The operations department receives orders from
independent marketing agents and from the sales department of EqualNet and USC
Telecom and then processes the orders for entry into the
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appropriate subsidiary's database. Operations personnel interface with the
underlying carriers and billing companies for processing and procedural matters.
During the third quarter of fiscal year 1998, the Company abandoned the
improvements to the "NetBase" system in favor of "AMS", a customer management
and information system with billing capabilities, purchased from an independent
telecom oriented software vendor, Platinum Communications. The Company
experienced difficulties converting from the NetBase system to AMS. Unlike
NetBase (the system used for most of fiscal year 1998 prior to conversion), AMS
purportedly had capabilities required for switch-based data gathering, rating
and billing. The conversion coincided with the management of a new customer base
(SA Telecom) and a migration to a switch based environment, considerable billing
errors and delays occurred. Additionally, there are intricacies about AMS that
placed the Company in substantial reliance upon the vendor of this software.
This reliance upon an outside source for billing system troubleshooting has
slowed the conversion process. As of September 25, 1998, EqualNet is making
plans to convert to CostGuard ENTERPRISE ("CostGuard"), a more powerful cost
rating, billing and customer care system built on a Microsoft SQL Server
database platform. This system is being purchased from Info Directions, Inc.,
"IDI" and is expected to dramatically improve rating speed and billing accuracy.
Also, EqualNet expects to be able to more readily extract meaningful data and
management reports from CostGuard. The CostGuard system design is flexible
enough to respond to rapid changes in the telecommunications marketplace. In
fiscal year 1998, EqualNet recorded write offs of $270,000 for NetBase and
estimated the useful life of AMS to be approximately one year until the
CostGuard system can be implemented. The new CostGuard system will cost $272,000
initially, and $68,000 per year thereafter for ongoing support and software
upgrades.
Bankruptcy Filing of EqualNet Corporation.
The Company believes on advice of counsel that the carrier contracts signed
by EqualNet are executory contracts and as such EqualNet may reject any of such
contracts in its pending Chapter 11 proceedings. To the extent EqualNet rejects
any such contracts, it is the understanding of the Company that any remaining
liabilities under those agreements could become unsecured claims in EqualNet's
bankruptcy proceeding.
The Company also believes that AT&T, Sprint, Furst, MCI Worldcom and other
underlying carriers that provide service to EqualNet could be classified as
utilities under the provisions of the Bankruptcy Code, and that as such, they
would be entitled to receive adequate assurance of the payment for services to
be provided by each of them during the pendency of the bankruptcy. Such
adequate assurance could be in the form of deposits or other prepayments that
could accelerate the timing of payment for these services to a date that is
earlier than the date on which EqualNet is currently entitled to make payment
pursuant to the terms of its existing contracts with these carriers, and could
require the Company or EqualNet to seek additional working capital. There are no
assurances that such additional working capital, if required, could be
obtained.
CUSTOMERS AND MARKETING
Customers
EqualNet markets its long-distance services primarily to small business
customers with monthly long-distance bills of less than $500. For the year ended
June 30, 1998, the monthly long-distance phone bill for an average EqualNet
customer was approximately $41. EqualNet does not have long term contracts with
its customers, but receives authorization from new customers in connection with
their order for service. In July, 1998, USC Telecom acquired certain customers
from SA Telecommunications.
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Those customers are primarily located in southern California and Texas. The new
USC Telecom customers are comprised mainly of smaller commercial users, similar
to the customer base of EqualNet, but also include some larger, dedicated
service customers whose average monthly usage is larger than the average
EqualNet customer's usage. The average usage for the USC Telecom customers
located primarily in California historically has been $178 per month and the
average usage for the USC Telecom customers located primarily in Texas
historically has been $73 per month.
Marketing
Historically, EqualNet has relied on independent marketing agents to market
its long-distance products. Independent marketing agents sell EqualNet long-
distance products directly to business customers as authorized agents or sales
agents of Equalnet and may be entitled to receive a continuing commission based
on the monthly usage of the customer accounts that they have brought to
EqualNet. EqualNet provides independent marketing agents with promotional
materials and products and offers training programs by EqualNet employees.
EqualNet solicits independent marketing agents primarily through its personnel's
industry contacts and relationships, supplemented by promotions through
telecommunications trade periodicals and trade shows.
As a result of the acquisition of SA Telecom through USC Telecom, the
Company acquired an internal sales force in West Texas and a base of independent
agents. These sales channels may be used to increase revenues. The Company
intends to use these sales channels to market the services of USC Telecom. Due
to the bankruptcy filing of EqualNet, there are no planned sales or marketing
efforts for EqualNet until such time as a plan of reorganization is confirmed.
TRADEMARKS AND PROPRIETARY RIGHTS
EqualNet has registered the trademark EqualNet(R) with the United States
Patent and trademark Office. The Company also has registered various trademarks
in connection with its product offerings.
REGULATION
Through the second quarter of fiscal 1998, as a non-facilities based
provider of long distance telecommunications services, EqualNet was subject to
many of the same regulatory requirements as facilities-based interexchange
carriers. EqualNet is regulated at the federal level by the FCC and is required
to file tariffs containing descriptions of its products, rates, terms and
conditions of service. In addition, EqualNet is required to maintain a
certificate, issued by the FCC, in connection with its international services.
EqualNet updates its tariffs to reflect any modifications to its existing rates
or terms and conditions of service, as well as to reflect any new products or
services developed for resale by EqualNet. USC Telecom, which commenced
operations in July, 1998 is subject to the same regulations and tariffing
requirements as EqualNet, and is currently in the process of filing tariffs and
obtaining the approvals necessary for it to provide services for the customer
bases acquired from SA Telecom. USC Telecom currently has a management
agreement in place with EqualNet under which EqualNet is providing those
services until USC Telecom receives the approvals necessary to provide those
services directly for its customers.
The intrastate long distance telecommunications operations of EqualNet and
USC Telecom are also subject to various state laws and regulations, including
prior certification, notification or registration requirements. EqualNet and USC
Telecom generally must obtain and maintain certificates of public convenience
and necessity from regulatory authorities in most states in which they offer
service. In
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most of these jurisdictions, EqualNet and USC Telecom must also file and obtain
prior regulatory approval of tariffs for intrastate service. EqualNet can
provide intrastate originating service to customers in the contiguous 48 states,
Hawaii, and the District of Columbia. EqualNet must update and amend its tariffs
when rates are adjusted or new products or services are added to those it
already offers.
The Telecommunications Act of 1996 (the "Act") is generally designed, among
other things, to stimulate the development of competition in local exchange
markets by permitting the RBOCs to enter the long distance arena only after they
comply with certain statutory requirements designed to eliminate their
monopolies over local exchange service. The RBOCs are permitted to offer long
distance services immediately in geographical areas other than the areas in
which they currently provide local exchange services. Before providing
interexchange services that originate in any state in their region, RBOCs must
petition the Federal Communications Commission ("FCC") for permission to provide
such services. The FCC must review such request within 90 days, but cannot
approve such request unless (i) such approval is consistent with the public
interest, convenience and necessity, (ii) the FCC has consulted with the
Department of Justice and given such Department's views substantial weight,
(iii) the RBOC has implemented the Act's checklist of conditions in the regions
where permission to provide interexchange services is sought, and (iv) either
the RBOC has entered into a binding interconnection agreement approved by the
state in question with one or more competing providers of local telephone
service to residential and commercial subscribers (which services are offered
either exclusively or predominately over such competitor's own facilities), or
the RBOC has received no such requests for interconnection within the
statutorily prescribed time period.
Entry by long distance companies into the markets for local service is
governed by the public utility regulatory authorities of each state in which
such service is to be provided. While state public utility commissions are
responsible for regulating such entry, the Act prohibits state regulations that
could bar such entry.
The Act requires the FCC to promulgate regulations to implement the
requirements of the Act. Since the passage of the Act, the FCC has issued
rulings governing three major areas: (i) interconnection, (ii) universal service
and (iii) access charge reform. Implementation of the Act is changing the manner
in which these areas are funded. The changes that most affect the Company are in
the areas of the funding of universal service (the fund to offset the high cost
of providing service in rural areas and to certain schools and libraries) and
local access (the charging by local exchange carriers to interexchange carriers
for their customers' accessing their networks to originate or terminate long
distance calls). Prior to the implementation of the Act, both universal service
and access charges were paid by EqualNet's underlying carriers and presumably
considered as a factor the underlying carriers used to determine the rates for
wholesale pricing charged to EqualNet. With the competitive changes anticipated
by the Act, funding for universal service is now shared on the federal level by
all communications carriers based upon their proportionate share of revenue as
compared with the budgeted funding required to provide these services. In
addition, many states have begun to assess universal service charges on a state
level to supplement the federal funding of universal service.
Access charge reform has resulted in access charges in the form of the
Primary Interexchange Carrier Charge ("PIC-C"), an assessment to be paid by the
interexchange carrier that the end user customer has selected as its primary
interexchange carrier. The charge is assessed against each telephone line of the
customer, which for EqualNet's customers varies from $0.31 per line to $2.75 per
line, depending upon the type of service.
Beginning in the third fiscal quarter, EqualNet began to be assessed both
universal service charges and PIC-C charges. Although the funding of universal
service and access charges are not new, the manner in which EqualNet is having
to pay for these items is new. Although EqualNet, and not its
9
<PAGE>
underlying carriers, is now primarily responsible for the payment of these
charges, EqualNet has not experienced a lowering of its cost of service from its
underlying carriers in an amount equal to the increased amounts of the
assessments it has to pay for universal service and access charges. To the
extent EqualNet does not receive a lowering of its cost of service from its
underlying carriers equal in amount to its increased cost of business by virtue
of these assessments, its operating margins are diminished. EqualNet is
attempting to recoup at least a portion of the increase of these assessments by
passing these charges through, where permitted, to its end user customers. In
such circumstances, although the rates charged to the end user customers are not
increased, the effect is an increase to EqualNet's customers in their cost of
obtaining service.
EMPLOYEES
As of June 30, 1998, the Company had approximately 124 full time employees,
none of whom were subject to any collective bargaining agreement. Subsequent to
the fiscal 1998 year end, the Company has added approximately 23 employees
resulting from the SA Telecom acquisition and has lost approximately 53
employees though either voluntary resignations or involuntary terminations. As
of October 2, 1998, the Company had 94 full time employees.
Various members of management left the Company during fiscal 1998 and the
first quarter of fiscal 1999: Zane Russell, the Company's former President and
Chief Executive Officer, and Michael L. Hlinak, former Chief Financial Officer
and Chief Operating Officer resigned their positions in April 1998, as a result
of the change in control of the Company that took place in March of 1998. Robert
H. Turner replaced Mr. Russell as Chief Executive Officer of the Company. In
July 1998, the Board of Directors decided to remove Mr. Turner as Chief
Executive Officer. Bob Henson, who replaced Mr. Hlinak as the Chief Operating
Officer in March 1998, left the Company in July 1998. Maurie Daigneau, who was
appointed as the Company's Chief Operating Officer in July 1998, resigned that
position in August 1998 to pursue other interests. Most of the other members of
management who were with the Company at the beginning of fiscal 1998 have either
resigned or been terminated since March 1998.
ITEM 2. PROPERTIES
EqualNet leases approximately 57,000 square feet of general and
administrative office space in Houston, Texas, under leases with unaffiliated
third parties that expire in 2004. EqualNet's monthly rental obligation for its
facilities is approximately $55,000. EqualNet believes its leased facilities are
in excess of its current needs and is seeking to sublet a portion of its leased
office space or negotiate a new lease for less space with its current landlord.
EqualNet has the right to reject its office lease in the bankruptcy proceedings.
If the lease is rejected, EqualNet would not be liable for any payments due
during the remainder of the lease term following its rejection, but the landlord
could assert a claim as an unsecured creditor in the bankruptcy.
ITEM 3. LEGAL PROCEEDINGS
In April, 1997, American Teletronics Long Distance, Inc. ("ATLD") and
MetroLink Communications, Inc. ("MetroLink") filed suit against EqualNet
Corporation and EqualNet Wholesale Services, Inc. in the United States District
Court for the Northern District of Illinois, Eastern Division (Cause
No. 97-C-2842) alleging damages based upon breach of contract, fraud and
negligent misrepresentation. Both defendants subsequently were served with
process and filed answers and counterclaims for damages. Plaintiffs allege
damages for EqualNet's failure to complete a purchase of
10
<PAGE>
ATLD's customer base, EqualNet's failure to pay for long distance services
provided by MetroLink to EqualNet's customers through its contract with Unified
Network Services LLC ("UNS") and for damages arising out of EqualNet's alleged
breach of contractual obligations to UNS, a Delaware limited liability company
of which EqualNet, Wholesale and MetroLink were shareholders. It is anticipated
that these matters will be disposed of in the respective bankruptcy proceedings
of EqualNet and Wholesale. EqualNet's management vehemently denies any
wrongdoing or liability in this matter.
EqualNet has committed to make certain payments to AT&T for usage incurred
in prior periods. EqualNet defaulted in the timely payment of those payments
during the fourth fiscal quarter of 1998, and began to enter into a series of
short term, alternative payment agreements with AT&T for the payment of amounts
due to AT&T for current usage with any surplus to be applied to the arrearage
amounts. The failure to make any payments due to AT&T could result in the
termination of service to EqualNet's customers whose long distance service is
provided over AT&T's networks. The pending bankruptcy proceeding discussed below
could have a substantial affect on this obligation. EqualNet is negotiating with
another AT&T reseller as a potential supplier of these services instead of
dealing with AT&T directly. If so, management would anticipate negotiating
payment terms superior to those available directly from AT&T.
On August 7,1998, Robert H. Turner ("Turner") filed suit against the
Company, Mark A. Willis and Willis Group, LLC in the 61st District Court of
Harris County, Texas in case number 98-37682 alleging an unspecified amount of
damages based upon an alleged breach of his employment contract and other
claims. The Company vehemently denies any wrongdoing or liability in the matter,
and intends to vigorously defend itself in this action. Since no discovery has
taken place in this matter, it is impossible to state with any degree of
certainty the amount of damages, if any, that the Company may incur, or if it
will be successful in asserting any cross claims or counterclaims it may have in
connection with the employment of Turner.
On August 13, 1998, Steverson & Company, Inc. filed suit against the
Company in case number 704,244 in the County Civil Court at Law Number 2 of
Harris County Texas seeking damages in the amount of $22,892.78 plus attorneys
fees and court costs. The Company maintains that these charges were for
temporary services personnel utilized by EqualNet and not the Company. The
invoices are addressed to Equal Net Communications, the former name of EqualNet
Corporation before its name change on November 28, 1994. The dates on the
invoices run from June 16, 1998 through August 11, 1998; EqualNet Holding Corp.
did not formally change its name to Equalnet Communications Corp. until June 10,
1998. Due to the fact that these charges may be a claim in the bankruptcy
proceedings of EqualNet discussed below, it is impossible at this time to state
with any degree of certainty the ultimate exposure of either the Company or
EqualNet in this matter.
On August 13, 1998, Centillion Data Systems, Inc. filed suit against
EqualNet in case number 49DO29808CPOO1147 in the Superior Court of Marion
County, Indiana, seeking damages in the amount of $115,490.50 for billing and
other services allegedly provided to EqualNet, plus interest, attorneys fees and
court costs. The fact that these charges are a claim in the bankruptcy
proceedings of EqualNet discussed below make it impossible at this time to state
with any degree of certainty the ultimate exposure of EqualNet in this matter.
On September 3, 1998, the Company received a demand from New Boston Systems
through their attorneys, Steadman & Steele, for the payment of placement fees
for personnel hired by EqualNet. Although New Boston System's engagement letter
was with the Company, the personnel it placed were hired as employees of
EqualNet. It is the position of the Company that any payment due to New Boston
11
<PAGE>
Systems would be due from EqualNet and not the Company. The amount claimed as
due to New Boston Systems is $10,526.25.
On September 15, 1998, Technigrafiks, Inc. filed suit against EqualNet dba
Creative Communications in case number 705,562 in the County Civil Court at Law
Number 1 of Harris County, Texas, seeking damages in the amount of $24,399 for
the printing of plastic cards for prepaid long-distance debit card-sales, plus
interest, attorneys fees and court costs. The fact that these charges are a
claim in the bankruptcy proceedings of EqualNet discussed below make it
impossible at this time to state with any degree of certainty the ultimate
exposure of EqualNet in this matter.
On September 17, 1998, KISS Catalog Ltd. filed suit against the Company as
assignee from Creative Communications International, Inc. of certain contract
rights from KISS Catalog Ltd. in case number 98 CIV. 6570 in the United States
District Court for the Southern District of New York, seeking payment of
$100,000 in license fees, attorneys fees, and any royalties which may be owing
under the license agreement. In 1996, the Company agreed to assume the
obligations under a merchandising license agreement, including the obligation to
make payments of royalties and license fees, with a minimum guarantee royalty
fee of $100,000 and a license fee of $150,000. Payments of the minimum guarantee
of $100,000 and $50,000 of the license fee were made. Payment of the remaining
$100,000 of the license fee has not been made.
On September 17, 1998, Comerica Leasing Corporation filed suit in the 270th
District Court of Harris County, Texas in case number 98-44481 against the
Company and EqualNet for breach of a settlement agreement arising out of
previous litigation for the enforcement of equipment and office furnishings
leases filed on February 12, 1998 in the 157th District Court of Harris County,
Texas in case number 98-06841. A settlement agreement was entered into by the
parties dismissing the earlier litigation and adding the Company as an obligor
for the payment of the settlement amounts. The remaining amounts due under the
settlement agreement and remaining lease obligations represent an amount in
excess of $1,000,000.
On September 21, 1998, Cyberserve, Inc., WSHS Enterprises, Inc. and William
Stuart (collectively "Bluegate") filed suit in the 215th District Court of
Harris County, Texas in case number 98-45115 against the Company, Willis Group,
LLC, Mark A. Willis, and Netco Acquisition LLC alleging damages for breach of
contract, breach of an employment agreement, fraud and fraud in the inducement
statutory fraud in a stock transaction, tortious interference with a contract
conspiracy, and quantum meruit. The matters complained of originated with a
letter of intent dated on or about October 28, 1997, wherein the Company
proposed the purchase of certain assets of Cyberserve, Inc. and WSHS
Enterprises, Inc. subject to the performance of due diligence by the parties.
Bluegate and certain of its shareholders had threatened to sue the Company in
the event the proposed transaction was not consummated substantially in
conformity with the terms set forth in the Letter of Intent. The damages
Bluegate alleges it incurred were as a result of, among other things, the
claimed modification of its business to its detriment in anticipation of the
integration of its operations with those of EqualNet. It is impossible to
determine with any degree of certainty what, if any, liability Equalnet or any
of its subsidiaries, may incur in this matter. The total amount of damages are
unspecified, but include a demand for a cash payment of $685,000, a sufficient
number of shares of Common Stock of the Company for the payment of $585,000, an
additional 525,000 shares of Common Stock, and other damages. The Company
vehemently denies any wrongdoing or liability in this matter and intends to
vigorously defend itself against all claims of the plaintiffs.
On September 29, 1998, SA Telecommunications Incorporated asserted claims
pursuant to the Purchase Agreement against USC Telecom, Inc. and the Company for
(i) $654,934 in operating losses for the period from April 1 through July 22,
1998, (ii) $278,377 for damages for delayed or unbillable revenue through
USBI/ZPDI, (iii) reimbursement of $8,149 for switch site leases, (iv) payment of
Specified Network Contracts Liabilities (amount not specified), (v) delivery of
5,358 shares of Series C Preferred escrowed at closing, and (vi) for return of
certain leased equipment not owned by SA Telecommunications
12
<PAGE>
but previously in its possession and allegedly removed by Equalnet or USC
Telecom. The Company and USC Telecom dispute each of the claims asserted by SA
Telecommunications in its demand.
During the past several months, EqualNet and the Company have experienced
severe liquidity problems and have received numerous notices of default in
payment of trade creditors and other financial obligations. For example and
without providing an exhaustive list, EqualNet has received notice of default of
its agent agreements with Walker Direct Inc., Future Telecom Networks, Inc.,
Global Pacific Telecom, Inc. and others, making demand for the payment of
commissions due and for mediation pursuant to the terms of their agent
agreements. Netco Acquisition LLC presented a notice dated August 25, 1998 under
the terms of the Tri-Party Agreement and Assignment dated January 20, 1998
between Netco Acquisition LLC, EqualNet Corporation and Cyberserve, Inc. that it
was enforcing its rights to foreclose on the web page customer base of EqualNet.
In additional EqualNet defaulted in making timely payments under the
$1,183,059 promissory note payable to Sprint Communications Company L.P., in the
timely payments to AT&T Corp., Premier Communications and MCI WorldCom for
carrier services. In addition, EqualNet received notice it was in default of its
lease agreement with Caroline Partners Ltd., the landlord for the office space
occupied by the Company and its subsidiaries, and that the landlord had
exercised its right to offset rents due against the letter of credit EqualNet
has provided as a security deposit for the landlord's benefit. Finova Capital
Corporation notified Netco of its failure to timely pay installments on its
promissory note in the original principal amount of $6.05 million. The payment
of such note is secured by the switches. Any liabilities for MSARC relating to
periods after the rejection date would likely be treated in the bankruptcy as
pre-petition unsecured indebtedness. Due to the amount of EqualNet's secured
indebtedness (approximately $16.0 million), it is unlikely AT&T would realize
significant benefits even if it does assert its claim for additional MSARC
payments. Norwest Equipment Finance, Inc. has notified EqualNet of its default
in the payment for leased furniture currently being utilized by EqualNet in the
operation of its business. The remaining amount owed under such lease is in
excess of $100,000. The bankruptcy proceedings of EqualNet discussed below make
it impossible at this time to state with any degree of certainty the ultimate
exposure of EqualNet in these matters.
As a result of the liquidity problems listed in the foregoing paragraph and
other matters, on September 10, 1998, EqualNet filed for protection under
Chapter 11 of Title 11 of the United States Code, in case number 98-39561-H5-11
in the United States District Court for the Southern District of Texas and
Wholesale filed for protection under Chapter 11 of Title 11 of the United
States Code, in case number 98-39560-H4-11 in the United States District Court
for the Southern District of Texas. On October 2, 1998, Wholesale filed a motion
seeking to convert its Chapter 11 reorganization proceeding to a Chapter 7
liquidation proceeding. It is impossible to state at this time whether or not
EqualNet as a debtor in bankruptcy will be able to reorganize its liabilities
or to confirm a plan of reorganization in bankruptcy.
During the last fiscal year, EqualNet settled disputed claims with the
attorneys general from eleven states alleging violations of consumer protection
statutes of those states. The settlement amount, which was paid in March, 1998,
totaled $225,000 plus the issuance of certain customer credits and adjustments.
The Company was either not included as a party or was dismissed as a party
before the entry of any final judgment in any of these proceedings.
From time to time the Company is involved in what it believes to be routine
litigation, or other legal proceedings that may be considered as part of the
ordinary course of its business. The Company does not believe that the adverse
determination of any such claims would have a material adverse effect on either
the results of operations or the financial condition of the Company.
13
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Security holders voted upon the following matters in a special meeting held
June 30, 1998:
1. Approval of an acquisition by the Company of certain assets of SA Telecom
in exchange for the payment of an aggregate of approximately $3,477,500 in
cash, the assumption of approximately $4,000,000 in liabilities and the
issuance of 196,553 shares of a newly designated series of the Company's
Preferred Stock.
<TABLE>
<CAPTION>
Votes:
----------
<S> <C>
For................. 17,513,748
Against............. 1,200
Abstain............. 3,300
Broker non-votes*... -
</TABLE>
2. Amendment of the Company's Employee Stock Option and Restricted Stock Plan
to increase the number of shares available for grant under that plan.
<TABLE>
<CAPTION>
Votes:
----------
<S> <C>
For................. 17,113,242
Against............. 393,306
Abstain............. 11,700
Broker non-votes*... -
</TABLE>
3. Amendment of the Company's Non-Employee Director Stock Option Plan to
increase the number of shares available for grant under that Plan and to
increase the amounts granted under that plan.
<TABLE>
<CAPTION>
Votes:
----------
<S> <C>
For................. 17,200,442
Against............. 304,906
Abstain............. 12,900
Broker non-votes*... -
</TABLE>
4. Amendment of the Company's Articles of Incorporation to change the name of
the Company from EqualNet Holding Corp. to Equalnet Communications Corp.
<TABLE>
<CAPTION>
Votes:
----------
<S> <C>
For................. 17,509,048
Against............. 4,400
Abstain............. 4,800
Broker non-votes*... -
</TABLE>
5. Ratification of the issuance of 3,000 shares of the Company's Series B
Senior Convertible Preferred Stock on March 9, 1998.
<TABLE>
<CAPTION>
Votes:
----------
<S> <C>
For................. 17,475,852
Against............. 33,696
Abstain............. 8,700
Broker non-votes*... -
</TABLE>
14
<PAGE>
6. Ratification of the issuance by the Company of warrants to two then current
directors of the Company in connection with the resignation of those
directors from offices of the Company to purchase an aggregate of up to
180,000 shares of Common Stock.
<TABLE>
<CAPTION>
Votes:
----------
<S> <C>
For.................. 17,464,452
Against.............. 49,496
Abstain.............. 4,300
Broker non-votes*.... -
</TABLE>
* Broker non-votes occur when a broker holding stock in street name does not
vote these shares.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on The Nasdaq National Market
("Nasdaq") under the symbol "ENET". The table below sets forth the high and low
sales prices of the Common Stock for the fiscal years 1997 and 1998, as reported
by Nasdaq. The quotations reflect inter-dealer prices, without retail mark-down
or commission and may not represent actual transactions.
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
Price Range
--------------------------
High Low
--------------------------
<S> <C> <C>
1997
First Quarter $ 4 7/8 $ 1 1/4
Second Quarter $ 3 1/8 $ 1 7/16
Third Quarter $ 2 13/16 $ 1
Fourth Quarter $ 2 3/32 $ 9/16
1998
First Quarter $ 2 7/16 $ 7/8
Second Quarter $ 2 1/8 $ 1 1/4
Third Quarter $ 2 31/32 $ 13/16
Fourth Quarter $ 3 $ 1 13/16
</TABLE>
On October 2, 1998, the last sales price per share of the Company's Common
Stock, as reported by Nasdaq, was $0.375.
On October 2, 1998, the Company's 18,385,832 shares of Common Stock
outstanding were held by approximately 2,100 shareholders of record.
The Company has never declared or paid a dividend on the Common Stock.
Holders of Common Stock are entitled to receive such dividends as may be
declared by the Board of Directors of the Company. The Company does not
expect to pay cash dividends in the foreseeable future. The Company is
prohibited from declaring dividends on the Common Stock unless and until the
Company has paid all accrued and outstanding dividends on the Company's
Preferred Stock. Furthermore, the Company's existing credit facility contains
restrictions relating to the payment of dividends and other distributions. The
Company intends to retain any future earnings to finance the expansion and
development of its business. The declaration and payment in the future of any
Common Stock cash dividends will be at the election of the Company's Board of
Directors and will depend upon the earnings, capital requirements and financial
position of the Company, existing or future loan covenants, general economic
conditions' and other pertinent factors.
15
<PAGE>
The following table sets forth required information regarding all securities
sold without registration (and not previously reported) during fiscal year 1998.
<TABLE>
<CAPTION>
Common
Stock Issuable
Date of Title of Upon Exercise Aggregate Exercise Price
Sale Securities of Warrant Name of Purchaser Offering Price Per Share
- - ----------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C>
3/5/98 Warrant 400,000 Willis Group, LLC (1) $ 1.00
3/5/98 Warrant 500,000 Michael Willis (2) $ 1.00
3/6/98 Warrant 50,000 J. C. Bradford Co. (3) $ 1.50
4/15/98 Warrant 85,000 Mezzanine Telecom, Inc. (4) $ 7.50
4/15/98 Warrant 15,000 John Dalton (5) $ 7.50
4/15/98 Warrant 90,000 Zane Russell (6) $ 2.00
4/15/98 Warrant 90,000 Michael L. Hlinak (7) $ 2.00
6/27/98 Warrant 1,066,665 Pacific Global Networks, Inc. (8) $ 2.00
6/27/98 Warrant 1,650,000 Future Telecom Networks, Inc. (9) $ 2.00
10/1/97 Warrant 200,000 Willis Group, LLC (10) $ 1.00
Series A
3/5/98 Preferred 2,000,000 MCM Partners $2.0 million $1,000.00
Series B
3/9/98 Preferred 1,500,000 Furst Group $3.0 million $2,000.00
3/26/98 Warrants 33,334 First Sterling Ventures Corp. (11) $ 1.50
Common
3/26/98 Stock 666,667 First Sterling Ventures Corp. (12)
3/26/98 Warrants 33,333 Frank Hevrdejs (13) $ 1.50
Common
3/26/98 Stock 666,666 Frank Hevrdejs (14)
4/24/98 Warrants 170,000 James R. Crane (15) $ 1.00
Common
4/24/98 Stock 3,400,000 James R. Crane (16)
</TABLE>
16
<PAGE>
The Company issued each warrant referenced above without registration in
reliance upon the exemption from registration afforded by Section 4(2) of the
Securities Act of 1933, as amended.
(1) Sold as partial consideration for the Switches.
(2) Sold in exchange for the delivery of a guarantee.
(3) Exchanged for investment advisory services.
(4) Sold as partial consideration for the exchange of one of the Company's
outstanding warrants.
(5) Sold as partial consideration for the exchange of one of the Company's
outstanding warrants.
(6) Issued as compensation to a resigning executive.
(7) Issued as compensation to a resigning executive.
(8) Exchanged for marketing services to be performed prior to vesting.
(9) Exchanged for marketing services to be performed prior to vesting.
(10) Sold as partial consideration for bridge loan financing.
(11) Sold for cash consideration.
(12) Sold for cash consideration of $ 1.0 million for stock plus warrants
described in (11) above.
(13) Sold for cash consideration.
(14) Sold for cash consideration of $1.0 million for stock plus warrants
described in (13) above.
(15) Sold for cash consideration.
(16) Sold for cash consideration of $3.4 million for stock plus warrants
described in (15) above.
17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated financial data
from the audited consolidated financial statements of the Company for each of
the five years ended June 30, 1998. This information should be read in
connection with and is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
under Item 8 of this Annual Report on Form 10-K. The earnings per share amounts
prior to 1997 have been restated as required to comply with Statement of
Financial Accounting Standards No. 128 "Earnings Per Share." For further
discussion of earnings per share and the impact of Statement of Financial
Accounting Standards No. 128, see the notes to the consolidated financial
statements under Item 8 of this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
---------------------------------------------------------------------------
1994 1995 1996 1997 1998
------------ ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales $35,397,331 $67,911,405 $ 78,354,858 $ 46,588,496 $ 24,876,242
Cost of sales 28,801,516 54,655,313 61,807,113 34,481,128 21,991,680
Selling, general and
administrative expenses 5,297,710 8,936,102 13,719,573 12,453,814 14,139,010
Depreciation and amortization 271,679 1,355,832 5,933,890 5,999,898 4,734,741
Write down of assets ---- ---- 6,882,661 4,400,000 1,134,666
----------- ----------- ------------ ------------ ------------
Operating income (loss) 1,026,426 2,964,158 (9,988,379) (10,746,344) (17,123,855)
Other income (expense) 742,916 (92,856) (1,088,887) (1,888,889) (819,533)
----------- ----------- ------------ ------------ ------------
Income (loss) before federal
income taxes and extraordinary
item 1,769,342 2,871,302 (11,077,266) (12,635,233) (17,943,388)
Provision (benefit) for federal
income taxes ---- 507,057 (2,659,853) 2,345,311 ----
----------- ----------- ------------ ------------ ------------
Net income (loss) $ 1,769,342 $ 2,364,245 $ (8,417,413) $(14,980,544) $(17,943,388)
=========== =========== ============ ============ ============
Net loss per share - basic and
diluted $(1.40) $(2.46) $(1.64)
============ ============ ============
Pro forma net income(1) $ 1,079,299 $ 1,751,494
=========== ===========
Pro forma net income per
share $0.27 $0.38
=========== ===========
Weighted average number of
shares(2) 4,000,000 4,618,043 6,017,332 6,096,932 10,943,630
=========== =========== ============ ============ ============
Cash dividends per share(3) $0.22 $0.61 $ ---- $ ---- $ ----
=========== =========== ============ ============ ============
Balance Sheet Data:
Cash and equivalents $ 194,571 $ 3,526,543 $ 381,849 $ 828,478 $ 459,581
Working capital (deficiency) 230,448 7,772,366 (3,161,437) (4,667,109) (13,559,609)
Total assets 9,044,595 39,315,569 34,595,832 19,162,160 27,760,447
Total long-term debt and capital
leases, net of current portion 512,914 1,142,640 45,000 ---- ----
Total shareholders' equity 1,350,698 20,705,724 12,383,998 (1,688,539) 2,957,782
(deficit)
</TABLE>
_______________
(1) From July 1, 1992 to March 7, 1995, the Company had reported for federal
income tax purposes as an S corporation. Accordingly, all taxable earnings
of the Company during that time have been taxed directly to the
shareholders of the Company at their individual tax rates. A pro forma
adjustment to reflect federal and state income taxes as if the Company were
a C corporation is presented for the respective periods at an estimated
effective rate of 39%.
(2) Shares used to compute pro forma net income per share are based upon the
actual weighted-average shares outstanding giving retroactive effect to the
Company's reorganization which occurred March 8, 1995.
(3) Shares used to compute cash dividends per share are based upon 4,000,000
shares outstanding beginning in 1993 and for the remaining periods as a
result of the reorganization. On March 7, 1995, the Company declared a
final dividend of $0.53 per share to the shareholders of record on such
date. The dividend was paid on March 24, 1995, to the shareholders of
record on March 7, 1995.
18
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of operations and financial condition of the
Company should be read in conjunction with the Consolidated Financial Statements
and Notes thereto included elsewhere in this Annual Report on Form 10-K. Special
Note: Certain statements set forth below constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. See "Special Note Regarding Forward-Looking Statements".
OVERVIEW
Because of the continued erosion of market share and continuing declines in
cash flow, EqualNet Corporation ("EqualNet"), one of the Company's wholly owned
subsidiaries, and EqualNet Wholesale Services, Inc. ("Wholesale"), a non-
operating wholly owned subsidiary of EqualNet, filed voluntary petitions for
relief under Chapter 11 ("Chapter 11") of the United States Bankruptcy Code (the
"Bankruptcy Code") on September 10, 1998 (the "Petition Date") in the United
States Bankruptcy Court for the Southern District of Texas (the "Bankruptcy
Court"), Houston, Texas. The cases are not being jointly administered at this
time and are pending in such Court as Cases No. 98-39561-H5-11 and 98-39560-H4-
11. Pursuant to Sections 1107 and 1108 of the Bankruptcy Code, EqualNet, as
debtor and debtor-in-possession, expects to continue to manage and operate
EqualNet's assets and business pending the confirmation of a plan of
reorganization and subject to the supervision and orders of the Bankruptcy
Court. On October 2, 1998, Wholesale filed its motion to convert its bankruptcy
proceeding from a Chapter 11 reorganization to a Chapter 7 liquidation.
EqualNet's long-distance volume declined from 10.6 million monthly minutes in
June 1997 to 6.4 million monthly minutes in June 1998. Substantially all of
EqualNet's revenues have been derived from the sale of long-distance services to
small business customers. The source of these accounts is primarily independent
marketing agents and the acquisition of customer accounts of other resellers.
Many of these agents previously marketed EqualNet's long-distance products via
telemarketing. The reduction in minutes can be partially attributed to AT&T
becoming much more cost competitive. Many of these customers have been offered
and accepted lower prices from other long distance vendors as well as AT&T.
EqualNet's revenue per minute averaged approximately $0.22 in June 1998, whereas
AT&T and other long-distance vendors currently market the same service for $0.10
or less per minute. EqualNet does not intend to market its services to new
customers until a plan of reorganization is approved.
During the first three quarters of fiscal 1998, EqualNet's primary costs, its
costs of sales, were variable and consisted of the underlying "wholesale" cost
of long-distance services from its underlying providers, commissions to
independent agents and billing costs. During the fourth quarter of fiscal year
1998, EqualNet entered into an agreement with Netco to provide for operation of
Netco's nine switches ("switches") and build out of network facilities in
exchange for the right to carry traffic over the network: thus EqualNet became a
switch-based carrier with new fixed costs (primarily maintenance and network
management). Since EqualNet did not have the customer density to support the
costs associated with the network facilities, EqualNet incurred losses which
created even larger cash flow deficits.
EqualNet generated revenue through orders received from independent marketing
agents and by acquiring the customer accounts of several other resellers.
EqualNet historically acquired customer accounts from independent marketing
agents on an individual price per order basis, with some agents receiving an
initial payment to help defer the cost of acquiring the orders which would be
offset by future commissions earned (agent advances) and others receiving a
higher initial payment with no future commission owed (deferred acquisition
costs). This allowed EqualNet to use the agents as a vehicle to outsource
telemarketing activities. Expenditures associated with individually acquired
orders, both advanced and purchased, totaled approximately $3.2 million and $0.6
million in fiscal years 1997 and 1998, respectively.
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<PAGE>
The operational problems encountered as a result of the attempted conversion
from the NetBase system to AMS kept EqualNet from being able to calculate and
pay its marketing agents the commissions due them on either a timely or regular
basis. In addition, these operational problems resulted in delays in
provisioning new customer orders from some of these agents, causing delays in
generating revenues from these customers, and in some instances, the loss of new
customer orders. These delays also adversely impacted revenues and cash flows
for the Company. As a result, the Company's and EqualNet's relationships with
marketing agents have deteriorated. See Liquidity and Capital Resources.
The Company's selling, general and administrative costs are primarily the
costs of back office operations including billing, provisioning and customer
service. The Company also has devoted significant resources to the information
technology necessary to support customer service and the network of independent
marketing agents. The Company is currently purchasing its third information
system, either purchased or internally developed, within eighteen months.
The Company reported for federal income tax purposes as an S corporation
under the Internal Revenue Code of 1986, as amended, until its reorganization in
connection with its initial public offering in March 1995, and was similarly
treated for state income tax purposes under comparable state laws.
REORGANIZATION OF EQUALNET CORPORATION
On September 10, 1998, EqualNet, a wholly owned subsidiary of the Company and
Wholesale, a non-operating subsidiary of EqualNet filed for protection under
Chapter 11 of the United States Bankruptcy Code. In the initial bankruptcy
filing, EqualNet reported total assets of $20.7 million and total liabilities of
$57.6 million. As of that date, the largest individual creditor of EqualNet was
the Company, which was owed approximately $33.0 million, representing
approximately 57.3% of EqualNet's total recorded liabilities. EqualNet will
file schedules of assets and liabilities with the bankruptcy court in the near
future. On October 2, 1998 Wholesale filed its motion to convert its bankruptcy
proceeding from a Chapter 11 reorganization to a Chapter 7 liquidation.
EqualNet's bankruptcy may make it difficult for the Company to obtain services
from vendors of EqualNet or otherwise maintain those vendor relationships or
relationships with EqualNet's marketing agents. Consequently, there can be no
assurance that the bankruptcy of EqualNet will not have a material adverse
effect on the Company.
Although EqualNet's filing was a voluntary petition, it was in default on its
debt and was in arrears on most of its vendor payables. Other than the Company,
the largest creditor of EqualNet is AT&T, which is owed approximately $9.0
million. This amount does not include any claims AT&T may assert arising from
EqualNet's MSARC obligations pursuant to its contract with AT&T. Based on the
current shortfall, the liability could be significantly higher. In the event
EqualNet rejects its contract with AT&T, the remaining commitments due under
that contract could become a part of AT&T's claim in the bankruptcy proceeding,
substantially increasing the amount of the claims of EqualNet's creditors.
Although it did not own them, EqualNet was the entity that operated the network
of nine switches, and it has incurred a substantial amount of additional
indebtedness to vendors associated with those operations.
EqualNet intends to seek to reorganize its business under bankruptcy
protection. The goal is to stabilize its operations and substantially improve
its balance sheet. Through the reorganization, EqualNet hopes to retain a
substantial portion of its customer base, reduce its liabilities, improve the
efficiency of its operations, and reduce its operating and administrative costs.
20
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EqualNet's customer base represented substantially all of the Company's
consolidated group's revenue in the fiscal year ended June 30, 1998. However,
as a result of the acquisition of SA Telecom's customer base and assets on July
23, 1998, EqualNet's revenues are currently approximately one-half of the
consolidated group's revenues. As of June 30, 1998, EqualNet's non-affiliate
liabilities of approximately $18.0 million represented 75% of the consolidated
group's liabilities, and the book basis of its assets, approximately $11.0
million, represented approximately 41% of the consolidated group's assets.
In order for EqualNet to successfully reorganize, it must successfully
negotiate new carrier agreements, arrange adequate assurance with its vendors
during the pendency of the reorganization, improve the efficiency of its back
office operations and reduce overhead to generate positive cash flow, retain a
substantial portion of its customer base and obtain the approval of creditors of
a plan of reorganization. Failure to achieve any of these items could lead to a
liquidation of EqualNet.
EqualNet intends to move as quickly as possible to submit a plan of
reorganization to its creditors and work toward its approval in the near future.
RESULTS OF OPERATIONS
The following table sets forth for the fiscal periods indicated the
percentages of total sales represented by certain items reflected in the
Company's consolidated statements of income and expenses:
<TABLE>
<CAPTION>
Percentage of Total Revenues
Fiscal Year Ended June 30,
----------------------------------------------
1994 1995 1996 1997 1998
------ ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
Total sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales 81.4 80.5 78.9 74.0 88.4
----- ----- ------ ------ -----
Gross margin 18.6 19.5 21.1 26.0 11.6
Selling, general and administrative expenses 14.9 13.1 17.5 26.7 56.8
Depreciation and amortization 0.8 2.0 7.6 12.9 19.0
Write down of long term assets - - 8.8 9.4 4.6
----- ----- ------ ------ -----
Operating income (loss) 2.9 4.4 (12.8) (23.0) (68.8)
Other income (expense):
Interest income 0.1 0.7 0.1 0.0 0.1
Interest expense (0.4) (0.8) (0.9) (2.2) (4.6)
Miscellaneous 2.4 (0.1) (0.6) (1.9) 1.2
----- ----- ------ ------ -----
Income (loss) before federal income
taxes and extraordinary item 5.0 4.2 (14.2) (27.1) (72.1)
Provision (benefit) for federal income taxes - 0.7 (3.4) 5.0 0.0
----- ----- ------ ------ -----
Net income (loss) 5.0% 3.5% (10.8)% (32.1)% (72.1)%
===== ===== ====== ====== =====
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
YEAR ENDED JUNE 30, 1998, COMPARED TO YEAR ENDED JUNE 30, 1997
Total Sales. Long distance sales decreased 46.6% from $46.6 million for
fiscal year 1997 to $24.9 million in fiscal year 1998. The decrease was due
primarily to a decrease in the number of customer
21
<PAGE>
accounts and a corresponding decrease in billable minutes. The decline in
revenues in fiscal year 1998 was the result of an increased rate of attrition on
existing customers and a decline in completed order activity. The company's
average price to its AT&T customer base was approximately $0.27 per minute. This
is considerably higher than competitors who have intensely marketed these
customers. To counter this attrition, EqualNet focused the efforts of its
independent marketing agents to utilize the underlying networks of carriers
other than AT&T, but the Company experienced considerable difficulty
provisioning these new customers because of the conversion problems with the AMS
system.
Total Cost of Sales. Long distance cost of sales decreased 36.2% from $34.5
million for fiscal year 1997 to $22.0 million in fiscal 1998. The decrease was
due primarily to a decrease in the company's total sales. The Company's cost of
sales as a percentage of revenue deteriorated from 74.0% in fiscal year 1997 to
88.4% in fiscal year 1998. If the same percentage of revenue would have been
maintained throughout fiscal year 1998, the cost of sales would have been
approximately $18.4 million. The additional $3.4 million in cost of sales is due
primarily to fixed and variable costs associated with the network which were not
incurred in fiscal year 1997. With the acquisition of Netco, the Company decided
to provision a nationwide network which could originate, transport, and
terminate the new traffic generated by the independent marketing agents.
Commission expense as a percentage of total sales increased from 5.6% to
9.5%. Commission expense includes advances to agents that are not expected to
be recovered through future commissions earned by those agents. These advances
were made because of provisioning problems. In order to retain the agents, the
Company advanced funds to the agents based on estimated revenues that could have
been generated by them if the provisioning problems had not occurred. Because
of provisioning problems and high attrition rates among these new customers, the
revenue expected from the agents was never attained.
Billing expense increased from 7.3% of total sales in fiscal year 1997 to
9.5% of total sales in fiscal year 1998 because of the transition to the AMS
billing system. The need to generate the same invoice multiple times and high
consulting costs were problems with this system. Bad debt expense increased
from 3.7% of total sales to 6.7% due primarily to the billing problems.
Customers routinely received their invoices late, (in some cases two months
late), especially in the fourth quarter and many were unwilling to pay the
amount due.
Selling, General and Administrative Expenses. Selling, general, and
administrative expenses increased from $12.5 million in fiscal year 1997 to
$14.1 million in fiscal year 1998. Selling, general, and administrative expenses
increased as a percentage of sales from 26.7% to 56.8% for the years ended 1997
and 1998, respectively. The increase in this ratio was due to a decline in
total sales without a corresponding reduction in selling, general and
administrative expenses. Until late in fiscal year 1998, the Company's
infrastructure continued to be more appropriate for a substantially larger
company. Payroll expenses in fiscal year 1998 increased as a percentage of
total revenues from 12% in fiscal year 1997 to 20%. This was due to the
acquisition of personnel knowledgeable in switch technology and computer
programming related to the new billing system which accounted for an increase in
costs of approximately $0.5 million. During fiscal year 1998, there were two
proxies. This resulted in an increase in accounting , professional and legal
fees of $0.9 million.
During the fourth quarter of fiscal year 1998, management re-evaluated the
value of certain assets. The Netbase billing system ($269,155), accounts
receivable from Cyberserve, Inc. and WSHS Enterprises, Inc. ("Bluegate")
($167,000), accounts receivable from UNS ($364,000) and agent advances
($300,000) were written down to net realizable values.
Depreciation and Amortization. Depreciation and amortization decreased 21.1%
as the Company recorded $6.0 million in fiscal year 1997 compared to $4.7
million in fiscal year 1998.
22
<PAGE>
The Company wrote down assets of approximately $4.8 million and $1.1 million
during the years ended June 30, 1997 and 1998, respectively. During fiscal year
1997, the Company recorded a charge to earnings for $4.4 million to reduce the
carrying value of purchased customer accounts to an estimate of future
discounted cash flows from the purchased accounts.
Operating Loss. The operating loss increased 59.3% from $10.7 million in
fiscal year 1997 to $17.1 million in fiscal year 1998.
Other Income (Expense). Other expenses decreased by $1.1 million or 56.6%
from fiscal year 1997 to fiscal year 1998. This reduction is primarily due to
the payment of penalties, settlement costs, and legal fees which were accrued in
fiscal year 1997. These accruals were associated with complaints against the
Company by various state regulatory agencies on behalf of customers. In fiscal
year 1997, there was also a $195,000 expense recorded in this account for the
failed Unified Network Services joint venture; these expenses were not incurred
during fiscal year 1998.
YEAR ENDED JUNE 30, 1997, COMPARED TO YEAR ENDED JUNE 30, 1996
Total Sales. Long-distance sales decreased 40.5%, from $78.4 million in
fiscal 1996 to $46.6 million for the year ended June 30, 1997. The decrease was
due primarily to a decrease in the number of customer accounts and a
corresponding decrease in billable minutes. The decline in revenues in fiscal
year 1997 was the result of an increased rate of attrition on existing customers
and a decline in order activity beginning in the last half of fiscal year 1996.
The Company began reducing order activity in early calendar 1996 to reduce the
incidence of loss due to delayed provisioning times at AT&T and because it
discovered a new customer management system was severely hampering the Company's
ability to provision and service new customers. The Company slowly began
increasing order activity once it had reverted to the original Netbase system
and provisioning times had returned to acceptable levels; however, the Company
began experiencing liquidity problems during this time frame and has been unable
to fund agent advances that stimulate order activity as significant as those
experienced prior to January 1996.
Total Cost of Sales. The Company's cost of sales, which are variable,
decreased from $61.8 million in fiscal 1996 to $34.5 million for the year ended
June 30, 1997, a decrease of 44.2%. This decrease was a result of a decrease in
the Company's sales. The Company's cost of long distance (which is a component
of cost of sales) improved as a percentage of sales, decreasing from 63.6% to
55.6% for the years ended June 30, 1996 and 1997, respectively. The improvement
in the percentage is the result of the renegotiation of the company's contracts
with its carriers and from the recognition of a one-time credit from AT&T. The
Company negotiated an 8% improvement in the interstate rate it receives from
AT&T in May 1996 followed by an 8% improvement again in November 1996 and
another 8% improvement in May 1997. Additionally, the Company was granted a
one-time credit of $1.2 million as part of the new contract with AT & T,
effective May 1, 1997 and a $400,000 backlog of carrier disputes being processed
by the Company and credited by the Company's carriers in March 1997. The
carrier dispute backlog was the result of difficulties AT & T encountered in
processing the Company's disputed long distance usage which had accumulated over
an extended period of time.
Commission expense as a percentage of sales decreased from 6.5% to 5.6%.
Commission expense included a $1.0 million charge and $400,000 charge for fiscal
years 1996 and 1997, respectively, to expense advances to agents that are not
expected to be recovered through future commissions earned by those agents.
Commissions as a percentage of revenues without these charges would be 5.2% and
4.7% for fiscal years 1996 and 1997, respectively. The decrease relates in part
to a payment in the second
23
<PAGE>
quarter of fiscal 1996 to a principal agent to reduce the agent's commission
rate by approximately 4%. Of the Company's total sales during fiscal years 1996
and 1997, 28% and 23%, respectively, were derived from customers introduced to
the Company from this agent. The Company shifted its sales strategy from that of
purchasing customer accounts and bases of customer accounts, which have very
little associated commission expense, to one of advancing commissions to
independent marketing agents for individual customer accounts.
Billing expense as a percentage of sales increased from 4.0% to 7.3% for the
fiscal years ending 1996 and 1997, respectively, as a result of the Company
beginning to bill a significant portion of its customers through Local Exchange
Carriers ("LECs"). Billings through the LECs represented 26.8% of the Company's
revenues for the year ended June 30, 1997. The cost of billing through LECs is
generally greater than billing customers through independent billing companies;
however, the Company believed that by billing customers through the LECs,
savings would also be recognized by decreased bad debt expense and reduced
customer attrition. In addition, because the majority of customer service was
performed by the LECs, the Company had been able to reduce overhead related to
the cost of servicing these customers directly. Bad debt expense decreased from
4.9% of sales in fiscal year 1996 to 3.7% of sales in fiscal year 1997. The
Company's collection efforts were hindered in fiscal 1996 by the failure of a
new customer management system to produce the necessary information to allow for
the most effective method of collection, resulting in a higher than normal
incident of uncollected accounts.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased 9.2% from $13.7 million for the year ended
June 30, 1996, to $12.5 million for the same period in fiscal 1997. Selling,
general and administrative expenses increased as a percentage of sales from
17.5% to 26.7% for the years ended June 30, 1996 and 1997, respectively. The
decrease in this expense was a result of cost reduction efforts by the Company.
Total staff decreased from an average of 204 temporary and permanent employees
during the year ended June 30, 1996 (183 permanent employees at June 30, 1996)
to an average of 163 temporary and permanent employees in fiscal 1997 (151
permanent employees at June 30, 1997). Salary related expense decreased $1.5
million from fiscal 1996 to fiscal 1997 as a result of the decrease in
personnel. Administrative expense was down $404,000 for fiscal 1997 compared to
fiscal 1996 as the result of decreasing supplies and office expense by $135,000
and due to a reduction in corporate long-distance and telephone related expenses
by $259,000. The decrease in long-distance and phone related expenses was
related to the acquisition of a new telephone system in January 1996 which
allowed the Company to significantly reduce hold times, thereby reducing long-
distance costs, and due to the decrease in the number of customers, resulting in
fewer calls. Additionally, the Company incurred $246,000 in acquisition related
costs in early fiscal 1996 which were not present in fiscal 1997. These savings
were offset somewhat by an increase in bank fees, marketing fees, lease expense
and the addition of Creative and its related overhead. The Company incurred
approximately $170,000 in additional legal and professional fees in fiscal 1997
as compared to fiscal 1996. Included in professional fees are fees paid to third
party verification companies which the Company utilized to verify customer
orders. These fees totaled approximately $151,000 in fiscal 1997 as compared to
$1,500 in fiscal 1996. Bank fees increased as a result of the cost of obtaining
an amendment to the Company's loan agreement. Marketing fees increased as the
Company conducted an aggressive campaign related to the placement of long-
distance calling cards with all of its customers. Lease expense increased
$422,000 from fiscal 1996 to fiscal 1997 due to the Company entering into two
significant leases beginning in January 1996 for a new telephone system and for
computer equipment to support the Company's information system network. Creative
Communications, an operating division of the Company, resulted in an additional
$450,000 in selling, general and administrative expenses to support its
operations, which were acquired by the Company in fiscal 1997.
Depreciation and Amortization. Depreciation and amortization increased
slightly as the company recorded $5.9 million and $6.0 million in expense during
1996 and 1997, respectively. The Company expended very little on capital
equipment during fiscal 1997 and returned to compensating agents through
commissions and advances on commissions.
24
<PAGE>
The Company wrote down assets of approximately $6.9 million and $4.4 million
during the years ended June 30, 1996 and 1997, respectively. During fiscal 1997
the Company recorded a charge to earnings for $4.4 million to reduce the
carrying value of purchased customer accounts to an estimate of future
discounted cash flows from the purchased accounts. Included in the write down
in fiscal 1996 was a similar $4.6 million non-cash charge to reduce the carrying
value of acquired customer bases to the present value of the expected future
cash flows associated with the underlying customer accounts and a $2.2 million
write off of capitalized software development costs associated with the NetBase
system. The write down of deferred acquisition costs was necessitated by a
greater than expected turnover of acquired customer bases which resulted from
difficulties in billing and servicing the underlying customer accounts.
Operating Loss. The operating loss increased 7.6% from $10.0 million for the
year ended June 30, 1996, to $10.7 million for the year ended June 30, 1997.
Other Income (Expense). Other expense increased from $1.1 million for the
year ended June 30, 1996 to $1.9 million for the year ended June 30, 1997. This
increase was primarily attributable to an increase in interest expense of
$343,000 from fiscal 1996 to fiscal 1997 and an increase in miscellaneous
expense of $406,000 from fiscal 1996 to fiscal 1997. The increase in interest
expense was the result of the increase in the interest rate under the Company's
bank line of credit and the addition of the note payable to Furst. Other expense
in fiscal 1996 includes a $250,000 accrual for possible penalties, settlement
costs and legal expenses associated with the resolution of pending complaints
against the Company by various state regulatory agencies with regard to customer
complaints. Fiscal 1997 includes an additional $390,000 for settlements
reached in fiscal 1998. See Item 3, "Legal Proceedings". Other expense also
included $135,000 and $195,000 in fiscal 1996 and fiscal 1997, respectively, in
losses related to the failed Unified Network Services joint venture, which the
Company entered into in February 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company recorded net losses of $8.4 million, $15.0 million and $17.9
million for the years ended June 30, 1996, 1997 and 1998, respectively. The
Company funded its operations during the year ended June 30, 1998 through
extension of payment terms from the Company's suppliers, fundings under
EqualNet's receivables purchase agreement, from investments totaling $9.4
million from private placements with several accredited investors and through
operating cash flows. EqualNet's funding availability under a receivables
purchase arrangement declined principally as a result of declining revenues and
billing and collections difficulties experienced as a result of EqualNet's
conversion to the AMS billing system. At current levels of operations and with a
declining revenue base, the Company may seek additional capital and continued
concessions from its vendors and may need to continue to reduce expenses to
bring them in line with current levels of revenues. There can be no assurances
that the Company can reduce its expenses enough to achieve a break even in cash
flow.
To date, the external funds necessary to fund the Company's capital
requirements arising from capital expenditures, acquisitions and working capital
have been provided primarily from asset based financing, third-party sources of
capital and the proceeds from the Company's initial public offering. Maximum
borrowings under the Company's line of credit increased from $100,000 in 1992 to
$7.5 million in 1997. EqualNet replaced the credit facility under which
borrowings at June 30, 1997 were outstanding with a new facility with RFC
Capital Corporation ("RFC") effective June 18, 1997 and
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<PAGE>
which funded July 7, 1997. RFC purchases EqualNet's receivables and unbilled
call detail records and periodically remits back to EqualNet excess collections
over amounts funded less financing fees. The maximum allowable amount of funding
under the RFC facility originally was $8.0 million and was increased to $10.0
million in July 1998. EqualNet's receivables purchase agreement at June 30, 1998
provided for a funding base that was dependent upon the amount and aging of
accounts receivable and unbilled call detail records. RFC may cease funding of
new receivables without prior written notice at its option. Financing charges on
the outstanding balance was prime plus 4.5% per annum (currently prime plus
7.0%). Should RFC cease to provide financing in accordance with its option,
EqualNet would be forced to seek immediate replacement of the facility to
provide working capital. Current sources of funds from operations and working
capital would be insufficient to provide funds adequate to continue funding
operations. On September 16, 1998, the bankruptcy court approved an interim
order approving a debtor-in-possession ("DIP") financing through RFC for
EqualNet which allows EqualNet to continue to finance its receivables on the
same basis as the pre-petition financing. A hearing to consider the final
approval of the DIP financing is scheduled on October 15, 1998. If the DIP
financing is not approved, it is unlikely EqualNet will have the working capital
needed to continue business.
EqualNet's contract with AT&T, which expires in April 2000, specifies the
pricing of the services provided to EqualNet by AT&T and establishes minimum
semi-annual revenue commitments ("MSARC") which must be met to receive the
contractual price and to avoid shortfall penalties. At June 30, 1998, EqualNet
had not reached the completion of the term of the third MSARC; however, EqualNet
was substantially below the cumulative pro rata monthly commitment. The total
shortfall for this MSARC is estimated to be $11.6 million. AT&T provides such
services to EqualNet pursuant to a long term contract which may be rejected in
bankruptcy proceedings. If the existing contract with AT&T is terminated,
either by EqualNet through a rejection of the existing contract pursuant to the
bankruptcy proceedings or by AT&T for non-payment, prior to the expiration of
the full term without execution of a new contract, EqualNet could be liable for
the total amount of the unsatisfied MSARC for the period in which the
discontinuance occurs and for 50% of the MSARCs for each semi-annual period
remaining in the contract tariff term. The MSARCs for year two of the contract
are $15.0 million each. The MSARCs for year three are $10.0 million each.
Historically, EqualNet has been able to negotiate a settlement of such
shortfalls with AT&T which has resulted in no penalty being incurred by
EqualNet. If EqualNet does not reject its contract with AT&T in bankruptcy, no
assurances can be made that EqualNet will be able to reach similar settlements
with AT&T should it continue to fail to meet its commitment. Should EqualNet be
unable to reach a settlement with the carrier, it would be required to fund the
resulting penalties through its operating cash flow, funds available under its
existing financing arrangement and working capital. If required at this time,
such funds would not be available to meet the commitments when due and AT&T
could terminate EqualNet's underlying service. In the event EqualNet rejects the
AT&T contract, EqualNet could seek to renegotiate an alternative contract with
AT&T, subscribe for other AT&T tariffed services or seek to acquire wholesale
services through other large customers of AT&T.
Cash Flow From Operations. The Company generated (used) net cash of
$3,974,000 and ($4,870,000) in operating activities in fiscal 1997 and fiscal
1998, respectively. Cash from net losses adjusted for non-cash expenses
decreased from a use of cash of $1.7 million in fiscal 1997 to a use of cash of
$9.8 million in fiscal 1998. This use in fiscal 1998 was offset by the change
in operating assets and liabilities, including a $1.5 million change in accounts
receivable, a $3.5 million change in accounts payable and a $389,000 decrease in
prepaid expenses and other. Accounts receivable decreased as revenues continued
to decline throughout fiscal 1998. Accounts payable, particularly the payable
to providers of long-distance, increased as a result of EqualNet's inability to
pay its vendors on a timely basis.
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<PAGE>
Cash Flow From Investing Activities. Net cash used in investing activities
in fiscal 1997 of $344,000 increased to $10.1 million in fiscal 1998. The
Company invested $6.8 million in property, plant and equipment. Most of the
investment related to the purchase of the Switches.
Financing Activities. Financing activities used $3.2 million in fiscal 1997
and generated $14.5 million in fiscal 1998. In fiscal 1997 due to increased
restrictions imposed upon the Company by its primary lender and due to the
declining revenue base, the Company experienced a decline in the borrowing base
available under the line of credit. This resulted in a net reduction in
borrowings under the line in fiscal 1997 of $6.1 million and further reductions
in fiscal 1998 of $4.5 million. In fiscal 1997, the Company sought to offset a
portion of the loss of funds under the line of credit and issued subordinated
debt in February 1997 which resulted in $3.0 million in proceeds. In fiscal
year 1998, the Company generated $9.4 million from the issuance of Common Stock
and warrants and $6.05 million from the securing of debt.
The Company closed several recapitalization transactions during fiscal 1998.
On October 1, 1997, the Company issued to the Willis Group a $1.0 million
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 0.2
million 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 was convertible 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. As of the date
of issuance of the convertible debt the Company recorded an interest charge of
$0.15 million to record the impact of the debt being convertible at a discount
to market. On March 5, 1998, the Note and accrued interest were exchanged for
1.05 million shares of Common Stock.
On December 2, 1997, EqualNet entered into several related agreements, (as
amended, the "Agreements") involving the Willis Group, LLC, a privately held
investment partnership ("the Willis Group"), and other third parties.
Collectively, these Agreements provided for a recapitalization of the Company
and for the Company to acquire certain telecommunications network assets and
switches (collectively the "Transactions".) Under the terms of the Agreements
the Company acquired nine telecommunications switches (the "Switches") from the
Willis Group for $7.6 million of aggregate consideration, consisting of $5.85
million in cash, 1.4 million shares of Common Stock, and warrants to purchase an
additional 0.4 million shares of Common Stock. The Company secured financing of
$6.05 million for the cash portion of the consideration through an unaffiliated
third party lender, which loan is secured by the Switches, bears interest at a
rate per year of 6.42% above an index rate based on U.S. Treasury Notes (the
loan interest rate currently is 12.1%) and is payable in 36 consecutive monthly
payments. In addition, an affiliate of the Company was granted 0.5 million
warrants for guaranteeing a portion of this financing.
Under the terms of the Agreements, the Company acquired Netco Acquisition
Corp. ("Netco"), a Delaware corporation controlled by the Willis Group, which
held certain intangible rights and assets previously acquired by the Willis
Group and formerly held by Total National Telecommunications. These assets
consisted of intangible rights to use certain software and codes necessary to
operate the Switches. The Company acquired Netco for $5.6 million in aggregate
consideration, including 3.58 million shares of Common Stock and 2,000 shares of
the Company's Series A Convertible Preferred Stock ("Series A Preferred".) The
Series A Preferred is non-voting, has a stated value of $1,000 per share and is
entitled to receive dividends at the rate of $80.00 per year, payable quarterly.
Holders of Series A Preferred have the right to convert their shares into 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 2.0
million shares of
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Common Stock, subject to adjustment pursuant to certain anti-dilution
provisions. The Series A Preferred has a $1,000 per share liquidation preference
over the Company's Common Stock. Dividends are payable at the determination of
the Board of Directors. Dividends when not paid are cumulative and bear interest
at a rate of 12.0%. Cumulative dividends in arrears at June 30, 1998 were
$52,000 or $26.00 per Series A Preferred share. Under the instrument defining
the rights of the holders of the Series A Preferred, the Company is prohibited
from declaring or paying dividends on the Common Stock unless all accrued
dividends on the Series A Preferred have been paid.
Under the terms of the Agreements, the Company also issued and sold to the
Willis Group 4.0 million shares of Common Stock at a price of $1.00 per share in
cash for total aggregate consideration of $4.0 million in cash.
On March 6, 1998, the Company entered into an exchange agreement ("Exchange
Agreement") with The Furst Group, ("Furst"), a New Jersey corporation, an
accredited investor and the holder of the Company's $3.0 million subordinated
debt, pursuant to which Furst exchanged the $3.0 million 10% subordinated note
due December 31, 1998 and warrants to purchase 1.5 million shares of Common
Stock for 3,000 shares of Series B Senior Convertible Preferred Stock ("Series B
Preferred") along with 0.3 million shares of the Company's Common Stock to
satisfy the accrued interest due on the notes. Each share of the Series B
Preferred has a stated value of $1,000 and is entitled to share with the Common
Stock in any dividends declared based upon the number of shares of Common Stock
the Series B is convertible into at the time such dividend is declared. Each
share of Series B Preferred is convertible initially into 500 shares of Common
Stock subject to certain anti-dilution provisions. The Series B Preferred has a
$1,000 per share liquidation preference over the Series A Preferred and the
Common Stock. Each share of Series B Preferred also entitles the holder thereof
to one vote, voting as a single class with the Common Stock, on matters
submitted to the shareholders of the Company.
On March 26, 1998, the Company issued to First Sterling Ventures, a Texas
corporation, and an individual, both accredited investors, an aggregate of
1.33 million shares of Common Stock and warrants to purchase an additional 0.67
million Common Stock shares for an aggregate of $2.0 million in cash. The
Willis Group was granted a 1.0% facilitation fee for these transactions totaling
$0.02 million.
On April 24, 1998, the Company entered into an agreement with an individual
investor to issue 3.4 million shares of par $.01 per share Common Stock of the
Company which constitute approximately 15.9% of the outstanding Common Stock and
warrants for the purchase of 0.17 million shares of Common Stock in exchange for
$3.4 million. The Willis Group was granted a 1.0% facilitation fee for this
transaction totaling $0.03 million.
During the quarter ended March 31, 1998, the Company obtained a cash flow
bridge loan of $0.4 million from Netco Acquisition, LLC, an entity owned 50% by
the Willis Group. This note was payable on March 31, 1998 and had an interest
rate of 10% which escalates to 18% after an event of default occurs. This note
is secured by the web page customers. As of June 30, 1998, the Company was in
default on this note as no principal or interest payments have been made.
Effective July 31, 1998, the Company issued two 6% Senior Secured Convertible
Notes due in 2001 (the "2001 Notes") in the amount of $1.5 million each to the
Willis Group and Genesee Fund Limited-Portfolio B ("Genesee"), a British Virgin
Islands corporation, both accredited investors. The 2001 Notes are convertible
into a variable number of shares of the Company's Common Stock. Ownership
percentage upon conversion is currently limited to no more than 4.9% of the
outstanding shares of Common Stock. The 2001 Notes bear interest at 6% and
interest payments are due each February 15, May 15, August 15 and November 15
commencing on November 15, 1998.
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The 2001 Notes rank equally with all other unsubordinated debt obligations
of the Company. The Company's obligations under the 2001 Notes are secured by
certain collateral pursuant to security agreements. A holder of the 2001 Note
may require the Company to repurchase the 2001 Note if an event of default
occurs. Events of default include, among other things, the Nasdaq delisting of
the Common Stock. A default under either of these 2001 Notes could have a
material adverse effect on the Company's ability to raise additional capital and
on the results of operations or financial condition.
In connection with the issuance of the 2001 Notes, the Company issued to
each of the Willis Group and Genesee a warrant ("Warrant") to purchase 333,116
shares of Common Stock at a purchase price of $0.9006 per share. In addition,
the Company issued to the Willis Group and Advantage Fund Limited 3,750 shares
of its Series D Convertible Preferred Stock ("Series D Preferred") in exchange
for 3.0 million shares of its Common Stock and $0.2 million. The Warrants expire
on September 4, 2003.
Any holder of a 2001 Note may convert the 2001 Note, in whole or in part,
into shares of Common Stock at a conversion price per share equal to the lesser
of:
. the product of (1) the average of the lowest sales price of the Company's
Common Stock on Nasdaq for the five days immediately preceeding the date
of conversion and (2) 85% (subject to reduction pursuant to the terms of
the 2001 Notes); and
. $0.9006 (subject to reduction pursuant to the terms of the 2001 Notes).
Each share of Series D Preferred will be entitled to receive dividends at a
rate of $60.00 per share per year, payable if declared by the Board of
Directors. Any dividends that accrue on the Series D Preferred may be paid, at
the Company's option (subject to certain limitations), in cash or, in whole or
in part, by issuing additional shares of Series D Preferred. Under the terms of
the Series D Preferred, the Company cannot declare or distribute any dividends
to holders of Common Stock unless all dividends on the Series D Preferred have
been paid.
Holders of shares of Series D Preferred will have the right to convert each
of their shares into a number of shares of Common Stock equal to the quotient
of:
. the sum of (1) $1,000 (subject to adjustment pursuant to the Series D
Preferred documents), (2) accrued but unpaid dividends to the applicable
conversion date on the share of Series D Preferred being converted and
(3) accrued but unpaid interest on the dividends on the share of Series D
Preferred being converted; and
. an amount equal to the lesser of:
. the product of (1) the average of the lowest sales price of the Common
Stock on Nasdaq for any five trading days during the 25 trading days
immediately preceding the conversion date and (2) 85% (subject to
downward adjustment, if applicable, pursuant to the Series D Preferred
documents); and
. $1.2281 (subject to reduction pursuant to the Series D Preferred
documents), subject to adjustment pursuant to the anti-dilution
provisions.
Working Capital and Long Cash Cycle.
Customer billings for long distance services are generated from detailed
calls records which are generally available; from the carriers on a weekly basis
following the previous week's customer usage, and from the switches on a daily
basis following the day of customer usage. Customer invoices usually are
generated; on a monthly basis for the direct-billed customers and weekly for the
LEC billed customers and are due upon receipt by the customer. However, the
Company historically collects a large
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portion of receivables after the scheduled due date, resulting in an average
cash cycle of in excess of 90 days. Since the Company's underlying carriers
typically have required payment within 35 days following the month of usage,
delays in receipt of customer payments have resulted in significant working
capital needs. During the fourth fiscal quarter, EqualNet was not able to
continue to pay AT&T either installments under its payment plan for usage in
arrears or for current usage on or before 35 days from the date of invoice, and
did not make some payments when due. In order to avoid termination of service,
EqualNet agreed in the first fiscal quarter of 1999 to send daily payments to
AT&T in amounts approximating the costs EqualNet would incur from AT&T for
providing such services. As noted above, on September 10, 1998, EqualNet and
Wholesale filed petitions for relief under Chapter 11 of the Bankruptcy Court.
On October 2, 1998 Wholesale filed its motion to convert its bankruptcy
proceeding from a Chapter 11 reorganization to a Chapter 7 liquidation.
During fiscal 1998, the Company had expenditures of $6.8 million on capital
items, including $6.05 million to purchase the Switches. The Company has
minimal planned capital expenditures budgeted for fiscal year 1999 other than
expenditures associated with the CostGuard billing system.
TAXES
Sales Taxes. An improper treatment of sales taxes arose from the Company's
failure to remit the sales tax due to various taxing authorities on the
incremental component of revenue in excess of the cost of the underlying service
(for which taxes were properly paid). At June 30, 1998 EqualNet had an accrual
of $339,500 for resolution of this matter. The Company believes that the amount
accrued is adequate for the satisfaction of this tax liability, including any
interest payable.
During the fiscal year, EqualNet was audited for sales taxes for the period
of July 1, 1991 through December 31, 1996. On April 20, 1998, the Texas
Comptroller's office assessed EqualNet with $465,876 in additional sales taxes
plus interest for these tax periods. EqualNet has paid $168,466 as the
undisputed portion of this assessment. EqualNet has disputed the basis for the
remaining assessment, timely filed its notice of appeal, and is currently
proceeding through the appeals process. EqualNet has accrued the full amount of
the remaining assessment plus interest incurred through June 30, 1998.
Federal Excise Taxes. During fiscal 1998, the Company had an installment
agreement with the Internal Revenue Service for payment of under payment of
second quarter fiscal 1994 federal excise taxes which allowed for the Company to
satisfy the amount outstanding in equal payments of $25,000 per month. During
fiscal 1998, the Company paid a total of $225,000 to the Internal Revenue
Service satisfying this obligation.
Income Taxes. The Company has gross deferred tax assets of $15.6 million for
which a valuation allowance of $15.6 million has been established. The deferred
tax assets arise from deductible temporary differences of $5.9 million and a net
operating loss carryforward of $9.7 million. In assessing the need for and
amount of a valuation allowance, the Company considered its inability to
generate taxable income in recent periods, the facts and circumstances which led
to the significant operating loss incurred in the years ended June 30, 1997 and
1998, and projections of future taxable income. Financial Accounting Standards
Board Statement No. 109, "Accounting for Income Taxes", allows for the
recognition of deferred tax assets by considering, among other things, the
ability of the Company to generate future taxable income. A valuation allowance
is required to reduce tax assets to their expected realizability if it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Statement 109 explicitly provides that reaching a conclusion that a
valuation allowance is not required is difficult when there is negative evidence
such as cumulative losses in recent years. The Company has been in a cumulative
loss position at June 30, 1998. The Company does not believe that positive
evidence of the ability to generate future taxable income is sufficient to
counteract the negative evidence, the cumulative losses, and accordingly has
recorded a valuation allowance for the full amount of the deferred tax.
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LEGAL LIABILITIES
In April, 1997, American Teletronics Long Distance, Inc. ("ATLD") and
MetroLink Communications, Inc. ("MetroLink") filed suit against EqualNet
Corporation and EqualNet Wholesale Services, Inc. in the United States District
Court for the Northern District of Illinois, Eastern Division (Cause No. 97-C-
2842) alleging damages based upon breach of contract, fraud and negligent
misrepresentation. Both defendants subsequently were served with process and
filed answers and counterclaims for damages. Plaintiffs allege damages for
EqualNet's failure to complete a purchase of ATLD's customer base, EqualNet's
failure to pay for long distance services provided by MetroLink to EqualNet's
customers through its contract with Unified Network Services LLC ("UNS") and for
damages arising out of EqualNet's alleged breach of contractual obligations to
UNS, a Delaware limited liability company of which EqualNet Corporation,
EqualNet Wholesale Services, Inc. and MetroLink were shareholders. It is
anticipated that these matters will be disposed of in the respective bankruptcy
proceedings of EqualNet and Wholesale. EqualNet's management vehemently denies
any wrongdoing or liability in this matter.
EqualNet has committed to make certain payments to AT&T for usage incurred in
prior periods. EqualNet defaulted in the timely payment of those payments during
the fourth fiscal quarter of 1998, and began to enter into a series of short
term, alternative payment agreements with AT&T for the payment of amounts due to
AT&T for current usage with any surplus to be applied to the arrearage amounts.
The failure to make any payments due to AT&T could result in the termination of
service to EqualNet's customers whose long distance service is provided over
AT&T's networks. The pending bankruptcy proceeding discussed below could have a
substantial affect on this obligation. EqualNet Corporation is negotiating with
another AT&T reseller as a potential supplier of these services instead of
dealing with AT&T directly. If so, management would anticipate negotiating
payment terms superior to those available directly from AT&T.
On August 7, 1998, Robert H. Turner ("Turner") filed suit against the
Company, Mark A. Willis and Willis Group, LLC in the 61st District Court of
Harris County, Texas in case number 98-37682 alleging an unspecified amount of
damages based upon an alleged breach of his employment contract and other
claims. The Company vehemently denies any wrongdoing or liability in the
matter, and intends to vigorously defend itself in this action. Since no
discovery has taken place in this matter, it is impossible to state with any
degree of certainty the amount of damages, if any, that the Company may incur,
or if it will be successful in asserting any cross claims or counterclaims it
may have in connection with the employment of Turner.
On August 13, 1998, Steverson & Company, Inc. filed suit against the Company
in case number 704,244 in the County Civil Court at Law Number 2 of Harris
County Texas seeking damages in the amount of $22,892.78 plus attorneys fees
and court costs. The Company maintains that these charges were for temporary
services personnel utilized by EqualNet, and not the Company. The invoices are
addressed to Equal Net Communications, the former name of EqualNet Corporation
before its name change on November 28, 1994. The dates on the invoices run from
June 16, 1998 through August 11, 1998. EqualNet Holding Corp. did not formally
change its name to Equalnet Communications Corp. until June 30, 1998. Due to
the fact that these charges may be a claim in the bankruptcy proceedings of
EqualNet discussed below, it is impossible at this time to state with any degree
of certainty the ultimate exposure of either the Company or EqualNet in this
matter.
On August 13, 1998, Centillion Data Systems, Inc. filed suit against EqualNet
in case number 49D029808CP001147 in the Superior Court of Marion County,
Indiana, seeking damages in the amount of $115,490.50 for billing and other
services allegedly provided to EqualNet, plus interest, attorneys fees and court
costs. The fact that these charges are a claim in the bankruptcy proceedings of
EqualNet discussed below make it impossible at this time to state with any
degree of certainty the ultimate exposure of EqualNet in this matter.
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On September 3, 1998, the Company received a demand from New Boston Systems
through their attorneys, Steadman & Steele, for the payment of placement fees
for personnel hired by EqualNet. Although New Boston System's engagement letter
was with the Company, the personnel it placed were hired as employees of
EqualNet. It is the position of the Company that any payment due to New Boston
Systems would be due from EqualNet and not the Company. The amount claimed as
due to New Boston Systems is $10,526.25.
On September 15, 1998, Technigrafiks, Inc. filed suit against EqualNet dba
Creative Communications in case number 705,562 in the County Civil Court at Law
Number 1 of Harris County, Texas, seeking damages in the amount of $24,399 for
the printing of plastic cards for debit card sales, plus interest, attorneys
fees and court costs. The fact that these charges are a claim in the bankruptcy
proceedings of EqualNet discussed below make it impossible at this time to state
with any degree of certainty the ultimate exposure of EqualNet in this matter.
On September 17, 1998, KISS Catalog Ltd. filed suit against the Company as
assignee from Creative Communications International, Inc. of certain contract
rights from KISS Catalog Ltd. in case number 98 CIV. 6570 in the United States
District Court for the Southern District of New York, seeking payment of
$100,000 in license fees, attorneys fees, and any royalties which may be owing
under the license agreement. In 1996, the Company agreed to assume the
obligations under a merchandising license agreement, including the obligation to
make payments of royalties and license fees, with a minimum guarantee royalty
fee of $100,000 and a license fee of $150,000. Payments of the minimum
guarantee of $100,000 and $50,000 of the license fee were made. Payment of the
remaining $100,000 of the license fee has not been made.
On September 17, 1998, Comerica Leasing Corporation filed suit in the 270th
District Court of Harris County, Texas in case number 98-44481 against the
Company and EqualNet for breach of a settlement agreement arising out of
previous litigation for the enforcement of equipment and office furnishings
leases filed on February 12, 1998 in the 157th District Court of Harris
County, Texas in case number 98-06841. A settlement agreement was entered into
by the parties dismissing the earlier litigation and adding the Company as an
obligor for the payment of the settlement amounts. The remaining amounts due
under the settlement agreement and remaining lease obligations represent an
amount in excess of $1,000,000.
On September 21, 1998, Cyberserve, Inc., WSHS Enterprises, Inc. and William
Stuart (collectively "Bluegate") filed suit in the 215th District Court of
Harris County, Texas in case number 98-45115 against the Company, Willis Group,
LLC, Mark A. Willis, and Netco Acquisition LLC alleging damages for breach of
contract, breach of an employment agreement, fraud and fraud in the inducement,
statutory fraud in a stock transaction, tortious interference with a contract,
conspiracy, and quantum meruit. The matters complained of originated with a
letter of intent dated on or about October 28, 1997, wherein the Company
proposed the purchase of certain assets of Cyberserve, Inc. and WSHS
Enterprises, Inc. subject to the performance of due diligence by the parties.
Bluegate and certain of its shareholders had threatened to sue the Company in
the event the proposed transaction was not consummated substantially in
conformity with the terms set forth in the Letter of Intent. The damages
Bluegate alleges it incurred were as a result of, among other things, the
claimed modification of its business to its detriment in anticipation of the
integration of its operations with those of EqualNet. It is impossible to
determine with any degree of certainty what, if any, liability Equalnet, or any
of its subsidiaries, may incur in this matter. The total amount of damages are
unspecified, but include a demand for a cash payment of $685,000, a sufficient
number of shares of Common Stock of the Company for the payment of $585,000, an
additional 525,000 shares of Common Stock, and other damages. The Company
vehemently denies any wrongdoing or liability in this matter and intends to
vigorously defend itself against all claims of the plaintiffs.
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On September 29, 1998, SA Telecommunications Incorporated asserted claims
pursuant to the Purchase Agreement against USC Telecom, Inc. and the Company for
(i) $654,934 in operating losses for the period from April 1 through July 22,
1998, (ii) $278,377 for damages for delayed or unbillable revenue through
USBI/ZPDI, (iii) reimbursement of $8,149 for switch site leases, (iv) payment of
Specified Network Contracts Liabilities (amount not specified), (v) delivery of
5,358 shares of Series C Preferred escrowed at closing, and (vi) for return of
certain leased equipment not owned by SA Telecommunications but previously in
its possession and allegedly removed by Equalnet or USC Telecom. The Company
and USC Telecom dispute each of the claims asserted by SA Telecommunications in
its demand.
During the past several months, EqualNet and the Company have experienced
severe liquidity problems and have received numerous notices of default in
payment of trade creditors and other financial obligations. For example and
without providing an exhaustive list, EqualNet has received notice of default of
its agent agreements with Walker Direct, Inc., Future Telecom Networks, Inc.,
Global Pacific Telecom, Inc. and others, making demand for the payment of
commissions due and for mediation pursuant to the terms of their agent
agreements. Netco Acquisition LLC presented a notice dated August 25, 1998
under the terms of the Tri-Party Agreement and Assignment dated January 20, 1998
between Netco Acquisition LLC, EqualNet Corporation and Cyberserve, Inc. that it
was enforcing its rights to foreclose on the web page customer base of EqualNet.
In additional EqualNet defaulted in making timely payments under the
$1,183,059.03 promissory note payable to Sprint Communications Company L.P., in
the timely payments to AT&T Corp., Premier Communications and MCI WorldCom for
carrier services. In addition, EqualNet received notice it was in default of
its lease agreement with Caroline Partners Ltd., the landlord for the office
space occupied by the Company and its subsidiaries, and that the landlord had
exercised its right to offset rents due against the letter of credit EqualNet
has provided as a security deposit for the landlord's benefit. Finova Capital
Corporation notified Netco of its failure to timely pay installments on its
promissory note in the original principal amount of $6.05 million. The payment
of such note is secured by the switches. Norwest Equipment Finance, Inc. has
notified EqualNet of its default in the payment for leased furniture currently
being utilized by EqualNet in the operation of its business. The remaining
amount owed under such lease is in excess of $100,000. The bankruptcy
proceedings of EqualNet discussed below make it impossible at this time to state
with any degree of certainty the ultimate exposure of EqualNet in these matters.
As a result of the liquidity problems listed in the foregoing paragraph and
other matters, on September 10, 1998, EqualNet filed for protection under
Chapter 11 of Title 11 of the United States Code, in case number 98-39561-H5-11
in the United States District Court for the Southern District of Texas and
Wholesale filed for protection under Chapter 11 of Title 11 of the United States
Code, in case number 98-39560-H4-11 in the United States District Court for the
Southern District of Texas. On October 2, 1998, Wholesale filed a motion
seeking to convert its Chapter 11 reorganization proceeding to a Chapter 7
liquidation proceeding. It is impossible to state at this time whether or not
EqualNet as a debtor in bankruptcy will be able to reorganize its liabilities or
to confirm a plan of reorganization in bankruptcy.
During the last fiscal year, EqualNet settled disputed claims with the
attorneys general from eleven states alleging violations of consumer protection
statutes of those states. The settlement amount, which was paid in March, 1998,
totaled $225,000 plus the issuance of certain customer credits and adjustments.
The Company was either not included as a party or was dismissed as a party
before the entry of any final judgment in any of these proceedings.
From time to time the Company is involved in what it believes to be routine
litigation or other legal proceedings that may be considered as part of the
ordinary course of its business. The Company does not believe that the adverse
determination of any such claims would have a material adverse effect on either
the results of operations or the financial condition of the Company.
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SEASONALITY
The Company's long distance revenue is subject to seasonal variations.
Because most of the Company's revenue is generated by non-residential customers,
the Company traditionally experiences decreases in long-distance usage and
revenue in those periods with holidays. In past years the Company's long-
distance traffic, which is primarily non-residential, has declined slightly
during the quarter ending December 31 due to the November and December holiday
periods.
INFLATION
Inflation has not had a significant impact on the Company's operations to
date.
YEAR 2000
The Year 2000 problem arises from the fact that due to early limitations on
memory and disk storage many computer programs indicate the year by only two
digits, rather than four. This limitation can cause programs (both system and
application) that perform arithmetic operations, comparisons, or sorting of data
fields to yield incorrect results when working outside the year range of 1900
through 1999.
The Company has anticipated potential Year 2000 issues and has substantially
completed all in-house preparation for the upcoming event. The Company is still
in the process of accessing vendors and customer's capabilities in dealing with
Year 2000 issues. The Company owns nine switches which were manufactured by
Siemens Telecom Network ("Siemens"). Siemens has agreed to provide software
patches which will ensure the switches are Year 2000 compliant. Siemens
represents these patches to be provided free of charge, and will be installed in
fiscal year 1999.
The Info Directions CostGuard billing system to be implemented by the Company
currently is represented as Year 2000 compliant.
The Company intends to poll vendors and customers about Year 2000 issues.
This process should be completed by the end of fiscal year 1999. The cost for
polling will be immaterial. The Company's major vendors: AT&T, Sprint and MCI
WorldCom are Fortune 500 companies which have disclosure requirements for Year
2000 issues. The risk of these vendors not minimizing their risk should be
minimal. The Company has two major concerns with Year 2000 issues as it applies
to customers. First, the customer phone equipment should be Year 2000
compliant. If it is not, the customers will not be able to utilize all of the
capabilities of the phone systems, thus possibly reducing the revenues of the
Company. The Info Directions CostGuard billing system will allow the Company
to provide billing information to customers in electronic data formats. If the
customer's computer systems are not Year 2000 compliant, they will not be able
to utilize this service.
CAUTIONARY STATEMENTS
In addition to the other information in this Annual Report on Form 10-K, the
following factors should be considered carefully when evaluating the likelihood
of the Company's realization of expectations with respect to operating results
and other matters described in this Annual Report on Form 10-K. See "Special
Note Regarding Forward-Looking Statements" on page 2.
ADDITIONAL NECESSARY CAPITAL - EqualNet and Wholesale filed for Chapter 11
protection in September of 1998. The Company may need additional capital to
obtain the creditor's approval of a plan of reorganization for EqualNet. In
addition, it is likely that additional capital may be needed to fund operating
deficits of the Company's other subsidiaries during the foreseeable future.
Although the Company has no current funding sources, it believes it can attract
additional funding if it is able to reduce the liabilities of EqualNet through
the plan of reorganization. There can be no assurances that the
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Company will be able to obtain the necessary capital or sufficiently reduce
EqualNet's liabilities to continue to operate the Company.
ATTRITION RATES - In the event that the Company experiences attrition rates in
excess of those anticipated either as a result of increased provisioning times
by its underlying carrier, the purchase of poorly performing traffic, or the
inability to properly manage the existing customer base, additional charges that
affect earnings may be incurred.
DEPENDENCE ON INDEPENDENT MARKETING AGENTS - USC Telecom has a small internal
sales force and obtains the majority of its new customers from independent
marketing agents ("Agents"). USC Telecom's near-term ability to expand its
business depends upon whether it can continue to maintain favorable
relationships with existing Agents and recruit and establish new relationships
with additional Agents. No assurances can be made as to the willingness of the
existing Agents to continue to provide new orders to USC Telecom or as to USC
Telecom's ability to attract and establish relationships with new Agents.
DEPENDENCE ON AT&T AND OTHER FACILITIES-BASED CARRIERS - The Company, even
though it now owns nine switches, depends upon other carriers to provide the
telecommunications services that it resells to its customers and the detailed
information upon which it bases its customer billings. The Company's near-term
ability to expand its business partially depends upon whether it can continue to
maintain relationships with AT&T and Sprint. The loss of the telecommunications
services that the Company receives from AT&T or Sprint could have a material
adverse effect on the Company's results of operations and financial condition.
CARRIER COMMITMENTS - EqualNet has significant commitments with certain carriers
to resell long-distance services. EqualNet's contracts with its carriers
contain clauses that could materially and adversely impact EqualNet should
EqualNet incur a shortfall in meeting its commitments. Although EqualNet has
from time to time failed to meet its commitment levels under a particular
contract and in each case has been able to negotiate a settlement with the
carrier which resulted in no penalty being incurred by EqualNet, there can be no
assurances that EqualNet will be able to reach similar favorable settlements
with its carriers in the event that EqualNet should fail to meet its future
commitments.
To the extent that these carriers are considered to be utilities in EqualNet's
bankruptcy proceeding, these carriers will be entitled to adequate assurance of
payment for carrier services after September 10, 1998, the Bankruptcy Filing
Date. Adequate assurance may be in the form of cash deposits or advance
payments in an amount determined by the court as sufficient to provide these
carriers with adequate assurance of payment. The failure to provide adequate
assurance of payment for future services would give these carriers the right to
discontinue to provide such services. Current sources of funds from operations
and working capital may not be sufficient to provide the amount of adequate
assurance of payment required by these carriers. There can be no assurance that
EqualNet would be able to secure funding for the amount of any adequate
assurance that may be required of EqualNet. See Note 2. Chapter 7 and 11 Filing
and Note 4. Liquidity and Working Capital Deficit.
In recent years, AT&T, MCI WorldCom and Sprint have consistently followed one
another in pricing their long-distance products. If MCI WorldCom and Sprint
were to lower their rates for long-distance service and AT&T did not adopt a
similar price reduction, adverse customer reaction could affect the Company's
ability to meet its commitments under the AT&T contract which could have a
material adverse affect on the Company's financial position and results of
operations.
35
<PAGE>
To the extent that these carriers are considered to be utilities in EqualNet's
bankruptcy proceedings, these carriers will be entitled to adequate assurance of
payment for carrier services after September 10, 1998, the Petition Date.
Adequate assurance may be in the form of cash deposits or advance payments in an
amount determined by the court as sufficient to provide these carriers with
adequate assurance of payment.
BILLING SYSTEM PROBLEMS - EqualNet converted to a new customer management,
billing and rating system - AMS, purchased from Platinum Communications in
March 1998. Unlike NetBase (the system used for most of fiscal year 1998 prior
to conversion), AMS has capabilities required for switch-based data gathering,
rating and billing. The conversion coincided with the acquisition of a new
customer base (SA Telecom) and a migration to a switch based environment,
considerable billing errors and delays occurred. Additionally, there are
aspects of AMS that could require continuing support from Platinum
Communications. This reliance upon an outside source for billing system
troubleshooting has slowed the conversion recovery process. As of September
25, 1998, EqualNet is making plans to convert to CostGuard ENTERPRISE, an
industrial class rating, billing and customer care system built on a Microsoft
SQL Server database platform. This system is being purchased from Info
Directions, Inc., "IDI" and is expected to dramatically improve rating speed
and billing accuracy. Also, EqualNet expects to be able to more readily extract
meaningful data and management reports from CostGuard. The system design is
flexible enough to respond to rapid changes in the telecommunications
marketplace. In fiscal year 1998, EqualNet recorded a write-off of $270,000 for
NetBase and estimated the useful file of AMS to be approximately one year until
the CostGuard system can be implemented. The new system, CostGuard, will cost
$272,000 initially, then $68,000 per year in subsequent years for ongoing
support and software upgrades. There can be no assurance that the IDI billing
system will fully meet EqualNet's current and on going needs. If the IDI system
fails to provide the expected results, EqualNet may need to invest in other
alternative billing systems.
RELATIONSHIPS WITH STATE REGULATORY AGENCIES - EqualNet's and USC Telecom's
intrastate long-distance telecommunications operations are subject to various
state laws and regulations, including prior certification, notification or
registration requirements. EqualNet and USC Telecom must generally obtain and
maintain certificates of public convenience and necessity from regulatory
authorities in most states in which it offers service. Any failure to maintain
proper certification in jurisdictions in which either of these companies provide
a significant amount of intrastate long-distance service could have a material
adverse effect on the Company's business.
VOLATILITY OF SECURITIES PRICES - Historically, the market price of the Common
Stock has been highly volatile. During all of fiscal 1998, the market price for
the Common Stock as reported by the Nasdaq has ranged from a high of $3.00 per
share to a low of $0.875 per share. There can be no assurance that the market
price of the Common Stock will remain at any level for any period of time or
that it will increase or decrease to any level. Changes in the market price of
the Common Stock may bear no relation to EqualNet's actual operational or
financial results. In addition, if the Company fails to maintain the minimum bid
price ($1.00 per share) or the minimum net tangible assets ($4.0 million)
requirements of Nasdaq, the Common Stock would be subject to delisting by
Nasdaq. On September 30, 1998, Nasdaq notified the Company that it would be
delisted if the closing bid price for its Common Stock is not equal to or
greater than $1.00 for a minimum of ten consecutive trading days during the
period from October 1, 1998 to December 29, 1998. On October 8, 1998, Nasdaq
also notified the Company that it would be delisted if the market value of its
public float was not equal to or greater than $5.0 million for a minimum of ten
consecutive trading days during the period from October 9, 1998 to January 6,
1999.
36
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk exposure related to changes in interest
rates on its borrowing and receivable sales facilities. These instruments carry
interest at a pre-agreed upon percentage point spread over the prime interest
rate. At June 30, 1998, the Company had $8.1 million outstanding under its debt
facilities. Based on this balance, an immediate change of one percent in the
interest rate would cause a change in interest expense of approximately $81,000
on an annual basis. The Company's objective in maintaining these variable rate
borrowings is the flexibility obtained regarding lower overall cost as compared
with fixed-rate borrowings.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial information required to
be filed under this Item are presented on pages 00 THROUGH 00 of this Annual
Report on Form 10-K, and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
37
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and titles of the Company's
directors and executive officers as of October 2, 1998.
<TABLE>
<CAPTION>
Year Term
As Director
Name Age Position(s) Will Expire
---- --- ----------- -----------
<S> <C> <C> <C>
Mark A. Willis 30 Chairman of the Board , Director 2000
Mitchell H. Bodian 47 President, Chief Executive Officer,
Director 1998
Dean H. Fisher 47 Senior Vice President, General
Counsel and Secretary
David L. Kerr 45 Chief Financial Officer
James T. Harris 39 Director 2000
John Isaac "Ike" Epley 32 Director 1999
Ronald J. Salazar 50 Director 1998
Zane Russell 33 Director 1998
Robert H. Turner 50 Director 1998
</TABLE>
Mark A. Willis has served as Chairman of the Board and a director of the
Company since March 1998. Mr. 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, 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 and Marketing
Manager. Before that, Mr. Willis served as a marketing and sales representative
for Talent Tree. Dr. Salazar, a director, is married to Mr. Willis' aunt.
Mitchell H. Bodian has served as President and Chief Executive Officer
since July 1998 and as a director of the Company since March 1998. Mr.
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. In October 1996, Mr.
Bodian was appointed as Chapter 11 Trustee for Conectco, a switchless reseller
that sold telephone debit cards and provided one plus telecommunications
services, and that filed for the 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.
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. In
January 1995 Mr. Fisher was elected Senior Vice President, Secretary and General
Counsel of the Company. He has also served as director of EqualNet from July
1991 to April 1998. 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.
David L. Kerr has been an officer of the Company since September 1998. Mr.
Kerr holds an Accounting and Business Administration degree from Mississippi
State University and is a licensed general securities representative. Mr. Kerr
was a partner with KPMG from 1987 to 1995 serving clients primarily in the
energy industry, providing tax consultation services and consulted on merger
and acquisition transactions. In 1995, Mr. Kerr co-founded Omni Ventures, LLC
("Omni"), an investment banking firm. Mr. Kerr joined Equalnet Communications
in September 1998 as interim Chief Financial Officer.
James T. Harris, C.P.A. has served as a director of the Company since March
1998. Mr. Harris 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.
John Isaac "Ike" Epley has served as a director of the Company since March
1998. Mr. Epley has been a Managing Director of Omni Ventures, L.L.C., a
venture capital and 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.
38
<PAGE>
Ronald J. Salazar, Ph.D. has served as a director of the Company since March
1998. Dr. Salazar 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 the management
consulting firm of Palladian Analysis & Consulting, L.L.C. 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. Dr.
Salazar is married to Mr. Mark Willis' (Chairman of the Board of Directors)
aunt.
Zane Russell has served as a director of the Company since January 1995. Mr.
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 until March 1998. He has also served as
the President of the Company from January 1995 until March 1998. 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.
Robert H. Turner has served as a director of the Company since March 1998 and
as President and Chief Executive Officer of the Company from March 1998 to July
1998. Mr. Turner was removed as President and Chief Executive Officer for cause
by the Board of Directors of the Company in July 1998. Mr. Turner served as
President and Chief Executive Officer of EON Corporation from 1996 to 1998. Mr.
Turner further served as President and Chief Executive Officer of Telezone Inc.
from 1994 to 1995. From 1991 to 1993 Mr. Turner also served as President and
Chief Executive Officer of PTT Telecom Netherlands US, Inc. Mr. Turner
previously held various positions with Insightguide, LP, Norlite Computer
Systems, Inc., BellSouth Corp., AT&T Corporation, Southern Bell Telephone
Company and Bojangles, Inc.
Section 16(a) Beneficial Ownership Reporting Compliance
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, 1998,
all officers, directors and greater than 10% shareholders complied with all
filing requirements applicable to them, except that Messrs. Dean Fisher and
James Harris failed to file timely form 5's. Delinquent form 5's were completed
and filed on October 12, 1998.
39
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
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, 1998 exceeded $100,000 (the "Named Executive Officers").
<TABLE>
<CAPTION>
Annual Compensation
Common
Stock
Name and Fiscal Underlying All Other
Principal Position Year Salary Bonus Options Compensation(1)
<S> <C> <C> <C> <C> <C>
Hal Turner 1998 $100,961 - - $3,076
former Chief Executive Officer 1997 -
1996 -
Zane Russell 1998 $142,931 - 90,000 $6,073
former Chairman of the Board and 1997 178,000 - 90,000 3,498
former Chief Executive Officer and 1996 178,000 - - 4,249
former President
Michael L. Hlinak 1998 175,182 - 90,000 6,434
former Executive Vice President, Chief 1997 155,000 - 90,000 3,607
Financial Officer and Chief Operating 1996 128,000 - - 6,576
Officer
Dean H. Fisher 1998 129,800 - - 6,059
Senior Vice President, General 1997 129,000 - 35,000 3,451
Counsel and Secretary 1996 128,000 - - 6,097
</TABLE>
- - ----------------------
(1) 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. Represents contributions in 1998 by the Company under the
Company's 401(k) Plan for Messrs. Russell, Hlinak and Fisher of $2,651,
$661, and $3,894, respectively, and health insurance premiums paid in 1998
by the Company for Messrs. Russell, Hlinak and Fisher of $3,422, $5,773,
and $2,165, respectively.
40
<PAGE>
OPTION GRANTS IN FISCAL 1998
The following table summarizes options and securities underlying options to
purchase shares of the Company's Common Stock that were granted to the Named
Executive Officers during fiscal 1998. No Options were exercised by any of the
Named Executive Officers during fiscal 1998.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Shares of Annual Rates of Stock
Common Percent of Price Appreciation for
Stock Total Options Exercise Option Term (1)
Underlying Granted to Price per -----------------------
Name Options Employees Share Expiration 5% 10%
- - ---- ---------- ------------- ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Dean H. Fisher 17,500 3.5 4.25 7/11/06 0 2,975
17,500(2) 3.5 2.50 1/20/07 10,540 37,800
</TABLE>
- - --------------------
(1) The potential realizable value of the options, if any, granted in fiscal
1997 to each of the Named Executive Officers was calculated by multiplying
the number of shares of Common Stock underlying such options by the excess
of (a) the assumed value, at the date of expiration of such option, of the
Company's Common Stock if the value of the Company's Common Stock were to
appreciate at a compounded annual rate of 5% or 10% from the date of the
grant of the option until the date of expiration of the option over (b) the
exercise price shown. The 5% and 10% appreciation rates are set forth in
regulations promulgated by the Securities and Exchange Commission, and no
representation is made that the Common Stock will appreciate at these
assumed rates or at all.
(2) Exercisable on or after July 11, 1998.
The following table sets forth information regarding the value of unexercised
options held by the Named Executive Officers. None of the Named Executive
Officers exercised any options in fiscal 1998.
<TABLE>
<CAPTION>
Number of Value of Unexercised
Securities Underlying In-the-Money Options at
Unexercised Options June 30, 1998 ($)(1)
at June 30, 1998
(# shares)
Name Exercisable Unexercisable Exercisable Unexercisable
- - ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Dean H. Fisher 17,500 17,500 - -
</TABLE>
(1) Based on $2.06 per share, the closing price of the Common Stock on June 30,
1998, as reported by Nasdaq.
41
<PAGE>
COMPENSATION OF DIRECTORS
Each non-employee director is paid $20,000 per year, plus $1,500 for each
meeting of the Board which he personally attends, $1,500 for each meeting of a
committee of the Board which he personally attends and $500 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 Director Plan, as amended in
May 1998, pursuant to which each non-employee director receives options to
purchase a number of shares of Common Stock equal to $60,000 divided by the
average of the highest and lowest price of the Common Stock the day before the
date of his election as a director ("Fair Market Value") and options to purchase
a number of shares of Common Stock equal to $30,000 divided by the Fair Market
Value of the Common Stock the day before each annual meeting of the Company's
shareholders for each year thereafter. These options have an exercise price
equal to the Fair Market Value of the Common Stock and the initial grants vest
over three years in 33-1/3% increments and the annual grants vest in six months
from the date of grant. Employee directors of the Company do not receive any
additional compensation from the Company for their services as directors.
SEVERANCE AGREEMENTS
Employment agreements with Mr. Zane Russell and Mr. Michael Hlinak were
terminated during the second half of fiscal 1998. Payments due to Mr. Russell
and Mr. Hlinak are described in Note 15 to the consolidated financial
statements.
42
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of October 2, 1998 (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:
<TABLE>
<CAPTION>
Beneficial Ownership(1)
------------------------
Name Shares Percent
- - ---- ------------ ---------
<S> <C> <C>
Michael T. Willis(3)
5005 Woodway, Suite 350
Houston, Texas 77056 8,156,082 41.2%
James T. Harris(3)(6)
5005 Woodway, Suite 350
Houston, Texas 77056 7,956,082 41.2%
The Willis Group, LLC(3)
5005 Woodway, Suite 350
Houston, Texas 77056 7,656,082 39.6%
Mark Willis(3)
5005 Woodway, Suite 350
Houston, Texas 77056 7,656,082 39.6%
James R. Crane(4)
15350 Vickery Drive
Houston, Texas 77032 3,570,000 19.2%
MCM Partners
10500 NE 8th, Suite 1920
Bellevue, Washington 98004 2,000,000 9.8%
SA Telecommunications, Inc.
1600 Promenade Center, 15th Floor
Richardson, Texas 75080 1,950,730 9.6%
The Furst Group, Inc.(2)
459 Oakshade Road
Shamong, New Jersey 08088 1,822,000 9.2%
James D. Kaylor(2)
916 P Street, Suite 200
Lincoln, Nebraska 68508 1,822,000 9.2%
John S. Streep(2)
15841 Kilmarnock Drive
Ft. Myers, Florida 33912 1,822,000 9.2%
Zane Russell
20607 Shadow Mill Court
Houston, Texas 77450 1,047,556 5.7%
Dean H. Fisher(5)
1250 Woodbranch Park Drive
Houston, Texas 77079 267,602 1.5%
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Mitchell Bodian(6)
1250 Woodbranch Park Drive
Houston, Texas 77079 0 n/a
John Isaac "Ike" Epley(6)
1250 Woodbranch Park Drive
Houston, Texas 77079 0 n/a
Ronald Salazar(6)
1250 Woodbranch Park Drive
Houston, Texas 77079 0 n/a
David Kerr
1250 Woodbranch Park Drive
Houston, Texas 77079 0 n/a
Hal Turner 0 n/a
Current directors and executive officers as a group (9 persons) 16,927,322 83.1%
</TABLE>
* 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 The Furst Group, Inc. ("TFG"), Mr.
Kaylor and Mr. Streep is based on managements information regarding the
transactions. Messrs. Kaylor and Streep each own 45% of the Common Stock of
TFG, Mr. Kaylor is the Chairman of the Board of TFG, and Mr. Streep is the
Chief Executive Officer of TFG.
(3) Information relating to ownership by The Willis Group, LLC ("TWG") and
Messrs. Michael T. Willis, Mark Willis and Harris is based on reports on
Schedule 13D filed with the Securities and Exchange Commission on October
10 and 14, 1997. According to those reports, TWG holds a warrant for the
purchase of 200,000 shares of Common Stock. None of such shares were
outstanding as of October 2, 1998. Messrs. Mike Willis and Mark Willis each
own 47.5% of the membership interest in The Willis Group and Mr. Harris
owns the remaining 5% membership interest. Mr. Mike Willis is the Secretary
of The Willis Group, Mr. Mark Willis is the President of The Willis Group
and Mr. Harris is the Treasurer of The Willis Group. According to the
report, TWG 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) Information relating to ownership by James R. Crane is based on reports on
Schedule 13D filed with the Securities and Exchange Commission on May 6,
1998. According to those reports, Mr. Crane holds a warrant for the
purchase of all 170,000 shares, none of which were issued as of October 2,
1998.
(5) 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.
(6) Excludes 5,000 shares of Common Stock issuable upon exercise of stock
options awarded under the Director Plan that are not exercisable within
sixty days.
44
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In February 1997, the Company issued to The Furst Group, Inc. ("TFG") (i) a
subordinated note in the principal amount of $3 million, bearing interest at 10%
per annum, due December 31, 1998 (the "TFG Note"), (ii) warrants exercisable for
the purchase of 1.5 million shares of Common Stock at $2.00 per share (the "TFG
Warrants") and (iii) a Right in the Event of a Change of Control (the "TFG
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, TFG'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. During fiscal 1998, the Company purchased
approximately $2.2 million of long-distance services from Sprint under this
contract. The TFG Note is secured by all of the accounts and general
intangibles of the Company. As of October 27, 1997, the TFG Warrants had not
been exercised. The TFG Right provides that TFG 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
TFG Right. Transactions that would trigger the TFG Right include Equalnet's
consolidation with, or merger with or into another person other than TFG and the
sale by Equalnet or its subsidiaries of a significant portion of the Company's
assets.
On March 6, 1998, the shareholders of the Company approved certain transactions
detailed below:
On March 6, 1998 as a result of various transactions, the Willis Group and its
affiliates gained control of the Board of Directors of the Company, having
nominated for shareholder approval four of the seven members of the Board of
Directors.
On October 1, 1997, the Company issued to the Willis Group a $1.0 million
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
0.2 million 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 was
convertible 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. As of the date of issuance of the convertible debt the Company
recorded an interest charge of $0.15 million to record the impact of the debt
being convertible at a discount to market. On March 5, 1998, the Note and
accrued interest were exchanged for 1.05 million shares of Common Stock.
Under the terms of the Agreements the Company acquired nine telecommunications
switches (the "Switches") from the Willis Group for $7.6 million of aggregate
consideration, consisting of $5.85 million in cash, 1.4 million shares of
Common Stock, and warrants to purchase an additional 0.4 million shares of
Common Stock. The Company secured financing of $6.05 million for the cash
portion of the consideration through an unaffiliated third party lender, which
loan is secured by the Switches, bears interest at a rate per year of 6.42%
above an index rate based on U.S. Treasury Notes (the loan interest rate
currently is 12.1%) and is payable in 36 consecutive monthly payments. In
addition, Mike Willis, a member of the Willis Group and father to Mark Willis,
was granted 0.5 million warrants for guaranteeing a portion of this financing.
Under the terms of the Agreements, the Company acquired Netco Acquisition
Corp. ("Netco"), a Delaware corporation controlled by the Willis Group, which
held certain intangible rights and assets previously acquired by the Willis
Group and formerly held by Total National Telecommunications. These assets
consisted of intangible rights to use certain software and codes necessary to
operate the Switches. The Company acquired Netco for $5.6 million in aggregate
consideration, including 3.58 million shares of Common Stock and 2,000 shares
of the Company's Series A Convertible Preferred Stock ("Series A Preferred".)
The Series A Preferred is non-voting and has a stated value of $1,000 per
share and is entitled to received dividends at the rate of $80.00 per
share per year, payable quarterly. Holders of Series A Preferred have the
right to convert their shares into Common Stock initially at the rate of 1,000
shares of Common Stock per share of Series
45
<PAGE>
A Preferred (or the stated value divided by $1.00), or an aggregate of 2.0
million shares of Common Stock, subject to adjustment pursuant to certain
anti-dilution provisions. The Series A Preferred has a $1,000 per share
liquidation preference over the Company's Common Stock. Dividends are payable
at the determination of the Board of Directors. Dividends when not paid are
cumulative and bear interest at a rate of 12.0%. Cumulative dividends in
arrears at March 31, 1998 are $11,557 or $5.78 per Series A Preferred share.
Under the instrument defining the rights of the holders of the Series A
Preferred, the Company is prohibited from declaring or paying dividends on the
Common Stock unless all accrued dividends on the Series A Preferred have been
paid.
Under the terms of the Agreements, the Company also issued and sold to the
Willis Group 4.0 million shares of Common Stock at a price of $1.00 per share
in cash.
On March 6, 1998, the Company entered into an exchange agreement ("Exchange
Agreement") with The Furst Group, ("Furst"), a New Jersey corporation, an
accredited investor and the holder of the Company's $3.0 million subordinated
debt, pursuant to which Furst exchanged the $3.0 million 10% subordinated note
due December 31, 1998 and warrants to purchase 1.5 million shares of Common
Stock for 3,000 shares of Series B Senior Convertible Preferred Stock ("Series B
Preferred") along with 0.3 million shares of the Company's Common Stock to
satisfy the accrued interest due on the notes. Each share of the Series B
Preferred has a stated value of $1,000 and is entitled to share with the Common
Stock in any dividends declared based upon the number of shares of Common Stock
the Series B is convertible into at the time such dividend is declared. Each
share of Series B Preferred is convertible into 500 shares of Common Stock,
subject to certain anti-dilution provisions. The Series B Preferred has a
$1,000 per share liquidation preference over the Series A Preferred and the
Common Stock. Each share of Series B Preferred also entitles the holder thereof
to one vote, voting as a single class with the Common Stock, on matters
submitted to the shareholders of the Company.
During the quarter ended March 31, 1998, the Company obtained a cash flow
bridge loan of $0.4 million from Netco Acquisition, LLC, an entity owned 50% by
the Willis Group. This note was payable on March 31, 1998 and had an interest
rate of 10% which escalates to 18% after an event of default occurs. This note
is secured by the web page customers. As of June 30, 1998, the Company was in
default on this note as no principal or interest payments have been made.
Effective July 31, 1998, the Company issued two 6% Senior Secured Convertible
Notes due in 2001 (the "2001 Notes") in the amount of $1.5 million each to the
Willis Group and Genesee Fund Limited-Portfolio B ("Genesee"), a British Virgin
Islands corporation, both accredited investors. The 2001 Notes are convertible
into a variable number of shares of the Company's Common Stock. Ownership
percentage upon conversion is currently limited to no more than 4.9% of the
outstanding Common Stock. The 2001 Notes bear interest at 6% and interest
payments are due each February 15, May 15, August 15 and November 15 commencing
on November 15, 1998.
The 2001 Notes rank equally with all other unsubordinated debt obligations
of the Company. The Company's obligations under the 2001 Notes are secured by
certain collateral pursuant to security agreements. A holder of the 2001 Note
may require the Company to repurchase the 2001 Note if an event of default
occurs. Events of default include among other things, the Nasdaq delisting of
the Common Stock. A default under either of these 2001 Notes could have a
material adverse effect on the Company's ability to raise additional capital and
on the results of operations or financial condition.
In connection with the issuance of the 2001 Notes, the Company issued to
each of the Willis Group and Genesee a warrant ("Warrant") to purchase 333,116
shares of Common Stock at a purchase price of $0.9006 per share. In addition,
the Company issued to the Willis Group and Advantage Fund Limited
46
<PAGE>
3,750 shares of its Series D Convertible Preferred Stock ("Series D Preferred")
in exchange for 3.0 million shares of its Common Stock and $0.2 million. The
Warrants expire on September 4, 2003.
Any holder of a 2001 Note may convert the 2001 Note, in whole or in part,
into shares of Common Stock at a conversion price per share equal to the lesser
of:
. the product of (1) the average of the lowest sales price of the Company's
Common Stock on Nasdaq for the five days immediately preceding the date
of conversion and (2) 85% (subject to reduction pursuant to the terms of
the 2001 Notes); and
. $0.9006 (subject to reduction pursuant to the terms of the 2001 Notes).
Each share of Series D Preferred will be entitled to receive dividends at a
rate of $60.00 per share per year, payable if declared by the Board of
Directors. Any dividends that accrue on the Series D Preferred may be paid, at
the Company's option (subject to certain limitations), in cash or, in whole or
in part, by issuing additional shares of Series D Preferred. Under the terms of
the Series D Preferred, the Company cannot declare or distribute any dividends
to holders of Common Stock unless all dividends on the Series D Preferred have
been paid.
Holders of shares of Series D Preferred will have the right to convert each
of their shares into a number of shares of Common Stock equal to the quotient
of:
. the sum of (1) $1,000 (subject to adjustment pursuant to the Series D
Preferred documents), (2) accrued but unpaid dividends to the applicable
conversion date on the share of Series D Preferred being converted and
(3) accrued but unpaid interest on the dividends on the share of Series D
Preferred being converted; and
. an amount equal to the lesser of:
. the product of (1) the average of the lowest sales price of the
Common Stock on Nasdaq for any five trading days during the 25
trading days immediately preceding the conversion date and (2) 85%
(subject to downward adjustment, if applicable, pursuant to the
Series D Preferred documents); and
. $1.2281 (subject to reduction pursuant to the Series D Preferred
documents),
subject to adjustment pursuant to the anti-dilution provisions.
47
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) DOCUMENTS INCLUDED IN THIS REPORT:
1. FINANCIAL STATEMENTS............................................PAGE
Report of Independent Auditors....................................... 55
Consolidated Balance Sheets as of June 30, 1997 and 1998............. 56
Consolidated Statements of Operations for the years ended
June 30, 1996, 1997 and 1998....................................... 58
Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended June 30, 1996, 1997 and 1998................... 59
Consolidated Statements of Cash Flows for the years
ended June 30, 1996, 1997 and 1998................................. 60
Notes to Financial Statements........................................ 61
2. FINANCIAL STATEMENT SCHEDULES
Schedule II
(B) REPORTS ON FORM 8-K:
On March 10, 1998, the Company filed with the Securities and Exchange Commission
a Current Report on Form 8-K reporting, under Items 1, 5 and 7, the change of
control of the Company and the Transactions described in this report. The
Company included a pro forma balance sheet as of January 31, 1998 after giving
effect to the Transactions, in that report.
On September 21, 1998, the Company filed with the Securities and Exchange
Commission a Current Report on Form 8-K reporting, under Item 3, the filing for
protection under Chapter 11 of the Bankruptcy Code for EqualNet Corporation and
Wholesale Services Inc.
(C) EXHIBITS:
Exhibits designated by the symbol * were filed with this Annual Report on
Form 10-K. or an amendment hereto. All exhibits not so designated are
incorporated by reference to a prior filing as indicated.
The Company undertakes to furnish to any shareholder so requesting a copy
of any of the following exhibits upon payment to the Company of the
reasonable costs incurred by the Company in furnishing any such exhibit.
48
<PAGE>
EXHIBIT NO. DESCRIPTION
3.1 Articles of Incorporation of the Registrant (incorporated by
reference to Exhibit 3.1 to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (Registration No. 33-88742); filed on
February 13, 1995).
3.2 Bylaws of the Registrant (incorporated by reference to Exhibit
3.2 to the Registrant's Registration Statement on Form S-1 (Registration
No. 33-88742); filed on January 24, 1995).
4.1 $1,000,000 Note dated October 1, 1997, issued by the Company to
the Willis Group (incorporated by reference to exhibit 4.1 of the
Company's Quarterly Report on Form 10-Q for the quarter ended 12/31/97).
4.2 Loan and Security Agreement, dated March 6, 1998, between the
Company and Finova Capital Corporation (incorporated by reference to
exhibit 4.2 of the Company's Quarterly Report on Form 10-Q for the
quarter ended 3/31/98).
10.1 Lease Agreement dated June 28, 1994, between EqualNet and Caroline
Partners, Ltd., as amended by First Amendment dated August 15, 1994, and
Second Amendment dated September 8, 1994 (incorporated by reference to
Exhibit 10.6 to Registrant's Registration Statement on Form S-1
(Registration No. 33-88742) filed on January 24, 1995).
10.2 Financing agreement between Receivables Funding Corporation and EqualNet
Holding Corporation, dated June 18, 1997 (incorporated by reference to
Exhibit 10.17 to Amendment 2 to the Registrant's Annual Report on Form
10-K for the year ended June 30, 1997, filed on October 28, 1997)
10.3 Carrier Agreement between AT & T and EqualNet Corporation, dated May 13,
1997 ( certain confidential portions of this exhibit have been omitted
pursuant to a request for confidential treatment pursuant to Rule 246-2
under the Securities Exchange Act of 1934, incorporated by reference to
Exhibit 10.18 to Amendment 2 to the Registrant's Annual Report on Form
10-K for the year ended June 30, 1997, filed on October 28, 1997)
10.4 Subscription Agreement, dated as of July 1, 1997, among the Company and
Lexus Commercial Enterprises, Ltd. (incorporated by reference to exhibit
10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended
9/30/97).
10.5 Secured Promissory Note, dated as of July 1, 1997, made by Lexus
Commercial Enterprises, Ltd. In favor of the Company (incorporated by
reference to exhibit 10.2 of the Company's Quarterly Report on Form 10-Q
for the quarter ended 9/30/97).
10.6 Note and Warrant Purchase Agreement, dated October 1, 1997, by and
among the Company and the Willis Group, as amended February 12, 1998
(incorporated by reference to exhibit 10.1 of the Company's Quarterly
Report on Form 10-Q for the quarter ended 12/31/97).
10.7 Switch Agreement, dated December 2, 1997, between the Company and the
Willis Group, as amended by the First Amendment dated December 19, 1997,
and Second Amendment dated February 12, 1998 (incorporated by reference
to exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the
quarter ended 12/31/97).
49
<PAGE>
10.8 Agreement of Merger and Plan of Reorganization, dated December 2, 1997,
between the Company and EQ Acquisition Sub. Inc., Netco Acquisition, LLC
and Netco Acquisition Corp., as amended by the First Amendment dated
December 19, 1997, and Second Amendment dated February 12, 1998
(incorporated by reference to exhibit 10.3 of the Company's Quarterly
Report on Form 10-Q for the quarter ended 12/31/97).
10.9 Stock Purchase Agreement, dated December 2, 1997, by and among the
Company and the Willis Group., as amended by the First Amendment dated
December 19, 1997. (incorporated by reference to exhibit 10.4 of the
Company's Quarterly Report on Form 10-Q for the quarter ended 12/31/97).
10.10 Exchange Agreement, dated March 6, 1998 between the Company and The Furst
Group, Inc. (incorporated by reference to exhibit 10.5 of the Company's
Quarterly Report on Form 10-Q for the quarter ended 3/31/98).
10.11 Stock and Warrant Purchase Agreement dated March 26 1998, between the
Company and First Sterling Ventures Corp. and Frank Hevrdejs
(incorporated by reference to exhibit 10.6 of the Company's Quarterly
Report on Form 10-Q for the quarter ended 3/31/98).
10.12 Stock Purchase Warrant dated March 26 1998, between the Company and First
Sterling Ventures Corp. (incorporated by reference to exhibit 10.7 of the
Company's Quarterly Report on Form 10-Q for the quarter ended 3/31/98).
10.13 Stock Purchase Warrant dated March 26 1998, between the Company and Frank
Hevrdejs (incorporated by reference to exhibit 10.8 of the Company's
Quarterly Report on Form 10-Q for the quarter ended 3/31/98).
10.14 Stock and Warrant Purchase Agreement dated April 24, 1998, between the
Company and James R. Crane (incorporated by reference to exhibit 10.9 of
the Company's Quarterly Report on Form 10-Q for the quarter ended
3/31/98).
10.15 Registration Rights Agreement dated April 24, 1998, between the Company
and James R. Crane (incorporated by reference to exhibit 10.10 of the
Company's Quarterly Report on Form 10-Q for the quarter ended 3/31/98).
10.16 Warrant Agreement dated April 24, 1998, between the Company and James R.
Crane (incorporated by reference to exhibit 10.11 of the Company's
Quarterly Report on Form 10-Q for the quarter ended 3/31/98).
10.17 Purchase Agreement dated January 15, 1998 between the Company and SA
Telecommunications, Inc. and Certain of its Subsidiaries as amended by
Amendment dated March 10, 1998 (incorporated by reference to exhibit
10.12 of the Company's Quarterly Report on Form 10-Q for the quarter
ended 3/31/98).
10.18 Management Services Agreement dated March 12, 1998 between the Company
and SA Telecommunications, Inc. (incorporated by reference to exhibit
10.13 of the Company's Quarterly Report on Form 10-Q for the quarter
ended 3/31/98).
10.19 *Secured Convertible Note, dated September 4, 1998, issued by the
Company to Genesee Fund Limited-Portfolio B.
50
<PAGE>
10.20 *Secured Convertible Note, dated September 4, 1998, issued by the
Company to the Willis Group, LLC.
10.21 *Common Stock Purchase Warrant, dated September 4, 1998 between the
Company and Genesee Fund Limited-Portfolio B.
10.22 *Common Stock Purchase Warrant, dated September 4, 1998 between the
Company and the Willis Group, LLC.
10.23 *Note Purchase and Exchange Agreement, effective as of July 31, 1998,
between the Company and Advantage Fund Limited.
10.24 *Note Purchase and Exchange Agreement, effective as of July 31, 1998,
between the Company and the Willis Group, LLC.
10.25 *Form of 6% Senior Secured Convertible Note due 2001 attached as Annex
I to Note Purchase and Exchange Agreement in exhibits 10.23 and 10.24
above.
10.26 *Form of Series D Preferred documents of Board of Directors Establishing
and Designating Series D Convertible Preferred Stock and Fixing the
Rights and Preferences of such Series attached as Annex II to Note
Purchase and Exchange Agreements in exhibits 10.23 and 10.24 above.
10.27 *Form of Common Stock Purchase Warrant attached as Annex III to Note
Purchase and Exchange Agreements in exhibits 10.23 and 10.24 above.
10.28 *Form of Registration Rights Agreement attached as Annex V to Note
Purchase and Exchange Agreements in exhibits 10.23 and 10.24 above.
10.29 *Form of Notice of Conversion of Series D Preferred Stock of Equalnet
Communications Corp. attached as Annex VII to Note Purchase and Exchange
Agreements in exhibits 10.23 and 10.24 above.
10.30 *Form of Opinion of Counsel to be Delivered on Closing Date attached as
Annex VIII to Note Purchase and Exchange Agreements in exhibits 10.23 and
10.24 above.
10.31 *Form of Opinion of the Company's General Counsel attached as Annex IX
to Note Purchase and Exchange Agreements in exhibits 10.23 and 10.24
above.
10.32 *Form of Opinion in Connection with Security Agreement attached as Annex
X to Note Purchase and Exchange Agreements in exhibits 10.23 and 10.24
above.
10.33 *Note Purchase Agreement, effective as of July 31, 1998 between the
Company and Genesee Fund Limited-Portfolio B.
10.34 *Form of 6% Senior Secured Convertible Note due 2001 attached as Annex I
to Note Purchase Agreements in exhibits 10.33 above.
10.35 *Form of Common Stock Purchase Warrant attached as Annex II to Note
Purchase Agreements in exhibits 10.33 above.
51
<PAGE>
10.36 *Form of Registration Rights Agreement attached as Annex IV to Note
Purchase Agreements in exhibits 10.33 above.
10.37 *Form of Opinion of Counsel to be Delivered on Closing Date attached as
Annex VI to Note Purchase Agreements in exhibits 10.33 above.
10.38 *Form of Opinion of the Company's General Counsel attached as Annex VII
to Note Purchase Agreements in exhibits 10.33 above.
10.39 *Form of Opinion in Connection with Security Agreement attached as
Annex X to Note Purchase Agreement in exhibit 10.33 above.
10.40 *Letter Agreement regarding net proceeds interest dated September 4, 1998
between the Company, Netco, Genesee Fund Limited-Portfolio B and the
Willis Group, LLC.
10.41 *Master Purchase Agreement dated as of July 31, 1998 by and between the
Company, Genesee Fund Limited-Portfolio B, the Willis Group, LLC and
Advantage Fund Limited.
10.42 *Security Agreement dated as of July 31, 1998 by and among the Company,
USC Telecom, Netco, EqualNet, the Willis Group, LLC and Genesee Fund
Limited-Portfolio B.
10.43 *Assignment of Rights and Obligations Under Purchase Agreement, dated
July 21, 1998 between the Company and SA Telecom, making reference to
the Purchase Agreement in exhibit 10.18 above.
10.44 *Receivables Sales Agreement dated July 23, 1998 between USC Telecom
and RFC.
10.45 *Carrier Services Switchless Agreement, dated June 30, 1998 between
Frontier Communications of the West, Inc. and the Company. (certain
confidential portions of this exhibit have been omitted pursuant to a
request for confidential treatment pursuant to Rule 246-2 under the
Securities Exchange Act of 1934, incorporated by reference to Exhibit
10.52 to the Registrant's Annual Report on Form 10-K for the year ended
June 30, 1998, filed on October 13, 1998).
10.46 *Stock Purchase Warrant dated October 1, 1997 from the Company to the
Willis Group, LLC.
10.47 *Stock Purchase Warrant dated as of December 2, 1997 between the Company
and Netco Acquisition, LLC.
10.48 *Stock Purchase Warrant dated March 5, 1998 from the Company to the
Willis Group, LLC.
10.49 *Stock Purchase Warrant dated March 5, 1998 from the Company to Mike
Willis.
10.50 *Stock Purchase Warrant dated March 6, 1998 from the Company to J.C.
Bradford.
10.51 *Stock Purchase Warrant dated April 15, 1998 from the Company to
Mezzanine Telecom, Inc.
10.52 *Stock Purchase Warrant dated April 15, 1998 from the Company to John
Dalton.
10.53 *Stock Purchase Warrant dated April 15, 1998 from the Company to Zane
Russell.
52
<PAGE>
10.54 *Stock Purchase Warrant dated April 15, 1998 from the Company to Michael
L. Hlinak.
10.55 *Stock Purchase Warrant dated June 27, 1998 from the Company to Pacific
Global Networks, Inc.
10.56 *Stock Purchase Warrant dated June 27, 1998 from the Company to Future
Telecom Networks, Inc.
10.57 *Stock Purchase Warrant dated July 23, 1998 from the Company to RFC
Capital Corporation.
10.58 *Stock Purchase Warrant dated August 19, 1998 from the Company to Lance
Hack.
10.59 *Stock Purchase Warrant dated September 10, 1998 from the Company to RFC
Capital Corporation.
10.60 *Registration Rights Agreement dated November 12, 1996 between the
Company and Creative Communications International, Inc.
27.1 *Financial Data Schedule.
53
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors.........................................
Consolidated Balance Sheets as of June 30, 1997 and 1998...............
Consolidated Statements of Operations for the years ended June 30,
1996, 1997 and 1998...................................................
Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended June 30, 1996, 1997 and 1998.....................
Consolidated Statements of Cash Flows for the years ended June 30,
1996, 1997 and 1998...................................................
Notes to Consolidated Financial Statements.............................
54
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Equalnet Communications Corp.
We have audited the accompanying consolidated balance sheets of Equalnet
Communications Corp., formerly EqualNet Holding Corp., and subsidiaries as of
June 30, 1997 and 1998, and the related consolidated statements of operations,
shareholders' equity(deficit), and cash flows for each of the three years in the
period ended June 30, 1998. Our audit also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Equalnet
Communications Corp. and subsidiaries at June 30, 1997 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1998, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
The accompanying financial statements have been prepared assuming Equalnet
Communications Corp. and subsidiaries will continue as a going concern. As more
fully described in Notes 2 and 4, the Company has incurred recurring operating
losses, has a working capital deficiency, debt in default and an operating
subsidiary has filed for protection under Chapter 11 of the Federal Bankruptcy
Court. These conditions raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 4. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
ERNST & YOUNG LLP
Houston, Texas
October 8, 1998
55
<PAGE>
EQUALNET COMMUNICATIONS CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash and equivalents $ 828,478 $ 459,581
Accounts receivable, net of allowance for doubtful accounts of
$1,450,954 at June 30, 1997 and $1,034,253 at June 30, 1998 9,048,961 5,839,284
Receivable from officers 28,367 -
Due from agents 2,907,922 1,596,590
Advance on acquisition purchase price - 3,014,000
Prepaid expenses and other 285,516 109,684
----------- -----------
Total current assets 13,099,244 11,019,139
----------- -----------
Property and equipment
Computer equipment 3,435,121 17,824,993
Office furniture and fixtures 1,209,032 1,209,032
Leasehold improvements 1,174,777 1,177,592
----------- -----------
5,818,930 20,211,617
Accumulated depreciation and amortization (3,028,768) (4,837,626)
----------- -----------
2,790,162 15,373,991
Customer acquisition costs, net of accumulated amortization of
$13,050,667 at June 30, 1997 and $13,957,622 at June 30, 1998 1,262,939 355,984
Other assets 1,027,507 1,011,333
Goodwill, net of accumulated
amortization of $46,020 at June 30, 1997 982,308 -
----------- -----------
Total assets $19,162,160 $27,760,447
=========== ===========
</TABLE>
See accompanying notes.
56
<PAGE>
EQUALNET COMMUNICATIONS CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1998
------------ ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Payable to providers of long distance services $ 7,977,531 $ 6,627,711
Accounts payable 1,858,065 4,237,310
Accrued expenses 1,398,319 3,799,315
Accrued sales taxes 591,182 205,108
Brokerage commissions payable 151,755 39,000
Current maturities of capital lease obligations 51,000 -
Notes payable to long distance provider 1,183,059 1,183,059
Debt in default - 5,752,535
Debt in default to an affiliate - 400,000
Contractual obligations with regard to receivable sales agreement - 2,334,710
Revolving line of credit 4,555,442 -
------------ ------------
Total current liabilities 17,766,353 24,578,748
------------ ------------
Subordinated note payable 2,864,058 -
Deferred rent 220,288 223,917
Commitments and contingencies
Shareholders' equity (deficit)
Preferred stock, $0.01 par value Authorized shares - 1,000,000 at
June 30, 1997 and 5,000,000 at June 30, 1998
Series A Convertible Preferred Stock (non-voting) aggregate - 20
liquidation preference of $2.1 million at June 30, 1998: Issued
and outstanding shares - 0 at June 30, 1997 and 2,000 at
June 30, 1998.
Series B Senior Convertible Preferred Stock (voting), - 30
aggregate liquidation preference of $3.0 million at June 30,
1998: Issued and outstanding - 0 at June 30, 1997 and 3,000
at June 30, 1998.
Common stock, $.01 par value 61,738 217,935
Authorized shares - 20,000,000 at June 30, 1997 and
50,000,000 at June 30, 1998 Issued and outstanding shares -
6,173,750 at June 30, 1997 and 21,793,517 June 30, 1998
Treasury stock at cost: 21,750 shares at June 30, 1997 and (104,881) (817,153)
400,447 at June 30, 1998
Additional paid in capital 20,390,927 42,063,418
Stock warrants 368,000 1,763,240
Deferred compensation (245,829) (115,826)
Retained deficit (22,158,494) (40,153,882)
------------ ------------
Total shareholders' equity (deficit) (1,688,539) 2,957,782
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 19,162,160 $ 27,760,447
============ ============
</TABLE>
See accompanying notes.
57
<PAGE>
EQUALNET COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Sales $ 78,354,858 $ 46,588,496 $ 24,876,242
Cost of sales 61,807,113 34,481,128 21,991,680
------------ ------------ ------------
Gross profit 16,547,745 12,107,368 2,884,562
Selling, general and administrative expenses 13,719,573 12,453,814 14,139,010
Depreciation and amortization 5,933,890 5,999,898 4,734,741
Write down of assets 6,882,661 4,400,000 1,134,666
------------ ------------ ------------
Operating loss (9,988,379) (10,746,344) (17,123,855)
Other income (expense)
Interest income 55,546 3,685 37,006
Interest expense (679,745) (1,022,284) (1,145,262)
Other income (expense) (464,688) (870,290) 288,723
------------ ------------ ------------
(1,088,887) (1,888,889) (819,533)
Loss before federal income taxes (11,077,266) (12,635,233) (17,943,388)
Provision (benefit) for federal income taxes (2,659,853) 2,345,311 -
------------ ------------ ------------
Net loss $ (8,417,413) $(14,980,544) $(17,943,388)
============ ============ ============
Preferred stock dividends - - $ 52,000
Net loss available to common shareholders $ (8,417,413) $(14,980,544) $(17,995,388)
Net loss per share - basic and diluted $(1.40) $(2.46) $(1.64)
============ ============ ============
</TABLE>
See accompanying notes.
58
<PAGE>
EQUALNET COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED COMMON PAID-IN
STOCK STOCK TREASURY STOCK CAPITAL WARRANTS
------------- -------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1995 $ - $ 60,237 $ - $20,065,199 $ -
Forfeiture of 18,182 shares of stock granted to
key employees (77,229) (122,771)
Forfeiture of 3,568 shares of stock granted to key
employees for tax withholdings payable (27,652)
Amortization of deferred compensation
Net loss $(1.40 per share)
------------- -------- ----------- ----------- ----------
Balance, June 30, 1996 - 60,237 (104,881) 19,942,428 -
Common stock and warrants issued in acquisition 1,501 448,499 199,000
Stock warrants issued with debt 169,000
Amortization of deferred compensation
Net Loss $(2.46 per share)
------------- -------- ----------- ----------- ----------
Balance, June 30, 1997 - 61,738 (104,881) 20,390,927 368,000
Forfeiture of 5,454 shares of stock granted to
key employees (12,272) (47,728)
Proceeds-issuance common stock & warrants 87,334 9,042,667 270,000
Preferred stock dividends
Common stock shares reacquired (700,000)
Issuance of warrants with debt 42,740
Conversion of convertible debt 30 13,733 4,528,570
Interest charge on convertible debt 150,000
Exchange of warrants for common stock (169,000)
Issuance of stock and warrants for equipment 20 50,040 6,954,072 950,000
Warrants issued under severance agreement 301,500
Issuance of stock for note receivable 5,090 1,044,910
Amortization of deferred compensation
Net loss $(1.64 per share)
------------- -------- ----------- ----------- ----------
Balance, June 30, 1998 $50 $217,935 $(817,153) $42,063,418 $1,763,240
============= ======== =========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
Retained
Deferred Earnings
Compensation (Deficit) Total
------------ ------------ ------------
<S> <C> <C> <C>
Balance, June 30, 1995 $(659,175) $ 1,239,463 $ 20,705,724
Forfeiture of 18,182 shares of stock granted to
key employees 200,000 -
Forfeiture of 3,568 shares of stock granted to key
employees for tax withholdings payable (27,652)
Amortization of deferred compensation 123,339 123,339
Net loss $(1.40 per share) (8,417,413) (8,417,413)
--------- ------------ ------------
Balance, June 30, 1996 (335,836) (7,177,950) 12,383,998
Common stock and warrants issued in acquisition 649,000
Stock warrants issued with debt 169,000
Amortization of deferred compensation 90,007 90,007
Net Loss $(2.46 per share) (14,980,544) (14,980,544)
--------- ------------ ------------
Balance, June 30, 1997 (245,829) (22,158,494) (1,688,539)
Forfeiture of 5,454 shares of stock granted to
key employees 60,000 -
Proceeds-issuance common stock & warrants 9,400,000
Preferred stock dividends (52,000) (52,000)
Common stock shares reacquired (700,000)
Issuance of warrants with debt 42,740
Conversion of convertible debt 4,542,334
Interest charge on convertible debt 150,000
Exchange of warrants for common stock (169,000)
Issuance of stock and warrants for equipment 7,954,132
Warrants issued under severance agreement 301,500
Issuance of stock for note receivable 1,050,000
Amortization of deferred compensation 70,003 70,003
Net loss $(1.64 per share) (17,943,388) (17,943,388)
--------- ------------ ------------
Balance, June 30, 1998 $(115,826) $(40,153,882) $ 2,957,782
========= ============ ============
</TABLE>
See accompanying notes.
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EQUALNET COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------------------
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (8,417,413) $(14,980,544) $(17,943,388)
Adjustments to reconcile net loss to cash provided by
(used in) operating activities:
Depreciation and amortization 5,933,890 5,999,898 4,734,741
Provision for bad debt 3,820,701 1,726,929 1,660,594
Provision for due from agents 1,000,000 - -
Provision (benefit) for deferred income taxes (3,486,686) 2,228,077 -
Loss on sale of assets 1,508 341 -
Imputed interest on note payable - 33,058 -
Compensation expense recognized for common stock issue 123,339 90,007 70,003
Interest charge on convertible debt issued at discount - - 150,000
Warrants issued under severance agreements - - 301,500
Write down of long term assets 6,882,661 4,400,000 1,134,666
Credit from carrier - (1,200,000) -
Change in operating assets and liabilities:
Accounts receivable 2,068,102 3,596,968 1,549,082
Due from agents (3,104,424) (1,765,853) 922,042
Prepaid expenses and other (519,802) 1,467,672 (251,905)
Other assets (562,786) (479,207) (654,609)
Accounts payable and accrued liabilities (4,911,888) 2,856,222 3,457,235
------------- ------------- -------------
Net cash provided by (used in) operating activities (1,172,798) 3,973,568 (4,870,039)
INVESTING ACTIVITIES
Purchase of property and equipment (4,404,531) (272,010) (6,834,245)
Proceeds from sale of equipment 1,010 4,331 -
Advance on acquisition purchase price - - (3,014,000)
Deferred acquisition costs - - (281,417)
Purchase of customer accounts (8,468,472) (76,457) -
------------- ------------- -------------
Net cash used in investing activities (12,871,993) (344,136) (10,129,662)
FINANCING ACTIVITIES
Proceeds from long-term debt - 3,000,000 7,800,000
Repayments on long-term debt - - (297,465)
Net proceeds from (repayments on) revolving line of credit 9,601,605 (6,098,803) (4,555,441)
Net proceeds from receivable sales agreement - - 2,334,710
Proceeds from sale leaseback transaction 1,434,144 - -
Repayments on capital lease obligations (108,000) (84,000) (51,000)
Proceeds from issuance of stock - - 9,400,000
Acquisition of treasury stock (27,652) - -
------------- ------------- -------------
Net cash provided by (used in) financing activities 10,900,097 (3,182,803) 14,630,804
------------- ------------- -------------
Net increase (decrease) in cash and equivalents (3,144,694) 446,629 (368,897)
Cash and equivalents, beginning of year 3,526,543 381,849 828,478
------------- ------------- -------------
Cash and equivalents, end of year $ 381,849 $ 828,478 $ 459,581
============= ============= =============
</TABLE>
See accompanying notes.
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EQUALNET COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Equal Net Communications, Inc. was incorporated in Texas on July 18, 1990.
On November 28, 1994, Equal Net Communications, Inc. changed its name to
EqualNet Corporation. Prior to its initial public offering of common stock in
1994, EqualNet formed EqualNet Holding Corp. (the Company) as a newly organized
holding company. Subsequent to the reorganization, EqualNet Corporation
("EqualNet") became a wholly owned subsidiary of the Company. On June 30, 1998,
the Company changed its name from EqualNet Holding Corp. to Equalnet
Communications Corp.
The Company is a national long-distance telephone company comprised of two
operating subsidiaries, EqualNet and Netco Acquisition Corp., ("Netco"). On
March 6, 1998 the Company purchased, through Netco, nine switches and became a
switch-based reseller with leased line facilities. EqualNet utilizes AT&T
Corp. ("AT&T") and Sprint Communications Company, L.P. ("Sprint"), through its
arrangement with The Furst Group, Inc. ("Furst") a privately-held reseller of
long-distance and telecommunications services, and Frontier Communications and
MCI WorldCom, to provide transmission of its customers' traffic.
Customers placed by one independent marketing agent accounted for
approximately 28%, 23% and 19% of sales in 1996, 1997 and 1998, respectively.
On July 23, 1998, the Company acquired certain assets and customer bases
from SA Telecommunications, Inc. ("SA Telecom") and formed a third operating
company, USC Telecom, Inc. ("USC Telecom"), to absorb the purchased assets. (See
also Note 19.)
On September 10, 1998, EqualNet, one of the Company's wholly owned
subsidiaries, and Wholesale Services, Inc. ("Wholesale"), a non-operating wholly
owned subsidiary of EqualNet, filed for protection under Chapter 11 of the
Bankruptcy Code. On October 2, 1998 Wholesale filed its motion to convert its
bankruptcy proceeding from a Chapter 11 reorganization to a Chapter 7
liquidation (See also Note 2.)
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Equalnet
Communications Corp. and all majority-owned subsidiaries. All significant
intercompany transactions have been eliminated.
PROPERTY AND EQUIPMENT
Computer equipment, office furniture and fixtures, and leasehold
improvements are carried at cost, less accumulated depreciation and
amortization. Depreciation and amortization are provided for by the straight-
line method over the estimated useful lives of the depreciable assets which
range from four to ten years. Leasehold improvements are amortized over the
shorter of their useful lives or the term of the lease.
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CUSTOMER ACQUISITION COSTS
Customer acquisition costs represent the direct costs of an acquired
billing base of customer accounts and orders bought on an individual basis from
certain agents or telemarketers. These costs are amortized by applying the
Company's attrition rate associated with the acquired customers each month
against the unamortized balance of the previous month (declining balance method)
over a five-year period, switching to the straight-line method when the
straight-line method results in greater amortization. During fiscal year 1996,
the attrition rate used to amortize customer acquisition costs was 3.0% through
March 31, 1996 and 5.0% thereafter. The attrition rate used during fiscal years
1997 and 1998 was 9.0%. The attrition rate used by the Company in amortizing
customer acquisition costs is an estimate of the attrition rate of the acquired
customer bases, and actual attrition may differ from the estimates used. The
Company evaluates the attrition rate of the acquired customer base each quarter
and adjusts the attrition rate as necessary. The Company periodically evaluates
the unamortized balance of customer acquisition costs to determine whether there
has been any impairment by comparing the undiscounted future cash flows of the
acquired customer base to the net book value of the associated customer base. If
it appears that an impairment has been incurred, management will write the
unamortized balance down to its fair value.
During the years ended June 30, 1996 and 1997, the Company wrote off $4.6
million and $4.4 million of customer acquisition costs as a result of higher
than expected attrition associated with those accounts.
PREPAID COMMISSIONS
During the year ended June 30, 1996, the Company modified the agreement
with one of its principal agents to reduce the commission rate the Company pays
to the agent on existing customers in exchange for $1.2 million from the
Company. The Company paid $710,000 in cash, with the remainder from the
transaction being utilized to offset advances due from the agent to the Company.
The prepaid commissions are amortized by applying the Company's attrition rate
associated with the underlying customers each month against the unamortized
balance of the previous month (declining balance method) over a two year period,
switching to the straight-line method when the straight-line method results in
greater amortization. Prepaid commissions were fully amortized as of June 30,
1998.
CASH AND CASH EQUIVALENTS
Highly liquid investments with a maturity of three months or less are
considered cash equivalents.
GOODWILL
Goodwill represents the excess cost over the net assets of an acquired
business and is being amortized on a straight line basis over 10 years. During
the fourth quarter of fiscal year 1998, the Company wrote-off the remaining
goodwill associated with the prior acquisition of Creative Communications
International, Inc. (See also Note 12.)
REVENUE RECOGNITION
Revenue is recognized in the month in which the Company's customers
complete the telephone call.
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INCOME TAXES
The Company accounts for deferred income taxes using the liability method.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk are accounts receivable. The Company continuously
evaluates the credit worthiness of its customers' financial conditions and
generally does not require collateral. The Company's allowance for doubtful
accounts is based on current market conditions and management's expectations.
Write-offs of accounts receivable, net of recoveries, were $2.46 million,
$5.57 million and $1.97 million for the years 1996, 1997, and 1998,
respectively.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128
("Statement 128"), "Earnings Per Share". Statement 128 replaced the calculation
of primary and fully diluted earnings per share with basic and diluted earnings
per share. Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the Statement 128
requirements.
TREASURY STOCK
Treasury stock is accounted for using the cost method. During fiscal years
1996 and 1998, 18,182 shares and 5,454 shares of Common Stock, respectively,
which had been granted to employees upon future service was forfeited (See
Note 16). As a result, $77,229 and $60,000 in deferred compensation was
recorded in fiscal years 1996 and 1998, respectively, as the cost of these
treasury shares. The cost of the treasury shares was determined by the closing
price per share of common stock on the date of forfeiture which ranged from
$3.84 to $5.88 and was $2.25 per share for fiscal years 1996 and 1998,
respectively. In addition, upon the vesting of stock grants by certain
employees, the employees elected to reduce the number of shares received to
satisfy federal income tax withholding liabilities to be paid by the Company on
the employee's behalf. In fiscal year 1996, the Company received 3,568 treasury
shares required to satisfy the liability based on the market value of the
exchanged shares on the date of the exchange, resulting in a total increase in
treasury stock of $27,652. Additionally, during fiscal year 1998, the Company
received 373,244 treasury shares upon default of a note receivable from a
shareholder to satisfy the outstanding principal, resulting in an increase in
treasury stock of $700,000.
ACCOUNTING FOR EMPLOYEE STOCK BASED COMPENSATION
The Company accounts for employee stock based compensation in accordance
with APB Opinion 25 and expects to continue doing so.
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NEW ACCOUNTING PRONOUNCEMENTS
In 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income,
and Statement No. 131, Disclosures About Segments of an Enterprise and Related
Information, and Statement No. 132, Employers' Disclosures About Pensions and
Other Post-Retirement Benefits. These statements, which are effective for
periods beginning after December 15, 1997, expand and modify disclosures and,
accordingly, will have no impact on the Company's reported financial position,
results of operations, or cash flows.
ACCOUNTING CHANGES
In March 1995, the FASB issued Statement No. 121, Accounting For the
Impairment of Long-Lived Assets and For Long-Lived Assets to be Disposed of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the asset's
carrying amount. Statement No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company adopted Statement
No. 121 in the first quarter of fiscal 1998. Prior to the adoption of
Statement 121, the Company determined any impairment write-downs of long-lived
assets in a manner generally consistent with Statement No. 121. At the date of
adoption, there was no impact to the financial statements. The Company reviews
its long-lived assets for impairment on a quarterly basis.
The FASB issued Statement No. 125, Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities, which requires an entity
to recognize the financial and servicing assets it controls and the liabilities
it has incurred and to derecognize financial assets when control has been
surrendered in accordance with the criteria provided in the Statement. The
Company adopted the new rules beginning in the first quarter of fiscal 1998. The
application of the new rules did not have a material impact on the financial
statements.
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("FAS") No. 128, Earnings per Share.
Statement 128 replaced the previously reported primary and fully diluted
earnings per share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effect of options, warrants, and convertible securities.
Diluted earnings per share is very similar to the previously reported fully
diluted earnings per share. Upon adoption of FAS No. 128 in the quarter ended
December 31, 1997, all earnings per share amounts for all periods have been
presented, and where necessary, restated to conform to the Statement 128
requirements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of accounts receivable, accounts payable and other
payables approximate fair values due to the short term maturities of these
instruments. The carrying value of the Company's notes payable to a long
distance carrier revolving line of credit, and contractual obligations with
regard to its receivable sales agreement approximate fair value because the rate
on such debt is variable, based on the current market.
RECLASSIFICATION
Certain balances from the years ending June 30, 1996 and 1997 have been
reclassified to be consistent with June 30, 1998 classifications.
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2. CHAPTER 7 AND 11 FILING
EqualNet, one of the Company's operating subsidiaries, and Wholesale, a
wholly owned non-operating subsidiary of EqualNet filed voluntary petitions for
relief under Chapter 11 ("Chapter 11") of the United States Bankruptcy Code (the
"Bankruptcy Code") on September 10, 1998 (the "Petition Date") in the United
States Bankruptcy Court for the Southern District of Texas (the "Bankruptcy
Court"), Houston, Texas. The cases are not being jointly administered at this
time pending in such Bankruptcy Court as Cases No. 98-39561-H5-11 and
98-39560-H4-11. On October 2, 1998 Wholesale filed its motion to convert its
bankruptcy proceeding from a Chapter 11 reorganization to a Chapter 7
liquidation. Pursuant to Sections 1107 and 1108 of the Bankruptcy Code, EqualNet
as debtor-in-possession, will continue to manage and operate EqualNet's assets
and business pending the confirmation of a reorganization plan and subject to
the supervision and orders of the Bankruptcy Court. The Company is currently
developing the reorganization plan and intends to submit the reorganization plan
for confirmation prior to the due date.
At this time, it is not possible to predict the outcome of EqualNet's
Chapter 11 case or the effect on EqualNet's business. Although management
intends that EqualNet will emerge from bankruptcy in a prompt and expeditious
manner during the third or fourth quarter of fiscal year 1999, there can be no
assurance that a reorganization will be consummated.
The Company's consolidated financial statements have been prepared on a
going concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities and commitments in the normal course of
business. The Chapter 11 filing by EqualNet, as well as related circumstances
and the losses from operations, continue to raise substantial doubt about the
Company's ability to continue as a going concern. The appropriateness of
reporting on the going concern basis is dependent upon, among other things,
confirmation of a plan of reorganization for EqualNet, future operations, and
the ability to generate sufficient cash from operations and financing sources to
meet obligations. The consolidated financial statements included herein do not
include any adjustments relating to the commencement of EqualNet's bankruptcy
case or to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of the uncertainty of the Company's ability to
continue as a going concern.
3. DIP FINANCING AND EXIT FACILITY
Prior to filing for bankruptcy protection, EqualNet and Receivables Funding
Corporation ("RFC") entered into an agreement whereby RFC agreed to amend
certain financing agreements with EqualNet to eliminate EqualNet's bankruptcy
filing as an event of default and, subject to bankruptcy court approval, to
continue to finance EqualNet's receivables under a debtor in possession ("DIP")
facility. On September 16, 1998, the bankruptcy court approved, on an interim
basis, the DIP financing which allowed EqualNet to continue to obtain funds from
RFC in the same manner as it did prior to the bankruptcy filing. The financing
cost of the DIP financing is prime rate plus seven percent (7%). A final
hearing to approve the DIP financing for the term of the bankruptcy proceeding
is scheduled for October 15, 1998.
EqualNet may be required to seek additional financing to obtain the
approval of creditors of its plan of reorganization. The Company does not have
the capital to provide the exit facility and does not currently have any
commitments from outside sources. The Company does intend to raise the needed
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capital from outside investors and provide EqualNet with the exit facility. By
providing the exit facility, the Company intends to own EqualNet after the
bankruptcy proceedings.
4. LIQUIDITY AND WORKING CAPITAL DEFICIT
For the years ended June 30, 1996, 1997 and 1998 the Company reported pre-
tax losses of $11.0 million, $12.6 million and $17.8 million, respectively.
Revenues declined from $46.6 million in fiscal year 1997 to $24.9 million in
fiscal year 1998. This decline is attributable to several internal and external
factors. Continuing provisioning challenges led to delayed billing and higher
customer attrition. Provisioning - the time it takes EqualNet's primary
underlying long-distance carrier to activate new customers - had risen sharply
in 1997, from approximately 20 days to approximately 45 days. In addition,
EqualNet converted to a new customer management, billing and rating system
- - - AMS, purchased from Platinum Communications in March 1998. All of these
factors adversely affected revenues and funding. As of September 25, 1998,
EqualNet is making plans to convert to CostGuard ENTERPRISE, a system being
purchased from Info Directions, Inc., "IDI" and expects a dramatic improvement
in rating speed and billing accuracy. In fiscal year 1998, EqualNet recorded
write offs of $270,000 and $417,000 for NetBase and AMS, respectively. The new
system, CostGuard, will cost $272,000 initially, then $68,000 per year in
subsequent years (for ongoing support and software upgrades).
Under the SA Telecom purchase and management agreements (see Note 18), cash
advances of $1.5 million were paid to SA Telecom during fiscal year 1998 to
support their operations during the acquisition transition period. However, an
additional $1.51 million was advanced to SA Telecom because of EqualNet's
billing system problems. Specifically, EqualNet converted SA Telecom's customer
base to AMS. The AMS conversion problems (delays and errors) adversely affected
SA Telecom's ability to get funding. The inability of EqualNet to successfully
transfer the acquired SA Telecom customer base to AMS resulted in a greater than
expected migration of the base to other long-distance providers.
Liquidity was strained upon EqualNet's transition during fiscal year 1998
from a switchless reseller to a switch-based carrier. The Company's lack of
capital resources also affected marketing efforts, which decreased considerably
from prior years. Until late in the fiscal year, EqualNet's overhead continued
to be more appropriate for a substantially larger company.
On December 2, 1997, the Company entered into several related agreements,
(as amended, the "Agreements") involving the Willis Group, LLC, a privately held
investment partnership, and other third parties. Collectively, these Agreements
provided for a recapitalization of the Company and for the Company to acquire
certain telecommunications network assets and switches.
The strategy was to create a platform (network of nine switches) to support
acquisitions of customer bases. However, the Company quickly realized it lacked
the capital resources to support the ongoing costs of the network while waiting
for call volume to increase through acquisitions of customer bases. During the
fourth quarter of fiscal year 1998, losses from the network was approximately
$2.0 million. See Note 7 for additional information regarding the utilization of
the network of nine Switches.
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During fiscal year 1997, the Company's borrowing capacity under its credit
facility continued to decline as a result of operating losses, and a decline in
the revenue base. On June 18, 1997 the Company entered into a new receivables
sale agreement with Receivables Funding Corporation ("RFC"). The agreement
funded on July 7, 1997 and has been the Company's primary operating liquidity
source throughout fiscal year 1998. The agreement provides for accounts
receivable purchase commitments of up to $8.0 million, and up to $10.0 million
after the amendment dated July 19, 1998, for the purchase of EqualNet's
receivables from customers that meet specified eligibility requirements. Funding
is based on a percentage of EqualNet's outstanding receivables and allows for
RFC to cease funding new receivables without prior written consent at RFC's
option. The funding percentage varies by billing cycle (AT&T, Sprint, LEC,
etc.) and according to the collections history. The funding percentage declined
late in the fiscal year because of the billing delays and errors. The program
fee applied to the outstanding balance of net purchased receivables was prime
plus 4.5% (13.0% at June 30, 1998), but changed to 7.0% plus prime on
September 17, 1998 (after Chapter 11 filing). As of June 30, 1998, the amount
owed to RFC under this agreement was $2.5 million with a credit reserve of
$144,000. This RFC agreement was extended via an amendment dated July 19, 1998.
The Company continues to incur operating deficits and is exploring ways to
increase revenue and reduce operating costs. To operate profitably, the Company
must reduce its variable long-distance carrier costs, right-size and make
efficient its back office and administrative operations and increase revenues by
implementing new sales and marketing plans. There can be no assurance the
Company will have the capital resources necessary to implement these measures
and return to profitability. It is highly likely the Company will need
additional capital to continue in business during its restructuring phase.
5. THE WILLIS GROUP LLC AND OTHER INVESTOR TRANSACTIONS
THE WILLIS GROUP LLC TRANSACTIONS
On October 1, 1997, the Company issued to the Willis Group, LLC ("Willis
Group") a $1.0 million 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 0.2 million shares of Common Stock at an exercise price of
$1.00 per share, subject to adjustment (the "October Warrant"). The October
Warrant was exercisable for five years. The outstanding balance of the Note was
convertible 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. As of the date of issuance of the convertible debt the Company
recorded an interest charge of $0.15 million to record the impact of the debt
being convertible at a discount to market. On March 5, 1998, the Note and
accrued interest were exchanged for 1.05 million shares of Common Stock.
On December 2, 1997, the Company entered into several related agreements,
(as amended, the "Agreements") involving the Willis Group and other third
parties. Collectively, these Agreements provided for a recapitalization of the
Company and for the Company to acquire certain telecommunications network assets
and switches (collectively the "Transactions".)
On March 6, 1998 as a result of various transactions the Willis Group
gained control of the Board of Directors of the Company, having nominated for
shareholder approval four of the seven members of the Board of Directors.
Under the terms of the Agreements, the Company acquired nine
telecommunications switches (the "Switches") from the Willis Group for $7.6
million, consisting of $5.85 million in cash, 1.4 million shares of Common
Stock, and warrants to purchase up to 0.4 million shares of Common Stock at an
exercise price
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of $1.00. The Company secured financing of $6.05 million for the cash portion of
the consideration through an unaffiliated third party lender, whose loan is
secured by the Switches, bears interest at a rate per year of 6.42% above an
index rate based on U.S. Treasury Notes (12.1% as of June 30, 1998) and is
payable in 36 consecutive monthly payments. An affiliate of the Company was
granted a warrant for the purchase of up to 0.5 million shares of Common Stock
at an exercise price of $1.00 per share for guaranteeing this financing.
Under the terms of the Agreements, the Company acquired Netco Acquisition
Corp. ("Netco"), a Delaware corporation controlled by the Willis Group, which
held certain intangible rights and assets previously acquired by the Willis
Group and formerly held by Total National Telecommunications. These assets
consisted of intangible rights to use certain software and codes necessary to
operate the Switches. The Company acquired Netco for $5.6 million, including
2.08 million shares of Common Stock, 1.5 million shares of Common Stock (equal
to the working capital loans made by the members of Netco Acquisition LLC or
their affiliates to Netco prior to the closing divided by $1.00), and 2,000
shares of the Company's Series A Convertible Preferred Stock ("Series A
Preferred".) The Series A Preferred is non-voting and has a stated value of
$1,000 per share and is entitled to receive dividends at the rate of $80.00
per year, payable quarterly. Holders of Series A Preferred have the right to
convert their shares into 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 2.0 million shares of Common Stock, subject to
adjustment pursuant to certain anti-dilution provisions. The Series A Preferred
has liquidation preference over the Company's Common Stock equal to the
summation of $1,000 per share plus accrued and unpaid dividends and interest.
Dividends are payable at the determination of the Board of Directors. Dividends
when not paid are cumulative and bear interest at a rate of 12.0%. Cumulative
dividends in arrears at June 30, 1998 are approximately $52,000 or $25.78 per
Series A Preferred share. Under the instrument defining the rights of the
holders of the Series A Preferred, the Company is prohibited from declaring or
paying dividends on the Common Stock unless all accrued dividends on the Series
A Preferred have been paid.
Under the terms of the Agreements, the Company also issued and sold to the
Willis Group 4.0 million shares of Common Stock at a price of $1.00 per share in
cash.
OTHER INVESTOR TRANSACTIONS
On July 1, 1997, the Company issued to Lexus Commercial Enterprises, Ltd.,
an accredited investor, 0.51 million shares of Common Stock of the Company in
exchange for a $1.0 million secured promissory note, secured by a pledge of the
purchased shares, which bore interest at a rate of 8.0% per annum. Upon default
of the secured promissory note due to missed payments, the Company reacquired,
on October 21, 1997, the remaining 0.37 million shares of the 0.51 million
shares that were purchased.
On March 26, 1998, the Company issued to First Sterling Ventures, a Texas
corporation, and an individual, both accredited investors, an aggregate of
1.33 million shares of Common Stock and warrants to purchase an additional 0.67
million Common Stock shares for an aggregate of $2.0 million in cash. The
Willis Group was granted a 1.0% facilitation fee for these transactions totaling
$0.02 million.
On April 24, 1998, the Company entered into an agreement with an individual
investor to issue 3.4 million shares of par $.01 per share Common Stock of the
Company which constitute approximately 15.9% of the outstanding Common Stock and
warrants for the purchase of 0.17 million shares of Common Stock in exchange for
$3.4 million. The Willis Group was granted a 1.0% facilitation fee for this
transaction totaling $0.03 million.
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6. BILLING SYSTEMS
EqualNet converted from NetBase to a new customer management, billing and
rating system, AMS in March 1998. As of October 2, 1998, EqualNet is making
plans to convert to CostGuard ENTERPRISE, a more powerful cost rating, billing
and customer care system. This system is expected to dramatically improve
rating speed and billing accuracy. Also, EqualNet expects to be able to easily
extract meaningful data and management reports from CostGuard. The system
design is flexible enough to respond to rapid changes in the telecommunications
marketplace. In fiscal year 1998, EqualNet recorded a write-off of
approximately $270,000 for NetBase and estimated the useful life of AMS to be
approximately one year until the CostGuard system can be implemented. The new
system, CostGuard, will cost $272,000 initially, then $68,000 per year in
subsequent years (for ongoing support and software upgrades).
7. FIXED ASSETS
During fiscal year 1998, the Company acquired nine telecommunications
switches (the "Switches") from the Willis Group for $7.6 million of aggregate
consideration. In a related transaction, the Company acquired Netco, a
corporation controlled by the Willis Group, which held certain intangible rights
related to the operation of the Switches and assets previously acquired by the
Willis Group. The Company acquired Netco for $5.6 million in aggregate
consideration. As a result of these two transactions, the Company recorded $13.2
million as its cost basis of the Switches and related network. The Company
incurred additional direct cost to purchase, install and implement the Switches
and related network of approximately $1 million which have been capitalized as
cost of the Switches and related network.
Netco, the owner of the Switches, subsequently entered into an agreement
with EqualNet whereby EqualNet assumed the operating responsibilities of the
Switches. EqualNet incurred substantial costs in the fourth quarter of fiscal
1998 in extending the network's access to most of the large metropolitan areas
in the United States in anticipation of a national marketing effort. This
marketing effort did not produce a significant number of sales due to EqualNet's
internal provisioning problems and the lack of sufficient capital. Utilization
of the Switches and national network without sufficient traffic to support the
fixed costs created negative operating margins and created an event that
indicated the $14.2 million asset might be impaired.
EqualNet is currently in the process of turning off the Switches and
network in an effort to reduce significant fixed charges and to reconfigure the
Switches which will be used to provide services to areas of geographic
concentration of customers in Texas and southern California. With respect to the
other Switches, the Company is evaluating alternative uses which may include
leasing or partitioning the Switches.
At the end of fiscal year 1998, the Company has classified the Switches and
network as operating assets and has supported the carrying value of the assets
through a projected undiscounted cash flow analysis of the traffic to be placed
on the network after the reconfiguration discussed above. The traffic to be
placed on the network relates primarily to the customer base acquired from SA
Telecom in July 1998 (see Note 18). Additionally, as part of the plan of
reorganization and plan to return the Company to profitability, the Company will
continue to evaluate the best economic use of the Switches and related network.
As a part of this continued evaluation, the Company may elect to sell all or a
portion of the Switches and related network. The Company has recently received
unsolicited offers to purchase all or portions of the Switches and related
network which range from fully recovering the carrying cost of the assets to a
potential loss. Management believes that the carrying value of the assets will
be realized through the operations of the assets or a combination of operating
the assets and potential sale of the assets. However, it is reasonably possible
that the undiscounted cash flows may change in the near future resulting in the
need to write-down those assets to fair value.
69
<PAGE>
8. DEBT
Effective February 3, 1997, the Company executed an agreement with The
Furst Group, ("Furst"), a New Jersey corporation, pursuant to which Furst loaned
the Company $3.0 million at an annual interest rate of 10%, maturing
December 31, 1998. In addition, the Company issued stock purchase warrants to
Furst, exercisable for an aggregate of 1,500,000 shares of Common Stock at a
purchase price of $2.00 per share, subject to adjustment in certain events
(including (i) changes in the capitalization of the Company, (ii) the cessation
of Mr. Zane Russell and Mr. Michael L. Hlinak to serve as Executive Officers of
the Company and (iii) the failure of the Company to satisfy the quantitative
continued listing requirements of the Nasdaq National Market ("Nasdaq") or
suspension or delisting of the Company from trading on that market). The
warrants expire on December 31, 1999. On March 6, 1998, the Company entered into
an exchange agreement ("Exchange Agreement") with Furst, an accredited investor,
pursuant to which Furst exchanged the $3.0 million subordinated note and
warrants for 3,000 shares of Series B Senior Convertible Preferred Stock
("Series B Preferred") along with 0.3 million shares of the Company's Common
Stock to satisfy the accrued interest due on the notes. Each share of the Series
B Preferred has a stated value of $1,000 and is entitled to share with the
Common Stock in any dividends declared based upon the number of shares of Common
Stock the Series B is convertible into at the time such dividend is declared.
The Series B Preferred has a $1,000 per share liquidation preference over the
Series A Preferred and the Common Stock. Each share of Series B Preferred also
entitles the holder thereof to one vote, voting as a single class with the
Common Stock, on matters submitted to the shareholders of the Company.
In March 1998, Netco secured financing of $6.05 million for the cash
portion of the consideration to purchase nine telecommunications switches from
the Willis Group through an unaffiliated third party lender, which loan is
secured by the Switches, bears interest at a rate per year of 6.42% above an
index rate based on U.S. Treasury Notes (12.1% as of June 30, 1998) and is
payable in 36 consecutive monthly payments. In addition, an affiliate of the
Company was granted 0.5 million warrants for guaranteeing this financing. Netco
defaulted on this loan subsequent to year-end due to failure to make the monthly
payments beginning with the July 1998 payment. The principal amount outstanding
as of June 30, 1998 of approximately $5.75 million is classified as Debt in
Default and considered to be a current liability.
During the quarter ended March 31, 1998, the Company obtained a cash flow
bridge loan of $0.4 million from Netco Acquisition, LLC, an entity owned 50% by
the Willis Group. This note was payable on March 31, 1998 and had an interest
rate of 10% which escalates to 18% after an event of default occurs. This note
is secured by the web page customers. As of June 30, 1998, the Company was in
default on this note as no principal or interest payments have been made.
At June 30, 1997, EqualNet had a $7.5 million revolving line of credit with
a bank which expired July 1, 1997. Interest on the outstanding balance was prime
plus 6% (14.5% at June 30, 1997). The maximum borrowings under the revolving
line of credit were subject to borrowing base limitations as defined in the
agreement. EqualNet replaced the revolving line of credit under which borrowings
at June 30, 1997 were outstanding with a new arrangement with Receivables
Funding Corp. ("RFC") effective June 18, 1997 and which funded July 7, 1997. The
agreement with RFC is essentially a receivable purchase arrangement which bases
borrowing capacity on a percentage of EqualNet's outstanding receivables up to a
maximum allowable amount of $8.0 million and increased to $10.0 million in July
1998 and allows for the lender to cease funding of new receivables without prior
written notice at the lenders option. The program fee applied to the outstanding
balance of net purchased receivables was prime plus 4.5% per annum (13% at
June 30, 1998), but changed to prime plus 7% on September 17, 1998 (after
Chapter 11 filing). As of June 30, 1998, the amount owed to RFC under this
agreement is $2.5 million with a credit reserve of $144,000. This RFC agreement
was extended on July 19, 1998 and subsequently amended on a temporary basis on
September 17, 1998. A hearing is scheduled in Bankruptcy Court on October 15,
1998, to determine if the RFC facility will remain in place during EqualNet's
bankruptcy.
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<PAGE>
At June 30, 1997, EqualNet had two notes payable with a long-distance carrier
for past long distance services provided by the carrier which were converted
from trade payables. The notes with original principal of $1,066,603 and
$649,987 and which bear interest at 17% and 12% matured on February 5, 1998 and
August 15, 1997, respectively, and were payable in equal monthly installments
prior to maturity. As of June 30, 1998, EqualNet had made no principal payments
on these notes payable and was in default with these notes. In July and August
1998, EqualNet was in discussions with the carrier regarding the total amount
owed to the carrier (including more recent past due amounts), but on September
10, 1998 filed for Chapter 11 protection under the Bankruptcy Code.
On October 1, 1997, the Company issued to the Willis Group a $1.0 million
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 0.2
million 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 was convertible 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. As of the date
of issuance of the convertible debt the Company recorded an interest charge of
$0.15 million to record the impact of the debt being convertible at a discount
to market. On March 5, 1998, the Note and accrued interest were exchanged for
1.05 million shares of Common Stock.
Interest paid by the Company during the years ended June 30, 1996, 1997 and
1998, totaled $573,721, $946,665 and $842,826, respectively. In fiscal 1998,
the Company exchanged two notes payable and associated interest due for Series B
Preferred and Common Stock of the Company. The interest due on these notes that
was exchanged was $344,500.
9. FEDERAL INCOME TAXES
The following disclosures relate to balances and activity for the fiscal years
ending June 30, 1997 and 1998.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
June 30, June 30,
1997 1998
----------- ------------
<S> <C> <C>
Deferred tax liabilities:
Cash to accrual differences $ (196,250) $ -
Other, net (62,256) (75,075)
----------- ------------
Total deferred tax liabilities (258,506) (75,075)
Deferred tax assets:
Amortization of deferred acquisition costs 4,769,258 4,567,944
Write-off of goodwill - 335,818
Bad debt allowance 562,970 401,290
Accrued liabilities 390,534 265,169
Net operating loss carryforward 2,922,038 9,735,300
Other 258,641 364,693
----------- ------------
Total deferred tax assets 8,903,441 15,670,214
Valuation allowance (8,644,935) (15,595,139)
----------- ------------
Net deferred tax assets $ 0 $ 0
=========== ============
</TABLE>
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<PAGE>
The Company recorded a valuation allowance amounting to the entire net
deferred tax asset balance at June 30, 1997 and June 30, 1998 due to the
Company's operating losses which give rise to uncertainty as to whether the
deferred tax asset is realizable.
The Company has a net operating loss carryforward totaling $25,090,979
million which are available to offset future taxable income which expire in 2012
through 2013. The Company experienced a change in control in March 1998 which
restricted the Company's ability to utilize approximately $15.0 million of the
net operating loss carry forwards.
The differences between income taxes computed at the federal statutory income
tax rate and the provision for income taxes for the years ended June 30, 1997
and 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Income tax benefit computed at
the federal statutory rate $(4,295,979) $(6,100,752)
State income tax benefit (518,532) (861,283)
Valuation allowances 7,097,236 6,950,202
Other 62,586 11,833
----------- -----------
Provision (benefit) for federal income taxes $ 2,345,311 $ -
=========== ===========
</TABLE>
The provision (benefit) for income taxes for the years ended June 30, 1996
and 1997 consisted of the following. For fiscal year 1998, the Company recorded
no benefit for income taxes due to the valuation allowance.
<TABLE>
<CAPTION>
1996 1997
------------ ----------
<S> <C> <C>
Current
Federal $ (476,612) $ 29,275
State 850 87,959
----------- ----------
(475,762) 117,234
Deferred:
Federal (1,914,217) 1,952,439
State (269,874) 275,638
----------- ----------
(2,184,091) 2,228,077
----------- -----------
Provision (benefit) for federal income taxes $(2,659,853) $2,345,311
=========== ==========
</TABLE>
Taxes paid during the fiscal years ended June 30, 1996 and 1997 totaled
$1,355,296 and $87,959, respectively. No income tax payments were made during
fiscal year ended 1998.
10. COMMITMENTS AND CONTINGENCIES
COMMITMENTS WITH PROVIDERS
At June 30, 1998 EqualNet had an agreement with AT&T which expires in April
2000. At expiration or any time prior, EqualNet can negotiate with AT&T for the
renewal of all material aspects of the present agreement with AT&T. In the
event that this is not possible, EqualNet may be able to negotiate equally
beneficial terms with other major telecommunications companies. Should neither
of these alternatives be possible, there could be materially adverse
implications for EqualNet's financial position and operations.
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<PAGE>
The agreement covers the pricing of the services and establishes minimum
semi-annual revenue commitments ("MSARCs") which must be met to receive the
contractual price and to avoid shortfall penalties. The commitment with AT&T is
segregated into components differentiated by the type of traffic. At June 30,
1998, EqualNet had not yet reached the completion of the term of the third
MSARC; however, EqualNet was approximately $3.7 million below the cumulative pro
rata monthly commitment. Should EqualNet continue at similar revenue levels, it
would be in an estimated shortfall position of approximately $11.6 million at
the end of the third MSARC period in October 1998. Historically, EqualNet has
been able to negotiate a settlement with the carrier which has resulted in no
penalty being incurred by EqualNet and no amount has been accrued in the
financial statements. No assurances can be made that EqualNet will be able to
reach similar favorable settlements with the carrier should it continue to fail
to meet its commitment.
Total future minimum usage commitments to AT&T as of June 30, 1998 are as
follows:
Year ending June 30,
--------------------
1999 $29,000,000
2000 16,000,000
----------
$45,000,000
===========
If the contract with AT&T is terminated prior to the expiration of the full
term, either by EqualNet or by AT&T for non-payment, EqualNet will be liable for
the total amount of the unsatisfied MSARC for the period in which the
discontinuance occurs and for 50% of the MSARCs for each semi-annual period
remaining in the contract tariff term, which amounts to an estimate of $29.1
million.
As a result of its bankruptcy filing, EqualNet has the opportunity to reject
its contract with AT&T. This is not feasible without first entering into a
contract with another carrier who is capable of servicing EqualNet's customer
base. EqualNet plans to enter into a wholesale carrier agreement with an
unrelated switchless reseller which currently services its long-distance
customers on the AT&T network. Under this plan, EqualNet's AT&T customers would
be moved from its AT&T contract to a contract with its new provider but would
continue to utilize the AT&T network. EqualNet would no longer be a direct
customer of AT&T and AT&T would not continue to be subject to any additional
credit risk with EqualNet but would continue to generate revenues from the
EqualNet customers through its contract with EqualNet's new service provider.
EqualNet would be required to pay its carrier cost in advance under the new
agreement. EqualNet has had numerous discussions with AT&T and the prospective
wholesale service provider but no agreements have been formalized to date.
If EqualNet is able to enter into this new wholesale carrier agreement, it
may reject its contract with AT&T. Any liabilities for MSARC relating to
periods after the rejection date would likely be treated in the bankruptcy as
pre-petition unsecured indebtedness. Due to the amount of EqualNet's secured
indebtedness (approximately $16.0 million), it is unlikely AT&T would realize
significant benefits even if it does assert its claim for additional MSARC
payments.
In the event EqualNet is not able to enter into an agreement with another
carrier, it must provide AT&T with adequate assurance of future performance in
order to continue to utilize the AT&T network. AT&T has asserted that it needs
a $2.0 million deposit from EqualNet for adequate assurance. It is unlikely
EqualNet and AT&T will enter into an out of court agreement on adequate
assurance. If AT&T prevails in court and EqualNet is required to make a $2.0
million deposit, it will likely lose its AT&T customer base because it does not
have the resources to make said deposit.
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<PAGE>
REGULATORY APPROVAL
EqualNet's intrastate long-distance telecommunications operations are subject
to various state laws and regulations, including consumer protection statutes
enforced by the Attorney General of each state. During 1995, 1996 and 1997 the
Attorneys General of eleven states alleged violations of various consumer
protection statutes against EqualNet. Each of these matters alleged that the
state received an excessive number of customer complaints that long-distance
service was switched to the Company without the customer's knowledge or informed
consent, with sanctions being sought under the deceptive trade practices or
consumer protection statutes of these states. The Company reached a settlement
agreement on December 22, 1997. The result of the settlement was that the
Company agreed to pay a total of $225,000 to the Attorneys General of the eleven
states involved by February 28, 1998. The payments were reimbursement for
investigative costs and attorney's fees incurred by the Attorneys General in
connection with the investigation of the alleged consumer protection violations
and to conduct consumer education activities. In addition, the Company agreed to
adjust balances appropriately on any pending and unresolved complaints, which
complaints are to be identified by each Attorney General. It is anticipated that
the amount of these adjustments will not be material. The settlement payments
were made to the appropriate states in March 1998.
LITIGATION
In April, 1997, American Teletronics Long Distance, Inc. ("ATLD") and
MetroLink Communications, Inc. ("MetroLink") filed suit against EqualNet
Corporation and EqualNet Wholesale Services, Inc. in the United States District
Court for the Northern District of Illinois, Eastern Division (Cause
No. 97-C-2842) alleging damages based upon breach of contract, fraud and
negligent misrepresentation. Both defendants subsequently were served with
process and filed answers and counterclaims for damages. Plaintiffs allege
damages for EqualNet's failure to complete a purchase of ATLD's customer base,
EqualNet's failure to pay for long distance services provided by MetroLink to
EqualNet's customers through its contract with Unified Network Services LLC
("UNS") and for damages arising out of EqualNet's alleged breach of contractual
obligations to UNS, a Delaware limited liability company of which EqualNet
Corporation, EqualNet Wholesale Services, Inc. and MetroLink were shareholders.
It is anticipated that these matters will be disposed of in the respective
bankruptcy proceedings of EqualNet and Wholesale. EqualNet's management
vehemently denies any wrongdoing or liability in this matter.
EqualNet has committed to make certain payments to AT&T for usage incurred in
prior periods. EqualNet defaulted in the timely payment of those payments during
the fourth fiscal quarter of 1998, and began to enter into a series of short
term, alternative payment agreements with AT&T for the payment of amounts due to
AT&T for current usage with any surplus to be applied to the arrearage amounts.
The failure to make any payments due to AT&T could result in the termination of
service to EqualNet's customers whose long distance service is provided over
AT&T's networks. The pending bankruptcy proceeding discussed below could have a
substantial affect on this obligation. EqualNet Corporation is negotiating with
another AT&T reseller as a potential supplier of these services instead of
dealing with AT&T directly. If so, management would anticipate negotiating
payment terms superior to those available directly from AT&T.
On August 7, 1998, Robert H. Turner ("Turner") filed suit against the
Company, Mark A. Willis and Willis Group, LLC in the 61/st/ District Court of
Harris County, Texas in case number 98-37682 alleging an unspecified amount of
damages based upon an alleged breach of his employment contract and other
claims.
74
<PAGE>
The Company vehemently denies any wrongdoing or liability in the matter, and
intends to vigorously defend itself in this action. Since no discovery has taken
place in this matter, it is impossible to state with any degree of certainty the
amount of damages, if any, that the Company may incur, or if it will be
successful in asserting any cross claims or counterclaims it may have in
connection with the employment of Turner.
On August 13, 1998, Steverson & Company, Inc. filed suit against the Company
in case number 704,244 in the County Civil Court at Law Number 2 of Harris
County Texas seeking damages in the amount of $22,892.78 plus attorneys fees
and court costs. The Company maintains that these charges were for temporary
services personnel utilized by EqualNet, and not the Company. The invoices are
addressed to Equal Net Communications, the former name of EqualNet Corporation
before its name change on November 28, 1994. The dates on the invoices run from
June 16, 1998 through August 11, 1998. EqualNet Holding Corp. did not formally
change its name to Equalnet Communications Corp. until June 30, 1998. Due to
the fact that these charges may be a claim in the bankruptcy proceedings of
EqualNet discussed below, it is impossible at this time to state with any degree
of certainty the ultimate exposure of either the Company or EqualNet in this
matter. The Company has accrued the amount of damages, excluding attorney fees
and court costs.
On August 13, 1998, Centillion Data Systems, Inc. filed suit against EqualNet
in case number 49D029808CP001147 in the Superior Court of Marion County,
Indiana, seeking damages in the amount of $115,490.50 for billing and other
services allegedly provided to EqualNet, plus interest, attorneys fees and court
costs. The fact that these charges are a claim in the bankruptcy proceedings of
EqualNet discussed below make it impossible at this time to state with any
degree of certainty the ultimate exposure of EqualNet in this matter. An accrual
for these services in the amount stated above has been reflected in the
financial statements.
On September 3, 1998, the Company received a demand from New Boston Systems
through their attorneys, Steadman & Steele, for the payment of placement fees
for personnel hired by EqualNet. Although New Boston System's engagement letter
was with the Company, the personnel it placed were hired as employees of
EqualNet. It is the position of the Company that any payment due to New Boston
Systems would be due from EqualNet and not the Company. The amount claimed as
due to New Boston Systems is $10,526.25, and has been accrued in the financial
statements.
On September 15, 1998, Technigrafiks, Inc. filed suit against EqualNet dba
Creative Communications in case number 705,562 in the County Civil Court at Law
Number 1 of Harris County, Texas, seeking damages in the amount of $24,399 for
the printing of plastic cards for debit card sales, plus interest, attorneys
fees and court costs. The fact that these charges are a claim in the bankruptcy
proceedings of EqualNet discussed below make it impossible at this time to state
with any degree of certainty the ultimate exposure of EqualNet in this matter.
However, the Company has provided for the claim of $24,399 in the financial
statements.
On September 17, 1998, KISS Catalog Ltd. filed suit against the Company as
assignee from Creative Communications International, Inc. of certain contract
rights from KISS Catalog Ltd. in case number 98 CIV. 6570 in the United States
District Court for the Southern District of New York, seeking payment of
$100,000 in license fees, attorneys fees, and any royalties which may be owing
under the license agreement. In 1996, the Company agreed to assume the
obligations under a merchandising license agreement, including the obligation to
make payments of royalties and license fees, with a minimum guarantee royalty
fee of $100,000 and a license fee of $150,000. Payments of the minimum
guarantee of $100,000 and $50,000 of the license fee were made. Payment of the
remaining $100,000 of the license fee has not been made, but has been reflected
as an accrued expense in the financial statements.
On September 17, 1998, Comerica Leasing Corporation filed suit in the 270/th/
District Court of Harris County, Texas in case number 98-44481 against the
Company and EqualNet for breach of a settlement agreement arising out of
previous litigation for the enforcement of equipment and office furnishings
leases
75
<PAGE>
filed on February 12, 1998 in the 157/th/ District Court of Harris County, Texas
in case number 98-06841. A settlement agreement was entered into by the parties
dismissing the earlier litigation and adding the Company as an obligor for the
payment of the settlement amounts. The remaining amounts due under the
settlement agreement and remaining lease obligations represent an amount in
excess of $1,000,000.
On September 21, 1998, Cyberserve, Inc., WSHS Enterprises, Inc. and William
Stuart (collectively "Bluegate") filed suit in the 215/th/ District Court of
Harris County, Texas in case number 98-45115 against the Company, Willis Group,
LLC, Mark A. Willis, and Netco Acquisition LLC alleging damages for breach of
contract, breach of an employment agreement, fraud and fraud in the inducement,
statutory fraud in a stock transaction, tortious interference with a contract,
conspiracy, and quantum meruit. The matters complained of originated with a
letter of intent dated on or about October 28, 1997, wherein the Company
proposed the purchase of certain assets of Cyberserve, Inc. and WSHS
Enterprises, Inc. subject to the performance of due diligence by the parties.
Bluegate and certain of its shareholders had threatened to sue the Company in
the event the proposed transaction was not consummated substantially in
conformity with the terms set forth in the Letter of Intent. The damages
Bluegate alleges it incurred were as a result of, among other things, the
claimed modification of its business to its detriment in anticipation of the
integration of its operations with those of EqualNet. It is impossible to
determine with any degree of certainty what, if any, liability Equalnet, or any
of its subsidiaries, may incur in this matter. The total amount of damages are
unspecified, but include a demand for a cash payment of $685,000, a sufficient
number of shares of Common Stock of the Company for the payment of $585,000, an
additional 525,000 shares of Common Stock, and other damages. The Company
vehemently denies any wrongdoing or liability in this matter and intends to
vigorously defend itself against all claims of the plaintiffs.
On September 29, 1998, SA Telecommunications Incorporated asserted claims
pursuant to the Purchase Agreement against USC Telecom, Inc. and the Company for
(i) $654,934 in operating losses for the period from April 1 through July 22,
1998, (ii) $278,377 for damages for delayed or unbillable revenue through
USBI/ZPDI, (iii) reimbursement of $8,149 for switch site leases, (iv) payment of
Specified Network Contracts Liabilities (amount not specified), (v) delivery of
5,358 shares of Series C Preferred escrowed at closing, and (vi) for return of
certain leased equipment not owned by SA Telecommunications but previously in
its possession and allegedly removed by Equalnet or USC Telecom. The Company and
USC Telecom dispute each of the claims asserted by SA Telecommunications in its
demand.
During the past several months, EqualNet and the Company have experienced
severe liquidity problems and have received numerous notices of default in
payment of trade creditors and other financial obligations. For example and
without providing an exhaustive list, EqualNet has received notice of default of
its agent agreements with Walker Direct, Inc., Future Telecom Networks, Inc.,
Global Pacific Telecom, Inc. and others, making demand for the payment of
commissions due and for mediation pursuant to the terms of their agent
agreements. Netco Acquisition LLC presented a notice dated August 25, 1998
under the terms of the Tri-Party Agreement and Assignment dated January 20, 1998
between Netco Acquisition LLC, EqualNet Corporation and Cyberserve, Inc. that it
was enforcing its rights to foreclose on the web page customer base of EqualNet.
In additional EqualNet defaulted in making timely payments under the
$1,183,059.03 promissory note payable to Sprint Communications Company L.P., in
the timely payments to AT&T Corp., Premier Communications and MCI WorldCom for
carrier services. In addition, EqualNet received notice it was in default of
its lease agreement with Caroline Partners Ltd., the landlord for the office
space occupied by the Company and its subsidiaries, and that the landlord had
exercised its right to offset rents due against the letter of credit EqualNet
has provided as a security deposit for the landlord's benefit. Finova Capital
Corporation notified Netco of its failure to timely pay installments on its
promissory note in the original principal amount of $6.05 million. The payment
of such note is secured by the switches. Norwest Equipment Finance, Inc. has
notified EqualNet of its default in the payment for leased furniture currently
being utilized by EqualNet in the operation of its business. The remaining
amount owed under such lease is in excess of $100,000. The bankruptcy
proceedings of EqualNet discussed below make it impossible at this time to state
with any degree of certainty the ultimate exposure of EqualNet in these matters.
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<PAGE>
As a result of the liquidity problems listed in the foregoing paragraph and
other matters, on September 10, 1998, EqualNet filed for protection under
Chapter 11 of Title 11 of the United States Code, in case number 98-39561-H5-11
in the United States District Court for the Southern District of Texas and
Wholesale filed for protection under Chapter 11 of Title 11 of the United States
Code, in case number 98-39560-H4-11 in the United States District Court for the
Southern District of Texas. On October 2, 1998, Wholesale filed a motion
seeking to convert its Chapter 11 reorganization proceeding to a Chapter 7
liquidation proceeding. It is impossible to state at this time whether or not
EqualNet as a debtor in bankruptcy will be able to reorganize its liabilities
or to confirm a plan of reorganization in bankruptcy.
From time to time the Company is involved in what it believes to be routine
litigation or other legal proceedings that may be considered as part of the
ordinary course of its business. The Company does not believe that the adverse
determination of any such claims would have a material adverse effect on either
the results of operations or the financial condition of the Company.
CAPITAL LEASES
During 1995, EqualNet entered into long-term lease agreements for the
purchase of equipment and furniture. The leases were capitalized and the related
obligations were recorded in the accompanying financial statements based on the
present value of future minimum lease payments. The gross balance of assets
included in property and equipment at June 30, 1997 was $306,000. These assets
were fully depreciated at June 30, 1998 and the obligation under these capital
leases was met during fiscal year 1998.
OPERATING LEASES
EqualNet leases certain equipment and office space under operating leases
that expire over the next nine years. Rental expense under operating leases was
$1,715,636, $2,137,857 and $1,952,507 in 1996, 1997 and 1998, respectively.
Future minimum lease payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
Year ended
June 30,
------------------
<S> <C>
1999 $1,586,185
2000 1,093,793
2001 654,801
2002 672,695
2003 672,695
Thereafter $1,009,043
----------
$5,689,212
==========
</TABLE>
EqualNet has entered into several agreements for the sale and leaseback of
certain computer equipment and office furniture. EqualNet has purchase and
lease renewal options at projected future fair market values under the
agreements. The leases are classified as operating leases in accordance with
the
77
<PAGE>
FASB Statement No. 13 - "Accounting for Leases". The leases have thirty-six
month terms and the future minimum lease payments are included in the table
above. Lease payments on these transactions average $477,000 annually.
11. WRITE DOWN OF ASSETS
The Company wrote down assets during the year ended June 30, 1996, 1997 and
1998, totaling $6.9 million, $4.8 million and $1.1 million, respectively.
Included in the write downs were $4.6 million and $4.4 million non-cash charges
in fiscal 1996 and 1997, respectively, to reduce the carrying value of acquired
customer bases (customer acquisition costs) to the present value of the expected
future cash flows associated with the underlying customer accounts and a $2.2
million non-cash charge in fiscal 1996 to eliminate capitalized software
development costs associated with the NetBase system. The write down of
deferred acquisition costs was necessitated by continued greater than expected
turnover of acquired customer bases which resulted from difficulties in billing
and servicing the Company's customer accounts. Included in the write-downs in
1998 were $0.9 million to write-off goodwill associated with the prior
acquisition of Creative Communications International, Inc. as a result of
winding this operation down and $0.2 million to write-off the undepreciated
balance of the NetBase system upon the implementation of a new billing and
customer service system.
12. INTANGIBLE ASSETS
On November 12, 1996, the Company purchased certain assets of Creative
Communications International, Inc., a Texas-based debit card company, for
150,000 shares of EqualNet Holding Corp. common stock, $.01 par value per share
("Common Stock"), a warrant to purchase 100,000 shares of Common Stock, and the
assumption of certain liabilities totaling $379,328. The total purchase
consideration was $1 million. Substantially all of the purchase price was
recorded as goodwill and was being amortized over ten years using the straight
line method of amortization. The acquisition was accounted for as a purchase and
the operations of Creative Communications, Inc. is included in the operations of
the Company from the date of acquisition. During the fourth quarter of fiscal
year 1998, the Company considered the goodwill associated with Creative
Communications to be fully impaired and wrote off the remaining unamortized
balance of goodwill of $0.9 million.
13. EMPLOYMENT AGREEMENT
The Company had employment agreements with Zane Russell and Michael Hlinak,
its former president and former chief operating officer. The agreements
contained certain conditions of employment including a covenant not to compete
upon termination of employment with the Company. Employment under both of these
contracts was terminated during fiscal 1998. The Company replaced the
employment agreements with severance agreements upon termination.
14. SAVINGS PLAN
The Company sponsors a 401(k) Plan (the "Plan") which became effective
January 1, 1993. The Plan is open to all employees over the age of 21. To
become eligible, an employee must have been employed on the effective date or
must complete six consecutive months of employment. The Plan gives the Company
the option to determine the amount they will contribute each year. The Company
matched 50% of the first 6% contributed by the participants until May 22, 1998.
SUBSEQUENT TO THAT DATE, THE COMPANY WAS UNABLE TO MATCH EMPLOYEE CONTRIBUTIONS
DUE TO LIMITED FUNDS. Contributions were made to the Plan in the amount of
$81,597, $63,061 and $43,479 for the years ended June 30, 1996, 1997 and 1998,
respectively.
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<PAGE>
15. RELATED PARTY TRANSACTIONS
The Willis Group received a finders fee of $54,000 related to certain
financing transactions which closed during fiscal year 1998. The Willis Group
entered into an agreement with the Company in April 1998, related to mergers and
acquisitions consulting services. Pursuant to their agreement, the Company was
obligated to pay the Willis Group $20,000 per month beginning in May 1998, and a
success fee based on a percentage of the purchase price of acquisitions closed
by the Company. No payments have been made by the Company to the Willis Group
with respect to the foregoing agreements.
During fiscal year 1998, the Willis Group incurred $0.14 million in out of
pocket expenses on behalf of the Company related to services provided by
consultants, travel expenses and other miscellaneous expenses. Subsequent to
June 30, 1998, the Company executed a note payable to the Willis Group for these
expenses.
James T. Harris and Ronald J. Salazar, directors of the Company, were paid
$86,895 and $20,000, respectively, for consulting services during fiscal year
1998, of which $36,000 and $20,000, respectively, was advanced by the Willis
Group.
Effective April 1, 1998, the Company entered into a severance agreement with
Michael L. Hlinak, former Chief Financial Officer, Chief Operating Officer and
Director of the Company, which requires the Company to pay Mr. Hlinak severance
payments of $155,833 over an eleven month severance period and to pay health
insurance benefits to Mr. Hlinak during the severance period. Additionally, the
Company issued to Mr. Hlinak a warrant for the purchase of up to 90,000 shares
of Common Stock at an exercise price of $2.00.
Effective April 1, 1998, the Company entered into a severance agreement
with Zane Russell, former Chief Executive Officer and Director of the Company,
which requires the Company to pay Mr. Russell severance payments through January
31, 1999 at an annualized rate of $87,500 and forgive and cancel a $75,000 note
payable by Mr. Russell to the Company. Additionally, the Company issued to Mr.
Russell a warrant for the purchase of up to 90,000 shares of Common Stock at an
exercise price of $2.00.
Note 5, The Willis Group, LLC Transactions, describes other transactions
related to the sale of the Switches and sale of Netco to the Company.
Michael T. Willis, a member of the Willis Group, personally guaranteed $3.0
million of the Company's $6.05 million note payable to Finova Capital
Corporation. Mr. Willis received warrants to acquire 500,000 shares of Common
Stock.
During the year ended June 30, 1996, EqualNet entered into a joint venture
with MetroLink, Inc., an Illinois Corporation ("MetroLink"), the purpose of
which was to market and sell wholesale long-distance services to the Company and
other long-distance resellers. The joint venture, Unified Network Services, LLC
("UNS"), is owned 49% by Wholesale, 25% by MetroLink, 25% by MediaNet, Inc., an
Illinois Corporation and wholly owned subsidiary of MetroLink, and 1% by
EqualNet. EqualNet utilized the services of UNS during fiscal years 1997 to
provide wholesale long-distance for resale and had accounts payable, net of
advances, to UNS at June 30, 1997 and 1998 of $644,301 and $0, respectively.
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During fiscal years 1996 and 1997, EqualNet utilized the marketing services
of a marketing company managed and directed by the brother-in-law of one of the
principal shareholders of the Company. EqualNet paid commissions to the
marketing company of $75,388 and $6,223 in 1996 and 1997, respectively.
Advances due the Company from the marketing company were $43,015 and $0 at June
30, 1996 and 1997, respectively.
16. SHAREHOLDERS' EQUITY
STOCK PURCHASE PLAN
During 1995, the Company adopted the EqualNet Holding Corp. Employee Stock
Purchase Plan (the Stock Purchase Plan) in which substantially all employees are
eligible to participate. The Stock Purchase Plan provides eligible employees of
the Company and its subsidiaries an opportunity to purchase shares of Common
Stock through after-tax payroll deductions. The Company will match
contributions in an amount equal to 15% of each participant's contribution. The
Stock Purchase Plan is administered by an independent administrator which
purchases shares of Common Stock on the open market with the amounts contributed
by the participants and the matching contributions made by the Company. The
Stock Purchase Plan was implemented during fiscal year 1996 and the Company
contributed $4,653 , $13,704 and $20,331 on behalf of employees toward the
purchase of Company stock during the years ended June 30, 1996, 1997 and 1998,
respectively.
STOCK OPTION AND RESTRICTED STOCK PLAN
During 1995, the Company adopted the EqualNet Holding Corp. Stock Option and
Restricted Stock Plan (the 1995 Plan). The 1995 Plan is designed to provide
certain full-time key employees, including officers and directors of the
Company, with additional incentives to promote the success of the Company's
business and to enhance the ability to attract and retain the services of
qualified persons. The 1995 Plan is administered by a committee of no less than
two persons (the Committee) appointed by the Board of Directors. Committee
members cannot be employees of the Company and must not have been eligible to
participate under the 1995 Plan for a period of at least one year prior to being
appointed to the committee. Under the 1995 Plan, the Committee may grant
restricted stock awards or options to purchase up to an aggregate of 800,000
shares of Common Stock. In June 1998, the Plan was amended to increase the
aggregate number of shares for grant to 4.0 million. The exercise price of an
option granted pursuant to the 1995 Plan is determined by the Committee on the
date the option is granted. In the case of a grant to an employee who owns ten
percent or more of the outstanding shares of Common Stock (a 10% Shareholder),
the exercise price of each option under the 1995 Plan may not be less than 110%
of the fair market value of the Common Stock on the date of the grant. No
option may be granted under the 1995 Plan with a term of more than ten years.
In the case of a 10% Shareholder, no option may be granted with a term of more
than five years. Options under the 1995 Plan are considered non-incentive stock
options when the aggregate fair market value of the stock with respect to which
the options are exercisable for the first time by the option holder in any
calendar year, under the 1995 Plan or any other incentive stock option plan of
the Company, exceeds $100,000. Under the 1995 Plan, the Committee may issue
shares of restricted stock to employees for no payment by the employee or for a
payment below the fair market value on the date of grant. The restricted stock
is subject to certain restrictions described in the 1995 Plan, with no
restrictions continuing for more than five years from the date of the award.
The 1995 Plan may be amended by the Board of Directors without any requirement
of shareholder approval, except as required by Rule 16b-3 under the Securities
Exchange Act of 1934 and the incentive option rules of the Internal Revenue Code
of 1986. The Company granted restricted stock awards for 63,638 shares of
Common Stock having an aggregate fair market value, based on the per share price
of the Common Stock at the measurement date, March 14, 1995, of $700,000 to
certain key
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employees, none of whom is a director or executive officer of the Company. These
employees will not be required to make any payment for these restricted stock
awards, which vest over five years in 20% increments. Restrictions on transfer
and forfeiture provisions upon termination of employment will apply to the
restricted stock covered by the awards for a period of five years, after which
time the restrictions will lapse and the stock will be owned by the employees
free of further restrictions under the 1995 Plan. During fiscal years 1996 and
1998, 18,182 shares and 5,454 shares of Common Stock were received into treasury
stock resulting from the forfeiture of restricted stock awards.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
The shareholders approved on November 28, 1995, the adoption of the Non-
Employee Director Stock Option Plan (the "Director Option Plan"). The Director
Option Plan is designed to attract and retain the services of experienced and
knowledgeable non-employee directors of the Company and to provide an incentive
for such directors to increase their proprietary interest in the Company and in
the Company's long-term success and progress. The Director Option Plan is
administered by the Board of Directors. The Company has adopted the Director
Plan, as amended in May 1998, pursuant to which each non-employee director
receives options to purchase a number of shares of Common Stock equal to $60,000
divided by the average of the highest and lowest price of the Common Stock the
day before the date of his election as a director ("Fair Market Value") and
options to purchase a number of shares of Common Stock equal to $30,000 divided
by the Fair Market Value of the Common Stock the day before each annual meeting
of the Company's shareholders for each year thereafter. These options have an
exercise price equal to the Fair Market Value of the Common Stock and the
initial grants vest over three years in 33-1/3% increments and the annual grants
vest in six months from the date of grant, assuming continued service on the
Board of Directors. Employee directors of the Company do not receive any
additional compensation from the Company for their services as directors. Each
stock option granted to a non-employee director will have a ten-year term. All
options granted under the Director Option Plan are non-qualified stock options
and may not be repriced. No awards may be granted under the Director Option Plan
after May 8, 2005, or such earlier date as determined by the Board of Directors.
The Director Option Plan may be amended by the Board of Directors without any
requirement of shareholder approval, except as required by Rule 16b-3 under the
Securities Exchange Act of 1934 and the incentive stock option provisions of the
Internal Revenue Code of 1986, and except that no amendment may be made more
than once every six months that would change the amount, price or timing of
grants under the Director Option Plan.
There are currently five non-employee directors eligible to participate in
the Director Option Plan. Options to purchase 5,000 shares of common stock
awarded May 9, 1995 with an exercise price of $14 3/4, 1,000 shares of common
stock awarded November 29, 1995, with an exercise price of $17 7/8 per share,
5,000 options to purchase shares of common stock awarded November 30, 1995, with
an exercise price of $18 1/2 per share and options to purchase 2,000 shares of
common stock awarded November 27, 1996 with an exercise price of $2 3/16 are
still outstanding at June 30, 1998.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options is
greater than or equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
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Pro forma information regarding net income and earnings per share is required
by Statement 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that Statement. The
fair value for these options was estimated at the date of grant using a Black-
Scholes option pricing model with the following weighted-average assumptions for
fiscal 1996, 1997 and 1998: risk-free interest rate of 6%; no dividend yield;
volatility factors of the expected market price of the Company's common stock of
2.3 in 1996 and 1997 and 1.4 in 1998; and a weighted-average expected life of
the option of 10 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
<TABLE>
<CAPTION>
1996 1997 1998
----------------------------------------------
<S> <C> <C> <C>
Pro forma net loss ($8,417,413) ($15,583,461) ($18,077,967)
Pro forma basic and diluted loss per share ($1.40) ($2.56) ($1.65)
</TABLE>
A summary of the Company's stock option activity, and related information for
the years ended June 30 follows:
<TABLE>
<CAPTION>
1996 1997 1998
----------------------------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price Options Exercise Price
------- ---------------- ------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning
of year 10,000 $14.75 11,000 $16.74 526,000 $3.57
Granted 7,000 18.32 538,000 3.31 20,000 1.88
Exercised - - - - - -
Forfeited (6,000) 15.27 (23,000) 3.87 (366,000) 3.36
------ ------- -------
Outstanding- end of year 11,000 $16.74 526,000 $ 3.57 180,000 $3.79
====== ======= =======
Exercisable at end of
year 2,667 $15.92 3,333 $16.63 94,834 $3.93
Weighted-Average fair
value of options
granted during the year $18.32 $ 2.73 $1.84
</TABLE>
Exercise prices for options outstanding under the Stock Option and Restricted
Stock Option Plan (147,000 shares) as of June 30, 1998 ranged from $1.88 to
$4.25. The weighted-average remaining contractual life of those options is 8
years.
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WARRANTS
The following sets forth warrants granted to purchase shares of the Company's
Common Stock at June 30, 1998. Each warrant may be used to purchase one share
of Common Stock.
Warrants Exercise Price Exercise Period
- - ----------- -------------- -----------------------------
200,000 $1.00 October 1997 - September 2002
400,000 1.00 March 1998 - March 2003
500,000 1.00 March 1998 - March 2008
116,667 1.50 March 1998 - February 2003
100,000 7.50 November 1996 - November 2001
90,000 2.00 July 1998 - June 2003
90,000 2.00 July 1998 - June 2001
170,000 1.00 April 1998 - April 2003
The Company also granted 2,716,665 warrants to agents to purchase Common
Stock which vest based upon performance of specific services. The warrant
expires in June 1999 if such services are not performed. As of June 30, 1998,
the agents had not performed the necessary services to vest in any of the
warrants and no services have been provided subsequent to year-end.
Additionally, management believes the warrants will not vest. As a result, the
warrants have not been included in the financial statements as of June 30, 1998.
If the performance criteria is met prior to June 30, 1999, the vested warrants
would be exercisable within one year of vesting at an exercise price of $2.00.
17. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share :
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------------------
1996 1997 1998
----------- ------------ -------------
<S> <C> <C> <C>
Numerator:
- - ----------
Net loss $(8,417,413) $(14,980,544) $(17,943,388)
Preferred stock dividends 0 0 52,000
----------- ------------ -------------
Numerator for basic and diluted loss per common share -
income avail. to common shareholders $(8,417,413) $(14,980,544) $(17,995,388)
Effect of Dilutive Securities: 0 0 0
----------- ------------ -------------
Numerator for diluted loss per common share -
income available to common shareholders $(8,417,413) $(14,980,544) $(17,995,388)
Denominator:
- - ------------
Denominator for basic loss per common share - 6,017,332 6,096,932 10,943,630
weighted average shares
Dilutive potential common shares 0 0 0
----------- ------------ -------------
Denominator for diluted loss per common share adjusted
weighted-average shares and assumed conversions 6,017,332 6,096,932 10,943,630
----------- ------------ -------------
Basic and diluted loss per common share $(1.40) $(2.46) $(1.64)
=========== ============ =============
</TABLE>
The analysis assumes that there are no conversions of any securities
during the periods shown because there is a loss in each fiscal year, and
therefore the effect of the conversion of any security would be anti-dilutive.
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18. SA TELECOM ACQUISITION
On January 21, 1998, the Company signed an agreement with SA
Telecommunications, Inc., ("SA Telecom") a switched based, long distance
telecommunications carrier serving customers primarily in Texas and California
to acquire certain assets and customer bases in exchange for a combination of
shares of stock, cash and assumption of certain liabilities. The transaction was
subject to certain conditions, including approval of the bankruptcy court
supervising the reorganization of SA Telecom under Chapter 11 of the United
States Bankruptcy Code. On March 9, 1998, the Company won approval from the
bankruptcy court. The purchase of SA Telecom was approved by the Company's
shareholders on June 30, 1998 and finalized oN July 23, 1998 for approximately
$3.47 million in cash and approximately $5.4 million in preferred stock and the
assumption of approximately $4 million in debt, payable to Greyrock Business
Credit, subject to final closing adjustments. Prior to the closing of the
transaction, the Company advanced $3.0 million to SA Telecom on the cash portion
of the proceeds. This amount is recorded in current assets in the financial
statements. Also, prior to the closing of this transaction and for the purpose
of providing for a smooth transaction of the acquired customer base, the Company
and SA Telecom entered into a management agreement pursuant to which the Company
would manage the operations of SA Telecom from April 1, 1998 until the close of
the transaction whereby the Company was responsible for any losses from SA
Telecom's operations on or after April 1, 1998. SA Telecom has provided the
Company with notice that the Company owes SA Telecom approximately $655,000 for
operating losses during the period the management agreement was effective. The
determination of operating losses under the management agreement is subject to
interpretation and the Company has disputed the amount of operating losses as
provided by SA Telecom. The Company estimates that the final amount of operating
losses under the management agreement are significantly lower than what has been
requested and could be as low as zero. Additionally, SA Telecom is disputing the
final purchase price settlement and has requested additional funding. It is most
likely the Company and SA Telecom will settle these disputes at the same time
and it is not possible to estimate the outcome. Any additional amount paid by
the Company, if any, is anticipated to be recorded as additional purchase
consideration. The Company has not included any losses associated with the SA
Telecom operations in its Consolidated Statement of Operations for the fiscal
year 1998.
19. SUBSEQUENT EVENTS
OPERATIONS
During the first quarter of fiscal year 1999, the Company continued to
operate at a loss. Although the Company began to take actions to reduce its
costs of operations and general and administrative costs, the favorable results
of these cost saving actions will not be fully recognized until the second or
third quarter of fiscal year 1999.
The Company's revenues have increased since the end of fiscal year 1998 due
to the acquisition of the assets of SA Telecom on July 22, 1998 (see SA Telecom
Acquisition). In September 1998, the Company's monthly gross revenue
approximated $2.9 million of which approximately $1.5 million was generated from
the former customers of SA Telecom. The Company has had a modest marketing
program, which has not been sufficient to cover the decrease in revenue
resulting from the attrition of its customer bases.
The Company's gross margin during the first quarter of fiscal year 1999 was
negative due to the continued operation of the Switches in areas in which it had
nominal long-distance traffic and problems the Company experienced in billing
its customers with its current billing system.
The Company has made a number of recent changes to reduce its operating
losses, improve its administrative operations and infuse its balance sheet. In
July and August 1998, the Company terminated or accepted resignations from six
members of its management team including its Chief
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Executive Officer, Chief Operating Officers and Senior Vice President of
Finance. The Company has recently reduced its number of employees from 124 full
time employees in June 1998 to 94 in October 1998. The Company is also in the
process of reconfiguring its network of Switches, therefore eliminating the
fixed costs associated with the network in areas in which the Company has
nominal revenues.
CONVERTIBLE NOTE TRANSACTIONS
Effective July 31, 1998, the Company issued two 6% Senior Secured Convertible
Notes due in 2001 (the "2001 Notes") in the amount of $1.5 million each to the
Willis Group and Genesee Fund Limited-Portfolio B ("Genesee"), a British Virgin
Islands corporation, both accredited investors. The 2001 Notes are convertible
into a variable number of shares of the Company's Common Stock. Ownership
percentage upon conversion is currently limited to no more than 4.9% of the
outstanding shares of Common Stock. The 2001 Notes bear interest at 6% and
interest payments are due each February 15, May 15, August 15 and November 15
commencing on November 15, 1998.
The 2001 Notes rank equally with all other unsubordinated debt obligations of
the Company. The Company's obligations under the 2001 Notes are secured by
certain collateral pursuant to security agreements. A holder of the 2001 Note
may require the Company to repurchase the 2001 Note if an event of default
occurs. Events of default include among other things, the Nasdaq delisting of
the Common Stock.
In connection with the issuance of the 2001 Notes, the Company issued to each
of the Willis Group and Genesee a warrant ("Warrant") to purchase 333,116 shares
of Common Stock at a purchase price of $0.9006 per share. In addition, the
Company issued to the Willis Group and Advantage Fund Limited 3,750 shares of
its Series D Convertible Preferred Stock ("Series D Preferred") in exchange for
3.0 million shares of its Common Stock and $0.2 million. The Warrants expire on
September 4, 2003.
Any holder of a 2001 Note may convert the 2001 Note, in whole or in part,
into shares of Common Stock at a conversion price per share equal to the lesser
of:
[ ] the product of (1) the average of the lowest sales price of the
Company's Common Stock on Nasdaq for the five days
immediately preceeding the date of conversion and (2) 85%
(subject to reduction pursuant to the terms of the 2001
Notes); and
[ ] $0.9006 (subject to reduction pursuant to the terms of the 2001
Notes).
Each share of Series D Preferred will be entitled to receive dividends at a
rate of $60.00 per share per year, payable if declared by the Board of
Directors. Any dividends that accrue on the Series D Preferred may be paid, at
the Company's option (subject to certain limitations), in cash or, in whole or
in part, by issuing additional shares of Series D Preferred. Under the terms of
the Series D Preferred, the Company cannot declare or distribute any dividends
to holders of Common Stock unless all dividends on the Series D Preferred have
been paid.
Holders of shares of Series D Preferred will have the right to convert each
of their shares into a number of shares of Common Stock equal to the quotient
of:
[ ] the sum of (1) $1,000(subject to adjustment pursuant to the Series D
Preferred documents), (2) accrued but unpaid dividends to the
applicable conversion date on the share of Series D Preferred
being converted and (3) accrued but unpaid interest on the
dividends on the share of Series D Preferred being converted;
and
[ ] an amount equal to the lesser of:
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[ ] the product of (1) the average of the lowest sales price of the
Common Stock on Nasdaq for any five trading days during the 25
trading days immediately preceding the conversion date and (2) 85%
(subject to downward adjustment, if applicable, pursuant to the
Series D Preferred documents); and
[ ] $1.2281 (subject to reduction pursuant to the Series D Preferred
documents),
subject to adjustment pursuant to the anti-dilution provisions.
NASDAQ LISTING
The Company's Common Stock currently trades on Nasdaq. If the Company fails
to maintain the minimum bid price or the minimum net tangible assets
requirements of Nasdaq, the Common Stock could be subject to delisting
therefrom. At June 30, 1998, the Company did not meet the minimum net worth
requirement. On September 30, 1998, Nasdaq notified the Company it would be
delisted on December 31, 1998 if its average closing bid price does not equal or
exceed the $1.00 minimum bid price requirement for a minimum of ten consecutive
trading days during the 90 day period ending December 29, 1998. On October 8,
1998, Nasdaq also notified the Company that it would be delisted if the market
value of its public float was not equal to or greater than $5.0 million for a
minimum of ten consecutive trading days during the period from October 9, 1998
to January 6, 1999.
FORECLOSURE OF WEB PAGES
Netco Acquisition, LLC issued a foreclosure letter on August 25, 1998 to
EqualNet stating its intent to immediately foreclose on the customer base of
EqualNet's web page hosting customers. At the time, EqualNet was in default on
a $400,000 note payable to Netco Acquisition, LLC.
RFC LOAN TO THE COMPANY
On July 23, 1998, the Company entered into a Loan and Security Agreement with
RFC which was subsequently amended on September 8, 1998 (the agreement as
amended, "RFC Loan"). RFC loaned the Company $1.5 million. Periodic monthly
principal and interest payments of $14,812 are due commencing on November 30,
1998. The balance due on the RFC Loan is payable on June 30, 2000. Interest is
payable on the outstanding principal balance in an amount equal to the prime
lending rate plus 5.5%. The RFC Loan is secured by all of the assets of the
Company and the stock of EqualNet and USC Telecom. In connection with the RFC
loan, the Company granted to RFC a warrant for the purchase of up to 294,000
shares of Common Stock at the exercise price equal to the arithmetic average of
the closing price of the Common Stock on Nasdaq for the three trading days
immediately preceding the consummation of the RFC loan. This warrant expires
July 23, 2003.
WILLIS GROUP LOAN
On September 2, 1998, the Company executed a loan agreement in favor of the
Willis Group in the amount of $241,106. The loan documented certain advances
which the Willis Group had made on the Company's behalf. The Willis Group loan
is secured by the assets of the Company and each of its subsidiaries. This loan
bears interest at 11% and matures on January 31, 1999.
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<PAGE>
RFC FUNDING TO USC TELECOM
In August 1998, USC Telecom entered into a receivables purchase facility with
RFC and used the proceeds of the initial funding of $2.1 million to pay off a
portion of the debt to Greyrock Business Credit, which was assumed in the SA
Telecom transaction. This facility is USC Telecom's primary source of working
capital. The maximum purchase commitment amount from RFC is $4.0 million, and
the program fee is the prime rate plus 4.0%. The term of the facility is two
years from the funding date.
20. INTERIM FINANCIAL DATA (UNAUDITED)
Selected quarterly financial results for the years 1997 and 1998 are
summarized below (in thousands except per share data):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
1997
<S> <C> <C> <C> <C>
Revenues $13,315 $12,090 $10,662 $10,521
Gross margin 3,027 2,445 2,818 3,817
Net loss (1,558) (7,151) (1,940) (4,332)
Net loss per share-basic and diluted $ (0.26) $ (1.18) $ (0.32) $ (0.70)
1998
Revenues $ 8,327 $ 6,481 $ 5,766 $ 4,302
Gross margin 2,063 1,753 1,125 (2,056)
Net loss (2,097) (2,178) (4,054) (9,614)
Net loss per share-basic and diluted $ (0.33) $ (0.35) $ (0.43) $ (0.53)
</TABLE>
The quarter ending December 31, 1996, includes a $4.4 million write down of
deferred acquisition costs (See Note 11). The quarter ending March 31, 1996,
includes a $3.6 million charge to the provision for uncollectible accounts, a
$1.0 million write down of deferred acquisition costs, a $2.2 million write off
of capitalized software development costs associated with the NetBase Plus
system and $700,000 of other charges which included accruals for estimated
settlements related to disputed carrier charges, long-distance commitment
shortfalls and consumer complaints filed with state agencies.
(1) Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share in 1997
does not equal the total computed for the year due to stock transactions
which occurred during the year.
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Equalnet Communications Corp.
Schedule II - Valuation and Qualifying Accounts
(in thousands)
<TABLE>
<CAPTION>
Balance Charged
at to Costs Charged Balance
Beginning and to other Deductions at End
of Period Expenses Accounts Describe(A) of Period
-------- --------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
Fiscal Year Ended June 30, 1998
Allowance for Doubtful Accounts $1,451 $1,661 $ (112) $1,966 $1,034
Fiscal Year Ended June 30, 1997
Allowance for Doubtful Accounts $3,285 $1,727 $2,011(B) $5,572 $1,451
Allowance for Advances to Agents $1,000 $ - $ - $1,000 $ -
Fiscal Year Ended June 30, 1996
Allowance for Doubtful Accounts $1,219 $3,821 $ 705(B) $2,460 $3,285
Allowance for Advances to Agents $ - $1,000 $ - $ - $1,000
</TABLE>
(A) Uncollectible accounts written off, net of recoveries
(B) Provision for uncollectible accounts receivable taken against agent
commissions payable
88
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 333-23427, Form S-3 No. 333-32049) of Equalnet Communications
Corp., formerly EqualNet Holding Corp., and in the related Prospectus and in the
Registration Statements (Form S-8 No. 33-97200) pertaining to the Employee
Stock Option and Restricted Stock Plan of EqualNet Holding Corp., (Form S-8 No.
333-04485) pertaining to the EqualNet Holding Corp. Employee Stock Purchase
Plan, (Form S-8 No. 333-04483) pertaining to the EqualNet Holding Corp. 1995
Non-Employee Director Stock Option Plan of our report dated October 8, 1998,
with respect to the consolidated financial statements and schedule of Equalnet
Communications Corp. included in the Annual Report for the year ended June 30,
1998.
ERNST & YOUNG LLP
Houston, Texas
October 8, 1998
89
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Equalnet Communications Corp.
(Registrant)
by: /s/ David L. Kerr
-----------------
David L. Kerr, Interim Chief Financial Officer
Dated: October 12, 1998
In accordance with the Securities and Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant and in the
capacities and on the dated indicated:
<TABLE>
<CAPTION>
Signature Title Date
- - --------------------------------------- -------- -------
<S> <C> <C>
/s/ Mark A. Willis Chairman of the Board and Director October 12, 1998
- - --------------------------------------
Mark A. Willis
/s/ Mitchell H. Bodian Chief Executive Officer, President October 12, 1998
- - -------------------------------------- and Director
Mitchell H. Bodian
/s/ David L. Kerr Interim Chief Financial Officer October 12, 1998
- - --------------------------------------
David L. Kerr
/s/ John Isaac "Ike" Epley Director October 12, 1998
- - --------------------------------------
John Isaac "Ike" Epley
/s/ James T. Harris Director October 12, 1998
- - --------------------------------------
James T. Harris
/s/ Ronald J. Salazar Director October 12, 1998
- - --------------------------------------
Ronald J. Salazar
/s/ Zane Russell Director October 12, 1998
- - --------------------------------------
Zane Russell
/s/ Hal Turner Director October 12, 1998
- - --------------------------------------
Hal Turner
</TABLE>
90
<PAGE>
EXHIBIT 10.19
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "1933 ACT"). THE ISSUANCE TO THE HOLDER OF THIS NOTE OF THE SHARES OF
COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE AND IN PAYMENT OF INTEREST ON
THIS NOTE ARE NOT COVERED BY A REGISTRATION STATEMENT UNDER THE 1933 ACT. THIS
NOTE HAS BEEN ACQUIRED, AND SUCH SHARES MUST BE ACQUIRED, FOR INVESTMENT ONLY
AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF REGISTRATION OF
THE RESALE THEREOF UNDER THE 1933 ACT OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY IN FORM, SCOPE AND SUBSTANCE TO THE COMPANY THAT SUCH REGISTRATION
IS NOT REQUIRED.
EQUALNET COMMUNICATIONS CORP.
6% SENIOR SECURED CONVERTIBLE NOTE DUE 2001
No. 1 $1,500,000.00
New York, New York
September 4, 1998
FOR VALUE RECEIVED, EQUALNET COMMUNICATIONS CORP., a Texas
corporation (hereinafter called the "Company"), hereby promises to pay to
GENESEE FUND LIMITED-PORTFOLIO B, Kaya Flamboyan 9, Curacao, Netherlands
Antilles, or registered assigns (the "Holder") or order, the sum of One Million
Five Hundred Thousand Dollars ($1,500,000.00), on the Maturity Date, and to pay
interest on the unpaid principal balance hereof at the Applicable Rate from the
date hereof, until the same becomes due and payable, whether at maturity or upon
acceleration or by repurchase in accordance with the terms hereof or otherwise.
Any amount of principal of or interest on this Note which is not paid when due
shall bear interest at the Default Rate from the due date thereof until the same
is paid ("Default Interest"). Interest shall be payable in arrears on each
Interest Payment Date, commencing on November 15, 1998, on the principal amount
outstanding on such date. Interest on this Note shall be computed on the basis
of a 360-day year of 12 30-day months and actual days elapsed. No interest shall
be payable on an Interest Payment Date on any portion of the principal amount of
this Note which shall have been converted or redeemed prior to such Interest
Payment Date so long as the Company shall have complied in full with its
obligations with respect to such conversion or redemption.
<PAGE>
All payments of principal of and premium, if any, and interest on
this Note shall be made in lawful money of the United States of America, or, at
the option of the Company and subject to the provisions of this Note, interest
payable on the Interest Payment Dates may be paid in whole or in part in
Interest Notes. All cash payments shall be made by wire transfer of immediately
available funds to such account as the Holder may from time to time designate by
written notice in accordance with the provisions of this Note. Whenever any
amount expressed to be due by the terms of this Note is due on any day which is
not a Business Day, the same shall instead be due on the next succeeding day
which is a Business Day and, in the case of any Interest Payment Date which is
not the date on which this Note is paid in full, the extension of the due date
thereof shall not be taken into account for purposes of determining the amount
of interest due on such date. Certain capitalized terms used in this Note are
defined in Article VI.
The obligations of the Company under this Note shall rank in
right of payment on a parity with all other unsubordinated obligations of the
Company for indebtedness for borrowed money or the purchase price of property.
This Note is issued pursuant to the Note Purchase Agreement and the Holder of
this Note and this Note are subject to the terms of the Note Purchase Agreement.
The obligations of the Company under this Note are secured pursuant to, and the
Holder of this Note is entitled to the benefits of, the Security Agreement.
This Note is one of the several 6% Senior Secured Convertible Notes due 2001 in
the original aggregate principal amount of $3,000,000.00 issued by the Company
pursuant to the Master Purchase Agreement, the Note Purchase Agreement and the
Other Note Purchase Agreements.
The following terms shall apply to this Note:
ARTICLE I
INTEREST NOTES; NO PREPAYMENT
1.1 ISSUANCE OF INTEREST NOTES IN LIEU OF CASH INTEREST. (a) If
the Company exercises its option to make a payment of interest on this Note
wholly or partly in Interest Notes (herein sometimes called the "Interest Note
Payment Option"), the issuance of Interest Notes upon such exercise of the
Interest Note Payment Option shall have been authorized by the Board of
Directors of the Company.
(b) The Company shall not be permitted to exercise the Interest
Note Payment Option with respect to any payment of interest on this Note if:
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<PAGE>
(i) the number of shares of Common Stock authorized, unissued and
unreserved for all purposes, or held in the Company's treasury, is
insufficient to permit the conversion in full of the Interest Notes to be
so issued;
(ii) the issuance or delivery of such Interest Note or the public
resale of the shares of Common Stock issuable upon conversion of such
Interest Note by the Holder would require registration with or approval
of any governmental authority under any law or regulation, and such
registration or approval has not been effected or obtained or is not in
effect or the Registration Statement is unavailable for use by the Holder
for the resale of such shares of Common Stock; provided, however//, that
this limitation shall not be deemed to be applicable prior to the date
which is 105 days after the Issuance Date, if the Registration Statement
is on Form S-3, or the date which is 120 days after the Issuance Date, if
the Registration Statement is on Form S-1, if this limitation otherwise
would be applicable solely because the Registration Statement shall not
yet have been declared effective, so long as the Company shall be in
compliance in all material respects with its obligations under the
Registration Rights Agreement;
(iii) the shares of Common Stock issuable upon conversion of such
Interest Note shall not at the time of issuance have been authorized for
listing, upon official notice of issuance, on the principal securities
exchange on which the Common Stock is then listed and traded;
(iv) an Event of Default has occurred and is continuing;
(v) any Repurchase Event shall have occurred and the Holder or the
holder of any Other Note shall have executed repurchase rights by reason
thereof and the Company shall not have paid the Repurchase Price hereof
or the repurchase price thereof; or
(vi) the Common Stock is neither (i) listed or admitted for
trading on a national securities exchange nor (ii) quoted on the Nasdaq
or the Nasdaq SmallCap.
(c) If the Interest Note Payment Option is elected, the Company
shall issue and deliver or cause to be delivered to the Holder on or before the
due date of such interest payment an Interest Note, duly executed on behalf of
the Company, in the principal amount equal to the total amount of lawful money
of the United States of America which the Holder would receive if the aggregate
amount of interest on this Note which is being paid in such Interest Note were
being paid in such lawful money; provided, however, that if in connection with
any such election the Company shall have failed to deliver such Interest Note to
the Holder within three Trading Days after the applicable Interest Payment Date,
then the Company shall not be entitled to use the
-3-
<PAGE>
Interest Note Payment Option in respect of such Interest Payment Date, such cash
interest shall be immediately due and payable and the Company shall pay the
interest for such Interest Payment Date in cash with Default Interest, at the
rate provided in this Note, from such Interest Payment Date until paid.
(d) If the Company exercises the Interest Note Payment Option with
respect to a payment of interest on this Note, the Company shall deliver to the
Holder, on or prior to the date on which such Interest Note is to be received by
the Holder, a Company Certificate setting forth (i) the total amount of the
interest payment to which the Holder is entitled, (ii) the portion of the
interest payment being made in an Interest Note and (iii) a brief statement that
none of the conditions set forth in Section 1.1(b) has occurred and is existing.
Each Interest Note shall be issued in the name of the Holder or its nominee. In
addition, on or before the date of issuance of each Interest Note the Company
shall notify the Transfer Agent of the issuance of such Interest Note, the
principal amount thereof and the name of the registered holder thereof.
(e) Each Interest Note, when issued pursuant to and in compliance
with this Section 1.1, shall be, and for all purposes shall be deemed to be,
duly authorized and a legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, and the shares of
Common Stock issuable upon conversion of such Interest Note, when so issued,
shall be, and for all purposes shall be deemed to be, validly issued, fully paid
and nonassessable shares of Common Stock; the issuance and delivery of such
Interest Note and such shares is in all respects authorized; and the issuance of
such Interest Note will be, and for all purposes shall be deemed to be, in full
discharge and satisfaction of the Company's obligation to pay the interest on
this Note to which such Interest Note relates.
1.2 OPTIONAL REDEMPTION. If (1) the Company shall be in compliance
in all material respects with its obligations to the Holder and the holders of
the Other Notes (including, without limitation, its obligations under the
Transaction Documents), (2) on the date the Company Optional Redemption Notice
is given and at all times until the Redemption Date, the Registration Statement
is effective and available for use by the Holder and each holder of Other Notes
for the resale of shares of Common Stock acquired by the Holder upon conversion
of this Note or by such other holders upon conversion of the Other Notes and (3)
no Repurchase Event shall have occurred with respect to which, on the date a
Redemption Notice is to be given or on the Redemption Date, the Holder or any
holder of Other Notes shall have exercised optional repurchase rights under
Sections 5.1 and 5.2 (or the comparable provisions of any Interest Note or Other
Note) by reason of such Repurchase Event and the Company shall not have paid the
Repurchase Price to the Holder or the repurchase price has not been paid to such
holder, as the case may be, then the Company shall have the right, exercisable
by giving a Company Optional Redemption Notice not less than 30 days or more
than 60 days prior to the Redemption Date the Holders, at any time to redeem all
or from time to
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<PAGE>
time to redeem any part of the outstanding principal amount of this Note in
accordance with this Section 1.2. The Company Optional Redemption Notice shall
state that: (1) the Company is exercising its right to redeem this Note in
accordance with this Section 1.3, (2) the principal amount of this Note to be
redeemed, (3) the Redemption Event Redemption Price and (4) the Redemption Event
Redemption Date. If the Company shall redeem less than all the outstanding
principal amount of this Note, such redemption shall be made as nearly as
practical pro rata from the Holder and all holders of Other Notes. Any Company
Optional Redemption Notice under this Section 1.2 shall be given to the Holder
at its address appearing on the records of the Company. On the Redemption Date
(or such later date as the Holder surrenders this Note to the Company), the
Company shall make payment of the applicable Redemption Price to the Holder in
immediately available funds to such account as specified by the Holder in
writing to the Company at least one Business Day prior to the Redemption Date.
The Holder shall be entitled to convert this Note or the portion hereof to be
redeemed in accordance with Article II through the day prior to the Redemption
Date and (2) if the Company shall fail to pay the Redemption Price of this Note
or the portion hereof to be redeemed when due, at any time after the due date
thereof until such date as the Company pays the Redemption Price of this Note or
the portion hereof to be redeemed. This Note or any portion hereof as to which
the Holder exercises the right of conversion pursuant to Article II or the
optional repurchase right pursuant to Sections 5.1 and 5.2 may be redeemed by
the Company pursuant to this Section 1.2 on or after the date of exercise of
such conversion right or optional repurchase right, as the case may be,
regardless of whether the Company Optional Redemption Notice shall have been
given prior to, or on or after, the date of exercise of such conversion right or
optional redemption right, as the case may be.
1.3 OPTIONAL REDEMPTION BY COMPANY FOR OPTIONAL REDEMPTION EVENT.
(a) If an Optional Redemption Event occurs the Company shall have the right to
redeem at any one time with respect to such Optional Redemption Event all of the
outstanding principal amount of this Note at the Redemption Event Redemption
Price pursuant to this Section 1.3 on any Redemption Event Redemption Date, so
long as (x) on the date the Redemption Event Redemption Notice is given and at
all times to and including the applicable Redemption Event Redemption Date, no
Event of Default has occurred and is continuing and no Repurchase Event has
occurred with respect to which the Holder or the holder of any Other Note has
exercised repurchase rights pursuant to Sections 5.1 and 5.2 (or the comparable
provisions of any Interest Note or Other Note) and the Repurchase Price has not
been paid to the Holder or the repurchase price has not been paid to such
holder, as the case may be, and (y) on the date a Redemption Event Redemption
Notice is given and at all times to and including the applicable Redemption
Event Redemption Date, the Company is in compliance in all material respects
with its obligations to the Holder and the holders of the Other Notes
(including, without limitation, its obligations under the Transaction
Documents). In order to exercise its right of redemption under this Section 1.3,
the Company shall
-5-
<PAGE>
give a Redemption Event Redemption Notice to the Holder not later than ten days
after an Optional Redemption Event occurs and not less than 20 days or more than
30 days prior to the Redemption Event Redemption Date stating that: (1) the
Company is exercising its right to redeem this Note in accordance with this
Section 1.3, (2) the principal amount of this Note to be redeemed, (3) the
Redemption Event Redemption Price and (4) the Redemption Event Redemption Date.
On the applicable Redemption Event Redemption Date (or such later date as the
Holder surrenders this Note to the Company) the Company shall pay to or upon the
order of the Holder by wire transfer of immediately available funds to such
account as shall be specified for such purpose by the Holder at least one
Business Day prior to the Redemption Event Redemption Date an amount equal to
the Redemption Event Redemption Price of this Note.
(b) The Company shall not be entitled to give a Redemption Event
Redemption Notice or to redeem any portion of this Note with respect to which
the Holder has given a Conversion Notice. Notwithstanding the giving of a
Redemption Event Redemption Notice, the Holder shall be entitled to convert this
Note in accordance with the terms of this Note by giving a Conversion Notice at
any time prior to the later of (1) the date which is one Business Day prior to
the applicable Redemption Event Redemption Date and (2) the date on which the
Company pays the Redemption Event Redemption Price of this Note to the Holder.
The Redemption Event Redemption Price set forth in an Redemption Event
Redemption Notice shall be adjusted to reflect the reduced outstanding principal
amount of this Note and related accrued interest and Default Interest on the
Redemption Event Redemption Date resulting from any permitted conversions of
this Note after the Redemption Event Redemption Notice is given.
(c) Any redemption of this Note pursuant to this Section 1.3 shall
be made at the same time as a redemption by the Company of the Interest Notes
and the Other Notes. The Company shall not redeem any of the Interest Notes or
the Other Notes pursuant to the provisions thereof similar to this Section 1.3
or repurchase or otherwise acquire any of the Interest Notes or the Other Notes
(other than a mandatory redemption pursuant to provisions of the Interest Notes
or the Other Notes comparable to Section 2.4) unless the Company offers
simultaneously to redeem, repurchase or otherwise acquire a pro rata portion
(based on outstanding principal amount) of this Note for cash at the same price
as the Interest Note or Interest Notes or the Other Note or Other Notes.
1.4 NO PREPAYMENT. Except as otherwise specifically provided in
Section 1.2 and 1.3, this Note may not be prepaid, redeemed or repurchased at
the option of the Company prior to September 4, 2001.
ARTICLE II
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<PAGE>
CONVERSION; CERTAIN MANDATORY REDEMPTION
RIGHTS AND OBLIGATIONS
2.1 CONVERSION RIGHT. Upon the terms and subject to the
limitations contained herein, the Holder shall have the right at any time on or
after the earlier of (x) the SEC Effective Date and (y) the date which is 90
days on and after the Issuance Date, and in either such case at any time prior
to the payment in full of this Note, to convert at any time all or from time to
time any part of the outstanding and unpaid principal amount of this Note, and
accrued and unpaid interest on the principal amount to be converted and Default
Interest on any such interest, into fully paid and nonassessable shares of
Common Stock at the Conversion Price in effect on the date the applicable
Conversion Notice is given in accordance with this Note. Notwithstanding any
other provision of this Note, in no event shall the Holder be entitled at any
time to convert any portion of the principal amount of this Note (and accrued
and unpaid interest thereon and Default Interest on any such interest) in excess
of that portion of the principal amount of this Note (and accrued and unpaid
interest thereon and Default Interest on any such interest) upon conversion of
which the sum of (1) the number of shares of Common Stock beneficially owned by
the Holder (including shares of Common Stock beneficially owned by all
Aggregated Persons) (other than shares of Common Stock deemed beneficially owned
by the Holder or any Aggregated Person of the Holder through the ownership of
(x) the unconverted portion of the principal amount of this Note, any Interest
Notes and the Other Notes and accrued and unpaid interest thereon and on any
such interest and (y) the unconverted or unexercised portion of the Warrants or
any instrument which contains limitations similar to those set forth in this
sentence) and (2) the number of shares of Common Stock issuable upon conversion
of the portion of the principal amount of this Note and accrued and unpaid
interest thereon and Default Interest on any such interest with respect to which
the determination in this sentence is being made, would result in beneficial
ownership by the Holder and all Aggregated Persons of the Holder of more than
4.9% of the outstanding shares of Common Stock. For purposes of the immediately
preceding sentence, beneficial ownership shall be determined in accordance with
Section 13(d) of the 1934 Act, and Regulation 13D-G thereunder, except as
otherwise provided in clause (1) of the immediately preceding sentence. For
purposes of the second preceding sentence, the Company shall be entitled to
rely, and shall be fully protected in relying, on any statement or
representation made by the Holder to the Company in connection with a particular
conversion, without any obligation on the part of the Company to make any
inquiry or investigation or to examine its records or the records of any
transfer agent for the Common Stock and without any liability of the Company
with respect thereto. The number of shares of Common Stock to be issued upon
each conversion of this Note shall be determined by dividing the sum of (1) that
portion of the principal amount of this Note to be converted plus (2) accrued
and unpaid interest on such principal amount to the date the Conversion Notice
for such conversion is
-7-
<PAGE>
given plus (3) accrued and unpaid Default Interest, if any, on the amount
referred to in the immediately preceding clause (2) to the date such Conversion
Notice is given, by the Conversion Price in effect on the date the Conversion
Notice for such conversion is given.
2.2 AUTHORIZED SHARES. The Company covenants that, during
the period the conversion rights exist, the Company will reserve from its
authorized, unissued and otherwise unreserved Common Stock free from preemptive
and similar rights 13,043,468 shares (such amount to be subject to equitable
adjustment from time to time on terms reasonably acceptable to the Holder for
stock splits, stock dividends, combinations, capital reorganizations and similar
events relating to the Common Stock occurring on or after the Issuance Date) to
provide for the issuance of Common Stock upon the conversion in full of this
Note, the Interest Notes and the Other Notes, subject to reduction from time to
time by the number of shares of Common Stock issued on conversion of this Note,
the Interest Notes and the Other Notes. The Company shall, from time to time,
authorize and reserve additional shares of Common Stock, free from preemptive
and similar rights, to be issuable pursuant to the terms of this Note as shall
be necessary to ensure that an adequate number of shares of Common Stock are at
all times authorized and reserved for issuance upon conversion in full of this
Note, the Interest Notes and the Other Notes. The Company shall notify the
Holder promptly, but in no event more than ten Business Days, after the Company
so reserves additional shares of Common Stock, which notice shall set forth the
number of additional shares of Common Stock so reserved. If at any time the
number of authorized but unissued shares of Common Stock not reserved or
required to be reserved for any other purpose shall be insufficient to effect
the conversion of this Note, all Interest Notes and all Other Notes, the Company
promptly shall seek, and use its best efforts to obtain and complete, such
corporate action as may, in the opinion of its counsel, be necessary to increase
its authorized but unissued shares of Common Stock to such number of shares as
shall be sufficient for such purpose. The Company represents and warrants that
upon issuance, such shares of Common Stock will be duly and validly issued,
fully paid and non-assessable. The Company agrees that its issuance of this
Note shall constitute full authority to its officers and agents who are charged
with the duty of executing stock certificates to execute and issue the necessary
certificates for shares of Common Stock upon the conversion of this Note.
2.3 METHOD OF CONVERSION. (a) The right of
the Holder to convert this Note shall be exercised by delivering (which may be
made by telephone line facsimile transmission) to the Transfer Agent at the
addresses or telephone line facsimile transmission number provided in or
pursuant to the Transfer Agent Instruction, a Conversion Notice. On the date
the Conversion Notice is delivered, the Company shall acknowledge the Conversion
Notice and forward the Conversion Notice as so acknowledged to the Transfer
Agent. The number of shares of Common Stock to be issued upon each conversion
of this Note shall be the number set forth in the applicable
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<PAGE>
Conversion Notice, which number shall be conclusive absent manifest error. The
Company shall notify the Holder of any claim by the Company of manifest error in
a Conversion Notice within one Trading Day after the Holder gives such
Conversion Notice and no such claim of error shall limit or delay performance of
the Company'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 for
all purposes to be in proper form unless the Company notifies the Holder by
telephone line facsimile transmission within one Trading Day after a Conversion
Notice has been given (which notice from the Company 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 Holder promptly
undertakes to correct all such defects. If the Company shall have notified the
Transfer Agent and such holder of any such manifest error, and the Company and
such holder do not agree as to a resolution of such manifest error on or before
the date of such notice by the Company of an error in such Conversion Notice,
the Company shall on the date such notice is given submit the dispute to Ernst &
Young LLP or another firm of independent public accountants of recognized
national standing (the "Auditors") for determination and shall instruct the
Auditors to resolve such dispute and to notify the Company, the Transfer Agent
and such holder within one Trading Day after such dispute is submitted to the
Auditors. Immediately after receipt of timely notice of the Auditors'
determination (but in any event within three Trading Days after the applicable
Conversion Notice is given to the Transfer Agent), the Transfer Agent shall
issue to the converting Holder any additional shares of Common Stock to which
such holder is entitled based on the determination of the Auditors. The Transfer
Agent is authorized and directed to rely on the Auditors' determination. If the
Auditors shall fail to notify the Transfer Agent of their determination within
three Trading Days after the applicable Conversion Notice is given to the
Transfer Agent, then the Transfer Agent shall, within three Trading Days after
receipt of the applicable Conversion Notice, issue to the converting holder any
additional shares of Common Stock to which such Holder is entitled based on the
applicable Conversion Notice. The Company shall pay any transfer or issuance
taxable payable in connection with any conversion of this Note except that the
Company shall not be required to pay any tax which may be payable in respect of
any transfer involved in the issuance and delivery of shares of Common Stock or
other securities or property on conversion of this Note in a name other than
that of the Holder, and the Company shall not be required to issue or deliver
any such shares or other securities or property unless and until the person or
persons requesting the issuance thereof shall have paid to the Company the
amount of any such tax or shall have established to the satisfaction of the
Company that such tax has been paid. The Holder shall be responsible for the
amount of any withholding tax payable in connection with any conversion of this
Note.
(b) If the Holder elects to convert this Note in accordance with
Section 2.1(a), the Holder shall not be required to surrender this Note
physically unless the entire unpaid principal amount of this Note is so
converted. The Company shall
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<PAGE>
maintain records showing the principal amount so converted and the dates of such
conversions or shall use such other method, reasonably satisfactory to the
Holder, so as not to require physical surrender of this Note upon each such
conversion. In the event of any dispute or discrepancy, such records of the
Company shall be controlling and determinative in the absence of manifest error.
Notwithstanding the foregoing, if any portion of this Note is converted without
physical surrender of this Note to the Company as aforesaid, the Holder may not
transfer this Note unless (1) the Holder first physically surrenders this Note
to the Company, whereupon the Company will forthwith issue and deliver upon the
order of the Holder a new note of like tenor, registered as the Holder (upon
payment by the Holder of any applicable transfer taxes) may request,
representing in the aggregate the remaining unpaid principal amount of this Note
and (2) such transfer is otherwise in compliance with Section 7.7 hereof. The
Company may by notice to the Holder from time to time require the Holder to
surrender this Note in exchange for the issuance by the Company of a new Note in
a principal amount equal to the outstanding principal amount of this Note and
otherwise having terms identical to this Note. Such new Note shall be delivered
by the Company to the Holder within three Trading Days after the Company
receives this Note from the Holder in response to such notice. The Holder and
any assignee, by acceptance of this Note, acknowledge and agree that, by reason
of the provisions of this paragraph, following conversion of a portion of this
Note, the unpaid and unconverted principal amount of this Note represented by
this Note may be less than the amount stated on the face hereof.
(c) In case of any consolidation or merger of the Company with any
other corporation (other than a wholly-owned subsidiary of the Company) in which
the Company is not the surviving corporation, or in case of any sale or transfer
of all or substantially all of the assets of the Company, 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 Company shall make
appropriate provision or cause appropriate provision to be made so that the
Holder shall have the right thereafter to convert this Note into the kind of
shares of stock and other securities and property receivable upon such
consolidation, merger, sale, transfer or share exchange by the persons who were
holders of Common Stock 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 Holder on a
basis as nearly as practical as such rights existed prior to such consolidation,
merger, sale, transfer or share exchange. 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 either securities, cash or other
assets upon completion of such transaction, the Company shall provide or cause
to be provided to the Holder the right to elect the securities, cash or other
assets into which this Note 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
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<PAGE>
elect, limitations on the period in which such election shall be made, and the
effect of failing to exercise the election). The Company 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.
Whenever the Company shall propose to take any of the actions
specified in this Section 2.3(c), the Company shall cause a notice to be mailed
to the Holder at least 20 days prior to the date on which the books of the
Company will close or on which a record will be taken for such action. Such
notice shall specify the action proposed to be taken by the Company 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.
(d) Upon receipt by the Transfer Agent from the Holder of a
Conversion Notice meeting the requirements for conversion as provided in Section
2.1(a) and this Section 2.3, the Company shall issue and deliver or cause to be
issued and delivered to the Holder certificates for the Common Stock issuable
upon such conversion by the close of business on the third Trading Day after the
date of such receipt, and as of the close of business on the date of receipt of
such Conversion Notice the Holder shall be deemed to be the holder of record of
the Common Stock issuable upon such conversion, the outstanding principal amount
and the amount of accrued and unpaid interest and Default Interest on this Note
shall be reduced to reflect such conversion, and all rights with respect to the
portion of this Note being so converted shall forthwith terminate except the
right to receive the Common Stock or other securities, cash or other assets, as
herein provided, on such conversion except as otherwise provided herein. If the
Holder shall have given a Conversion Notice in accordance with the terms of this
Note, the Company's obligation to issue and deliver the certificates for Common
Stock shall be absolute and unconditional, irrespective of any action or
inaction by the 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 Company to the Holder, or any setoff, counterclaim,
recoupment, limitation or termination, or any breach or alleged breach by the
Holder or any other person of any obligation to the Company or any violation or
alleged violation of law by the Holder or any other person, and irrespective of
any other circumstance which might otherwise limit such obligation of the
Company to the Holder in connection with such conversion. The occurrence of an
event which requires an equitable adjustment of the Market Price as contemplated
by the definition thereof in Section 6.1 shall in no way restrict or delay the
right of the Holder to receive shares of Common Stock upon conversion of this
Note and the Company shall use its best efforts to implement such adjustment on
terms reasonably acceptable to the Holder within two Business Days after such
occurrence. If the Company fails to issue and deliver the certificates for the
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Common Stock to the Holder pursuant to the first sentence of this Section 2.3(d)
as and when required to do so, in addition to any other liabilities the Company
may have hereunder and under applicable law (1) the Company shall pay or
reimburse the Holder on demand for all out-of-pocket expenses, including,
without limitation, fees and expenses of legal counsel, incurred by the Holder
as a result of such failure, (2) the Conversion Percentage used to determine the
Conversion Price applicable to such conversion shall be reduced by one
percentage point from the Conversion Percentage otherwise used to calculate the
Conversion Price applicable to such conversion or, if such conversion is based
on the Ceiling Price, the ceiling price used to determine the Conversion Price
applicable to such conversion shall be reduced by one percentage point from the
amount that the Conversion Price otherwise would have been without reduction
pursuant hereto, in either case, for each Trading Day after such third Trading
Day until such shares of Common Stock are delivered to the Holder and (3) the
Holder may by notice (which may be given by mail, courier, personal service or
telephone line facsimile transmission) or oral notice (promptly confirmed in
writing) given at any time prior to delivery to the Holder of the shares of
Common Stock issuable upon such conversion of this Note, rescind such
conversion, whereupon the Holder shall have the right to convert this Note
thereafter in accordance herewith.
(e) No fractional shares of Common Stock shall be issued upon
conversion of this Note but, in lieu of any fraction of a share of Common Stock
which would otherwise be issuable in respect of the aggregate number of such
shares converted at one time by the same holder, the Company may round the
number of shares of Common Stock issued on such conversion up to the next
highest whole share or may pay lawful money of the United States of America for
such fractional share, based on a value of one share of Common Stock being equal
to the Market Price, as reported by Bloomberg, L.P, of the Common Stock on the
date the applicable Conversion Notice is given to the Company.
2.4 LIMITATION ON SHARES ISSUABLE ON CONVERSION; MANDATORY
REDEMPTION. (a) Notwithstanding any other provision herein, unless the
Stockholder Approval shall have been obtained from the stockholders of the
Company or waived by Nasdaq (or other appropriate stock exchange or market), so
long as the Common Stock is listed on the Nasdaq, the Nasdaq SmallCap, the NYSE
or the AMEX the Company shall not be required to issue upon conversion of this
Note and the Interest Notes a number of shares of Common Stock in excess of the
Maximum Share Amount. The Company shall maintain records which show the number
of shares of Common Stock issued by the Company upon conversion from time to
time of this Note and any Interest Notes, which records shall be controlling in
the absence of manifest error. The Company shall maintain records which show the
principal amount of Interest Notes issued by the Company pursuant to Section 1.1
in payment of interest on this Note and issued pursuant to any Interest Note in
payment of interest thereon, which records shall be controlling in the absence
of manifest error. Each Interest Note shall be allocated a
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portion of the Maximum Share Amount allocated to this Note and the other
Interest Notes outstanding at the time of issuance of such Interest Note, based
on the outstanding principal amounts thereof at the time of such issuance, and
the certificate for such Interest Note shall bear a notation as to the
certificate number of this Note. Upon surrender of this Note for transfer or re-
registration hereof (or, at the option of the Holder, for conversion pursuant to
Section 2.1(a) of less than all of this Note), the Company shall make a notation
on the new Note issued upon such transfer or re-registration or evidencing such
unconverted portion of this Note, as the case may be, as to the remaining number
of shares of Common Stock from the Maximum Share Amount remaining available for
conversion of the Note evidenced by such new certificate. If this Note is
surrendered for split-up into two or more Notes representing an aggregate
principal amount equal to the principal amount of this Note at the time so
surrendered (as reduced by any contemporaneous conversion of this Note), each
Note issued on such split-up shall bear a notation of the portion of the Maximum
Share Amount allocated thereto determined by pro rata allocation from among the
remaining Maximum Share Amount at the time this Note is so surrendered. If this
Note is converted in full, repaid, repurchased or redeemed, all of the Maximum
Share Amount which remains unissued after such conversion, repayment, repurchase
or redemption shall be re-allocated (1) to all Interest Notes and Other Notes
held by the Holder at the close of business on the Conversion Date for such
conversion, based on the outstanding principal amounts thereof, and (2) if the
Holder does not hold any Interest Notes or Other Notes at the close of business
on such Conversion Date, to the Other Notes, based on the principal amounts
thereof outstanding at the close of business on such Conversion Date. If any
Other Note is converted in full, repaid, repurchased or redeemed, all of the
portion of the Maximum Share Amount (as defined in such Other Note) of such
Other Note not re-allocated to Other Notes held by the holder of such Other Note
and which remains unissued after such conversion, repayment, repurchase or
redemption shall be re-allocated to this Note, the Interest Notes and the Other
Notes outstanding at the close of business on the date of such conversion,
repayment, repurchase or redemption of the Other Note so converted, repaid,
repurchased or redeemed pro rata based on the principal amounts outstanding at
the close of business on such date.
(b) (1) If on or after December 16, 1998 and on or prior to
September 4, 2001 a Maximum Share Amount Inconvertibility occurs, then the
Company shall promptly, but in no event later than five Business Days after each
such occurrence, give an Inconvertibility Notice to the Holder (by telephone
line facsimile transmission at such number as the Holder has specified in
writing to the Company for such purposes or, if the Holder shall not have
specified any such number, by overnight courier at the Holder's address as the
same appears on the records of the Company) and the Holder may at any time after
such occurrence give an Inconvertibility Notice to the Company. If the Company
shall have given or been required to give any Inconvertibility Notice, or if the
Holder shall have given any Inconvertibility Notice, then within the applicable
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Redemption Election Period the Holder shall have the right by a Redemption
Election given to the Company (which may be contained in the Inconvertibility
Notice given by the Holder) to direct the Company to redeem the portion of this
Note (which, if applicable, shall be all of this Note) as shall not, on the
Business Day prior to the applicable Share Limitation Redemption Date be
convertible into shares of Common Stock by reason of the limitations set forth
in Section 2.4(a) on the applicable Share Limitation Redemption Date, at a price
equal to the Share Limitation Redemption Price, payable on the date which is
five Business Days after the Holder gives such Redemption Election. If the
Holder directs the Company to redeem this Note or any portion hereof and, prior
to the date the Company is required to redeem this Note or such portion hereof,
the Company would have been able, within the limitations set forth in Section
2.4(a), to convert all of this Note (determined without regard to the
limitation, if any, on beneficial ownership of shares of Common Stock by the
Holder contained in the second sentence of Section 2.1) on any ten Trading Days
within any period of 15 consecutive Trading Days commencing after the period of
20 consecutive Trading Days which gave rise to the applicable Inconvertibility
Notice from the Company or the Holder, as the case may be, had the Holder
exercised its right to convert this Note in full on each of such ten Trading
Days within such 15 Trading Day period, then the Company shall not be required
to redeem any of this Note by reason of such Inconvertibility Notice.
(2) An Inconvertibility Notice or a Redemption Election given by
the Holder shall be deemed for all purposes to be in proper form unless the
Company notifies the Holder in writing within three Business Days after an
Inconvertibility Notice or a Redemption Election has been given (which notice
shall specify all defects in the Inconvertibility Notice or Redemption
Election), and any Inconvertibility Notice or Redemption Election containing any
such defect shall nonetheless be effective on the date given if the Holder
promptly undertakes to correct all such defects. Whether or not the Holder has
given such undertaking, no such claim of error shall limit or delay performance
of the Company's obligation to redeem the full amount of the portion of this
Note as to which a Redemption Election has been given and which is not in
dispute.
(c) Notwithstanding the giving of any Inconvertibility Notice by
the Company to the Holder or the giving or the absence of any Inconvertibility
Notice or Redemption Election by the Holder or any redemption of an
inconvertible portion of this Note pursuant to Section 2.4(b), thereafter the
provision of Section 2.4(b) shall continue to be applicable on any occasion
unless the Stockholder Approval shall have been obtained or waived by the
Nasdaq.
(d) On each Share Limitation Redemption Date, the Company shall
make payment in immediately available funds of the applicable Share Limitation
Redemption Price to or upon the order of the Holder as specified by the Holder
in writing to the Company at least one Business Day prior to such Share
Limitation
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Redemption Date. If the Company is required to redeem this Note or any portion
hereof pursuant to this Section 2.4, the Company shall make payment to the
Holder of an amount equal to the Share Limitation Redemption Price. Upon
redemption of less than all of this Note, promptly, but in no event later than
three Business Days after surrender of this Note to the Company, the Company
shall issue a replacement Note of like tenor having a principal amount equal to
the principal amount of this Note remaining after such redemption.
ARTICLE III
CERTAIN COVENANTS
So long as the Company shall have any obligation under this Note:
3.1 CERTAIN REPURCHASES. (a) The Company shall not itself, and
shall not permit any Subsidiary to redeem, repurchase or otherwise acquire in
any one transaction or series of related transactions any shares of Common Stock
if the number of shares so repurchased, redeemed or otherwise acquired in such
transaction or series of related transactions (excluding any Option Share
Surrender) is more than either (x) 5.0% of the number of shares of Common Stock
outstanding immediately prior to such transaction or series of related
transactions or (y) 1% of the number of shares of Common Stock 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 Company or such Subsidiary offers to purchase for
cash from the Holder at the time of such redemption, repurchase or acquisition
the same percentage of the outstanding principal amount of this Note as the
percentage of the number of outstanding shares of Common Stock to be so
redeemed, repurchased or acquired at a purchase price equal to the greater of
(i) the Premium Price on the date of purchase pursuant to this Section 3.1(a)
and (ii) the Converted Market Price on the date of purchase pursuant to this
Section 3.1(a); provided, however, that if in connection with any
determination of the purchase price payable pursuant to this Section 3.1 the
amount specified in clause (y) of the definition of the term Converted Market
Price is greater than 200% of the Ceiling Price on the date as of which such
amount is determined, then for purposes of computing the purchase price payable
pursuant to this Section 3.1 in such instance, the amount otherwise specified in
clause (y) of the definition of the term Converted Market Price shall be reduced
by 20% of the amount by which (A) the amount otherwise specified in clause (y)
of the definition of the term Converted Market Price exceeds (B) the Ceiling
Price on the date as of which such amount is determined.
(b) The Company shall not, and shall not permit any Subsidiary,
directly or indirectly to repurchase, redeem or otherwise acquire any shares of
its
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capital stock other than Common Stock other than repurchases or redemptions of
the Company's Series A Preferred Stock or Series D Convertible Preferred Stock
which are required to be made by the Company in accordance with the terms
thereof as in effect on the Issuance Date or as proposed to be amended pursuant
to the Amendment Agreement.
3.2 CERTAIN TENDER OFFERS. The Company shall not itself, and shall
not permit any Subsidiary to (1) make any Tender Offer for outstanding shares of
Common Stock unless the Company 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 Company or any Subsidiary, unless such
person agrees with the Company to make an offer, in either such case, to the
Holder to purchase the same percentage of the outstanding principal amount of
this Note held by the Holder as the percentage of outstanding shares of Common
Stock offered to be purchased in such Tender Offer, at a price equal to the
greater of (i) the Premium Price on the date of purchase pursuant to this
Section 3.2 and (ii) the greater of (x) the Converted Market Price on the date
of purchase pursuant to this Section 3.2 and (y) the greater of (A) the
Converted Market Price on the date of the first public announcement of such
Tender Offer and (B) the Converted Market Price on the date of purchase pursuant
to this Section 3.2.
3.3 PAYMENT OF OBLIGATIONS. The Company will pay and discharge,
and will cause each Subsidiary to pay and discharge when due, all their
respective obligations and liabilities which are material to the Company and the
Subsidiaries, taken as a whole, including, without limitation, tax liabilities,
except where the same may be contested in good faith by appropriate proceedings
and for which appropriate reserves have been made on the books of the Company or
such Subsidiary.
3.4 MAINTENANCE OF PROPERTY; INSURANCE. (a) The Company will keep,
and will cause each Subsidiary to keep, all property useful and necessary in its
business in good working order and condition, ordinary wear and tear excepted.
(b) The Company will maintain, and will cause each Subsidiary to
maintain, with financially sound and responsible insurance companies, insurance
against loss or damage by fire or other casualty and such other insurance,
including but not limited to, product liability insurance, in such amounts and
covering such risks as is reasonably adequate for the conduct of their
businesses and the value of their properties in at least such amounts and
against such risks as is reasonably adequate for the conduct of their respective
businesses and the value of their respective properties.
3.5 CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE. The Company
will continue, and will cause each Subsidiary to continue, to engage in business
of the same general type as conducted by the Company and the Subsidiaries
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on the Issuance Date, and will preserve, renew and keep in full force and
effect, and will cause each Subsidiary to preserve, renew and keep in full force
and effect, their respective corporate existence and their respective rights,
privileges and franchises necessary or desirable in the normal conduct of
business.
3.6 COMPLIANCE WITH LAWS. The Company will comply, and will cause
each Subsidiary to comply, in all material respects with all applicable laws,
ordinances, rules, regulations, decisions, orders and requirements of
governmental authorities and courts (including, without limitation,
environmental laws) except (i) where compliance therewith is contested in good
faith by appropriate proceedings or (ii) where non-compliance therewith could
not reasonably be expected to have a material adverse effect on the business,
condition (financial or otherwise), operations, performance, properties or
prospects of the Company and the Subsidiaries, taken as a whole.
3.7 INVESTMENT COMPANY ACT. The Company will not be or become an
open-end investment trust, unit investment trust or face-amount certificate
company that is or is required to be registered under Section 8 of the
Investment Company Act of 1940, as amended.
3.8 TRANSACTIONS WITH AFFILIATES. The Company will not, and will
not permit any Subsidiary, directly or indirectly, to pay any funds to or for
the account of, make any investment (whether by acquisition of stock or
Indebtedness, by loan, advance, transfer of property, guarantee or other
agreement to pay, purchase or service, directly or indirectly, any Indebtedness,
or otherwise) in, lease, sell, transfer or otherwise dispose of any assets,
tangible or intangible, to, or participate in, or effect any transaction in
connection with, any joint enterprise or other joint arrangement with, any
Affiliate of the Company or any Affiliate of any Subsidiary, except, on terms to
the Company or such Subsidiary no less favorable than terms that could be
obtained by the Company or such Subsidiary from a Person that is not an
Affiliate of the Company or an Affiliate of any Subsidiary, as determined in
good faith by the Board of Directors.
3.9 COMPLIANCE. The Company shall (a) use its commercially
reasonable best efforts to obtain knowledge of any failure or default by the
Company in the timely performance of any material obligation to the Holder or
the holder of any Interest Note or Other Note under the terms of this Note or
any other Transaction Document and (b) shall notify the Holder promptly, but in
no event later than three Business Days after the Company first learns of any
such failure or default.
ARTICLE IV
EVENTS OF DEFAULT
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If any of the following events of default (each, an "Event of
Default") shall occur:
4.1 FAILURE TO PAY PRINCIPAL OR INTEREST. The Company fails (a) to
pay the principal, Redemption Price, Redemption Event Redemption Price or
Repurchase Price hereof or of any Interest Note when due, whether at maturity,
upon redemption, upon acceleration or otherwise, as applicable, or (b) to pay
any installment of interest hereon or on any Interest Note when due and, in the
case of this clause (b) of this Section 4.1 only, such failure continues for a
period of three Business Days after the due date thereof; or
4.2 CONVERSION AND THE SHARES. The Company fails to issue or cause
to be issued shares of Common Stock to the Holder upon exercise by the Holder of
the conversion rights of the Holder in accordance with the terms of this Note or
upon exercise of the Warrants or fails to transfer any certificate for shares of
Common Stock issued to the Holder upon conversion of this Note or any Interest
or upon exercise of the Warrants as and when required by this Note, the Interest
Notes, the Note Purchase Agreement, the Transfer Agent Instruction and the
Warrants; or
4.3 BREACH OF COVENANT. The Company (a) fails to comply with
Section 3.1, 3.2 or 3.9 or (b) fails to comply in any material respect with any
provision of Article III of this Note (other than Section 3.1, 3.2 or 3.9) or
breaches any other material covenant or other material term or condition of this
Note (other than as specifically provided in Sections 4.1, 4.2, 4.3(a)), the
Note Purchase Agreement, the Security Agreement, the Transfer Agent Instruction
or the Warrants, and in the case of this clause (b) of this Section 4.3 only,
such breach continues for a period of 20 days after written notice thereof to
the Company from the Holder; or
4.4 BREACH OF REPRESENTATIONS AND WARRANTIES. Any material
representation or warranty of the Company made herein or in any agreement,
statement or certificate given in writing pursuant hereto or in connection
herewith (including, without limitation, the Note Purchase Agreement, the
Security Agreement, the Transfer Agent Instruction and the Warrants) shall be
false or misleading in any material respect when made; or
4.5 CERTAIN VOLUNTARY PROCEEDINGS. The Company or any Subsidiary
shall commence a voluntary case or other proceeding seeking liquidation,
reorganization or other relief with respect to itself or its debts under any
bankruptcy, insolvency or other similar law now or hereafter in effect or
seeking the appointment of a trustee, receiver, liquidator, custodian or other
similar official of it or any substantial part of its property, or shall consent
to any such relief or to the appointment of or taking possession by any such
official in an involuntary case or other proceeding commenced against it, or
shall make a general assignment for the benefit of creditors, or shall fail
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generally to pay its debts as they become due or shall admit in writing its
inability generally to pay its debts as they become due; or
4.6 CERTAIN INVOLUNTARY PROCEEDINGS. An involuntary case or
other proceeding shall be commenced against the Company or any Subsidiary
seeking liquidation, reorganization or other relief with respect to it or its
debts under any bankruptcy, insolvency or other similar law now or hereafter in
effect or seeking the appointment of a trustee, receiver, liquidator, custodian
or other similar official of it or any substantial part of its property, and
such involuntary case or other proceeding shall remain undismissed and unstayed
for a period of 60 consecutive days; or
4.7 JUDGMENTS. Any court of competent jurisdiction shall enter one
or more final judgments against the Company or any Subsidiary or any of their
respective properties or other assets in an aggregate amount in excess of
$100,000, which is not vacated, bonded, stayed, discharged, satisfied or waived
for a period of 30 consecutive days; or
4.8 DEFAULT UNDER OTHER AGREEMENTS. Except as otherwise agreed in
writing by the Company and the original Holder of this Note (which agreement
shall be binding on any subsequent Holder of this Note or any Interest Note) (a)
the Company or any Subsidiary shall default in any payment with respect to any
indebtedness for borrowed money (other than this Note) which indebtedness has an
outstanding principal amount in excess of $100,000 individually or $200,000 in
the aggregate for the Company and the Subsidiaries, beyond the period of grace,
if any, provided in the instrument or agreement under which such indebtedness
was created; provided, however, that the events and conditions described in the
preceding clause shall not constitute an Event of Default unless and until the
Company fails to take the action necessary to correct such event or condition
within five (5) Business Days of becoming aware of such event or condition; or
(b) any indebtedness of the Company or any Subsidiary which has an outstanding
principal amount in excess of $100,000 individually or $200,000 in the aggregate
shall, in accordance with its terms, be declared to be due and payable, or
required to be prepaid other than by a regularly scheduled or required payment
prior to the stated maturity thereof;
4.9 DELISTING OF COMMON STOCK. The Common Stock shall cease to be
listed on any of Nasdaq, the NYSE or the AMEX and shall remain unlisted for a
period of three Trading Days; or
4.10 FAILURE TO OBTAIN OPINION. The Company fails to deliver an
opinion of its counsel, Weil, Gotshal & Manges LLP addressed to the Holder as
provided in Section 4(l) of the Note Purchase Agreement within seven (7)
Business Days of the issuance of this Note;
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then, (X) upon the occurrence and during the continuation of any Event of
Default specified in Section 4.1, 4.2, 4.3, 4.4, 4.7, 4.8, 4.9 or 4.10, at the
option of the Holder the Company shall, and upon the occurrence of any Event of
Default specified in Section 4.5 or 4.6, the Company shall, pay to the Holder an
amount equal to the Premium Price on the date of such payment, (Y) all other
amounts payable hereunder shall immediately become due and payable, all without
demand, presentment or notice, all of which hereby are expressly waived,
together with all costs, including, without limitation, reasonable legal fees
and expenses, of collection, and (Z) the Holder shall be entitled to exercise
all other rights and remedies available at law or in equity, including all
rights and remedies under or in connection with the Security Agreement;
provided, however, that if in connection with any Event of Default the Company
shall not at such time be in compliance with its obligations under Section 1.2,
3.1 or 3.2 or shall be obligated, or to cause another Person, to redeem,
repurchase or purchase all or any portion of this Note, then in lieu of payment
of the amount provided in the preceding clause (X) the Company shall pay to the
Holder an amount equal to the amount which would be payable to the Holder upon
redemption, repurchase or purchase of this Note in accordance with Section 1.2,
3.1 or 3.2 as if the Company had exercised its right to redeem or repurchase
this Note (or such Person had become obligated to purchase this Note) pursuant
thereto on the date of such payment pursuant hereto.
ARTICLE V
REPURCHASE UPON A REPURCHASE EVENT
5.1 REPURCHASE RIGHT UPON REPURCHASE EVENT. If a Repurchase Event
occurs, then the Holder shall have the right, at the Holder's option, to require
the Company to repurchase all of this Note, or any portion hereof (in a minimum
principal amount of $100,000 or integral multiples thereof (or such lesser
remaining principal amount of this Note)), on the repurchase date that is five
Business Days after the date of the Holder Notice delivered with respect to such
Repurchase Event. The Holder shall have the right to require the Company to
repurchase all or any such portion of this Note if a Repurchase Event occurs at
any time while any portion of the principal amount of this Note is outstanding
at a price equal to the Repurchase Price.
5.2 NOTICES; METHOD OF EXERCISING REPURCHASE RIGHTS, ETC. (a) On
or before the fifth Business Day after the occurrence of a Repurchase Event, the
Company shall give to the Holder a Company Notice of the occurrence of the
Repurchase Event and of the repurchase right set forth herein arising as a
result thereof. Such Company Notice shall set forth:
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(i) a statement that a Repurchase Event has occurred, the date of
such occurrence and the type of Repurchase Event (by reference to the
applicable clause of the definition of such term);
(ii) the date by which the repurchase right must be exercised, and
(iii) a description of the procedure (set forth in this Section
5.2) which the Holder must follow to exercise the repurchase right.
No failure of the Company to give a Company Notice or defect therein shall
limit the Holder's right to exercise the repurchase right or affect the validity
of the proceedings for the repurchase of this Note or portion hereof.
(b) To exercise the repurchase right, the Holder shall deliver to
the Company on or before the 30th day after a Company Notice (or if no
such Company Notice has been given, within 40 days after the Holder first
learns of the Repurchase Event) (i) a Holder Notice setting forth the name
of the Holder and the principal amount of this Note to be repurchased, and
(ii) this Note, duly endorsed for transfer to the Company of the portion
of the principal amount of this Note to be repurchased. A Holder Notice
may be revoked by the Holder at any time prior to the time the Company
pays the applicable Repurchase Price to the Holder.
(c) If the Holder shall have given a Holder Notice, on the date
which is five Business Days after the date such Holder Notice is given (or
such later date as the Holder surrenders this Note) the Company shall make
payment in immediately available funds of the applicable Repurchase Price
to such account as specified by the Holder in writing to the Company at
least one Business Day prior to the applicable repurchase date.
5.3 OTHER. (a) If the Company fails to repurchase on the
applicable repurchase date this Note (or portion hereof) as to which the
repurchase right has been properly exercised pursuant to this Article V, then
the Repurchase Price for the portion (which, if applicable, may be all) of this
Note which is required to have been so repurchased shall bear interest to the
extent not prohibited by applicable law from the applicable repurchase date
until paid at the Default Rate.
(b) If a portion of this Note is to be repurchased, upon surrender
of this Note to the Company in accordance with the terms of this Article V, the
Company shall execute and deliver to the Holder without service charge, a new
Note or Notes, having the same date hereof and containing identical terms and
conditions, in such denomination or denominations as requested by the Holder in
aggregate principal amount equal to, and in exchange for, the unrepurchased
portion of the principal amount of the Note so surrendered.
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(c) A Holder Notice given by the Holder shall be deemed for all
purposes to be in proper form unless the Company notifies the Holder within
three Business Days after such Holder Notice has been given (which notice shall
specify all defects in the Holder Notice), and any Holder Notice containing any
such defect shall nonetheless be effective on the date given if the Holder
promptly undertakes to correct all such defects. No such claim of defect shall
limit or delay performance of the Company's obligation to repurchase any portion
of this Note, the repurchase of which is not in dispute.
ARTICLE VI
DEFINITIONS
6.1 CERTAIN DEFINED TERMS. (a) All the agreements or instruments
herein defined shall mean such agreements or instruments as the same may from
time to time be supplemented or amended or the terms thereof waived or modified
to the extent permitted by, and in accordance with, the terms thereof and of
this Note.
(b) The following terms shall have the following meanings (such
meanings to be equally applicable to both the singular and plural forms of the
terms defined):
"Affiliate" means, with respect to any Person, any other Person
that directly, or indirectly through one or more intermediaries, controls, is
controlled by or under common control with the subject Person. For purposes of
the term "Affiliate", the term "control" (including the terms "controlling",
"controlled by" and "under common control with") means the possession, direct or
indirect, of the power to direct or to cause the direction of the management and
policies of a Person, whether through the ownership of securities, by contract
or otherwise.
"Aggregated Person" means any person whose beneficial ownership of
shares of Common Stock would be aggregated with the Holder's beneficial
ownership of shares of Common Stock for purposes of Section 13(d) of the 1934
Act and Regulation 13D-G thereunder.
"Amendment Agreement" means the Amendment Agreement, dated as of
July 31, 1998, by and between the Company and MCM Partners, relating to
amendment of the rights and preferences of the Series A Preferred Stock.
"AMEX" means the American Stock Exchange, Inc.
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"Applicable Rate" means six percent per annum.
"Average Market Price" for any date means the arithmetic average
of the Market Price on each of the five Trading Days, whether or not
consecutive, during the applicable Measurement Period having the lowest Market
Prices.
"Business Day" shall mean any day other than a Saturday, Sunday or
a day on which commercial banks in The City of New York are authorized or
required by law or executive order to remain closed.
"Ceiling Price" means $.9006 (subject to equitable adjustments
from time to time on terms reasonably acceptable to the Majority Holders for
stock splits, stock dividends, combinations, recapitalizations,
reclassifications and similar events occurring or with respect to which "ex-"
trading commences on or after the Issuance Date); provided, however, that,
notwithstanding any other provision hereof, the Ceiling Price applicable to a
particular conversion shall be subject to reduction as provided in Section
2.3(d); provided further, however, that if a Registration Event occurs, then, in
addition to any other right or remedy of the Holder, thereafter the Ceiling
Price shall be permanently reduced on each Computation Date by an amount equal
to two percent of the amount that the Ceiling Price otherwise would have been
without any reduction pursuant to this proviso (pro rated in the case of any
Computation Date which is less than 30 days after a Registration Event occurs or
less than 30 days after another Computation Date).
"Common Stock" shall mean the Common Stock, $.01 par value, or any
shares of capital stock into which such stock shall be changed or reclassified
after the Issuance Date.
"Company" shall have the meaning provided in the first paragraph
of this Note.
"Company Certificate" means a certificate of the Company signed by
an Officer.
"Company Notice" means a notice from the Company to the Holder
setting forth the information provided in Section 5.2.
"Company Optional Redemption Notice" means a notice from the
Company to the Holder setting forth the information required by Section 1.2.
"Computation Date" means, if a Registration Event occurs, any of
(1) the date which is 30 days after such Registration Event occurs, if any
Registration Event is continuing on such date, (2) each date which is 30 days
after a Computation Date, if any
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Registration Event is continuing on such date, and (3) the date on which all
Registration Events cease to continue.
"Conversion Date" means the date on which a Conversion Notice is
actually received by the Transfer Agent, whether by mail, courier, personal
service, telephone line facsimile transmission or other means.
"Conversion Notice" means a Notice of Conversion of 6% Senior
Convertible Note due 2001 substantially in the form attached hereto as EXHIBIT
A, given by the Holder.
"Conversion Percentage" means 85%; provided, however, that,
notwithstanding any other provision hereof, if a Registration Event occurs, then
such percentage stated above shall be permanently reduced by two percentage
points on each Computation Date (pro rated in the case of any Computation Date
which is less than 30 days after a Registration Event occurs or less than 30
days after another Computation Date).
"Conversion Price" means the lesser of:
(1) the product of (a) the Average Market Price
for such date times (b) the applicable Conversion Percentage; and
(2) the Ceiling Price;
provided, however, that the Conversion Price applicable to a particular
conversion shall be subject to reduction as provided in Section 2.3(d).
"Converted Market Price" means, for this Note or any portion
hereof as of any date of determination, an amount equal to the product obtained
by multiplying (x) the number of shares of Common Stock which would, at the time
of such determination, be issuable on conversion in accordance with Article II
of this Note or such portion hereof and any accrued and unpaid interest hereon
and any accrued and unpaid Default Interest hereon if a Conversion Notice were
given by the Holder on the date of such determination (determined without regard
to any limitation on conversion based on beneficial ownership contained in
Section 2.1 times (y) the arithmetic average of the Market Price of the Common
Stock for the five consecutive Trading Days ending on the Trading Day prior to
the date of such determination.
"Default Interest" shall have the meaning provided in the first
paragraph of this Note.
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"Default Rate" means 14 percent per annum (or such lesser rate
equal to the highest rate permitted by applicable law).
"Event of Default" shall have the meaning provided in Article IV.
"Generally Accepted Accounting Principles" for any Person means
the generally accepted accounting principles and practices applied by such
Person from time to time in the preparation of its audited financial statements.
"Holder" shall have the meaning provided in the first paragraph of
this Note.
"Holder Notice" means a Holder Notice in the form attached hereto
as EXHIBIT E.
"Inconvertibility Notice" means a notice from the Company to the
Holder in the form set forth in EXHIBIT B or a notice from the Holder to the
Company in the form set forth in EXHIBIT C.
"Indebtedness" as used in reference to any Person means all
indebtedness of such person for borrowed money, the deferred purchase price of
property, goods and services and obligations under leases which are required to
be capitalized in accordance with Generally Accepted Accounting Principles and
shall include all such indebtedness guaranteed in any manner by such person or
in effect guaranteed by such person through a contingent agreement to purchase
and all indebtedness for the payment or purchase of which such person has
contingently agreed to advance or supply funds and all indebtedness secured by
mortgage or other lien upon property owned by such person, although such person
has not assumed or become liable for the payment of such indebtedness, and, for
all purposes hereof, such indebtedness shall be treated as though it has been
assumed by such person.
"Interest Note" means any 6% Senior Convertible Note due 2001 of
like tenor with this Note which is issued by the Company in payment of interest
on this Note or any Interest Note in accordance with the terms hereof or
thereof.
"Interest Note Payment Option" shall have the meaning provided in
Section 1.1(a).
"Interest Payment Dates" shall mean each February 15, May 15,
August 15 and November 15 and the Maturity Date.
"Issuance Date" means the date this Note was issued to the
original Holder of this Note.
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"Majority Holders" means at any time the holders of this Note,
Interest Notes and the Other Notes which hold Notes, Interest Notes and Other
Notes which, based on the outstanding principal amounts thereof, represent a
majority of the aggregate outstanding principal amount of this Note, the
Interest Notes and the Other Notes.
"Market Price" of the Common Stock on any date means the lowest
sale price (regular way) for one share of Common Stock on such date on the first
applicable among the following: (a) the national securities exchange on which
the shares of Common Stock are listed which constitutes the principal securities
market for the Common Stock, (b) the Nasdaq, if the Nasdaq constitutes the
principal market for the Common Stock on such date, or (c) the Nasdaq SmallCap,
if the Nasdaq SmallCap constitutes the principal securities market for the
Common Stock on such date, in any such case as reported by Bloomberg, L.P.;
provided, however, that if during any Measurement Period or other period during
which the Market Price is being determined:
(i) The Company shall declare or pay a dividend or make a
distribution to all holders of the outstanding Common Stock in shares of
Common Stock or fix any record date for any such action, then the Market
Price for each day in such Measurement Period or such other period which
day is prior to the earlier of (1) the date fixed for the determination of
stockholders entitled to receive such dividend or other distribution and
(2) the date on which ex-dividend trading in the Common Stock with respect
to such dividend or distribution begins shall be reduced by multiplying
the Market Price (determined without regard to this proviso) for each such
day in such Measurement Period or such other period by a fraction, the
numerator of which shall be the number of shares of Common Stock
outstanding at the close of business on the earlier of (1) the record date
fixed for such determination and (2) the date on which ex-dividend trading
in the Common Stock with respect to such dividend or distribution begins
and the denominator of which shall be the sum of such number of shares and
the total number of shares constituting such dividend or other
distribution;
(ii) The Company shall issue rights or warrants to all holders of
its outstanding shares of Common Stock, or fix a record date for such
issuance, which rights or warrants entitle such holders (for a period
expiring within forty-five (45) days after the date fixed for the
determination of stockholders entitled to receive such rights or warrants)
to subscribe for or purchase shares of Common Stock at a price per share
less than the Market Price (determined without regard to this proviso) for
any day in such Measurement Period or such other period which day is prior
to the end of such 45-day period, then the Market Price for
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each such day shall be reduced so that the same shall equal the price
determined by multiplying the Market Price (determined without regard to
this proviso) by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding at the close of business on the record
date fixed for the determination of stockholders entitled to receive such
rights or warrants plus the number of shares which the aggregate offering
price of the total number of shares so offered would purchase at such
Market Price, and the denominator of which shall be the number of shares
of Common Stock outstanding on the close of business on such record date
plus the total number of additional shares of Common Stock so offered for
subscription or purchase. In determining whether any rights or warrants
entitle the holders to subscribe for or purchase shares of Common Stock at
less than the Market Price (determined without regard to this proviso),
and in determining the aggregate offering price of such shares of Common
Stock, there shall be taken into account any consideration received for
such rights or warrants, the value of such consideration, if other than
cash, to be determined in good faith by a resolution of the Board of
Directors of the Corporation;
(iii) The outstanding shares of Common Stock shall be subdivided
into a greater number of shares of Common Stock or a record date for any
such subdivision shall be fixed, then the Market Price of the Common Stock
for each day in such Measurement Period or such other period which day is
prior to the earlier of (1) the day upon which such subdivision becomes
effective and (2) the date on which ex-dividend trading in the Common
Stock with respect to such subdivision begins shall be proportionately
reduced, and conversely, in case the outstanding shares of Common Stock
shall be combined into a smaller number of shares of Common Stock, the
Market Price each trade (regular way) on for each day in such Measurement
Period or such other period which day is prior to the earlier of (1) the
date on which such combination becomes effective and (2) the date on which
trading in the Common Stock on a basis which gives effect to such
combination begins, shall be proportionately increased;
(iv) The Company shall, by dividend or otherwise, distribute to
all holders of its Common Stock shares of any class of capital stock of
the Company (other than any dividends or distributions to which clause (i)
of this proviso applies) or evidences of its indebtedness, cash or other
assets (including securities, but excluding any rights or warrants
referred to in clause (ii) of this proviso and dividends and distributions
paid exclusively in cash and excluding any capital stock, evidences of
indebtedness, cash or assets distributed upon a merger or consolidation)
(the foregoing hereinafter in this clause (iv) of this proviso called the
"Securities"), or fix a record date for any such distribution, then, in
each such case, the Market Price for each day in such Measurement Period
or such other period which day is prior to the earlier of (1) the record
date
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for such distribution and (2) the date on which ex-dividend trading in the
Common Stock with respect to such distribution begins shall be reduced so
that the same shall be equal to the price determined by multiplying the
Market Price (determined without regard to this proviso) by a fraction,
the numerator of which shall be the Market Price (determined without
regard to this proviso) for such date less the fair market value (as
determined in good faith by resolution of the Board of Directors of the
Company) on such date of the portion of the Securities so distributed or
to be distributed applicable to one share of Common Stock and the
denominator of which shall be the Market Price (determined without regard
to this proviso) for such date; provided, however, that in the event the
then fair market value (as so determined) of the portion of the Securities
so distributed applicable to one share of Common Stock is equal to or
greater than the Market Price (determined without regard to this clause
(iv) of this proviso) for any such Trading Day, in lieu of the foregoing
adjustment, adequate provision shall be made so that the Holder shall have
the right to receive upon conversion of this Note the amount of Securities
the Holder would have received had the holders of shares of Series C
Preferred Stock converted the shares of Series C Preferred Stock
immediately prior to the record date for such distribution. If the Board
of Directors of the Corporation determines the fair market value of any
distribution for purposes of this clause (iv) by reference to the actual
or when issued trading market for any securities comprising all or part of
such distribution, it must in doing so consider the prices in such market
on the same day for which an adjustment in the Market Price is being
determined.
For purposes of this clause (iv) and clauses (i) and (ii) of this
proviso, any dividend or distribution to which this clause (iv) is
applicable that also includes shares of Common Stock, or rights or
warrants to subscribe for or purchase shares of Common Stock to which
clause (i) or (ii) of this proviso applies (or both), shall be deemed
instead to be (1) a dividend or distribution of the evidences of
indebtedness, assets, shares of capital stock, rights or warrants other
than such shares of Common Stock or rights or warrants to which clause (i)
or (ii) of this proviso applies (and any Market Price reduction required
by this clause (iv) with respect to such dividend or distribution shall
then be made) immediately followed by (2) a dividend or distribution of
such shares of Common Stock or such rights or warrants (and any further
Market Price reduction required by clauses (i) and (ii) of this proviso
with respect to such dividend or distribution shall then be made), except
that any shares of Common Stock included in such dividend or distribution
shall not be deemed "outstanding at the close of business on the date
fixed for such determination" within the meaning of clause (i) of this
proviso;
(v) The Company or any Subsidiary shall (x) by dividend or
otherwise, distribute to all holders of its Common Stock cash in (or fix
any record date for
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any such distribution), or (y) repurchase or reacquire shares of its Common
Stock (other than an Option Share Surrender) for, in either case, an
aggregate amount that, combined with (1) the aggregate amount of any other
such distributions to all holders of its Common Stock made exclusively in
cash after the Issuance Date and within the 12 months preceding the date of
payment of such distribution, and in respect of which no adjustment
pursuant to this clause (v) has been made, (2) the aggregate amount of any
cash plus the fair market value (as determined in good faith by a
resolution of the Board of Directors of the Company) of consideration paid
in respect of any repurchase or other reacquisition by the Company or any
Subsidiary of any shares of Common Stock (other than an Option Share
Surrender) made after the Issuance Date and within the 12 months preceding
the date of payment of such distribution or making of such repurchase or
reacquisition, as the case may be, and in respect of which no adjustment
pursuant to this clause (v) has been made, and (3) the aggregate of any
cash plus the fair market value (as determined in good faith by a
resolution of the Board of Directors of the Company) of consideration
payable in respect of any Tender Offer by the Company or any Subsidiary for
all or any portion of the Common Stock concluded within the 12 months
preceding the date of payment of such distribution or completion of such
repurchase or reacquisition, as the case may be, and in respect of which no
adjustment pursuant to clause (vi) of this proviso has been made (such
aggregate amount combined with the amounts in clauses (1), (2) and (3)
above being the "Combined Amount"), exceeds 10% of the product of the
Market Price (determined without regard to this proviso) for any day in
such Measurement Period or such other period which day is prior to the
earlier of (A) the record date with respect to such distribution and (B)
the date on which ex-dividend trading in the Common Stock with respect to
such distribution begins or the date of such repurchase or reacquisition,
as the case may be, times the number of shares of Common Stock outstanding
on such date, then, and in each such case, the Market Price for each such
day shall be reduced so that the same shall equal the price determined by
multiplying the Market Price (determined without regard to this proviso)
for such day by a fraction (i) the numerator of which shall be equal to the
Market Price (determined without regard to this proviso) for such day less
an amount equal to the quotient of (x) the excess of such Combined Amount
over such 10% and (y) the number of shares of Common Stock outstanding on
such day and (ii) the denominator of which shall be equal to the Market
Price (determined without regard to this proviso) for such day; provided,
however, that in the event the portion of the cash so distributed or paid
for the repurchase or reacquisition of shares (determined per share based
on the number of shares of Common Stock outstanding) applicable to one
share of Common Stock is equal to or greater than the Market Price
(determined without regard to this clause (v) of this proviso) of the
Common Stock for any such day, then in lieu of the foregoing adjustment
with respect to such day, adequate provision shall be made so that the
Holder shall
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have the right to receive upon conversion of this Note the amount of cash
the Holders would have received had the Holder converted this Note
immediately prior to the record date for such distribution or the payment
date of such repurchase, as applicable; or
(vi) A Tender Offer made by the Company or any Subsidiary for all
or any portion of the Common Stock shall expire and such Tender Offer (as
amended upon the expiration thereof) shall require the payment to
stockholders (based on the acceptance (up to any maximum specified in the
terms of the Tender Offer) of Purchased Shares (as defined herein)) of an
aggregate consideration having a fair market value (as determined in good
faith by resolution of the Board of Directors of the Company) that combined
together with (1) the aggregate of the cash plus the fair market value (as
determined in good faith by a resolution of the Board of Directors of the
Company), as of the expiration of such Tender Offer, of consideration
payable in respect of any other Tender Offers, by the Company or any
Subsidiary for all or any portion of the Common Stock expiring within the
12 months preceding the expiration of such Tender Offer and in respect of
which no adjustment pursuant to this clause (vi) has been made, (2) the
aggregate amount of any cash plus the fair market value (as determined in
good faith by a resolution of the Board of Directors of the Company) of
consideration paid in respect of any repurchase or other reacquisition by
the Company or any Subsidiary of any shares of Common Stock (other than an
Option Share Surrender) made after the Issuance Date and within the 12
months preceding the expiration of such Tender Offer and in respect of
which no adjustment pursuant to clause (v) of this proviso has been made,
and (3) the aggregate amount of any distributions to all holders of Common
Stock made exclusively in cash within 12 months preceding the expiration of
such Tender Offer and in respect of which no adjustment pursuant to clause
(v) of this proviso has been made, exceeds 10% of the product of the Market
Price (determined without regard to this proviso) for any day in such
period times the number of shares of Common Stock outstanding on such day,
then, and in each such case, the Market Price for such day shall be reduced
so that the same shall equal the price determined by multiplying the Market
Price (determined without regard to this proviso) for such day by a
fraction, the numerator of which shall be the number of shares of Common
Stock outstanding on such day multiplied by the Market Price (determined
without regard to this proviso) for such day and the denominator of which
shall be the sum of (x) the fair market value (determined as aforesaid) of
the aggregate consideration payable to stockholders based on the acceptance
(up to any maximum specified in the terms of the Tender Offer) of all
shares validly tendered and not withdrawn as of the last time tenders could
have been made pursuant to such Tender Offer (the "Expiration Time") (the
shares deemed so accepted, up to any such maximum, being referred to as the
"Purchased Shares") and (y) the product of the number of
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shares of Common Stock outstanding (less any Purchased Shares) on such day
times the Market Price (determined without regard to this proviso) of the
Common Stock on the Trading Day next succeeding the Expiration Time. If the
application of this clause (vi) to any Tender Offer would result in an
increase in the Market Price (determined without regard to this proviso)
for any trade, no adjustment shall be made for such Tender Offer under this
clause (vi) for such day.
"Master Purchase Agreement" means the Master Purchase Agreement,
dated as of July 31,1998, by and between the Company Genesee Fund Limited-
Portfolio B, a British Virgin Islands corporation,Willis Group, LLC, a Texas
limited liability company, and Advantage Fund Limited, a British Virgin Islands
corporation.
"Maturity Date" means September 4, 2001.
"Maximum Share Amount" means 142,620 shares, less from time to
time the number of shares issued upon exercise of the Warrants, or such greater
number as permitted by the rules of Nasdaq (such amount to be subject to
equitable adjustment from time to time on terms reasonably acceptable to the
Majority Holders for stock splits, stock dividends, combinations, capital
reorganizations and similar events relating to the Common Stock occurring after
the Issuance Date) of Common Stock; provided, however, that if for purposes of
Rule 4460(i) of the Nasdaq (or any successor or replacement provision of any
stock exchange or stock market on which the Common Stock is listed or traded)
the (x) issuance of the Warrants and the shares of Common Stock issuable upon
exercise of the Warrants or (y) the issuance of shares of Series D Convertible
Preferred Stock and the issuance of shares of Common Stock upon conversion
thereof or (z) the issuance of the common stock purchase warrants issued in
connection with the issuance of the Series D Convertible Preferred Stock and the
issuance of shares of Common Stock upon exercise thereof is not required to be
integrated with the issuance of this Note and the Other Notes and the issuance
of shares of Common Stock upon conversion thereof, then in each such case the
"Maximum Share Amount" shall mean such greater number as equals the maximum
number of shares of Common Stock as are permitted by the rules of the Nasdaq or
such exchange or market (determined by pro rata allocation of any increase
thereof among the Note and the Other Notes based on the original principal
amounts thereof) (such amount to be subject to equitable adjustment in terms
reasonably acceptable to the Majority Holders from time to time for stock
splits, stock dividends, combinations, capital reorganizations and similar
events relating to the Common Stock occurring after the Issuance Date).
"Maximum Share Amount Inconvertibility" means the occurrence
within any period of ten consecutive Trading Days of five or more Trading Days
on which all or any portion of this Note is inconvertible due to the
restrictions in Section 2.4.
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"Measurement Period" means with respect to any date the period of
25 consecutive Trading Days ending on the Trading Day prior to such date.
"Nasdaq" means the Nasdaq National Market.
"Nasdaq SmallCap" means the Nasdaq SmallCap Market.
"1933 Act" means the Securities Act of 1933, as amended.
"1934 Act" means the Securities Exchange Act of 1934, as amended.
"Note" means this instrument as originally executed, or if later
amended or supplemented in accordance with its terms, then as so amended or
supplemented.
"Note Purchase Agreement" shall mean the Note Purchase Agreement
or Note Purchase and Exchange Agreement, as the case may be, dated as of July
31, 1998, by and between the Company and the original Holder of this Note.
"NYSE" shall mean the New York Stock Exchange, Inc.
"Officer" means the Chairman of the Board, the Chief Executive
Officer, the President or the Chief Financial Officer of the Company.
"Optional Redemption Event" means that on each Trading Day in any
period of 20 consecutive Trading Days commencing on or after the date which is
730 days after the Issuance Date, the Market Price of the Common Stock shall
have been not less than 200% of the Ceiling Price in effect on such Trading
Day.
"Option Share Surrender" means the surrender of shares of Common
Stock to the Company in payment of the exercise price or tax obligations
incurred in connection with the exercise of a stock option granted by the
Company to any of its employees, directors or consultants.
"Other Notes" means the several 6% Senior Convertible Notes due
2001 issued by the Company pursuant to the Other Note Purchase Agreements and
any other promissory notes of like tenor issued by the Company in payment of
interest thereon or on any Other Note so issued.
"Other Note Purchase Agreements" means the several Note Purchase
and Exchange Agreements or the Note Purchase Agreement, as the case may be,
dated as of the date of the Note Purchase Agreement, by and between the Company
and the several buyers named therein.
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"Permitted Transferee" means any person who is an "accredited
investor" as defined in Regulation D under the 1933 Act.
"Person" means any natural person, corporation, partnership,
limited liability company, trust, incorporated organization, unincorporated
association or similar entity or any government, governmental agency or
political subdivision.
"Premium Percentage" means 115%.
"Premium Price" means, for this Note or any portion hereof as of
any date of determination, the product obtained by multiplying (a) the sum of
(1) the outstanding principal amount of this Note or such portion hereof plus
(2) an amount equal to the accrued but unpaid interest on this Note or such
portion hereof to the date of determination, plus (3) an amount equal to the
accrued and unpaid Default Interest on this Note or such portion hereof to the
date of determination times (b) the Premium Percentage.
"Redemption Date" means the date of a redemption of this Note or a
portion hereof pursuant to Section 1.2, determined in accordance herewith.
"Redemption Election" means (1) a notice by the Holder to the
Company substantially in the form set forth in EXHIBIT D or (2) a notice by the
Holder to the Company included in the form of Inconvertibility Notice set forth
in EXHIBIT C.
"Redemption Election Period" means, with respect to a particular
inconvertibility of this Note pursuant to Section 2.4, the period of ten
Business Days after the later of (x) the date an Inconvertibility Notice with
respect to such inconvertibility is given or (y) the date such Inconvertibility
Notice was required to have been given by the Company.
"Redemption Event Redemption Date" means any Business Day during
the period commencing on the date which is 730 days after the Issuance Date and
ending on September 4, 2001.
"Redemption Event Redemption Notice" means a Redemption Event
Redemption Notice setting forth the information required by Section 1.3(a).
"Redemption Event Redemption Price" means an amount in cash equal
to the sum of (1) the outstanding principal amount of this Note on the
Redemption Event Redemption Date plus (2) accrued and unpaid interest on such
principal amount to the Redemption Event Redemption Date plus (3) accrued and
unpaid Default Interest, if any, on the amount referred to in the immediately
preceding clause (2) at the rate provided in this Note to the Redemption Event
Redemption Date.
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"Redemption Price" means the greater of:
(1) the Premium Price on the applicable Redemption Date; and
(2) the Converted Market Price on the applicable Redemption Date;
provided, however, that if in connection with any determination of the
Redemption Price the amount specified in clause (y) of the definition of
the term Converted Market Price is greater than 200% of the Ceiling Price
on the date as of which such amount is determined, then for purposes of
computing the Redemption Price in such instance, the amount otherwise
specified in clause (y) of the definition of the term Converted Market
Price shall be reduced by 20% of the amount by which (A) the amount
otherwise specified in clause (y) of the definition of the term Converted
Market Price exceeds (B) the Ceiling Price on the date as of which such
amount is determined.
"Registration Event" shall mean (1) the Registration Statement is
not effective within 105 days after the Issuance Date, if the Registration
Statement is on Form S-3, or 120 days after the Issuance Date, if the
Registration Statement is on Form S-1, (2) the Company fails to file the
Registration Statement with the SEC within 60 days after the Issuance Date, (3)
the Company fails to submit a request for acceleration of the effective date of
the Registration Statement in accordance with Section 3(a) of the Registration
Rights Agreement, (4) the Registration Statement shall cease to be available for
use by the Holder for any reason (including, without limitation, by reason of an
SEC stop order, a material misstatement or omission in the Registration
Statement or the information contained in the Registration Statement having
become outdated); provided, however, that no Registration Event pursuant to this
clause (4) shall be deemed to occur prior to the SEC Effective Date, (5) the
Common Stock is not listed for trading on any of the NYSE,the AMEX, the Nasdaq
or the Nasdaq SmallCap, or (6) the Holder having become unable to convert this
Note in accordance with Article II for any reason (other than by reason of the
4.9% limitation on beneficial ownership set forth therein or a redemption or
repurchase thereof).
"Registration Rights Agreements" means the several Registration
Rights Agreements entered into between the Company and the original Holder and
the original holders of the Other Notes, as amended or modified from time to
time in accordance with their respective terms.
"Registration Statement" means the Registration Statement
required to be filed by the Company with the SEC pursuant to Section 2(a) of the
Registration Rights Agreements.
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"Repurchase Event" means the occurrence on or before September 4,
2001 of any one or more of the following events:
(1) For any period of five consecutive Trading Days following the
date hereof there shall be no reported sale price of the Common Stock on
the Nasdaq, the Nasdaq SmallCap, the NYSE or the AMEX;
(2) The Common Stock is not listed for trading on any of the
Nasdaq, the Nasdaq SmallCap, the NYSE or the AMEX;
(3) The inability for 45 or more days (whether or not consecutive)
of the Holder or the holder of any Other Note to sell shares of Common
Stock issued or issuable on conversion of this Note, any Interest Note or
any Other Note pursuant to the Registration Statement for any reason on
each of such 45 days;
(4) The Company shall (A) default in the timely performance of the
obligation to issue shares of Common Stock upon conversion of this Note,
any Interest Note or any Other Note as and when required by hereby or
thereby or the timely performance of its obligations under Section 3.9 or
(B) the Company shall fail or default in the timely performance of any
material obligation (other than as specifically set forth elsewhere in
this definition) to the Holder or the holder of any Other Note under the
terms of this Note, any Interest Note, any Other Note or any of the other
Transaction Documents, as such instruments may be amended from time to
time, and in the case of this clause (B) only, such failure or default
shall continue for ten Business Days after notice thereof from the Holder
to the Company;
(5) Any consolidation or merger of the Company with or into
another entity (other than a merger or consolidation of a Subsidiary into
the Company or a wholly-owned Subsidiary) where the stockholders of the
Company immediately prior to such transaction do not collectively own at
least 51% of the outstanding voting securities of the surviving
corporation of such consolidation or merger immediately following such
transaction or the common stock of such surviving corporation is not
listed for trading on the NYSE, the AMEX, the Nasdaq or the Nasdaq
SmallCap, or any sale or other transfer of all or substantially all of the
assets of the Company;
(6) The taking of any action, including any amendment to the
Company's Articles of Incorporation, without the consent of the Majority
Holders which materially and adversely affects the rights of the Holder or
any holder of Other Notes;
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<PAGE>
(7) The Stockholder Approval shall not have been obtained on or
before the date which is 120 days after the Issuance Date; or
(8) The occurrence of any Event of Default specified in Article IV
of this Note.
"Repurchase Price" means with respect to any repurchase pursuant
to Sections 5.1 and 5.2 an amount in cash equal to the Premium Price on the
applicable repurchase date.
"SEC" means the Securities and Exchange Commission.
"SEC Effective Date" means the date on which the Registration
Statement is first declared effective by the SEC.
"Security Agreement" means the Security Agreement, dated as of
September 4, 1998, by and between the Company and the original Holder of this
Note.
"Series A Preferred Stock" means the Company's Series A
Convertible Preferred Stock, $.01 par value.
"Share Limitation Redemption Date" shall mean each date on which
the Company is required to redeem this Note or any portion hereof as provided in
Section 2.4(b).
"Share Limitation Redemption Price" means an amount in cash equal
to the Premium Price on the applicable Share Limitation Redemption Date.
"Stockholder Approval" means the approval by a majority of the
votes cast by the holders of shares of Common Stock (in person or by proxy) at a
meeting of the stockholders of the Company (duly convened at which a quorum was
present), or a written consent of holders of shares of Common Stock entitled to
such number of votes given without a meeting, of the issuance by the Company of
20% or more of the outstanding Common Stock of the Company for less than the
greater of the book or market value of such Common Stock on conversion of this
Note and the Other Notes, as and to the extent required under Rule 4460(i) of
Nasdaq as in effect at such time (or any successor or replacement provision
thereof).
"Subsidiary" means any corporation or other entity of which a
majority of the capital stock or other ownership interests having ordinary
voting power to elect a majority of the board of directors or other persons
performing similar functions are at the time directly or indirectly owned by the
Company.
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<PAGE>
"Tender Offer" means a tender offer or exchange offer.
"Trading Day" means a day on whichever of (x) the national
securities exchange, (y) Nasdaq or (z) the Nasdaq SmallCap which at the time
constitutes the principal securities market for the Common Stock is open for
general trading of securities.
"Transaction Documents" means this Note, the Interest Notes, the
Other Notes, the Note Purchase Agreement, the Other Note Purchase Agreements,
the Security Agreement, the Transfer Agent Instruction from the Company to the
Transfer Agent for the benefit of, among others, the Holder of this Note and the
Holders of the Other Notes, as contemplated by the Note Purchase Agreement.
"Transfer Agent" means American Stock Transfer & Trust Company,
its successor or such other person who shall be serving as transfer agent and
registrar for the Common Stock and who shall have been authorized by the Company
to act as conversion agent for this Note in accordance with the Transfer Agent
Instruction and the name, address and telephone number of whom shall have been
given to the Holder by notice from the Company.
"Transfer Agent Instruction" means the Transfer Agent Instruction
from the Company to the Transfer Agent for the benefit of, among others, the
Holder of this Note and the holders of the Other Notes, as contemplated by the
Note Purchase Agreement.
"Warrants" means the Common Stock Purchase Warrants of the Company
issued to the original Holder of this Note pursuant to the Note Purchase
Agreement and to the original holders of the Other Notes pursuant to the Other
Note Purchase Agreements.
ARTICLE VII
MISCELLANEOUS
7.1 FAILURE OR INDULGENCY NOT WAIVER. No failure or delay on the
part of the Holder in the exercise of any power, right or privilege hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
any such power, right or privilege preclude other or further exercise thereof or
of any other right, power or privileges. All rights and remedies existing
hereunder are cumulative to, and not exclusive of, any rights or remedies
otherwise available.
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<PAGE>
7.2 NOTICES. Except as otherwise specifically provided herein, any
notice herein required or permitted to be given shall be in writing and may be
personally served, sent by telephone line facsimile transmission or delivered by
courier or sent by United States mail and shall be deemed to have been given
upon receipt if personally served, sent by telephone line facsimile transmission
or sent by courier or three (3) days after being deposited in the United States
mail, certified, with postage pre-paid and properly addressed, if sent by mail.
For the purposes hereof, the address of the Holder shall be as shown on the
records of the Company (telephone line facsimile transmission number
011-599-932-2008, with a copy to Genesee International, Inc., 10500 N.E. 8th
Street, Suite 1920, Bellevue, Washington 98004-4332 (telephone line facsimile
number (425) 462-4645); and the address of the Company shall be 1250 Wood Branch
Park Drive, Houston, Texas 77079, Attention: Chief Executive Officer (telephone
line facsimile transmission number (281) 529-4650). The Holder or the Company
may change its address for service by service of written notice to the other as
herein provided.
7.3 AMENDMENT, WAIVERS, ETC. (a) Neither this Note, any Interest
Note or any Other Note nor the Security Agreement nor any terms hereof or
thereof may be changed, waived, discharged or terminated unless such change,
waiver, discharge or termination is in writing signed by the Majority Holders,
provided that no such change, waiver, discharge or termination shall, without
the consent of the Holder and the holders of the Other Notes affected thereby
(i) extend the scheduled final maturity of this Note, any Interest Note or any
Other Note, or reduce the rate or extend the time of payment of interest (other
than as a result of waiving the applicability of any post-default increase in
interest rates) hereon or thereon or reduce the principal amount hereof or
thereof or the Redemption Price, the Redemption Event Redemption Price, the
Share Limitation Redemption Price or the Repurchase Price, (ii) release the
collateral or reduce the amount of collateral required to be deposited or
maintained by the Company pursuant to the Security Agreement except as expressly
provided in the Security Agreement, (iii) amend, modify or waive any provision
of this Section 7.3, (iv) reduce any percentage specified in, or otherwise
modify, the definition of Majority Holders or (v) except as provided in this
Note, change the method of calculating the Conversion Price in a manner adverse
to the Holder.
(b) Notwithstanding any other provision of this Note or the Note
Purchase Agreement, in addition to the requirements of Section 7.3(a), any
amendment of (x) the second or third sentence of Section 2.1, (y) the definition
of the term Aggregated Person or (z) this Section 7.3(b) shall require approval
by the affirmative vote of the holders of a majority of the outstanding shares
of Common Stock, present in person or represented by proxy at a duly convened
meeting of stockholders of the Company, and entitled to vote or the consent
thereto in writing by holders of a majority of the outstanding shares of Common
Stock, and the stockholders of the Company are hereby expressly made third party
beneficiaries of this Section 7.3(b).
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<PAGE>
7.4 ASSIGNABILITY. This Note shall be binding upon the Company and
its successors, and shall inure to the benefit of and be binding upon the Holder
and its successors and permitted assigns. The Company may not assign its rights
or obligations under this Note.
7.5 CERTAIN EXPENSES. The Company shall pay on demand all expenses
incurred by the Holder, including reasonable attorneys' fees and expenses, as a
consequence of, or in connection with (x) any amendment, modification, waiver or
consent relating to this Note, (y) any default or breach of any of the Company's
obligations set forth in the Transaction Documents and (z) the enforcement or
restructuring of any right of, including the collection of any payments due, the
Holder under the Transaction Documents, including any action or proceeding
relating to such enforcement or any order, injunction or other process seeking
to restrain the Company from paying any amount due the Holder.
7.6 GOVERNING LAW; EXECUTION, ISSUANCE AND DELIVERY. This Note
shall be governed by the internal laws of the State of New York, without regard
to the principles of conflict of laws. This Note has been signed, issued and
delivered in the State of New York and it is the intention of the Company and
the Holder that this Note shall be construed accordingly for all purposes.
7.7 TRANSFER OF NOTE. This Note has not been and is not being
registered under the provisions of the 1933 Act or any state securities laws and
this Note may not be transferred unless (1) the transferee is a Permitted
Transferee and (2) the Holder shall have delivered to the Company an opinion of
counsel, reasonably satisfactory in form, scope and substance to the Company, to
the effect that this Note may be sold or transferred without registration under
the 1933 Act. Prior to any such transfer, such transferee shall have represented
in writing to the Company that such transferee has requested and received from
the Company all information relating to the business, properties, operations,
condition (financial or other), results of operations or prospects of the
Company and the Subsidiaries deemed relevant by such transferee; that such
transferee has been afforded the opportunity to ask questions of the Company
concerning the foregoing and has had the opportunity to obtain and review the
Registration Statement and the prospectus included therein, each as amended or
supplemented to the date of transfer to such transferee, and the reports and
other information concerning the Company which at the time of such transfer have
been filed by the Company with the SEC pursuant to the 1934 Act and which are
incorporated by reference in such prospectus as of the date of such transfer. If
such transfer is intended to assign the rights and obligations under (x)
Sections 4, 5 and 9 of the Note Purchase Agreement, such transfer shall
otherwise be made in compliance with Section 9(h) of the Note Purchase Agreement
and (y) the Registration Rights Agreement to which the
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<PAGE>
Holder is entitled to the benefits such transfer shall otherwise be made in
compliance with Section 9 of such Registration Rights Agreement.
7.8 ENFORCEABLE OBLIGATION. The Company represents and warrants
that at the time of the original issuance of this Note it received the full
purchase price payable pursuant to the Note Purchase Agreement in an amount at
least equal to the original principal amount of this Note, and that this Note is
an enforceable obligation of the Company which is not subject to any offset,
reduction, counterclaim or disallowance of any sort.
7.9 CERTAIN AMOUNTS. Whenever pursuant to this Note the Company is
required to pay an amount in excess of the outstanding principal amount (or the
portion thereof required to be paid at that time) plus accrued and unpaid
interest plus Default Interest on such interest, the Company and the Holder
agree that the actual damages to the Holder from the receipt of cash payment on
this Note may be difficult to determine and the amount to be so paid by the
Company represents stipulated damages and not a penalty and is intended to
compensate the Holder in part for loss of the opportunity to convert this Note
and to earn a return from the sale of shares of Common Stock acquired upon
conversion of this Note at a price in excess of the price paid for such shares
pursuant to this Note. The Company and the Holder hereby agree that such amount
of stipulated damages is not plainly disproportionate to the possible loss to
the Holder from the receipt of a cash payment without the opportunity to convert
this Note into shares of Common Stock.
7.10 REPLACEMENT OF NOTES. Upon receipt by the Company of evidence
reasonably satisfactory to it of the ownership of and the loss, theft,
destruction or mutilation of this Note and (a) in the case of loss, theft or
destruction, of indemnity from the Holder reasonably satisfactory in form to the
Company (and without the requirement to post any bond or other security) or (b)
in the case of mutilation, upon surrender and cancellation of this Note, the
Company will execute and deliver to the Holder a new Note of like tenor without
charge to the Holder.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Note to be signed
in its name by its duly authorized officer on the day and in the year first
above written.
EQUALNET COMMUNICATIONS CORP.
By: _____________________________________
Name:
Title:
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<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
OF 6% SENIOR SECURED CONVERTIBLE NOTE DUE 2001
OF EQUALNET COMMUNICATIONS CORP.
To: American Stock Transfer & Trust Company,
as Transfer Agent
6201 Fifteen Avenue
Third Floor
Brooklyn, New York 11219
Attention: Mr. Barry Rosenthal
Facsimile No.: (718) 259-1144
(1) Pursuant to the terms of the 6% Senior Secured
Convertible Note due 2001 (the "Note"), the undersigned hereby elects to convert
$ of the Note, equal to the sum of $ principal
amount of the Note, $ of accrued and unpaid interest on such
principal amount and $ of Default Interest on such interest into
shares of Common Stock of Equalnet Communications Corp., a Texas corporation
(the "Company"), at a Conversion Price per share equal to $ .
Capitalized terms used herein and not otherwise defined herein have the
respective meanings provided in the Note.
(2) The number of shares of Common Stock issuable
upon the conversion of the Note to which this Notice relates is .
(3) If the conversion of the Note by this Notice is based on
the Market Prices during a Measurement Period, set forth below or on a schedule
which accompanies this Notice are the Market Prices during the Measurement
Period applicable to this Notice and an indication of the five Market Prices
used to determine the Conversion Price set forth above.
Date Trading Price
---- -------------
1. ___________ , ______ $ ______________
2. ___________ , ______ $ ______________
3. ___________ , ______ $ ______________
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<PAGE>
4. ___________ , ______ $ ______________
5. ___________ , ______ $ ______________
6. ___________ , ______ $ ______________
7. ___________ , ______ $ ______________
8. ___________ , ______ $ ______________
9. ___________ , ______ $ ______________
10. ___________ , ______ $ ______________
11. ___________ , ______ $ ______________
12. ___________ , ______ $ ______________
13. ___________ , ______ $ ______________
14. ___________ , ______ $ ______________
15. ___________ , ______ $ ______________
16. ___________ , ______ $ ______________
17. ___________ , ______ $ ______________
18. ___________ , ______ $ ______________
19. ___________ , ______ $ ______________
20. ___________ , ______ $ ______________
21. ___________ , ______ $ ______________
22. ___________ , ______ $ ______________
23. ___________ , ______ $ ______________
24. ___________ , ______ $ ______________
25. ___________ , ______ $ ______________
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<PAGE>
(4) Please issue a certificate or certificates for ________ shares of
Common Stock in the name(s) specified immediately below or, if additional space
is necessary, on an attachment hereto:
- - -------------------- -------------------
Name Name
- - -------------------- --------------------
Address Address
- - -------------------- --------------------
SS or Tax ID Number SS or Tax ID Number
Delivery Instructions
for Common Stock: --------------------
(5) The Holder hereby represents to the Company that the exercise of
conversion rights contained herein does not violate the provisions of Section
2.1(a) of the Note relating to beneficial ownership in excess of 4.9% of the
Common Stock.
(6) If this Notice is given on or prior to the date which is two
years after the Issuance Date and the shares of Common Stock issuable upon
conversion of the Note have not been registered under the Securities Act of
1933, as amended (the "Act"), the undersigned represents and warrants that (i)
the shares of Common Stock issuable upon the conversion of the Note to which
this Notice relates are being acquired for the account of the undersigned for
investment, and not with a view to, or for resale in connection with, the
distribution thereof and (ii) the undersigned is an "accredited investor" as
defined in Regulation D under the 1933 Act. The undersigned further agrees
that (A) such shares shall not be sold or transferred unless either (i) they
first shall have been registered under the 1933 Act and applicable state
securities laws or (ii) the Company shall have been furnished with an opinion of
legal counsel reasonably satisfactory to the Company to the effect that such
sale or transfer is exempt from the
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<PAGE>
registration requirements of the 1933 Act and (B) until such shares are
registered under the 1933 Act, the Company may place a legend on the
certificate(s) for the shares to that effect and place a stop-transfer
restriction in its records relating to the shares.
NAME:
----------------------------
Date
------------------------------- ----------------------------------
Signature of Registered Holder
(Must be signed exactly as name
appears in the Note.)
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<PAGE>
EXHIBIT B
COMPANY INCONVERTIBILITY NOTICE
(SECTION 2.4(b) OF 6% SENIOR SECURED CONVERTIBLE NOTE DUE 2001)
TO:
-------------------------------
(Name of Holder)
(1) Pursuant to the terms of the 6% Senior Secured Convertible Note
due 2001 (the "Note"), Equalnet Communications Corp., a Texas corporation (the
"Company"), hereby notifies the above-named Holder:
(a) On (fill in date) five Inconvertibility Days had occurred
in a period of ten Trading Days and on such date $ (fill in
amount) of principal of the Note and the related interest, if any,
became inconvertible by reason of the occurrence of five
Inconvertibility Days within a period of ten consecutive Trading Days.
(b) The five Inconvertibility Days covered by this Notice and the
applicable Conversion Price on each such day are as follows:
__________________ , ____ $_____________
__________________ , ____ $_____________
__________________ , ____ $_____________
__________________ , ____ $_____________
__________________ , ____ $_____________
(2) Capitalized terms used herein and not otherwise defined herein
have the respective meanings provided in the Note.
Date _________________________ EQUALNET COMMUNICATIONS CORP.
By
-------------------------------
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<PAGE>
EXHIBIT C
HOLDER INCONVERTIBILITY NOTICE
(SECTION 2.4(b) OF 6% SENIOR SECURED CONVERTIBLE NOTE DUE 2001)
TO: EQUALNET COMMUNICATIONS CORP.
(1) Pursuant to the terms of the 6% Senior Secured Convertible Note
due 2001 (the "Note"), the undersigned (the "Holder"), hereby notifies Equalnet
Communications Corp., a Texas corporation (the "Company"):
(a) On (fill in date) five Inconvertibility Days had
occurred in a period of ten Trading Days and on such date
$ (fill in amount) of principal of the Note and the related
interest, if any, became inconvertible by reason of the occurrence of
five Trading Days on which all or a portion of this Note was
inconvertible within a period of ten consecutive Trading Days.
(b) The five Trading Days on which all or a portion of this Note
was inconvertible and which are covered by this Notice and the
applicable Conversion Price on each such day are as follows:
__________________ , ____ $_____________
__________________ , ____ $_____________
__________________ , ____ $_____________
__________________ , ____ $_____________
__________________ , ____ $_____________
(2) If the following date and amounts are completed in this Notice,
the Holder hereby directs the Company to redeem the principal amount set forth
below (and the related interest) in accordance with Section 7(a) of the
Certificate of Designations set forth below:
(a) Principal amount of Note to be redeemed: (fill in)
(b) On (fill in Redemption Date), the Company shall pay the
Holder the Share Limitation Redemption Price of the portion (which, if
applicable, may be all) of the Note to be redeemed.
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<PAGE>
(3) Capitalized terms used herein and not otherwise defined herein
have the respective meanings provided in the Note.
Date _________________________ NAME OF HOLDER:
-----------------------------------
By
--------------------------------
Title:
-48-
<PAGE>
EXHIBIT D
HOLDER REDEMPTION ELECTION
(SECTION 2.4(b) OF 6% SENIOR
SECURED CONVERTIBLE NOTE DUE 2001)
TO: EQUALNET COMMUNICATIONS CORP.
(1) Pursuant to the terms of the 6% Senior Secured Convertible
Note due 2001 (the "Note"), the undersigned (the "Holder") hereby notifies
Equalnet Communications Corp., a Texas corporation (the "Company"), that the
Holder is exercising its right to require the Company to redeem a portion
(which, if applicable, may be all) of the Note as set forth below in accordance
with Section 2.4(b) of the Note. On (fill in
Redemption Date), the Company shall pay the Holder the Share Limitation
Redemption Price for redemption of $ principal amount of
the Note and the related interest.
(2) Capitalized terms used herein and not otherwise defined herein
have the respective meanings provided in the Note.
Date _____________________________ NAME OF HOLDER:
By
---------------------------------
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EXHIBIT E
HOLDER NOTICE
(SECTION 5.2(b) OF 6% SENIOR SECURED CONVERTIBLE NOTE DUE 2001)
TO: EQUALNET COMMUNICATIONS CORP.
(1) Pursuant to the terms of the 6% Senior Secured Convertible Note
due 2001 (the "Note"), the undersigned Holder hereby elects to exercise its
right to require repurchase by the Company pursuant to Sections 5.2(a) and
5.2(b) of $ of the Note, equal to the sum of $ principal amount of
the Note, $ of accrued and unpaid interest on such principal amount and
$ of Default Interest on such interest at the Repurchase Price provided
in the Note.
(2) Capitalized terms used herein and not otherwise defined herein
have the respective meanings provided in the Note.
Date: ______________________________ NAME OF HOLDER:
By
---------------------------------
Signature of Registered Holder
(Must be signed exactly as
name appears in the Note.)
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<PAGE>
EXHIBIT 10.20
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "1933 ACT"). THE ISSUANCE TO THE HOLDER OF THIS NOTE OF THE SHARES OF
COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE AND IN PAYMENT OF INTEREST ON
THIS NOTE ARE NOT COVERED BY A REGISTRATION STATEMENT UNDER THE 1933 ACT. THIS
NOTE HAS BEEN ACQUIRED, AND SUCH SHARES MUST BE ACQUIRED, FOR INVESTMENT ONLY
AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF REGISTRATION OF
THE RESALE THEREOF UNDER THE 1933 ACT OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY IN FORM, SCOPE AND SUBSTANCE TO THE COMPANY THAT SUCH REGISTRATION
IS NOT REQUIRED.
EQUALNET COMMUNICATIONS CORP.
6% SENIOR SECURED CONVERTIBLE NOTE DUE 2001
No. 2 $1,500,000.00
New York, New York
September 4, 1998
FOR VALUE RECEIVED, EQUALNET COMMUNICATIONS CORP., a Texas corporation
(hereinafter called the "Company"), hereby promises to pay to WILLIS GROUP LLC,
5005 Woodway, Suite 350, Houston, Texas 77056, or registered assigns (the
"Holder") or order, the sum of One Million Five Hundred Thousand Dollars
($1,500,000.00), on the Maturity Date, and to pay interest on the unpaid
principal balance hereof at the Applicable Rate from the date hereof, until the
same becomes due and payable, whether at maturity or upon acceleration or by
repurchase in accordance with the terms hereof or otherwise. Any amount of
principal of or interest on this Note which is not paid when due shall bear
interest at the Default Rate from the due date thereof until the same is paid
("Default Interest"). Interest shall be payable in arrears on each Interest
Payment Date, commencing on November 15, 1998, on the principal amount
outstanding on such date. Interest on this Note shall be computed on the basis
of a 360-day year of 12 30-day months and actual days elapsed. No interest shall
be payable on an Interest Payment Date on any portion of the principal amount of
this Note which shall have been converted or redeemed prior to such Interest
Payment Date so long as the Company shall have complied in full with its
obligations with respect to such conversion or redemption.
All payments of principal of and premium, if any, and interest on this Note
shall be made in lawful money of the United States of America, or, at the option
of the Company and subject to the provisions of this Note, interest payable on
the Interest Payment Dates may be paid in whole or in part in Interest Notes.
All cash payments shall be made by wire transfer of immediately available funds
to such account as the Holder may from time to time designate by written notice
in accordance with the provisions of this Note. Whenever any amount expressed to
be due by the terms of this Note is due on any day which is not a Business Day,
the same shall instead be due on the next succeeding day which is a Business
Day and, in the case of any Interest Payment Date which is not the date on
which this Note is paid in full, the extension of the due date thereof shall not
be taken into account for purposes of determining the amount of interest due on
such date. Certain capitalized terms used in this Note are defined in
Article VI.
<PAGE>
The obligations of the Company under this Note shall rank in right of
payment on a parity with all other unsubordinated obligations of the Company for
indebtedness for borrowed money or the purchase price of property. This Note is
issued pursuant to the Note Purchase Agreement and the Holder of this Note and
this Note are subject to the terms of the Note Purchase Agreement. The
obligations of the Company under this Note are secured pursuant to, and the
Holder of this Note is entitled to the benefits of, the Security Agreement. This
Note is one of the several 6% Senior Secured Convertible Notes due 2001 in the
original aggregate principal amount of $3,000,000.00 issued by the Company
pursuant to the Master Purchase Agreement, the Note Purchase Agreement and the
Other Note Purchase Agreements.
The following terms shall apply to this Note:
ARTICLE I
INTEREST NOTES; NO PREPAYMENT
1.1 ISSUANCE OF INTEREST NOTES IN LIEU OF CASH INTEREST. (a) If the Company
exercises its option to make a payment of interest on this Note wholly or partly
in Interest Notes (herein sometimes called the "Interest Note Payment Option"),
the issuance of Interest Notes upon such exercise of the Interest Note Payment
Option shall have been authorized by the Board of Directors of the Company.
(b) The Company shall not be permitted to exercise the Interest Note
Payment Option with respect to any payment of interest on this Note if:
(i) the number of shares of Common Stock authorized, unissued and
unreserved for all purposes, or held in the Company's treasury, is
insufficient to permit the conversion in full of the Interest Notes to be
so issued.
(ii) the issuance or delivery of such Interest Note or the public
resale of the shares of Common Stock issuable upon conversion of such
Interest Note by the Holder would require registration with or approval of
any governmental authority under any law or regulation, and such
registration or approval has not been effected or obtained or is not in
effect or the Registration Statement is unavailable for use by the Holder
for the resale of such shares of Common Stock; provided, however, that this
limitation shall not be deemed to be applicable prior to the date which is
105 days after the Issuance Date, if the Registration Statement is on Form
S-3, or the date which is 120 days after the Issuance Date, if the
Registration Statement is on Form S-1, if this limitation otherwise would
be applicable solely because the Registration Statement shall not yet have
been declared effective, so long as the Company shall be in compliance in
all material respects with its obligations under the Registration Rights
Agreement;
(iii) the shares of Common Stock issuable upon conversion of such
Interest Note shall not at the time of issuance have been authorized for
listing, upon official notice of issuance, on the principal securities
exchange on which the Common Stock is then listed and traded;
(iv) an Event of Default has occurred and is continuing;
(v) any Repurchase Event shall have occurred and the Holder or the
holder of any Other Note shall have executed repurchase rights by reason
thereof and the Company shall not have paid the Repurchase Price hereof or
the repurchase price thereof; or
2
<PAGE>
(vi) the Common Stock is neither (i) listed or admitted for trading on
a national securities exchange nor (ii) quoted on the Nasdaq or the Nasdaq
Small Cap.
(c) If the Interest Note Payment Option is elected, the Company shall issue
and deliver or cause to be delivered to the Holder on or before the due date of
such interest payment an Interest Note, duly executed on behalf of the Company,
in the principal amount equal to the total amount of lawful money of the United
States of America which the Holder would receive if the aggregate amount of
interest on this Note which is being paid in such Interest Note were being paid
in such lawful money; provided, however, that if in connection with any such
election the Company shall have failed to deliver such Interest Note to the
Holder within three Trading Days after the applicable Interest Payment Date,
then the Company shall not be entitled to use the Interest Note Payment Option
in respect of such Interest Payment Date, such cash interest shall be
immediately due and payable and the Company shall pay the interest for such
Interest Payment Date in cash with Default Interest, at the rate provided in
this Note, from such Interest Payment Date until paid.
(d) If the Company exercises the Interest Note Payment Option with respect
to a payment of interest on this Note, the Company shall deliver to the Holder,
on or prior to the date on which such Interest Note is to be received by the
Holder, a Company Certificate setting forth (i) the total amount of the interest
payment to which the Holder is entitled, (ii) the portion of the interest
payment being made in an Interest Note and (iii) a brief statement that none of
the conditions set forth in Section 1.1(b) has occurred and is existing. Each
Interest Note shall be issued in the name of the Holder or its nominee. In
addition, on or before the date of issuance of each Interest Note the Company
shall notify the Transfer Agent of the issuance of such Interest Note, the
principal amount thereof and the name of the registered holder thereof.
(e) Each Interest Note, when issued pursuant to and in compliance with this
Section 1.1, shall be, and for all purposes shall be deemed to be, duly
authorized and a legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, and the shares of Common Stock
issuable upon conversion of such Interest Note, when so issued, shall be, and
for all purposes shall be deemed to be, validly issued, fully paid and
nonassessable shares of Common Stock; the issuance and delivery of such Interest
Note and such shares is in all respects authorized; and the issuance of such
Interest Note will be, and for all purposes shall be deemed to be, in full
discharge and satisfaction of the Company's obligation to pay the interest on
this Note to which such Interest Note relates.
1.2 OPTIONAL REDEMPTION. If (1) the Company shall be in compliance in all
material respects with its obligations to the Holder and the holders of the
Other Notes (including, without limitation, its obligations under the
Transaction Documents), (2) on the date the Company Optional Redemption Notice
is given and at all times until the Redemption Date, the Registration Statement
is effective and available for use by the Holder and each holder of Other Notes
for the resale of shares of Common Stock acquired by the Holder upon conversion
of this Note or by such other holders upon conversion of the Other Notes and (3)
no Repurchase Event shall have occurred with respect to which, on the date a
Redemption Notice is to be given or on the Redemption Date, the Holder or any
holder of Other Notes shall have exercised optional repurchase rights under
Sections 5.1 and 5.2 (or the comparable provisions of any Interest Note or Other
Note) by reason of such Repurchase Event and the Company shall not have paid the
Repurchase Price to the Holder or the repurchase price has not been paid to such
holder, as the case may be, then the Company shall have the right, exercisable
by giving a Company Optional Redemption Notice not less than 30 days or more
than 60 days prior to the Redemption Date the Holders, at any time to redeem all
or from time to time to redeem any part of the outstanding principal amount of
this Note in accordance with this Section 1.2. The Company Optional Redemption
Notice shall state that: (1) the Company is exercising its right to redeem this
Note in accordance with this Section 1.3, (2) the principal
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amount of this Note to be redeemed, (3) the Redemption Event Redemption Price
and (4) the Redemption Event Redemption Date. If the Company shall redeem less
than all the outstanding principal amount of this Note, such redemption shall be
made as nearly as practical pro rata from the Holder and all holders of Other
Notes. Any Company Optional Redemption Notice under this Section 1.2 shall be
given to the Holder at its address appearing on the records of the Company. On
the Redemption Date (or such later date as the Holder surrenders this Note to
the Company), the Company shall make payment of the applicable Redemption Price
to the Holder in immediately available funds to such account as specified by the
Holder in writing to the Company at least one Business Day prior to the
Redemption Date. The Holder shall be entitled to convert this Note or the
portion hereof to be redeemed in accordance with Article II through the day
prior to the Redemption Date and (2) if the Company shall fail to pay the
Redemption Price of this Note or the portion hereof to be redeemed when due, at
any time after the due date thereof until such date as the Company pays the
Redemption Price of this Note or the portion hereof to be redeemed. This Note or
any portion hereof as to which the Holder exercises the right of conversion
pursuant to Article II or the optional repurchase right pursuant to Sections 5.1
and 5.2 may be redeemed by the Company pursuant to this Section 1.2 on or after
the date of exercise of such conversion right or optional repurchase right, as
the case may be, regardless of whether the Company Optional Redemption Notice
shall have been given prior to, or on or after, the date of exercise of such
conversion right or optional redemption right, as the case may be.
1.3 Optional Redemption by Company for Optional Redemption Event. (a) If an
Optional Redemption Event occurs the Company shall have the right to redeem at
any one time with respect to such Optional Redemption Event all of the
outstanding principal amount of this Note at the Redemption Event Redemption
Price pursuant to this Section 1.3 on any Redemption Event Redemption Date, so
long as (x) on the date the Redemption Event Redemption Notice is given and at
all times to and including the applicable Redemption Event Redemption Date, no
Event of Default has occurred and is continuing and no Repurchase Event has
occurred with respect to which the Holder or the holder of any Other Note has
exercised repurchase rights pursuant to Sections 5.1 and 5.2 (or the comparable
provisions of any Interest Note or Other Note) and the Repurchase Price has not
been paid to the Holder or the repurchase price has not been paid to such
holder, as the case may be, and (y) on the date a Redemption Event Redemption
Notice is given and at all times to and including the applicable Redemption
Event Redemption Date, the Company is in compliance in all material respects
with its obligations to the Holder and the holders of the Other Notes
(including, without limitation, its obligations under the Transaction
Documents). In order to exercise its right of redemption under this Section 1.3,
the Company shall give a Redemption Event Redemption Notice to the Holder not
later than ten days after an Optional Redemption Event occurs and not less than
20 days or more than 30 days prior to the Redemption Event Redemption Date
stating that: (1) the Company is exercising its right to redeem this Note in
accordance with this Section 1.3, (2) the principal amount of this Note to be
redeemed, (3) the Redemption Event Redemption Price and (4) the Redemption Event
Redemption Date. On the applicable Redemption Event Redemption Date (or such
later date as the Holder surrenders this Note to the Company) the Company shall
pay to or upon the order of the Holder by wire transfer of immediately available
funds to such account as shall be specified for such purpose by the Holder at
least one Business Day prior to the Redemption Event Redemption Date an amount
equal to the Redemption Event Redemption Price of this Note.
(b) The Company shall not be entitled to give a Redemption Event Redemption
Notice or to redeem any portion of this Note with respect to which the Holder
has given a Conversion Notice. Notwithstanding the giving of a Redemption Event
Redemption Notice, the Holder shall be entitled to convert this Note in
accordance with the terms of this Note by giving a Conversion Notice at any time
prior to the later of (1) the date which is one Business Day prior to the
applicable Redemption Event Redemption Date and (2) the date on which the
Company pays the Redemption Event Redemption Price of this Note to the Holder.
The Redemption Event Redemption Price set forth in an Redemption Event
Redemption Notice shall be adjusted to reflect
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the reduced outstanding principal amount of this Note and related accrued
interest and Default Interest on the Redemption Event Redemption Date resulting
from any permitted conversions of this Note after the Redemption Event
Redemption Notice is given.
(c) Any redemption of this Note pursuant to this Section 1.3 shall be made
at the same time as a redemption by the Company of the Interest Notes and the
Other Notes. The Company shall not redeem any of the Interest Notes or the Other
Notes pursuant to the provisions thereof similar to this Section 1.3 or
repurchase or otherwise acquire any of the Interest Notes or the Other Notes
(other than a mandatory redemption pursuant to provisions of the Interest Notes
or the Other Notes comparable to Section 2.4) unless the Company offers
simultaneously to redeem, repurchase or otherwise acquire a pro rata portion
(based on outstanding principal amount) of this Note for cash at the same price
as the Interest Note or Interest Notes or the Other Note or Other Notes.
1.4 No Prepayment. Except as otherwise specifically provided in Section 1.2
and 1.3, this Note may not be prepaid, redeemed or repurchased at the option of
the Company prior to September 4, 2001.
ARTICLE II
CONVERSION; CERTAIN MANDATORY REDEMPTION
RIGHTS AND OBLIGATIONS
2.1 Conversion Right. Upon the terms and subject to the limitations
contained herein, the Holder shall have the right at any time on or after the
earlier of (x) the SEC Effective Date and (y) the date which is 90 days on and
after the Issuance Date, and in either such case at any time prior to the
payment in full of this Note, to convert at any time all or from time to time
any part of the outstanding and unpaid principal amount of this Note, and
accrued and unpaid interest on the principal amount to be converted and Default
Interest on any such interest, into fully paid and nonassessable shares of
Common Stock at the Conversion Price in effect on the date the applicable
Conversion Notice is given in accordance with this Note. Notwithstanding any
other provision of this Note, in no event shall the Holder be entitled at any
time to convert any portion of the principal amount of this Note (and accrued
and unpaid interest thereon and Default Interest on any such interest) in excess
of that portion of the principal amount of this Note (and accrued and unpaid
interest thereon and Default Interest on any such interest) upon conversion of
which the sum of (1) the number of shares of Common Stock beneficially owned by
the Holder (including shares of Common Stock beneficially owned by all
Aggregated Persons) (other than shares of Common Stock deemed beneficially owned
by the Holder or any Aggregated Person of the Holder through the ownership of
(x) the unconverted portion of the principal amount of this Note, any Interest
Notes and the Other Notes and accrued and unpaid interest thereon and on any
such interest and (y) the unconverted or unexercised portion of the Warrants or
any instrument which contains limitations similar to those set forth in this
sentence) and (2) the number of shares of Common Stock issuable upon conversion
of the portion of the principal amount of this Note and accrued and unpaid
interest thereon and Default Interest on any such interest with respect to which
the determination in this sentence is being made, would result in beneficial
ownership by the Holder and all Aggregated Persons of the Holder of more than
4.9% of the outstanding shares of Common Stock. For purposes of the immediately
preceding sentence, beneficial ownership shall be determined in accordance with
Section 13(d) of the 1934 Act, and Regulation 13D-G thereunder, except as
otherwise provided in clause (1) of the immediately preceding sentence. For
purposes of the second preceding sentence, the Company shall be entitled to
rely, and shall be fully protected in relying, on any statement or
representation made by the Holder to the Company in connection with a particular
conversion, without any obligation on the part of the Company to make any
inquiry or investigation or to examine its records or the records of any
transfer agent for
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the Common Stock and without any liability of the Company with respect thereto.
The number of shares of Common Stock to be issued upon each conversion of this
Note shall be determined by dividing the sum of (1) that portion of the
principal amount of this Note to be converted plus (2) accrued and unpaid
interest on such principal amount to the date the Conversion Notice for such
conversion is given plus (3) accrued and unpaid Default Interest, if any, on the
amount referred to in the immediately preceding clause (2) to the date such
Conversion Notice is given, by the Conversion Price in effect on the date the
Conversion Notice for such conversion is given.
2.2 Authorized Shares. The Company covenants that, during the period the
conversion rights exist, the Company will reserve from its authorized, unissued
and otherwise unreserved Common Stock free from preemptive and similar rights
13,043,468 shares (such amount to be subject to equitable adjustment from time
to time on terms reasonably acceptable to the Holder for stock splits, stock
dividends, combinations, capital reorganizations and similar events relating to
the Common Stock occurring on or after the Issuance Date) to provide for the
issuance of Common Stock upon the conversion in full of this Note, the Interest
Notes and the Other Notes, subject to reduction from time to time by the number
of shares of Common Stock issued on conversion of this Note, the Interest Notes
and the Other Notes. The Company shall, from time to time, authorize and reserve
additional shares of Common Stock, free from preemptive and similar rights, to
be issuable pursuant to the terms of this Note as shall be necessary to ensure
that an adequate number of shares of Common Stock are, at all times authorized
and reserved for issuance upon conversion in full of this Note, the all Interest
Notes and the Other Notes. The Company shall notify the Holder promptly, but in
no event more than ten Business Days, after the Company so reserves additional
shares of Common Stock which notice shall set forth the number of additional
shares of Common Stock so reserved. If at any time the number of authorized but
unissued shares of Common Stock not reserved or required to be reserved for any
other purpose shall be insufficient to effect the conversion of this Note, all
Interest Notes and all Other Notes, the Company promptly shall seek, and use its
best efforts to obtain and complete, such corporate action as may, in the
opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purpose. The Company represents and warrants that upon issuance, such shares of
Common Stock will be duly and validly issued, fully paid and non-assessable. The
Company agrees that its issuance of this Note shall constitute full authority to
its officers and agents who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for shares of
Common Stock upon the conversion of this Note.
2.3 Method of Conversion. (a) The right of the Holder to convert this Note
shall be exercised by delivering (which may be made by telephone line facsimile
transmission) to the Transfer Agent at the addresses or telephone line facsimile
transmission number provided in or pursuant to the Transfer Agent Instruction, a
Conversion Notice. On the date the Conversion Notice is delivered, the Company
shall acknowledge the Conversion Notice and forward the Conversion Notice as so
acknowledged to the Transfer Agent. The number of shares of Common Stock to be
issued upon each conversion of this Note shall be the number set forth in the
applicable Conversion Notice, which number shall be conclusive absent manifest
error. The Company shall notify the Holder of any claim by the Company of
manifest error in a Conversion Notice within one Trading Day after the Holder
gives such Conversion Notice and no such claim of error shall limit or delay
performance of the Company'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 for all purposes to be in proper form unless the Company notifies the
Holder by telephone line facsimile transmission within one Trading Day after a
Conversion Notice has been given (which notice from the Company 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 Holder
promptly undertakes to correct all such defects. If the Company shall have
notified the Transfer Agent and such holder of any such manifest error, and the
Company and such holder do not agree as to a resolution of such manifest error
on or before the date of such notice by the Company of an error
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in such Conversion Notice, the Company shall on the date such notice is given
submit the dispute to Ernst & Young LLP or another firm of independent public
accountants of recognized national standing (the "Auditors") for determination
and shall instruct the Auditors to resolve such dispute and to notify the
Company, the Transfer Agent and such holder within one Trading Day after such
dispute is submitted to the Auditors. Immediately after receipt of timely notice
of the Auditors' determination (but in any event within three Trading Days after
the applicable Conversion Notice is given to the Transfer Agent), the Transfer
Agent shall issue to the converting Holder any additional shares of Common Stock
to which such holder is entitled based on the determination of the Auditors. The
Transfer Agent is authorized and directed to rely on the Auditors'
determination. If the Auditors shall fail to notify the Transfer Agent of their
determination within three Trading Days after the applicable Conversion Notice
is given to the Transfer Agent, then the Transfer Agent shall, within three
Trading Days after receipt of the applicable Conversion Notice, issue to the
converting, holder any additional shares of Common Stock to which such Holder is
entitled based on the applicable Conversion Notice. The Company shall pay any
transfer or issuance taxable payable in connection with any conversion of this
Note except that the Company shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of
shares of Common Stock or other securities or property on conversion of this
Note in a name other than that of the Holder, and the Company shall not be
required to issue or deliver any such shares or other securities or property
unless and until the person or persons requesting, the issuance thereof shall
have paid to the Company the amount of any such tax or shall have established to
the satisfaction of the Company that such tax has been paid. The Holder shall be
responsible for the amount of any withholding tax payable in connection with any
conversion of this Note.
(b) If the Holder elects to convert this Note in accordance with Section 2.
1 (a), the Holder shall not be required to surrender this Note physically unless
the entire unpaid principal amount of this Note is so converted. The Company
shall maintain records showing the principal amount so converted and the dates
of such conversions or shall use such other method, reasonably satisfactory to
the Holder, so as not to require physical surrender of this Note upon each such
conversion. In the event of any dispute or discrepancy, such records of the
Company shall be controlling and determinative in the absence of manifest error.
Notwithstanding the foregoing, if any portion of this Note is converted without
physical surrender of this Note to the Company as aforesaid, the Holder may not
transfer this Note unless (1) the Holder first physically surrenders this Note
to the Company, whereupon the Company will forthwith issue and deliver upon the
order of the Holder a new note of like tenor, registered as the Holder (upon
payment by the Holder of any applicable transfer taxes) may request,
representing in the aggregate the remaining unpaid principal amount of this Note
and (2) such transfer is otherwise in compliance with Section 7.7 hereof. The
Company may by notice to the Holder from time to time require the Holder to
surrender this Note in exchange for the issuance by the Company of a new Note in
a principal amount equal to the outstanding principal amount of this Note and
otherwise having terms identical to this Note. Such new Note shall be delivered
by the Company to the Holder within three Trading Days after the Company
receives this Note from the Holder in response to such notice. The Holder and
any assignee, by acceptance of this Note, acknowledge and agree that, by reason
of the provisions of this paragraph, following conversion of a portion of this
Note, the unpaid and unconverted principal amount of this Note represented by
this Note may be less than the amount stated on the face hereof.
(c) In case of any consolidation or merger of the Company with any other
corporation (other than a wholly-owned subsidiary of the Company) in which the
Company is not the surviving corporation, or in case of any sale or transfer of
all or substantially all of the assets of the Company, 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 Company shall make
appropriate provision or cause appropriate provision to be made so that the
Holder shall have the right thereafter to convert this Note into the kind of
shares of stock and other securities and
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property receivable upon such consolidation, merger, sale, transfer or share
exchange by the persons who were holders of Common Stock 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 Holder on a basis as nearly as practical as such rights existed
prior to such consolidation, merger, sale, transfer or share exchange. 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 either
securities, cash or other assets upon completion of such transaction, the
Company shall provide or cause to be provided to the Holder the right to elect
the securities, cash or other assets into which this Note 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 Company 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.
Whenever the Company shall propose to take any of the actions
specified in this Section 2.3(c), the Company shall cause a notice to be mailed
to the Holder at least 20 days prior to the date on which the books of the
Company will close or on which a record will be taken for such action. Such
notice shall specify the action proposed to be taken by the Company 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.
(d) Upon receipt by the Transfer Agent from the Holder of a Conversion
Notice meeting the requirements for conversion as provided in Section 2.1 (a)
and this Section 2.3, the Company shall issue and deliver or cause to be issued
and delivered to the Holder certificates for the Common Stock issuable upon such
conversion by the close of business on the third Trading Day after the date of
such receipt, and as of the close of business on the date of receipt of such
Conversion Notice the Holder shall be deemed to be the holder of record of the
Common Stock issuable upon such conversion, the outstanding principal amount and
the amount of accrued and unpaid interest and Default Interest on this Note
shall be reduced to reflect such conversion, and all rights with respect to the
portion of this Note being so converted shall forthwith terminate except the
right to receive the Common Stock or other securities, cash or other assets, as
herein provided, on such conversion except as otherwise provided herein. If the
Holder shall have given a Conversion Notice in accordance with the terms of this
Note, the Company's obligation to issue and deliver the certificates for Common
Stock shall be absolute and unconditional, irrespective of any action or
inaction by the 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 Company to the Holder, or any setoff, counterclaim,
recoupment, limitation or termination, or any breach or alleged breach by the
Holder or any other person of any obligation to the Company or any violation or
alleged violation of law by the Holder or any other person, and irrespective of
any other circumstance which might otherwise limit such obligation of the
Company to the Holder in connection with such conversion. The occurrence of an
event which requires an equitable adjustment of the Market Price as contemplated
by the definition thereof in Section 6.1 shall in no way restrict or delay the
right of the Holder to receive shares of Common Stock upon conversion of this
Note and the Company shall use its best efforts to implement such adjustment on
terms reasonably acceptable to the Holder within two Business Days after such
occurrence. If the Company fails to issue and deliver the certificates for the
Common Stock to the Holder pursuant to the first sentence of this Section 2.3(d)
as and when required to do so, in addition to any other liabilities the Company
may have hereunder and under applicable law (1) the Company shall pay or
reimburse the Holder on demand for all out-of-pocket expenses, including,
without limitation, fees and expenses of legal counsel, incurred by the Holder
as a result of such failure, (2) the Conversion Percentage used to determine the
Conversion Price applicable to such conversion shall
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be reduced by one percentage point from the Conversion Percentage otherwise used
to calculate the Conversion Price applicable to such conversion or, if such
conversion is based on the Ceiling Price, the ceiling price used to determine
the Conversion Price applicable to such conversion shall be reduced by one
percentage point from the amount that the Conversion Price otherwise would have
been without reduction pursuant hereto, in either case, for each Trading Day
after such third Trading Day until such shares of Common Stock are delivered to
the Holder and (3) the Holder may by notice (which may be given by mail,
courier, personal service or telephone line facsimile transmission) or oral
notice (promptly confirmed in writing) given at any time prior to delivery to
the Holder of the shares of Common Stock issuable upon such conversion of this
Note, rescind such conversion, whereupon the Holder shall have the right to
convert this Note thereafter in accordance herewith.
(e) No fractional shares of Common Stock shall be issued upon conversion of
this Note but, in lieu of any fraction of a share of Common Stock which would
otherwise be issuable in respect of the aggregate number of such shares
converted at one time by the same holder, the Company may round the number of
shares of Common Stock issued on such conversion up to the next highest whole
share or may pay lawful money of the United States of America for such
fractional share, based on a value of one share of Common Stock being equal to
the Market Price, as reported by Bloomberg, L.P, of the Common Stock on the date
the applicable Conversion Notice is given to the Company.
2.4 Limitation on Shares Issuable on Conversion; Mandatory Redemption. (a)
Notwithstanding any other provision herein, unless the Stockholder Approval
shall have been obtained from the stockholders of the Company or waived by
Nasdaq (or other appropriate stock exchange or market), so long as the Common
Stock is listed on the Nasdaq, the Nasdaq SmallCap, the NYSE or the AMEX the
Company shall not be required to issue upon conversion of this Note and the
Interest Notes a number of shares of Common Stock in excess of the Maximum Share
Amount. The Company shall maintain records which show the number of shares of
Common Stock issued by the Company upon conversion from time to time of this
Note and any Interest Notes, which records shall be controlling in the absence
of manifest error. The Company shall maintain records which show the principal
amount of Interest Notes issued by the Company pursuant to Section 1. 1 in
payment of interest on this Note and issued pursuant to any Interest Note in
payment of interest thereon, which records shall be controlling in the absence
of manifest error. Each Interest Note shall be allocated a portion of the
Maximum Share Amount allocated to this Note and the other Interest Notes
outstanding at the time of issuance of such Interest Note, based on the
outstanding principal amounts thereof at the time of such issuance, and the
certificate for such Interest Note shall bear a notation as to the certificate
number of this Note. Upon surrender of this Note for transfer or re-registration
hereof (or, at the option of the Holder, for conversion pursuant to Section 2. 1
(a) of less than all of this Note), the Company shall make a notation on the new
Note issued upon such transfer or re-registration or evidencing such unconverted
portion of this Note, as the case may be, as to the remaining number of shares
of Common Stock from the Maximum Share Amount remaining available for conversion
of the Note evidenced by such new certificate. If this Note is surrendered for
split-up into two or more Notes representing an aggregate principal amount equal
to the principal amount of this Note at the time so surrendered (as reduced by
any contemporaneous conversion of this Note), each Note issued on such split-up
shall bear a notation of the portion of the Maximum Share Amount allocated
thereto determined by pro rata allocation from among the remaining Maximum Share
Amount at the time this Note is so surrendered. If this Note is converted in
full, repaid, repurchased or redeemed, all of the Maximum Share Amount which
remains unissued after such conversion, repayment, repurchase or redemption
shall be re-allocated (1) to all Interest Notes and Other Notes held by the
Holder at the close of business on the Conversion Date for such conversion,
based on the outstanding principal amounts thereof, and (2) if the Holder does
not hold any Interest Notes or Other Notes at the close of business on such
Conversion Date, to the Other Notes, based on the principal amounts thereof
outstanding at the close of business on such Conversion Date. If any
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Other Note is converted in full, repaid, repurchased or redeemed, all of the
portion of the Maximum Share Amount (as defined in such Other Note) of such
Other Note not re-allocated to Other Notes held by the holder of such Other Note
and which remains unissued after such conversion, repayment, repurchase or
redemption shall be re-allocated to this Note, the Interest Notes and the Other
Notes outstanding at the close of business on the date of such conversion,
repayment, repurchase or redemption of the Other Note so converted, repaid,
repurchased or redeemed pro rata based on the principal amounts outstanding at
the close of business on such date.
(b) (1) If on or after December 16, 1998 and on or prior to September 4,
2001 a Maximum Share Amount Inconvertibility occurs, then the Company shall
promptly, but in no event later than five Business Days after each such
occurrence, give an Inconvertibility Notice to the Holder (by telephone line
facsimile transmission at such number as the Holder has specified in writing, to
the Company for such purposes or, if the Holder shall not have specified any
such number, by overnight courier at the Holder's address as the same appears on
the records of the Company) and the Holder may at any time after such occurrence
give an Inconvertibility Notice to the Company. If the Company shall have given
or been required to give any Inconvertibility Notice, or if the Holder shall
have given any Inconvertability Notice, then within the applicable Redemption
Election Period the Holder shall have the right by a Redemption Election given
to the Company (which may be contained in the Inconvertability Notice given by
the Holder) to direct the Company to redeem the portion of this Note (which, if
applicable, shall be all of this Note) as shall not, on the Business Day prior
to the applicable Share Limitation Redemption Date be convertible into shares of
Common Stock by reason of the limitations set forth in Section 2.4(a) on the
applicable Share Limitation Redemption Date, at a price equal to the Share
Limitation Redemption Price, payable on the date which is five Business Days
after the Holder gives such Redemption Election. If the Holder directs the
Company to redeem this Note or any portion hereof and, prior to the date the
Company is required to redeem this Note or such portion hereof, the Company
would have been able, within the limitations set forth in Section 2.4(a), to
convert all of this Note (determined without regard to the limitation, if any,
on beneficial ownership of shares of Common Stock by the Holder contained in the
second sentence of Section 2. 1) on any ten Trading Days within any period of 15
consecutive Trading Days commencing after the period of 20 consecutive Trading
Days which gave rise to the applicable Inconvertibility Notice from the Company
or the Holder, as the case may be, had the Holder exercised its right to convert
this Note in full on each of such ten Trading Days within such 15 Trading Day
period, then the Company shall not be required to redeem any of this Note by
reason of such Inconvertibility Notice.
(2) An Inconvertibility Notice or a Redemption Election given b the Holder
shall be deemed for all purposes to be in proper form unless the Company
notifies tie Holder in writing within three Business Days after an
Inconvertibility Notice or a Redemption Election has been given (which notice
shall specify all defects in the Inconvertibility Notice or Redemption
Election), and any Inconvertibility Notice or Redemption Election containing any
such defect shall nonetheless be effective on the date given if the Holder
promptly undertakes to correct all such defects. Whether or not the Holder has
given such undertaking, no such claim of error shall limit or delay performance
of the Company's obligation to redeem the full amount of the portion of this
Note as to which a Redemption Election has been given and which is not in
dispute.
(c) Notwithstanding the giving of any Inconvertibility Notice by the
Company to the Holder or the giving or the absence of any Inconvertibility
Notice or Redemption Election by the Holder or any redemption of an
inconvertible portion of this Note pursuant to Section 2.4(b), thereafter the
provision of Section 2.4(b) shall continue to be applicable on any occasion
unless the Stockholder Approval shall have been obtained or waived by the
Nasdaq.
(d) On each Share Limitation Redemption Date, the Company shall make
payment in immediately available funds of the applicable Share Limitation
Redemption Price to or
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upon the order of the Holder as specified by the Holder in writing to the
Company at least one Business Day prior to such Share Limitation Redemption
Date. If the Company is required to redeem this Note or any portion hereof
pursuant to this Section 2.4, the Company shall make payment to the Holder of an
amount equal to the Share Limitation Redemption Price. Upon redemption of less
than all of this Note, promptly, but in no event later than three Business Days
after surrender of this Note to the Company, the Company shall issue a
replacement Note of like tenor having a principal amount equal to the principal
amount of this Note remaining after such redemption.
ARTICLE III
CERTAIN COVENANTS
So long as the Company shall have any obligation under this Note:
3.1 Certain Repurchases. (a) The Company shall not itself, and shall not
permit any Subsidiary to redeem, repurchase or otherwise require in any one
transaction or series of related transactions any shares of Common Stock if the
number of shares so repurchased, redeemed or otherwise acquired in such
transaction or series of related transactions (excluding any Option Share
Surrender) is more than either (x) 5.0% of the number of shares of Common Stock
outstanding immediately prior to such transaction or series of related
transactions or (y) 1% of the number of shares of Common Stock outstanding
immediately prior to such transaction or series of related transactions if such
transaction or series of transactions is with any one person or group of
affiliated persons, unless the Company or such Subsidiary offers to purchase for
cash from the Holder at the time of such redemption, repurchase or acquisition
the same percentage of the outstanding principal amount of this Note as the
percentage of the number of outstanding shares of Common Stock to be so
redeemed, repurchased or acquired at a purchase price equal to the greater of
(i) the Premium Price on the date of purchase pursuant to this Section 3.1 (a)
and (ii) the Converted Market Price on the date of purchase pursuant to this
Section 3.1 (a); provided, however, that if in connection with any
determination of the purchase price payable pursuant to this Section 3.1 the
amount specified in clause (y) of the definition of the term Converted Market
Price is greater than 200% of the Ceiling Price on the date as of which such
amount is determined, then for purposes of computing the purchase price payable
pursuant to this Section 3.1 in such instance, the amount otherwise specified in
clause (y) of the definition of the term Converted Market Price shall be reduced
by 20% of the amount by which (A) the amount otherwise specified in clause (y)
of the definition of the term Converted Market Price exceeds (B) the Ceiling
Price on the date as of which such amount is determined.
(b) The Company shall not, and shall not permit any Subsidiary, directly or
indirectly to repurchase, redeem or otherwise acquire any shares of its capital
stock other than Common Stock other than repurchases or redemptions of the
Company's Series A Preferred Stock or Series D Convertible Preferred Stock which
are required to be made by the Company in accordance with the terms thereof as
in effect on the Issuance Date or as proposed to be amended pursuant to the
Amendment Agreement.
3.2 Certain Tender Offers. The Company shall not itself, and shall not
permit any Subsidiary to (1) make any Tender Offer for outstanding shares of
Common Stock unless the Company 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 Company or any Subsidiary, unless such
person agrees with the Company to make an offer, in either such case, to the
Holder to purchase the same percentage of the outstanding principal amount of
this Note held by the Holder as the percentage of outstanding shares of Common
Stock offered to be purchased in such Tender Offer, at a price equal to the
greater of (i) the Premium Price on the
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date of purchase pursuant to this Section 3.2 and (ii) the greater of (x) the
Converted Market Price on the date of purchase pursuant to this Section 3.2 and
(y) the greater of (A) the Converted Market Price on the date of the first
public announcement of such Tender Offer and (B) the Converted Market Price on
the date of purchase pursuant to this Section 3.2.
3.3 Payment of Obligations. The Company will pay and discharge, and will
cause each Subsidiary to pay and discharge when due, all their respective
obligations and liabilities which are material to the Company and the
Subsidiaries, taken as a whole, including without limitation, tax liabilities,
except where the same may be contested in good faith by appropriate proceedings
and for which appropriate reserves have been made on the books of the Company or
such Subsidiary.
3.4 Maintenance of Property; Insurance. (a) The Company will keep, and will
cause each Subsidiary to keep, all property useful and necessary in its business
in good working order and condition, ordinary wear and tear excepted.
(b) The Company will maintain, and will cause each Subsidiary to maintain,
with financially sound and responsible insurance companies insurance against
loss or damage by fire or other casualty and such other insurance, including but
not limited to, product liability insurance, in such amounts and covering such
risks as is reasonably adequate for the conduct of their businesses and the
value of their properties in at least such amounts and against such risks as is
reasonably adequate for the conduct of their respective businesses and the value
of their respective properties.
3.5 Conduct of Business and Maintenance of Existence. The Company will
continue, and will cause each Subsidiary to continue, to engage in business of
the same general type as conducted by the Company and the Subsidiaries on the
Issuance Date, and will preserve, renew and keep in full force and effect, and
will cause each Subsidiary to preserve, renew and keep in full force and effect,
their respective corporate existence and their respective rights, privileges and
franchises necessary or desirable in the normal conduct of business.
3.6 Compliance with Laws. The Company will comply, and will cause each
Subsidiary to comply, in all material respects with all applicable laws,
ordinances, rules, regulations, decisions, orders and requirements of
governmental authorities and courts (including, Without limitation,
environmental laws) except (i) where compliance therewith is contested in good
faith by appropriate proceedings or (ii) where non-compliance therewith could
not reasonably be expected to have a material adverse effect on the business,
condition (financial or otherwise), operations, performance, properties or
prospects of the Company and the Subsidiaries, taken as a whole.
3.7 Investment Company Act. The Company will not be or become an open-end
investment trust, unit investment trust or face-amount certificate company that
is or is required to be registered under Section 8 of the Investment Company Act
of 1940, as amended.
3.8 Transactions with Affiliates. The Company will not, and will not permit
any Subsidiary, directly or indirectly, to pay any funds to or for the account
of, make any investment (whether by acquisition of stock or Indebtedness, by
loan, advance, transfer of property, guarantee or other agreement to pay,
purchase or service, directly or indirectly, any Indebtedness, or otherwise) in,
lease, sell, transfer or otherwise dispose of any assets, tangible or
intangible, to, or participate in, or effect any transaction in connection with,
any joint enterprise or other joint arrangement with, any Affiliate of the
Company or any Affiliate of any Subsidiary, except, on terms to the Company or
such Subsidiary no less favorable than terms that could be obtained by the
Company or such Subsidiary from a Person that is not an Affiliate of the Company
or an Affiliate of any Subsidiary, as determined in good faith by the Board of
Directors.
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3.9 Compliance. The Company shall (a) use its commercially reasonable best
efforts to obtain knowledge of any failure or default by the Company in the
timely performance of any material obligation to the Holder or the holder of any
Interest Note or Other Note under the terms of this Note or any other
Transaction Document and (b) shall notify the Holder promptly, but in no event
later than three Business Days after the Company first learns of any such
failure or default.
ARTICLE IV
EVENTS OF DEFAULT
If any of the following events of default (each, an "Event of Default")
shall occur:
4.1 Failure to Pay Principal or Interest. The Company fails (a) to pay the
principal, Redemption Price, Redemption Event Redemption Price or Repurchase
Price hereof or of any Interest Note when due, whether at maturity, on
redemption, upon acceleration or otherwise, as applicable, or (b) to pay any
installment of interest hereon or on any Interest Note is, when due and, in the
case of this clause (b) of this Section 4.1 only, such failure continues for a
period of three Business Days after the due date thereof; or
4.2 Conversion and the Shares. The Company fails to issue or cause to be
issued shares of Common Stock to the Holder upon exercise by the Holder of the
conversion rights of the Holder in accordance with the terms of this Note or
upon exercise of the Warrants or fails to transfer any certificate for shares of
Common Stock issued to the Holder upon conversion of this Note or any Interest
or upon exercise of the Warrants as and when required by this Note, the Interest
Notes, the Note Purchase Agreement, the Transfer Agent Instruction and the
Warrants; or
4.3 Breach of Covenant. The Company (a) fails to comply with Section 3.1,
3.2 or 3.9 or (b) fails to comply in any material respect with any provision of
Article III of this Note (other than Section 3.1, 3.2 or 3.9) or breaches any
other material covenant or other material term or condition of this Note (other
than as specifically provided in Sections 4.1, 4.2, 4.3(a)), the Note Purchase
Agreement, the Security Agreement, the Transfer Agent Instruction or the
Warrants, and in the case of this clause (b) of this Section 4.3 only, such
breach continues for a period of 20 days after written notice thereof to the
Company from the Holder; or
4.4 Breach of Representations and Warranties. Any material representation
or warranty of the Company made herein or in any agreement, statement or
certificate given in writing pursuant hereto or in connection herewith
(including, without limitation, the Note Purchase Agreement, the Security
Agreement, the Transfer Agent Instruction and the Warrants) shall be false or
misleading in any material respect when made; or
4.5 Certain Voluntary Proceedings The Company or any Subsidiary shall
commence a voluntary case or other proceeding seeking liquidation,
reorganization or other relief with respect to itself or its debts under any
bankruptcy, insolvency or other similar law now or hereafter in effect or
seeking the appointment of a trustee, receiver, liquidator, custodian or other
similar official of it or any substantial part of its property, or shall consent
to any such relief or to the appointment of or taking possession by any such
official in an involuntary case or other proceeding commenced against it, or
shall make a general assignment for the benefit of creditors, or shall fail
generally to pay its debts as they become due or shall admit in writing its
inability generally to pay its debts as they become due; or
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4.6 Certain Involuntary Proceedings. An involuntary case or other
proceeding shall be commenced against the Company or any Subsidiary seeking
liquidation, reorganization or other relief with respect to it or its debts
under any bankruptcy, insolvency or other similar law now or hereafter in effect
or seeking the appointment of a trustee, receiver, liquidator, custodian or
other similar official of it or any substantial part of its property, and such
involuntary case or other proceeding shall remain undismissed and unstayed for a
period of 60 consecutive days; or
4.7 Judgments. Any court of competent jurisdiction shall enter one or more
final judgments against the Company or any Subsidiary or any of their respective
properties or other assets in an aggregate amount in excess of $100,000, which
is not vacated, bonded, stayed, discharged, satisfied or waived for a period of
30 consecutive days; or
4.8 Default Under Other Agreements. Except as otherwise agreed in writing
by the Company and the original Holder of this Note (which agreement shall be
binding on any subsequent Holder of this Note or any Interest Note) (a) the
Company or any Subsidiary shall default in any payment with respect to any
indebtedness for borrowed money (other than this Note) which indebtedness has an
outstanding principal amount excess of $100,000 individually or $200,000 in the
aggregate for the Company and the Subsidiaries, beyond the period of grace, if
any, provided in the instrument or agreement under which such indebtedness was
created; provided, however, that the events and conditions described in the
preceding clause shall not constitute an Event of Default unless and until the
Company fails to take the action necessary to correct such event or condition
within five Business Days of becoming aware of such event or condition; or (b)
any indebtedness of the Company or any Subsidiary which has an outstanding
principal amount in excess of $100,000 individually or $200,000 in the aggregate
shall, in accordance with its terms, be declared to be due and payable, or
required to be prepaid other than by a regularly scheduled or required payment
prior to the stated maturity thereof;
4.9 Delisting of Common Stock. The Common Stock shall cease to be listed on
any of Nasdaq, the NYSE or the AMEX and shall remain unlisted for a period of
three Trading Days; or
4.10 Failure to Obtain Opinion. The Company fails to deliver an opinion of
its counsel, Weil, Gotshal & Manges LLP addressed to the Holder as provided in
Section 4(l) of the Note Purchase Agreement within seven (7) Business Days of
the issuance of this Note;
then, (X) upon the occurrence and during the continuation of any Event of
Default specified in Section 4.1 4.2, 4.3, 4.4, 4.7, 4.8, 4.9 or 4. 10, at the
option of the Holder the Company shall, and upon the occurrence of any Event of
Default specified in Section 4.5 or 4.6, the Company shall, pay to the Holder an
amount equal to the Premium Price on the date of such payment, (Y) all other
amounts payable hereunder shall immediately become due and payable, all without
demand, presentment or notice, all of which hereby are expressly waived,
together with all costs, including, without limitation, reasonable legal fees
and expenses, of collection, and (Z) the Holder shall be entitled to exercise
all other rights and remedies available at law or in equity, including all
rights and remedies under or in connection with the Security Agreement;
provided, however, that if in connection with any Event of Default the Company
shall not at such time be in compliance with its obligations under Section 1.2,
3.1 or 3.2 or shall be obligated, or to cause another Person, to redeem,
repurchase or purchase all or any portion of this Note, then in lieu of payment
of the amount provided in the preceding clause (X) the Company shall pay to the
Holder an amount equal to the amount which would be payable to the Holder upon
redemption, repurchase or purchase of this Note in accordance with Section 1.2,
3.1 or 3.2 as if the Company had exercised its right to redeem or repurchase
this Note (or such Person had become obligated to purchase this Note) pursuant
thereto on the date of such, payment pursuant hereto.
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ARTICLE V
REPURCHASE UPON A REPURCHASE EVENT
5.1 Repurchase Right Upon Repurchase Event. If a Repurchase Event occurs,
then the Holder shall have the right, at the Holder's option, to require the
Company to repurchase all of this Note, or any portion hereof (in a minimum
principal amount of $100,000 or integral multiples thereof (or such lesser
remaining principal amount of this Note)), on the repurchase date that is five
Business Days after the date of the Holder Notice delivered with respect to such
Repurchase Event. The Holder shall have the right to require the Company to
repurchase all or any such portion of this Note if a Repurchase Event occurs at
any time while any portion of the principal amount of this Note is outstanding
at a price equal to the Repurchase Price.
5.2 Notices; Method of Exercising Repurchase Rights, Etc. (a) On or before
the fifth Business Day after the occurrence of a Repurchase Event, the Company
shall give to the Holder a Company Notice of the occurrence of the Repurchase
Event and of the repurchase right set forth herein arising as a result thereof.
Such Company Notice shall set forth:
(i) a statement that a Repurchase Event has occurred, the date of such
occurrence and the type of Repurchase Event (by reference to the applicable
clause of the definition of such term);
(ii) the date by which the repurchase right must be exercised, and
(iii) a description of the procedure (set forth in this Section 5.2)
which the Holder must follow to exercise the repurchase right.
No failure of the Company to give a Company Notice or defect therein shall limit
the Holder's right to exercise the repurchase right or affect the validity of
the proceedings for the repurchase of this Note or portion hereof.
(b) To exercise the repurchase right, the Holder shall deliver to the
Company on or before the 30th day after a Company Notice (or if no such Company
Notice has been given, within 40 days after the Holder first learns of the
Repurchase Event) (i) a Holder Notice setting forth the name of the Holder and
the principal amount of this Note to be repurchased, and (ii) this Note, duly
endorsed for transfer to the Company of the portion of the principal amount of
this Note to be repurchased. A Holder Notice may be revoked by the Holder at any
time prior to the time the Company pays the applicable Repurchase Price to the
Holder.
(c) If the Holder shall have given a Holder Notice, on the date which is
five Business Days after the date such Holder Notice is given (or such later
date as the Holder surrenders this Note) the Company shall make payment in
immediately available funds of the applicable Repurchase Price to such account
as specified by the Holder in writing to the Company at least one Business Day
prior to the applicable repurchase date.
5.3 Other. (a) If the Company fails to repurchase on the applicable
repurchase date this Note (or portion hereof) as to which the repurchase right
has been properly exercised pursuant to this Article V, then the Repurchase
Price for the portion (which, if applicable, may be all) of this Note which is
required to have been so repurchased shall bear interest to the extent not
prohibited by applicable law from the applicable repurchase date until paid at
the Default Rate.
(b) If a portion of this Note is to be repurchased, upon surrender of this
Note to the Company in accordance with the terms of this Article V, the Company
shall execute and deliver
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to the Holder without service charge, a new Note or Notes, having the same date
hereof and containing identical terms and conditions, in such denomination or
denominations as requested by the Holder in aggregate principal amount equal to,
and in exchange for, the unrepurchased portion of the principal amount of the
Note so surrendered.
(c) A Holder Notice given by the Holder shall be deemed for all purposes to
be in proper form unless the Company notifies the Holder within three Business
Days after such Holder Notice has been given (which notice shall specify all
defects in the Holder Notice), and any Holder Notice containing any such defect
shall nonetheless be effective on the date given if the Holder promptly
undertakes to correct all such defects. No such claim of defect shall limit or
delay performance of the Company's obligation to repurchase any portion of this
Note, the repurchase of which is not in dispute.
ARTICLE VI
DEFINITIONS
6.1 Certain Defined Terms. (a) All the agreements or instruments herein
defined shall mean such agreements or instruments as the same may from time to
time be supplemented or amended or the terms thereof waived or modified to the
extent permitted by, and in accordance with, the terms thereof and of this Note.
(b) The following terms shall have the following meanings (such
meanings to be equally applicable to both the singular and plural forms of the
terms defined):
"Affiliate" means, with respect to any Person, any other Person that
directly, or indirectly through one or more intermediaries, controls, is
controlled by or under common control with the subject Person. For purposes of
the term "Affiliate", the term "control" (including the terms "controlling",
"controlled by" and "under common control with") means the possession, direct or
indirect, of the power to direct or to cause the direction of the management and
policies of a Person, whether through the ownership of securities, by contract
or otherwise.
"Aggregated Person" means any person whose beneficial ownership of shares
of Common Stock would be aggregated with the Holder's beneficial ownership of
shares of Common Stock for purposes of Section 13(d) of the 1934 Act and
Regulation 13D-G thereunder.
"Amendment Agreement" means the Amendment Agreement, dated as of July 31,
1998, by and between the Company and MCM Partners, relating to amendment of the
rights and preferences of the Series A Preferred Stock.
"AMEX" means the American Stock Exchange, Inc.
"Applicable Rate" means six percent per annum.
"Average Market Price" for any date means the arithmetic average of the
Market Price on each of the five Trading Days, whether or not consecutive,
during the applicable Measurement Period having the lowest Market Prices.
"Business Day" shall mean any day other than a Saturday, Sunday or a day on
which commercial banks in The City of New York are authorized or required by law
or executive order to remain closed.
"Ceiling Price" means $.9006 (subject to equitable adjustments from time to
time on
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terms reasonably acceptable to the Majority Holders for stock splits, stock
dividends, combinations, recapitalizations, reclassifications and similar events
occurring or with respect to which "ex-" trading commences on or after the
Issuance Date); provided, however, that, notwithstanding any other provision
hereof, the Ceiling Price applicable to a particular conversion shall be subject
to reduction as provided in Section 2.3(d); provided further, however, that if a
Registration Event occurs, then, in addition to any other right or remedy of the
Holder, thereafter the Ceiling Price shall be permanently reduced on each
Computation Date by an amount equal to two percent of the amount that the
Ceiling Price otherwise would have been without any reduction pursuant to this
proviso (pro rated in the case of any Computation Date which is less than 30
days after a Registration Event occurs or less than 30 days after another
Computation Date).
"Common Stock" shall mean the Common Stock, $.01 par value, or any shares
of capital stock into which such stock shall be changed or reclassified after
the Issuance Date.
"Company" shall have the meaning provided in the first paragraph of this
Note.
"Company Certificate" means a certificate of the Company signed by an
Officer.
"Company Notice" means a notice from the Company to the Holder setting
forth the information provided in Section 5.2.
"Company Optional Redemption Notice" means a notice from the Company to the
Holder setting forth the information required by Section 1.2.
"Computation Date" means, a Registration Event occurs, any of (1) the date
which is 30 days after such Registration Event occurs, if any Registration Event
is continuing on such date, (2) each date which is 30 days after a Computation
Date, if any Registration Event is continuing on such date, and (3) the date on
which all Registration Events cease to continue.
"Conversion Date" means the date on which a Conversion Notice is actually
received by the Transfer Agent, whether by mail, courier, personal service,
telephone line facsimile transmission or other means.
"Conversion Notice" means a Notice of Conversion of 6% Senior Convertible
Note due 2001 substantially in the form attached hereto as Exhibit A, given by
the Holder.
"Conversion Percentage" means 85%; provided, however, that, notwithstanding
any other provision hereof, if a Registration Event occurs, then such percentage
stated above shall be permanently reduced by two percentage points on each
Computation Date (pro rated in the case of any Computation Date which is less
than 30 days after a Registration Event occurs or less than 30 days after
another Computation Date).
"Conversion Price" means the lesser of:
(1) the product of (a) the Average Market Price for such date times (b) the
applicable Conversion Percentage; and
(2) the Ceiling Price;
provided, however, that the Conversion Price applicable to a particular
conversion shall be subject to reduction as provided in Section 2.3(d).
"Converted Market Price" means, for this Note or any portion hereof as of
any date of determination, an amount equal to the product obtained by
multiplying (x) the number of shares
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of Common Stock which would, at the time of such determination, be issuable on
conversion in accordance with Article II of this Note or such portion hereof and
any accrued and unpaid interest hereon and any accrued and unpaid Default
Interest hereon if a Conversion Notice were given by the Holder on the date of
such determination (determined without regard to any limitation on conversion
based on beneficial ownership contained in Section 2.1 times (y) the arithmetic
average of the Market Price of the Common Stock for the five consecutive Trading
Days ending on the Trading Day prior to the date of such determination.
"Default Interest" shall have the meaning provided in the first paragraph
of this Note.
"Default Rate" means 14 percent per annum (or such lesser rate equal to the
highest rate permitted by applicable law).
"Event of Default" shall have the meaning provided in Article IV.
"Generally Accepted Accounting Principles" for any Person means the
generally accepted accounting principles and practices applied by such Person
from time to time in the preparation of its audited financial statements.
"Holder" shall have the meaning provided in the first paragraph of
this Note.
"Holder Notice" means a Holder Notice ie form attached hereto as
Exhibit E.
"Inconvertibility Notice" means a notice from the Company to the Holder in
the form set forth in Exhibit B or a notice from the Holder to the Company in
the form set forth in Exhibit C.
"Indebtedness" as used in reference to any Person means all indebtedness of
such person for borrowed money, the deferred purchase price of property, goods
and services and obligations under leases which are required to be capitalized
in accordance with Generally Accepted Accounting Principles and shall include
all such indebtedness guaranteed in any manner by such person or in effect
guaranteed by such person through a contingent agreement to purchase and all
indebtedness for the payment or purchase of which such person has contingently
agreed to advance or supply funds and all indebtedness secured by mortgage or
other lien upon property owned by such person, although such person has not
assumed or become liable for the payment of such indebtedness, and, for all
purposes hereof, such indebtedness shall be treated as though it has been
assumed by such person.
"Interest Note" means any 6% Senior Convertible Note due 2001 of like tenor
with this Note which is issued by the Company in payment of interest on this
Note or any Interest Note in accordance with the terms hereof or thereof.
"Interest Note Payment Option" shall have the meaning provided in
Section 1.1(a).
"Interest Payment Dates" shall mean each February 15, May 15, August 15 and
November 15 and the Maturity Date.
"Issuance Date" means the date this Note was issued to the original Holder
of this Note.
"Majority Holders" means at any time the holders of this Note, Interest
Notes and the Other Notes which hold Notes, Interest Notes and Other Notes
which, based on the outstanding principal amounts thereof, represent a majority
of the aggregate outstanding principal amount of this Note, the Interest Notes
and the Other Notes.
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"Market Price" of the Common Stock on any date means the lowest sale price
(regular way) for one share of Common Stock on such date on the first applicable
among the following: (a) the national securities exchange on which the shares of
Common Stock are listed which constitutes the principal securities market for
the Common Stock, (b) the Nasdaq, if the Nasdaq constitutes the principal market
for the Common Stock on such date, or (c) the Nasdaq SmallCap, if the Nasdaq
SmallCap constitutes the principal securities market for the Common Stock on
such date, in any such case as reported by Bloomberg, L.P.; provided, however,
that if during, any Measurement Period or other period during which the Market
Price is being determined:
(i) The Company shall declare or pay a dividend or make a
distribution to all holders of the outstanding Common Stock in shares of
Common Stock or fix any record date for any such action, then the Market
Price for each day in such Measurement Period or such other period which
day is prior to the earlier of (1) the date fixed for the determination of
stockholders entitled to receive such dividend or other distribution and
(2) the date on which ex-dividend trading in the Common Stock with respect
to such dividend or distribution begins shall be reduced by multiplying the
Market Price (determined without regard to this proviso) for each such day
in such Measurement Period or such other period by a fraction, the
numerator of which shall be the number of shares of Common Stock
outstanding at the close of business on the earlier of (1) the record date
fixed for such determination and (2) the date on which ex-dividend trading
in the Common Stock with respect to such dividend or distribution begins
and the denominator of which shall be the sum of such number of shares and
the total number of shares constituting such dividend or other
distribution;
(ii) Company shall issue rights or warrants to all holders of its
outstanding shares of Common Stock, or fix a record date for such issuance,
which rights or warrants entitles such holders (for a period expiring
within forty-five (45) days after the date fixed for the determination of
stockholders entitled to receive such rights or warrants) to subscribe for
or purchase shares of Common Stock at a price per share less than the
Market Price (determined without regard to this proviso) for any day in
such Measurement Period or such other period which day is prior to the end
of such 45-day period, then the Market Price for each such day shall be
reduced so that the same shall equal the price determined by multiplying
the Market Price (determined without regard to this proviso) by a fraction,
the numerator of which shall be the number of shares of Common Stock
outstanding at the close of business on the record date fixed for the
determination of stockholders entitled to receive such rights or warrants
plus the number of shares which the aggregate offering price of the total
number of shares so offered would purchase at such Market Price, and the
denominator of which shall be the number of shares of Common Stock
outstanding on the close of business on such record date plus the total
number of additional shares of Common Stock so offered for subscription or
purchase. In determining whether any rights or warrants entitle the holders
to subscribe for or purchase shares of Common Stock at less than the Market
Price (determined without regard to this proviso), and in determining the
aggregate offering price of such shares of Common Stock, there shall be
taken into account any consideration received for such rights or warrants,
the value of such consideration, if other than cash, to be determined in
good faith by a resolution of the Board of Directors of the Corporation;
(iii) The outstanding shares of Common Stock shall be subdivided into
a greater number of shares of Common Stock or a record date for any such
subdivision shall be fixed, then the Market Price of the Common Stock for
each day in such Measurement Period or such other period which day is prior
to the earlier of (1) the day upon which such subdivision becomes effective
and (2) the date on which ex-dividend trading in the
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Common Stock with respect to such subdivision begins shall be
proportionately reduced, and conversely, in case the outstanding shares of
Common Stock shall be combined into a smaller number of shares of Common
Stock, the Market Price each trade (regular way) on for each day in such
Measurement Period or such other period which day is prior to the earlier
of (1) the date on which such combination becomes effective and (2) the
date on which trading in the Common Stock on a basis which gives effect to
such combination begins, shall be proportionately increased;
(iv) The Company shall, by dividend or otherwise, distribute to all
holders of its Common Stock shares of any class of capital stock of the
Company (other than any dividends or distributions to which clause (i) of
this proviso applies) or evidences of its indebtedness, cash or other
assets (including securities, but excluding any rights or warrants referred
to in clause (ii) of this proviso and dividends and distributions paid
exclusively in cash and excluding any capital stock, evidences of
indebtedness, cash or assets distributed upon a merger or consolidation)
(the foregoing hereinafter in this clause (iv) of this proviso called the
"Securities"), or fix a record date for any such distribution, then, in
each such case, the Market Price for each day in such Measurement Period or
such other period which day is prior to the earlier of (1) the record date
for such distribution and (2) the date on which ex-dividend trading in the
Common Stock with respect to such distribution begins shall be reduced so
that the same shall be equal to the price determined by multiplying the
Market Price (determined without regard to this proviso) by a fraction, the
numerator of which shall be the Market Price (determined without regard to
this proviso) for such date less the fair market value (as determined in
good faith by resolution of the Board of Directors of the Company) on such
date of the portion of the Securities so distributed or to be distributed
applicable to one share of Common Stock and the denominator of which shall
be the Market Price (determined without regard to this proviso) for such
date; provided, however, that in the event the then fair market value (as
so determined) of the portion of the Securities so distributed applicable
to one share of Common Stock is equal to or greater than the Market Price
(determined without regard to this clause (iv) of this proviso) for any
such Trading Day, in lieu of the foregoing adjustment, adequate provision
shall be made so that the Holder shall have the right to receive upon
conversion of this Note the amount of Securities the Holder would have
received had the holders of shares of Series C Preferred Stock converted
the shares of Series C Preferred Stock immediately prior to the record date
for such distribution. If the Board of Directors of the Corporation
determines the fair market value of any distribution for purposes of this
clause (iv) by reference to the actual or when issued trading market for
any securities comprising all or part of such distribution, it must in
doing so consider the prices in such market on the same day for which an
adjustment in the Market Price is being determined.
For purposes of this clause (iv) and clauses (i) and (ii) of this
proviso, any dividend or distribution to which this clause (iv) is
applicable that also includes shares of Common Stock, or rights or warrants
to subscribe for or purchase shares of Common Stock to which clause (i) or
(ii) of this proviso applies (or both), shall be deemed instead to be (1) a
dividend or distribution of the evidences of indebtedness, assets, shares
of capital stock, rights or warrants other than such shares of Common Stock
or rights or warrants to which clause (i) or (ii) of this proviso applies
(and any Market Price reduction required by this clause (iv) with respect
to such dividend or distribution shall then be made) immediately followed
by (2) a dividend or distribution of such shares of Common Stock or such
rights or warrants (and any further Market Price reduction required by
clauses (i) and (ii) of this proviso with respect to such dividend or
distribution shall then be made), except that any shares of Common Stock
included in such dividend or distribution shall not be deemed "outstanding
at the close of business on the date fixed for such determination" within
the meaning of clause (i) of this proviso;
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(v) The Company or any Subsidiary shall (x) by dividend or otherwise,
distribute to all holders of its Common Stock cash in (or fix any record
date for any such distribution), or (y) repurchase or reacquire shares of
its Common Stock (other than an Option Share Surrender) for, in either
case, an aggregate amount that, combined with (1) the aggregate amount of
any other such distributions to all holders of its Common Stock made
exclusively in cash after the Issuance Date and within the 12 months
preceding the date of payment of such distribution, and in respect of which
no adjustment pursuant to this clause (v) has been made, (2) the aggregate
amount of any cash plus the fair market value (as determined in good faith
by a resolution of the Board of Directors of the Company) of consideration
paid in respect of any repurchase or other reacquisition by the Company or
any Subsidiary of any shares of Common Stock (other than an Option Share
Surrender) made after the Issuance Date and within the 12 months preceding
the date of payment of such distribution or making of such repurchase or
reacquisition, as the case may be, and in respect of which no adjustment
pursuant to this clause (v) has been made, and (3) the aggregate of any
cash plus the fair market value (as determined in good faith by a
resolution of the Board of Directors of the Company) of consideration
payable in respect of any Tender Offer by the Company or any Subsidiary for
all or any portion of the Common Stock concluded within the 12 months
preceding the date of payment of such distribution or completion of such
repurchase or reacquisition, as the case may be, and in respect of which no
adjustment pursuant to clause (vi) of this proviso has been made (such
aggregate amount combined with the amounts in clauses (1), (2) and (3)
above being the "Combined Amount"), exceeds 10% of the product of the Price
(determined without regard to this proviso) for any day in such Measurement
Period or such other period which day is prior to the earlier of (A) the
record date with respect to such distribution and (B) the date on which ex-
dividend trading in the Common Stock with respect to such distribution
begins or the date of such repurchase or reacquisition, as the case may be,
times the number of shares of Common Stock outstanding on such date, then,
and in each such case, the Market Price for each such day shall be reduced
so that the same shall equal the price determined by multiplying the Market
Price (determined without regard to this proviso) for such day by a
fraction (i) the numerator of which shall be equal to the Market Price
(determined without regard to this proviso) for such day less an amount
equal to the quotient of (x) the excess of such Combined Amount over such
10% and (y) the number of shares of Common Stock outstanding on such day
and (ii) the denominator of which shall be equal to the Market Price
(determined without regard to this proviso) for such day; provided,
however, that in the event the portion of the cash so distributed or paid
for the repurchase or reacquisition of shares (determined per share based
on the number of shares of Common Stock outstanding) applicable to one
share of Common Stock is equal to or greater than the Market Price
(determined without regard to this clause (v) of this proviso) of the
Common Stock for any such day, then in lieu of the foregoing adjustment
with respect to such day, adequate provision shall be made so that the
Holder shall have the right to receive upon conversion of this Note the
amount of cash the Holders would have received had the Holder converted
this Note immediately prior to the record date for such distribution or the
payment date of such repurchase, as applicable; or
(vi) A Tender Offer made by the Company or any Subsidiary for all or any
portion of the Common Stock shall expire and such Tender Offer (as amended
upon the expiration thereof) shall require the payment to stockholders
(based on the acceptance (up to any maximum specified in the terms of the
Tender Offer) of Purchased Shares (as defined herein)) of an aggregate
consideration having a fair market value (as determined in good faith by
resolution of the Board of Directors of the Company) that combined together
with (1) the aggregate of the cash plus the fair market value (as
determined in good faith by a resolution of the Board of Directors of the
Company), as of the expiration of such Tender Offer, of consideration
payable in respect of any other Tender Offers, by the Company or
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any Subsidiary for all or any portion of the Common Stock expiring within
the 12 months preceding the expiration of such Tender Offer and in respect
of which no adjustment pursuant to this clause (vi) has been made, (2) the
aggregate amount of any cash plus the fair market value (as determined in
good faith by a resolution of the Board of Directors of the Company) of
consideration paid in respect of any repurchase or other reacquisition by
the Company or any Subsidiary of any shares of Common Stock (other than an
Option Share Surrender) made after the Issuance Date and within the 12
months preceding the expiration of such Tender Offer and in respect of
which no adjustment pursuant to clause (v) of this proviso has been made,
and (3) the aggregate amount of any distributions to all holders of Common
Stock made exclusively in cash within 12 months preceding the expiration of
such Tender Offer and in respect of which no adjustment pursuant to clause
(v) of this proviso has been made, exceeds 10% of the product of the
Market Price (determined without regard to this proviso) for any day in
such period times the number of shares of Common Stock outstanding on such
day, then, and in each such case, the Market Price for such day shall be
reduced so that the same shall equal the price determined by multiplying
the Market Price (determined without regard to this proviso) for such day
by a fraction, the numerator of which shall be the number of shares of
Common Stock outstanding on such day multiplied by the Market Price
(determined without regard to this proviso) for such day and the
denominator of which shall be the sum of (x) the fair market value
(determined as aforesaid) of the aggregate consideration payable to
stockholders based on the acceptance (up to any maximum specified in the
terms of the Tender Offer) of all shares validly tendered and not withdrawn
as of the last time tenders could have been made pursuant to such Tender
Offer (the "Expiration Time") (the shares deemed accepted, up to any such
maximum, being referred to as the "Purchased Shares") and (y) the product
of the number of shares of Common Stock outstanding (less any Purchased
Shares) on such day times the Market Price (determined without regard to
this proviso) of the Common Stock on the Trading Day exit succeeding the
Expiration Time. If the application of this clause (vi) to any Tender Offer
would result in an increase in the Market Price (determined without regard
to this proviso) for any trade, no adjustment shall be made for such Tender
Offer under this clause (vi) for such day.
"Master Purchase Agreement" means the Master Purchase Agreement, dated as
of July 31, 1998, by and between the Company Genesee Fund Limited-Portfolio B, a
British Virgin Islands corporation, Willis Group, LLC, a Texas limited liability
company and Advantage Fund Limited, a British Virgin Islands corporation.
"Maturity Date" means September 4, 2001.
"Maximum Share Amount" means 142,620 shares, less from time to time the
number of shares issued upon exercise of the Warrants, or such greater number as
permitted by the rules of Nasdaq (such amount to be subject to equitable
adjustment from time to time on terms reasonably acceptable to the Majority
Holders for stock splits, stock dividends, combinations, capital reorganizations
and similar events relating to the Common Stock occurring after the Issuance
Date) of Common Stock; provided, however, that if for purposes of Rule 4460(i)
of the Nasdaq (or any successor or replacement provision of any stock exchange
or stock market on which the Common Stock is listed or traded) the (x) issuance
of the Warrants and the shares of Common Stock issuable upon exercise of the
Warrants or (y) the issuance of shares of Series D Convertible Preferred Stock
and the issuance of shares of Common Stock upon conversion thereof or (z) the
issuance of the common stock purchase warrants issued in connection with the
issuance of the Series D Convertible Preferred Stock and the issuance of shares
of Common Stock upon exercise thereof is not required to be integrated with the
issuance of this Note and the Other Notes and the issuance of shares of Common
Stock upon conversion thereof, then in each such case the "Maximum Share Amount"
shall mean such greater number as equals the maximum number of shares of Common
Stock as are permitted by the rules of the Nasdaq or such exchange or market
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(determined by pro rata allocation of any increase thereof among the Note and
the Other Notes based on the original principal amounts thereof) (such amount to
be subject to equitable adjustment in terms reasonably acceptable to the
Majority Holders from time to time for stock splits, stock dividends,
combinations, capital reorganizations and similar events relating to the Common
Stock occurring after the Issuance Date).
"Maximum Share Amount Inconvertibility" means the occurrence within any
period of ten consecutive Trading Days of five or more Trading Days on which all
or any portion of this Note is inconvertible due to the restrictions in Section
2.4.
"Measurement Period" means with respect to any date the period of 25
consecutive Trading Days ending on the Trading Day prior to such date.
"Nasdaq" means the Nasdaq National Market.
"Nasdaq SmallCap" means the Nasdaq SmallCap Market.
"1933 Act" means the Securities Act of 1933, as amended.
"1934 Act" means the Securities Exchange Act of 1934, as amended.
"Note" means this instrument as originally executed, or if later amended or
supplemented in accordance with its terms, then as so amended or supplemented.
"Note Purchase Agreement" shall mean the Note Purchase Agreement or Note
Purchase and Exchange Agreement, as the case may be, dated as of July 31, 1998,
by and between the Company and the original Holder of this Note.
"NYSE" shall mean the New York Stock Exchange, Inc.
"Officer" means the Chairman of the Board, the Chief Executive Officer, the
President or the Chief Financial Officer of the Company.
"Optional Redemption Event" means that on each Trading Day in any period of
20 consecutive Trading Days commencing on or after the date which is 730 days
after the Issuance Date, the Market Price of the Common Stock shall have been
not less than 200% of the Ceiling Price in effect on such Trading Day.
"Option Share Surrender" means the surrender of shares of Common Stock to
the Company in payment of the exercise price or tax obligations incurred in
connection with the exercise of a stock option granted by the Company to any of
its employees, directors or consultants.
"Other Notes" means the several 6% Senior Convertible Notes due 2001 issued
by the Company pursuant to the Other Note Purchase Agreements and any other
promissory notes of like tenor issued by the Company in payment of interest
thereon or on any Other Note so issued.
"Other Note Purchase Agreements" means the several Note Purchase and
Exchange Agreements or the Note Purchase Agreement, as the case may be, dated as
of the date of the Note Purchase Agreement, by and between the Company and the
several buyers named therein.
"Permitted Transferee" means any person who is an "accredited investor" as
defined in Regulation D under the 1933 Act.
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"Person" means any natural person, corporation, partnership, limited
liability company, trust, incorporated organization, unincorporated association
or similar entity or any government, governmental agency or political
subdivision.
"Premium Percentage" means 115%.
"Premium Price" means, for this Note or any portion hereof as of any date
of determination, the product obtained by multiplying (a) the sum of (1) the
outstanding principal amount of this Note or such portion hereof plus (2) an
amount equal to the accrued but unpaid interest on this Note or such portion
hereof to the date of determination, plus (3) an amount equal to the accrued and
unpaid Default Interest on this Note or such portion hereof to the date of
determination times (b) the Premium Percentage.
"Redemption Date" means the date of a redemption of this Note or a portion
hereof pursuant to Section 1.2, determined in accordance herewith.
"Redemption Election" means (1) a notice by the Holder to the Company
substantially in the form set forth in EXHIBIT D or (2) a notice by the Holder
to the Company included in the form of Inconvertibility Notice set forth in
EXHIBIT C.
"Redemption Election Period" means, with respect to a particular
inconvertibility of this Note pursuant to Section 2.4, the period of ten
Business Days after the later of (x) the date an Inconvertibility Notice with
respect to such inconvertibility is given or (y) the date such Inconvertibility
Notice was required to have been given by the Company.
"Redemption Event Redemption Date" means any Business Day during the period
commencing on the date which is 730 days after the Issuance Date and ending on
September 4, 2001.
"Redemption Event Redemption Notice" means a Redemption Event Redemption
Notice setting forth the information required by Section 1.3(a).
"Redemption Event Redemption Price" means an amount in cash equal to the
sum of (1) the outstanding principal amount of this Note on the Redemption Event
Redemption Date plus (2) accrued and unpaid interest on such principal amount to
the Redemption Event Redemption Date plus (3) accrued and unpaid Default
Interest, if any, on the amount referred to in the immediately preceding clause
(2) at the rate provided in this Note to the Redemption Event Redemption Date.
"Redemption Price" means the greater of:
(1) the Premium Price on the applicable Redemption Date; and
(2) the Converted Market Price on the applicable Redemption Date;
provided, however, that if in connection with any determination of the
Redemption Price the amount specified in clause (y) of the definition of
the term Converted Market Price is greater than 200% of the Ceiling Price
on the date as of which such amount is determined, then for purposes of
computing the Redemption Price in such instance, the amount otherwise
specified in clause (y) of the definition of the term Converted Market
Price shall be reduced by 20% of the amount by which (A) the amount
otherwise specified in clause (y) of the definition of the term Converted
Market Price exceeds (B) the Ceiling Price on the date as of which such
amount is determined.
"Registration Event" shall mean (1) the Registration Statement is not
effective
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within 105 days after the Issuance Date, if the Registration Statement is on
Form S-3, or 120 days after the Issuance Date, if the Registration Statement is
on Form S-1, (2) the Company fails to file the Registration Statement with the
SEC within 60 days after the Issuance Date, (3) the Company fails to submit a
request for acceleration of the effective date of the Registration Statement in
accordance with Section 3(a) of the Registration Rights Agreement, (4) the
Registration Statement shall cease to be available for use by the Holder for any
reason (including, without limitation, by reason of an SEC stop order, a
material misstatement or omission in the Registration Statement or the
information contained in the Registration Statement having become outdated);
provided, however, that no Registration Event pursuant to this clause (4) shall
be deemed to occur prior to the SEC Effective Date, (5) the Common Stock is not
listed for trading on any of the NYSE, the AMEX, the Nasdaq or the Nasdaq
SmallCap, or (6) the Holder having become unable to convert this Note in
accordance with Article II for any reason (other than by reason of the 4.9%
limitation on beneficial ownership set forth therein or a redemption or
repurchase thereof).
"Registration Rights Agreements" means the several Registration Rights
Agreements entered into between the Company and the original Holder and the
original holders of the Other Notes, as amended or modified from time to time in
accordance with their respective terms.
"Registration Statement" means the Registration Statement required to be
filed by the Company with the SEC pursuant to Section 2(a) of the Registration
Rights Agreements.
"Repurchase Event" means the occurrence on or before September 4, 2001 of
any one or more of the following events:
(1) For any period of five consecutive Trading Days following the date
hereof there shall be no reported sale price of the Common Stock on the
Nasdaq, the Nasdaq SmallCap, the NYSE or the AMEX;
(2) The Common Stock is not listed for trading on any of the Nasdaq,
the Nasdaq SmallCap, the NYSE or the AMEX;
(3) The inability for 45 or more days (whether or not consecutive) of
the Holder or the holder of any Other Note to sell shares of Common Stock
issued or issuable on conversion of this Note, any Interest Note or any
Other Note pursuant to the Registration Statement for any reason on each of
such 45 days;
(4) The Company shall (A) default in the timely performance of the
obligation to issue shares of Common Stock upon conversion of this Note,
any Interest Note or any Other Note as and when required by hereby or
thereby or the timely performance of its obligations under Section 3.9 or
(B) the Company shall fail or default in the timely performance of any
material obligation (other than as specifically set forth elsewhere in this
definition) to the Holder or the holder of any Other Note under the terms
of this Note, any Interest Note, any Other Note or any of the other
Transaction Documents, as such instruments may be amended from time to
time, and in the case of this clause (B) only, such failure or default
shall continue for ten Business Days after notice thereof from the Holder
to the Company;
(5) Any consolidation or merger of the Company with or into another
entity (other than a merger or consolidation of a Subsidiary into the
Company or a wholly-owned Subsidiary) where the stockholders of the Company
immediately prior to such transaction do not collectively own at least 51%
of the outstanding voting securities of the surviving corporation of such
consolidation or merger immediately following such transaction or the
common stock of such surviving corporation is not listed for trading on the
NYSE, the
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AMEX, the Nasdaq or the Nasdaq SmallCap, or any sale or other transfer of
all or substantially all of the assets of the Company;
(6) The taking of any action, including any amendment to the Company's
Articles of Incorporation, without the consent of the Majority Holders
which materially and adversely affects the rights of the Holder or any
holder of Other Notes;
(7) The Stockholder Approval shall not have been obtained on or before
the date which is 120 days after the Issuance Date; or
(8) The occurrence of any Event of Default specified in Article IV of
this Note.
"Repurchase Price" means with respect to any repurchase pursuant to
Sections 5.1 and 5.2 an amount in cash equal to the Premium Price on the
applicable repurchase date.
"SEC" means the Securities and Exchange Commission.
"SEC Effective Date" means the date on which the Registration Statement is
first declared effective by the SEC.
"Security Agreement" means the Security Agreement, dated as of September 4,
1998, by and between the Company and the original Holder of this Note.
"Series A Preferred Stock" means the Company's Series A Convertible
Preferred Stock, $.01 par value.
"Share Limitation Redemption Date" shall mean each date on which the
Company is required to redeem this Note or any portion hereof as provided in
Section 2.4(b).
"Share Limitation Redemption Price" means an amount in cash equal to the
Premium Price on the applicable Share Limitation Redemption Date.
"Stockholder Approval" means the approval by a majority of the votes cast
by the holders of shares of Common Stock (in person or by proxy) at a meeting of
the stockholders of the Company (duly convened at which a quorum was present),
or a written consent of holders of shares of Common Stock entitled to such
number of votes given without a meeting, of the issuance by the Company of 20%
or more of the outstanding Common Stock of the Company for less than the greater
of the book or market value of such Common Stock on conversion of this Note and
the Other Notes, as and to the extent required under Rule 4460(i) of Nasdaq as
in effect at such time (or any successor or replacement provision thereof).
"Subsidiary" means any corporation or other entity of which a majority of
the capital stock or other ownership interests having ordinary voting power to
elect a majority of the board of directors or other persons performing similar
functions are at the time directly or indirectly owned by the Company.
"Tender Offer" means a tender offer or exchange offer.
"Trading Day" means a day on whichever of (x) the national securities
exchange, (y) Nasdaq or (z) the Nasdaq SmallCap which at the time constitutes
the principal securities market for the Common Stock is open for general trading
of securities.
"Transaction Documents" means this Note, the Interest Notes, the Other
Notes, the Note Purchase Agreement, the Other Note Purchase Agreements, the
Security Agreement, the
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Transfer Agent Instruction from the Company to the Transfer Agent for the
benefit of, among others, the Holder of this Note and the Holders of the Other
Notes, as contemplated by the Note Purchase Agreement.
"Transfer Agent" means American Stock Transfer & Trust Company, its
successor or such other person who shall be serving as transfer agent and
registrar for the Common Stock and who shall have been authorized by the Company
to act as conversion agent for this Note in accordance with the Transfer Agent
Instruction and the name, address and telephone number of whom shall have been
given to the Holder by notice from the Company.
"Transfer Agent Instruction" means the Transfer Agent Instruction from the
Company to the Transfer Agent for the benefit of, among others, the Holder of
this Note and the holders of the Other Notes, as contemplated by the Note
Purchase Agreement.
"Warrants" means the Common Stock Purchase Warrants of the Company issued
to the original Holder of this Note pursuant to the Note Purchase Agreement and
to the original holders of the Other Notes pursuant to the Other Note Purchase
Agreements.
ARTICLE VII
MISCELLANEOUS
7.1 Failure or Indulgency Not Waiver. No failure or delay on the part of
the Holder in the exercise of any power, right or privilege hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such power, right or privilege preclude other or further exercise thereof or of
any other right, power or privileges. All rights and remedies existing hereunder
are cumulative to, and not exclusive of, any rights or remedies otherwise
available.
7.2 Notices. Except as otherwise specifically provided herein, any notice
herein required or permitted to be given shall be in writing and may be
personally served, sent by telephone line facsimile transmission or delivered by
courier or sent by United States mail and shall be deemed to have been given
upon receipt if personally served, sent by telephone line facsimile transmission
or sent by courier or three (3) days after being deposited in the United States
mail, certified, with postage pre-paid and properly addressed, if sent by mail.
For the purposes hereof, the address of the Holder shall be as shown on the
records of the Company (telephone line facsimile transmission number 011-599-
932-2008, with a copy to Genesee International, Inc., 10500 N.E. 8th Street,
Suite 1920, Bellevue, Washington 98004-4332 (telephone line facsimile number
(425) 462-4645); and the address of the Company shall be 1250 Wood Branch Park
Drive, Houston, Texas 77079, Attention: Chief Executive Officer (telephone line
facsimile transmission number (281) 529-4650). The Holder or the Company may
change its address for service by service of written notice to the other as
herein provided.
7.3 Amendment, Waivers, Etc. (a) Neither this Note, any Interest Note or
any Other Note nor the Security Agreement nor any terms hereof or thereof may be
changed, waived, discharged or terminated unless such change, waiver, discharge
or termination is in writing signed by the Majority Holders, provided that no
such change, waiver, discharge or termination shall, without the consent of the
Holder and the holders of the Other Notes affected thereby (i) extend the
scheduled final maturity of this Note, any Interest Note or any Other Note, or
reduce the rate or extend the time of payment of interest (other than as a
result of waiving the applicability of any post-default increase in interest
rates) hereon or thereon or reduce the principal amount hereof or thereof or the
Redemption Price, the Redemption Event Redemption Price, the Share Limitation
Redemption Price or the Repurchase Price, (ii) release the collateral or reduce
the
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amount of collateral required to be deposited or maintained by the Company
pursuant to the Security Agreement except as expressly provided in the Security
Agreement, (iii) amend, modify or waive any provision of this Section 7.3, (iv)
reduce any percentage specified in, or otherwise modify, the definition of
Majority Holders or (v) except as provided in this Note, change the method of
calculating the Conversion Price in a manner adverse to the Holder.
(b) Notwithstanding any other provision of this Note or the Note Purchase
Agreement, in addition to the requirements of Section 7.3(a), any amendment of
(x) the second or third sentence of Section 2.1, (y) the definition of the term
Aggregated Person or (z) this Section 7.3(b) shall require approval by the
affirmative vote of the holders of a majority of the outstanding shares of
Common Stock, present in person or represented by proxy at a duly convened
meeting of stockholders of the Company, and entitled to vote or the consent
thereto in writing by holders of a majority of the outstanding shares of Common
Stock, and the stockholders of the Company are hereby expressly made third party
beneficiaries of this Section 7.3(b).
7.4 Assignability. This Note shall be binding upon the Company and its
successors, and shall inure to the benefit of and be binding upon the Holder and
its successors and permitted assigns. The Company may not assign its rights or
obligations under this Note.
7.5 Certain Expenses The Company shall pay on demand all expenses incurred
by the Holder, including reasonable attorneys' fees and expenses, as a
consequence of, or in connection with (x) any amendment, modification, waiver or
consent relating to this Note, (y) any default or breach of any of the Company's
obligations set forth in the Transaction Documents and (z) the enforcement or
restructuring of any right of, including the collection of any payments due, the
Holder under the Transaction Documents, including any action or proceeding
relating to such enforcement or any order, injunction or other process seeking
to restrain the Company from paying any amount due the Holder.
7.6 Governing Law; Execution Issuance and Delivery. This Note shall be
governed by the internal laws of the State of New York, without regard to the
principles of conflict of laws. This Note has been signed, issued and delivered
in the State of New York and it is the intention of the Company and the Holder
that this Note shall be construed accordingly for all purposes.
7.7 Transfer of Note. This Note has not been and is not being registered
under the provisions of the 1933 Act or any state securities laws and this Note
may not be transferred unless (1) the transferee is a Permitted Transferee and
(2) the Holder shall have delivered to the Company an opinion of counsel,
reasonably satisfactory in form, scope and substance to the Company, to the
effect that this Note may be sold or transferred without registration under the
1933 Act. Prior to any such transfer, such transferee shall have represented in
writing to the Company that such transferee has requested and received from the
Company all information relating to the business, properties, operations,
condition (financial or other), results of operations or prospects of the
Company and the Subsidiaries deemed relevant by such transferee; that such
transferee has been afforded the opportunity to ask questions of the Company
concerning the foregoing and has had the opportunity to obtain and review the
Registration Statement and the prospectus included therein, each as amended or
supplemented to the date of transfer to such transferee, and the reports and
other information concerning the Company which at the time of such transfer have
been filed by the Company with the SEC pursuant to the 1934 Act and which are
incorporated by reference in such prospectus as of the date of such transfer. If
such transfer is intended to assign the rights and obligations under (x)
Sections 4, 5 and 9 of the Note Purchase Agreement, such transfer shall
otherwise be made in compliance with Section 9(h) of the Note Purchase Agreement
and (y) the Registration Rights Agreement to which the Holder is entitled to the
benefits such transfer shall otherwise be made in compliance with Section 9 of
such Registration Rights Agreement.
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7.8 Enforceable Obligation. The Company represents and warrants that at the
time of the original issuance of this Note it received the full purchase price
payable pursuant to the Note Purchase Agreement in an amount at least equal to
the original principal amount of this Note, and that this Note is an enforceable
obligation of the Company which is not subject to any offset, reduction,
counterclaim or disallowance of any sort.
7.9 Certain Amounts. Whenever pursuant to this Note the Company is required
to pay an amount in excess of the outstanding principal amount (or the portion
thereof required to be paid at that time) plus accrued and unpaid interest plus
Default Interest on such interest, the Company and the Holder agree that the
actual damages to the Holder from the receipt of cash payment on this Note may
be difficult to determine and the amount to be so paid by the Company represents
stipulated damages and not a penalty and is intended to compensate the Holder in
part for loss of the opportunity to convert this Note and to earn a return from
the sale of shares of Common Stock acquired upon conversion of this Note at a
price in excess of the price paid for such shares pursuant to this Note. The
Company and the Holder hereby agree that such amount of stipulated damages is
not plainly disproportionate to the possible loss to the Holder from the receipt
of a cash payment without the opportunity to convert this Note into shares of
Common Stock.
7.10 Replacement of Notes. Upon receipt by the Company of evidence
reasonably satisfactory to it of the ownership of and the loss, theft,
destruction or mutilation of this Note and (a) in the case of loss, theft or
destruction of indemnity from the Holder reasonably satisfactory in form to the
company (and without requirement to post any bond or other security) or (b) in
the case of mutilation, upon surrender and cancellation of this Note, the
Company will execute and deliver to the Holder a new Note of like tenor without
charge to the Holder.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
29
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Note to be signed in its
name by its duly authorized officer on the day and in the year first above
written.
EQUALNET COMMUNICATIONS CORP.
By: /s/ Mitchell H. Bodiar
--------------------------------------
Name: Mitchell H. Bodiar
Title: President and CEO
30
<PAGE>
Exhibit A
---------
NOTICE OF CONVERSION
OF 6% SENIOR SECURED CONVERTIBLE NOTE DUE 2001
OF EQUALNET COMMUNICATIONS CORP.
To: American Stock Transfer & Trust Company,
as Transfer Agent
6201 Fifteen Avenue
Third Floor
Brooklyn, New York 11219
Attention: Mr. Barry Rosenthal
Facsimile No.: (718) 259-1144
(1) Pursuant to the terms of the 6% Senior Secured Convertible Note due
2001 (the "Note"), the undersigned hereby elects to convert $________ of the
Note, equal to the sum of $ __________ principal amount of the Note, $__________
of accrued and unpaid interest on such principal amount of $ ___________ of
Default Interest on such interest into shares of Common Stock of Equalnet
Communications Corp., a Texas corporation (the "Company"), at a Conversion Price
equal to $ _________ Capitalized terms used herein and not otherwise defined
herein have the respective meanings provided in the Note.
(2) The number of shares of Common Stock issuable upon the conversion of
the Note to which this Notice relates is ________________.
(3) If the conversion of the Note by this Notice is based on the Market
Prices during a Measurement Period, set forth below or on a schedule which
accompanies this Notice are the Market Prices during the Measurement Period
applicable to this Notice and an indication of the five Market Prices used to
determine the Conversion Price set forth above.
Date Trading Price
1. ________________, ______ $____________
2. ________________, ______ $____________
3. ________________, ______ $____________
4. ________________, ______ $____________
5. ________________, ______ $____________
6. ________________, ______ $____________
7. ________________, ______ $____________
8. ________________, ______ $____________
9. ________________, ______ $____________
10. ________________, ______ $____________
A-1
<PAGE>
11. ________________, ______ $____________
12. ________________, ______ $____________
13. ________________, ______ $____________
14. ________________, ______ $____________
15. ________________, ______ $____________
16. ________________, ______ $____________
17. ________________, ______ $____________
18. ________________, ______ $____________
19. ________________, ______ $____________
20. ________________, ______ $____________
21. ________________, ______ $____________
22. ________________, ______ $____________
23. ________________, ______ $____________
24. ________________, ______ $____________
25. ________________, ______ $____________
(4) Please issue a certificate or certificates for ______ shares of
Common Stock in the name(s) specified immediately below or, if additional space
is necessary, on an attachment hereto:
___________________________ _________________________
Name Name
___________________________ _________________________
Address Address
___________________________ _________________________
SS or Tax ID Number SS or Tax ID Number
Delivery Instructions
for Common Stock: _________________________
_________________________
_________________________
_________________________
A-2
<PAGE>
(5) The Holder hereby represents to the Company that the exercise of
conversion rights contained herein does not violate the provisions of Section
2.1 (a) of the Note relating to beneficial ownership in excess of 4.9% of the
Common Stock.
(6) If this Notice is given on or prior to the date which is two years
after the Issuance Date and the shares of Common Stock issuable upon conversion
of the Note have not been registered under the Securities Act of 1933, as
amended (the "Act"), the undersigned represents and warrants that (i) the shares
of Common Stock issuable upon the conversion of the Note to which this Notice
relates are being, acquired for the account of the undersigned for investment,
and not with a view to, or for resale in connection with, the distribution
thereof and (ii) the undersigned is an "accredited investor" as defined in
Regulation D under the 1933 Act. The undersigned further agrees that (A) such
shares shall not be sold or transferred unless either (i) they first shall have
been registered under the 1933 Act and applicable state securities laws or (ii)
the Company shall have been furnished with an opinion of legal counsel
reasonably satisfactory to the Company to the effect that such sale or transfer
is exempt from the registration requirements of the 1933 Act and (B) until such
shares are registered under the 1933 Act, the Company may place a legend on the
certificate(s) for the shares to that effect and place a stop-transfer
restriction in its records relating to the shares.
NAME: ___________________________________
Date __________________________ ___________________________________
Signature of Registered Holder
(Must be signed exactly as name
appears in the Note.)
A-3
<PAGE>
Exhibit B
---------
COMPANY INCONVERTIBILITY NOTICE
(Section 2.4(b) of 6% Senior Secured Convertible Note due 2001)
TO: ____________________________
(Name of Holder)
(1) Pursuant to the terms of the 6% Senior Secured Convertible Note due
2001 (the "Note"), Equalnet Communications Corp., a Texas corporation (the
"Company"), hereby notifies the above-named Holder:
(a) On __________________ (fill in date) five Inconvertibility Days
had occurred in a period of ten Trading Days and on such date $____________
(fill in amount) of principal of the Note and the related interest, if any,
became inconvertible by reason of the occurrence of five Inconvertibility
Days within a period of ten consecutive Trading Days.
(b) The five Inconvertibility Days cove by this Notice and the
applicable Conversion Price on each such day are as follows:
_______________________, _________ $_________
_______________________, _________ $_________
_______________________, _________ $_________
_______________________, _________ $_________
_______________________, _________ $_________
(2) Capitalized terms used herein and not otherwise defined herein have the
respective meanings provided in the Note.
Date ___________________________ EQUALNET COMMUNICATIONS CORP.
By __________________________
B-1
<PAGE>
Exhibit C
---------
HOLDER INCONVERTIBILITY NOTICE
(Section 2.4(b) of 6% Senior Secured Convertible Note due 2001)
TO: EQUALNET COMMUNICATIONS CORP.
(1) Pursuant to the terms of the 6% Senior Secured Convertible Note due
2001 (the "Note"), the undersigned (the "Holder"), hereby notifies Equalnet
Communications Corp., a Texas corporation (the "Company"):
(a) On ________________ (fill in date) five Inconvertibility Days had
occurred in a period of ten Trading Days and on such date $_____________
(fill in amount) of principal of the Note and the related interest, if any,
became inconvertible by reason of the occurrence of five Trading Days on
which all or a portion of this Note was inconvertible within a period of
ten consecutive Trading Days.
(b) The five Trading Days on which all or a portion of this Note was
inconvertible and which are covered by this Notice and the applicable
Conversion Price on each such day are as follows:
_______________________, _________ $_________
_______________________, _________ $_________
_______________________, _________ $_________
_______________________, _________ $_________
_______________________, _________ $_________
(2) If the following date and amounts are completed in this Notice, the
Holder hereby directs the Company to redeem the principal amount set forth below
(and the related interest) in accordance with Section 7(a) of the Certificate of
Designations set forth below:
(a) Principal amount of Note to be redeemed: _____________________
(fill in)
(b) On ___________ (fill in Redemption Date), the Company shall
pay the Holder the Share Limitation Redemption Price of the portion (which, if
applicable, may be all) of the Note to be redeemed.
(3) Capitalized terms used herein and not otherwise defined herein have the
respective meanings provided in the Note.
Date ___________________________ NAME OF HOLDER:
____________________________________
By:_________________________________
Title:
C-1
<PAGE>
Exhibit D
---------
HOLDER REDEMPTION ELECTION
(Section 2.4(b) of 6% Senior
Secured Convertible Note due 2001)
TO: EQUALNET COMMUNICATIONS CORP.
(1) Pursuant to the terms of the 6% Senior Secured Convertible Note due
2001 (the "Note"), the undersigned (the "Holder") hereby notifies Equalnet
Communications Corp., a Texas corporation (the "Company"), that the Holder is
exercising its right to require the Company to redeem a portion (which, if
applicable, may be all) of the Note as set forth below in accordance with
Section 2.4(b) of the Note. On ___________ (fill in Redemption Date), the
Company shall pay the Holder the Share Limitation Redemption Price for
redemption of $_____________ principal amount of the Note and the related
interest.
(2) Capitalized terms used herein and not otherwise defined herein have the
respective meanings provided in the Note.
Date ________________________ NAME OF HOLDER:
_______________________________________
By ____________________________________
D-1
<PAGE>
Exhibit E
---------
HOLDER NOTICE
(Section 5.2(b) of 6% Senior Secured Convertible Note due 2001)
TO: EQUALNET COMMUNICATIONS CORP.
(1)Pursuant to the terms of the 6% Senior Secured Convertible Note due
2001 (the "Note"), the undersigned Holder hereby elects to exercise its right to
require repurchase by the Company pursuant to Sections 5.2(a) and 5.2(b) of
$_____________ of the Note, equal to the sum of $____________ principal amount
of the Note, $_____________ of accrued and unpaid interest on such principal
amount and $_____________ of Default Interest on such interest at the
Repurchase Price provided in the Note.
(2) Capitalized terms used herein and not otherwise defined herein have the
respective meanings provided in the Note.
Date:__________________________ NAME OF HOLDER:
___________________________________
By ________________________________
Signature of Registered Holder
(Must be signed exactly as name
appears in the Note.)
E-1
<PAGE>
EXHIBIT 10.21
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES HAVE BEEN ACQUIRED FOR
INVESTMENT AND MAY NOT BE RESOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR AN OPINION OF COUNSEL THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT.
Right to Purchase 333,116 Shares of Common
Stock of Equalnet Communications Corp.
EQUALNET COMMUNICATIONS CORP.
COMMON STOCK PURCHASE WARRANT
NO. W-1
EQUALNET COMMUNICATIONS CORP., a Texas corporation (the "Company"),
hereby certifies that, for value received, Genesee Fund Limited-Portfolio B or
registered assigns (the "Holder"), is entitled, subject to the terms set forth
below, to purchase from the Company at any time or from time to time after the
date hereof, and before 5:00 p.m., New York City time, on the Expiration Date
(as defined herein), 333,116 fully paid and nonassessable shares of Common Stock
(as defined herein) at a purchase price per share equal to the Purchase Price
(as hereinafter defined). The number of such shares of Common Stock and the
Purchase Price are subject to adjustment as provided in this Warrant.
As used herein the following terms, unless the context otherwise
requires, have the following respective meanings:
"AMEX" means the American Stock Exchange, Inc.
"Common Stock" includes the Company's Common Stock, $.01 par value per
share, as authorized on the date hereof, and any other securities into which or
for which the Common Stock may be converted or exchanged pursuant to a plan of
recapitalization, reorganization, merger, sale of assets or otherwise.
"Company" shall include Equalnet Communications Corp. and any
corporation that shall succeed to or assume the obligation of Equalnet
Communications Corp. hereunder in accordance with the terms hereof.
"Expiration Date" means September 4, 2003.
"Issuance Date" means the first date of original issuance of this
Warrant.
<PAGE>
"Maximum Share Amount" shall have the meaning provided in the
Note.
"Nasdaq" means the Nasdaq National Market.
"Nasdaq SmallCap" means the Nasdaq SmallCap Market.
"1934 Act" means the Securities Exchange Act of 1934, as amended.
"1933 Act" means the Securities Act of 1933, as amended.
"Note" means the 6% Senior Secured Convertible Note due 2001 issued by
the Company, all 6% Senior Secured Convertible Notes due 2001 issued by the
Company upon transfer, re-registration or split-up thereof and all Interest
Notes, as defined therein.
"Note Purchase Agreement" means the Note Purchase Agreement or the
Note Purchase and Exchange Agreement, as the case may be, dated as of July 31
1998, by and between the Company and the original Holder of this Warrant, as
amended from time to time in accordance with its terms.
"NYSE" shall mean the New York Stock Exchange, Inc.
"Other Securities" refers to any stock (other than Common Stock) and
other securities of the Company or any other person (corporate or otherwise)
which the Holder at any time shall be entitled to receive, or shall have
received, on the exercise of this Warrant, in lieu of or in addition to Common
Stock, or which at any time shall be issuable or shall have been issued in
exchange for or in replacement of Common Stock or Other Securities pursuant to
Section 4.
"Purchase Price" shall mean $.9006 per share, subject to adjustment as
provided in this Warrant.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of July 31, 1998, by and between the Company and the
original Holder of this Warrant, as amended from time to time in accordance with
its terms.
"Stockholder Approval" means the approval by a majority of the votes
cast by the holders of shares of Common Stock (in person or by proxy) at a
meeting of the stockholders of the Company (duly convened at which a quorum was
present), or a written consent of holders of shares of Common Stock entitled to
such number of votes given without a meeting, of the issuance by the Company of
20% or more of the outstanding Common Stock of the Company for less than the
greater of the book or market value of such Common Stock on conversion of this
Note and the Other Notes, as and to the extent required under Rule 4460(i) of
Nasdaq as in effect at such time (or any successor or replacement provision
thereof).
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<PAGE>
"Trading Day" means a day on which the principal securities market for
the Common Stock is open for general trading of securities.
1. EXERCISE OF WARRANT.
1.1 EXERCISE. (a) This Warrant may be exercised by the Holder
hereof in full or in part at any time or from time to time during the exercise
period specified in the first paragraph hereof until the Expiration Date by
surrender of this Warrant and the subscription form annexed hereto (duly
executed by the Holder), to the Company's transfer agent and registrar for the
Common Stock, and by making payment, in cash or by certified or official bank
check payable to the order of the Company, in the amount obtained by multiplying
(a) the number of shares of Common Stock designated by the Holder in the
subscription form by (b) the Purchase Price then in effect. On any partial
exercise the Company will forthwith issue and deliver to or upon the order of
the Holder hereof a new Warrant or Warrants of like tenor, in the name of the
Holder hereof or as the Holder (upon payment by the Holder of any applicable
transfer taxes) may request, providing in the aggregate on the face or faces
thereof for the purchase of the number of shares of Common Stock for which such
Warrant or Warrants may still be exercised.
(b) Notwithstanding any other provision of this Warrant, in no event
shall the Holder be entitled at any time to purchase a number of shares of
Common Stock on exercise of this Warrant in excess of that number of shares upon
purchase of which the sum of (1) the number of shares of Common Stock
beneficially owned by the Holder and all persons whose beneficial ownership of
shares of Common Stock would be aggregated with the Holder's beneficial
ownership of shares of Common Stock for purposes of Section 13(d) of the 1934
Act and Regulation 13D-G thereunder, (each such person other than the Holder an
"Aggregated Person" and all such persons other than the Holder, collectively,
the "Aggregated Persons") (other than shares of Common Stock deemed beneficially
owned through the ownership by the Holder and all Aggregated Persons of the
Holder of the unexercised portion of this Warrant and any other security of the
Company which contains similar provisions) and (2) the number of shares of
Common Stock issuable upon exercise of the portion of this Warrant with respect
to which the determination in this sentence is being made, would result in
beneficial ownership by the Holder and all Aggregated Persons of the Holder of
more than 4.9% of the outstanding shares of Common Stock. For purposes of the
immediately preceding sentence, beneficial ownership shall be determined in
accordance with Section 13(d) of the 1934 Act and Regulation 13D-G thereunder,
except as otherwise provided in clause (1) of the immediately preceding
sentence. For purposes of the second preceding sentence, the Company shall be
entitled to rely, and shall be fully protected in relying, on any statement or
representation made by the Holder to the Company in connection with a particular
exercise of this Warrant, without any obligation on the part of the Company to
make any inquiry or investigation or to examine its records or the records of
any transfer agent for the Common Stock.
1.2 NET ISSUANCE. Notwithstanding anything to the contrary contained
in Section 1.1, the Holder may elect to exercise this Warrant in whole or in
part by receiving shares of Common Stock equal to the net issuance value (as
determined below) of this Warrant, or any
-3-
<PAGE>
part hereof, upon surrender of this Warrant to the Company's transfer agent and
registrar for the Common Stock the principal office of the Company together with
the subscription form annexed hereto (duly executed by the Holder), in which
event the Company shall issue to the Holder a number of shares of Common Stock
computed using the following formula:
X = Y (A-B)
-------
A
Where: X = the number of shares of Common Stock to be issued
to the Holder
Y = the number of shares of Common Stock as to which
this Warrant is to be exercised
A = the current fair market value of one share of
Common Stock calculated as of the last trading day
immediately preceding the exercise of this Warrant
B = the Purchase Price
As used herein, current fair market value of Common Stock as of a
specified date shall mean with respect to each share of Common Stock the average
of the closing sale price of the Common Stock on the principal securities market
on which the Common Stock may at the time be listed or, if there have been no
sales on any such exchange on such day, the average of the highest bid and
lowest asked prices on the principal securities market at the end of such day,
or, if on such day the Common Stock is not so listed, the average of the
representative bid and asked prices quoted in the Nasdaq System as of 4:00 p.m.,
New York City time, or, if on such day the Common Stock is not quoted in the
Nasdaq System, the average of the highest bid and lowest asked price on such day
in the domestic over-the-counter market as reported by the National Quotation
Bureau, Incorporated, or any similar successor organization, in each such case
averaged over a period of five consecutive Trading Days consisting of the day as
of which the current fair market value of a share of Common Stock is being
determined (or if such day is not a Trading Day, the Trading Day next preceding
such day) and the four consecutive Trading Days prior to such day. If on the
date for which current fair market value is to be determined the Common Stock is
not listed on any securities exchange or quoted in the Nasdaq System or the
over-the-counter market, the current fair market value of Common Stock shall be
the highest price per share which the Company could then obtain from a willing
buyer (not a current employee or director) for shares of Common Stock sold by
the Company, from authorized but unissued shares, as determined in good faith by
the Board of Directors of the Company, unless prior to such date the Company has
become subject to a merger, acquisition or other consolidation pursuant to which
the Company is not the surviving party, in which case the current fair market
value of the Common Stock shall be deemed to be the value received by the
holders of the Company's Common Stock for each share thereof pursuant to the
Company's acquisition.
-4-
<PAGE>
1.3 LIMITATION ON SHARES ISSUABLE ON EXERCISE. Notwithstanding
any other provision herein, unless the Stockholder Approval shall have been
obtained from the stockholders of the Company or waived by the Nasdaq (or other
appropriate stock exchange or market), so long as the Common Stock is listed on
the Nasdaq, the Nasdaq SmallCap, the NYSE or the AMEX the Company shall not be
required to issue upon conversion of this Warrant a number of shares of Common
Stock in excess of the Maximum Share Amount. The Company shall maintain records
which show the number of shares of Common Stock issued by the Company upon
conversion from time to time of the Note and exercise of this Warrant, which
records shall be controlling in the absence of manifest error. Upon surrender
of this Warrant for transfer or re-registration hereof (or, at the option of the
Holder, for exercise of less than all of this Warrant), the Company shall make a
notation on the new Warrant issued upon such transfer or re-registration or
evidencing such unexercised portion of this Warrant, as the case may be, as to
the remaining number of shares of Common Stock from the Maximum Share Amount
remaining available for conversion of the Note and exercise of the Warrant
evidenced by such new certificate. If this Warrant is surrendered for split-up
into two or more Warrants representing the right to purchase an aggregate number
of shares equal to the number of shares which may be purchased upon exercise of
this Warrant at the time so surrendered (as reduced by any contemporaneous
exercise of this Warrant), each Warrant issued on such split-up shall bear a
notation of the portion of the Maximum Share Amount allocated thereto determined
by pro rata allocation from among the remaining Maximum Share Amount at the time
this Warrant is so surrendered.
2. DELIVERY OF STOCK CERTIFICATES, ETC., ON EXERCISE. As soon
as practicable after the exercise of this Warrant, and in any event within three
Trading Days thereafter, the Company at its expense (including the payment by it
of any applicable issue or stamp taxes) will cause to be issued in the name of
and delivered to the Holder hereof, or as the Holder (upon payment by the Holder
of any applicable transfer taxes) may direct, a certificate or certificates for
the number of fully paid and nonassessable shares of Common Stock (or Other
Securities) to which the Holder shall be entitled on such exercise, in such
denominations as may be requested by the Holder, plus, in lieu of any fractional
share to which the Holder would otherwise be entitled, cash equal to such
fraction multiplied by the then current fair market value (as determined in
accordance with subsection 1.2) of one full share, together with any other stock
or other securities any property (including cash, where applicable) to which the
Holder is entitled upon such exercise pursuant to Section 1 or otherwise. Upon
exercise of this Warrant as provided herein, the Company's obligation to issue
and deliver the certificates for Common Stock shall be absolute and
unconditional, irrespective of the absence of any action by the 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
Company to the Holder, or any setoff, counterclaim, recoupment, limitation or
termination, or any breach or alleged breach by the Holder or any other person
of any obligation to the Company, and irrespective of any other circumstance
which might otherwise limit such obligation of the Company to the Holder in
connection with such exercise. If the Company fails to issue and deliver the
certificates for the Common Stock to the Holder pursuant to the first sentence
of this paragraph as and when required to do so, in addition to any other
liabilities the Company may have hereunder and under applicable law, the Company
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<PAGE>
shall pay or reimburse the Holder on demand for all out-of-pocket expenses
including, without limitation, fees and expenses of legal counsel incurred by
the Holder as a result of such failure.
3. ADJUSTMENT FOR DIVIDENDS IN OTHER STOCK, PROPERTY, ETC.;
RECLASSIFICATION, ETC. In case at any time or from time to time, all the
holders of Common Stock (or Other Securities) shall have received, or (on or
after the record date fixed for the determination of stockholders eligible to
receive) shall have become entitled to receive, without payment therefor,
(a) other or additional stock or other securities or property
(other than cash) by way of dividend, or
(b) any cash (excluding cash dividends payable solely out of
earnings or earned surplus of the Company), or
(c) other or additional stock or other securities or property
(including cash) by way of spin-off, split-up, reclassification,
recapitalization, combination of shares or similar corporate rearrangement,
other than additional shares of Common Stock (or Other Securities) issued as a
stock dividend or in a stock-split (adjustments in respect of which are provided
for in Section 5), then and in each such case the Holder, on the exercise hereof
as provided in Section 1, shall be entitled to receive the amount of stock and
other securities and property (including cash in the cases referred to in
subdivisions (b) and (c) of this Section 3) which the Holder would hold on the
date of such exercise if on the date thereof the Holder had been the holder of
record of the number of shares of Common Stock called for on the face of this
Warrant and had thereafter, during the period from the date hereof to and
including the date of such exercise, retained such shares and all such other or
additional stock and other securities and property (including cash in the case
referred to in subdivisions (b) and (c) of this Section 3) receivable by the
Holder as aforesaid during such period, giving effect to all adjustments called
for during such period by Section 4.
4. EXERCISE UPON REORGANIZATION, CONSOLIDATION, MERGER, ETC.
In case at any time or from time to time, the Company shall (a) effect a
reorganization, (b) consolidate with or merge into any other person, or (c)
transfer all or substantially all of its properties or assets to any other
person under any plan or arrangement contemplating the dissolution of the
Company, then, in each such case, as a condition of such reorganization,
consolidation, merger, sale or conveyance, the Company shall give at least 30
days notice to the Holder of such pending transaction whereby the Holder shall
have the right to exercise this Warrant prior to any such reorganization,
consolidation, merger, sale or conveyance. Any exercise of this Warrant
pursuant to notice under this Section shall be conditioned upon the closing of
such reorganization, consolidation, merger, sale or conveyance which is the
subject of the notice and the exercise of this Warrant shall not be deemed to
have occurred until immediately prior to the closing of such transaction.
-6-
<PAGE>
5. ADJUSTMENT FOR EXTRAORDINARY EVENTS. In the event that the
Company shall (i) issue additional shares of the Common Stock as a dividend or
other distribution on outstanding Common Stock, (ii) subdivide or reclassify its
outstanding shares of Common Stock, or (iii) combine its outstanding shares of
Common Stock into a smaller number of shares of Common Stock, then, in each such
event, the Purchase Price shall, simultaneously with the happening of such
event, be adjusted by multiplying the Purchase Price in effect immediately prior
to such event by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to such event and the
denominator of which shall be the number of shares of Common Stock outstanding
immediately after such event, and the product so obtained shall thereafter be
the Purchase Price then in effect. The Purchase Price, as so adjusted, shall be
readjusted in the same manner upon the happening of any successive event or
events described herein in this Section 5. The Holder shall thereafter, on the
exercise hereof as provided in Section 1, be entitled to receive that number of
shares of Common Stock determined by multiplying the number of shares of Common
Stock which would be issuable on such exercise immediately prior to such
issuance by a fraction of which (i) the numerator is the Purchase Price in
effect immediately prior to such issuance and (ii) the denominator is the
Purchase Price in effect on the date of such exercise.
6. FURTHER ASSURANCES. The Company will take all action that
may be necessary or appropriate in order that the Company may validly and
legally issue fully paid and nonassessable shares of stock, free from all taxes,
liens and charges with respect to the issue thereof, on the exercise of all or
any portion of this Warrant from time to time outstanding.
7. NOTICES OF RECORD DATE, ETC. In the event of
(a) any taking by the Company of a record of the holders of any class
of securities for the purpose of determining the holders thereof who are
entitled to receive any dividend on, or any right to subscribe for, purchase
or otherwise acquire any shares of stock of any class or any other securities
or property, or to receive any other right, or
(b) any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company or any transfer of all or
substantially all of the assets of the Company to or consolidation or merger
of the Company with or into any other person, or
(c) any voluntary or involuntary dissolution, liquidation or
winding-up of the Company,
then and in each such event the Company will mail or cause to be mailed to the
Holder, at least ten days prior to such record date, a notice specifying (i) the
date on which any such record is to be taken for the purpose of such dividend,
distribution or right, and stating the amount and character of such dividend,
distribution or right, (ii) the date on which any such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding-up is to take place, and the time, if any is
to be fixed, as of which the holders of record of Common Stock (or Other
Securities) shall be entitled to exchange their shares of Common
-7-
<PAGE>
Stock (or Other Securities) for securities or other property deliverable on such
reorganization, reclassification, recapitalization, transfer, consolidation,
merger, dissolution, liquidation or winding-up, and (iii) the amount and
character of any stock or other securities, or rights or options with respect
thereto, proposed to be issued or granted, the date of such proposed issue or
grant and the persons or class of persons to whom such proposed issue or grant
is to be offered or made. Such notice shall also state that the action in
question or the record date is subject to the effectiveness of a registration
statement under the 1933 Act, or a favorable vote of stockholders if either is
required. Such notice shall be mailed at least ten days prior to the date
specified in such notice on which any such action is to be taken or the record
date, whichever is earlier.
8. RESERVATION OF STOCK, ETC., ISSUABLE ON EXERCISE OF
WARRANTS. The Company will at all times reserve and keep available out of its
authorized but unissued shares of capital stock, solely for issuance and
delivery on the exercise of this Warrant, a sufficient number of shares of
Common Stock (or Other Securities) to effect the full exercise of this Warrant
and the exercise, conversion or exchange of any other warrant or security of the
Company exercisable for, convertible into, exchangeable for or otherwise
entitling the holder to acquire shares of Common Stock (or Other Securities),
and if at any time the number of authorized but unissued shares of Common Stock
(or Other Securities) shall not be sufficient to effect such exercise,
conversion or exchange, the Company shall take such action as may be necessary
to increase its authorized but unissued shares of Common Stock (or Other
Securities) to such number as shall be sufficient for such purposes.
9. TRANSFER OF WARRANT. This Warrant shall inure to the
benefit of the successors to and assigns of the Holder. This Warrant and all
rights hereunder, in whole or in part, are registrable at the office or agency
of the Company referred to below by the Holder hereof in person or by his duly
authorized attorney, upon surrender of this Warrant properly endorsed.
10. REGISTER OF WARRANTS. The Company shall maintain, at the
principal office of the Company (or such other office as it may designate by
notice to the Holder hereof), a register in which the Company shall record the
name and address of the person in whose name this Warrant has been issued, as
well as the name and address of each successor and prior owner of such Warrant.
The Company shall be entitled to treat the person in whose name this Warrant is
so registered as the sole and absolute owner of this Warrant for all purposes.
11. EXCHANGE OF WARRANT. This Warrant is exchangeable, upon the
surrender hereof by the Holder hereof at the office or agency of the Company
referred to in Section 10, for one or more new Warrants of like tenor
representing in the aggregate the right to subscribe for and purchase the number
of shares of Common Stock which may be subscribed for and purchased hereunder,
each of such new Warrants to represent the right to subscribe for and purchase
such number of shares as shall be designated by said Holder hereof at the time
of such surrender.
12. REPLACEMENT OF WARRANT. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of any
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such loss, theft or destruction of this Warrant, on delivery of an indemnity
agreement or security reasonably satisfactory in form and amount to the Company
or, in the case of any such mutilation, on surrender and cancellation of this
Warrant, the Company at its expense will execute and deliver, in lieu thereof, a
new Warrant of like tenor.
13. WARRANT AGENT. In accordance with the Transfer Agent
Instruction, dated September __, 1998, by and among the Company, American Stock
Transfer & Trust Company, as Transfer Agent and Registrar (the "Transfer
Agent"), and the original Holder of this Warrant and the other common stock
purchase warrants of like tenor issued by the Company in connection with the
issuance of this Warrant the Company has appointed the Transfer Agent as the
exercise agent for purposes of issuing shares of Common Stock (or Other
Securities) on the exercise of this Warrant pursuant to Section 1. The Company
may, by notice to the Holder, appoint an agent having an office in the United
States of America for the purpose of exchanging this Warrant pursuant to Section
11 and replacing this Warrant pursuant to Section 12, or either of the
foregoing, and thereafter any such exchange or replacement, as the case may be,
shall be made at such office by such agent.
14. REMEDIES. The Company stipulates that the remedies at law of the
Holder in the event of any default or threatened default by the Company in the
performance of or compliance with any of the terms of this Warrant are not and
will not be adequate, and that such terms may be specifically enforced by a
decree for the specific performance of any agreement contained herein or by an
injunction against a violation of any of the terms hereof or otherwise.
15. NO RIGHTS OR LIABILITIES AS A STOCKHOLDER. This Warrant
shall not entitle the Holder hereof to any voting rights or other rights as a
stockholder of the Company. No provision of this Warrant, in the absence of
affirmative action by the Holder hereof to purchase Common Stock, and no mere
enumeration herein of the rights or privileges of the Holder hereof, shall give
rise to any liability of the Holder for the Purchase Price or as a stockholder
of the Company, whether such liability is asserted by the Company or by
creditors of the Company.
16. NOTICES, ETC. All notices and other communications from the
Company to the registered Holder shall be mailed by first class certified mail,
postage prepaid, at such address as may have been furnished to the Company in
writing by the Holder or at the address shown for the Holder on the register of
Warrants referred to in Section 10.
17. TRANSFER RESTRICTIONS. By acceptance of this Warrant, the
Holder represents to the Company that this Warrant is being acquired for the
Holder's own account and for the purpose of investment and not with a view to,
or for sale in connection with, the distribution thereof, nor with any present
intention of distributing or selling the Warrant or the Common Stock issuable
upon exercise of the Warrant. The Holder acknowledges and agrees that this
Warrant and, except as otherwise provided in the Registration Rights Agreement,
the Common Stock issuable upon exercise of this Warrant (if any) have not been
(and at the time of acquisition by the Holder, will not have been or will not
be), registered under the 1933 Act or under the securities laws of any state, in
reliance upon certain exemptive provisions of such statutes. The Holder further
recognizes and acknowledges that because this Warrant and, except
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as provided in the Registration Rights Agreement, the Common Stock issuable upon
exercise of this Warrant (if any) are unregistered, they may not be eligible for
resale, and may only be resold in the future pursuant to an effective
registration statement under the 1933 Act and any applicable state securities
laws, or pursuant to a valid exemption from such registration requirements.
Unless the shares of Common Stock issuable upon exercise of this Warrant have
theretofore been registered for resale under the 1933 Act, the Company may
require, as a condition to the issuance of Common Stock upon the exercise of
this Warrant (i) in the case of an exercise in accordance with Section 1.1
hereof, a confirmation as of the date of exercise of the Holder's
representations pursuant to this Section 17, or (ii) in the case of an exercise
in accordance with Section 1.2 hereof, an opinion of counsel reasonably
satisfactory to the Company that the shares of Common Stock to be issued upon
such exercise may be issued without registration under the 1933 Act.
18. LEGEND. Unless theretofore registered for resale under the
1933 Act, each certificate for shares issued upon exercise of this Warrant shall
bear the following legend:
The securities represented by this certificate have not been registered under
the Securities Act of 1933, as amended. The securities have been acquired for
investment and may not be resold, transferred or assigned in the absence of an
effective registration statement for the securities under the Securities Act
of 1933, as amended, or an opinion of counsel that registration is not
required under said Act.
19. MISCELLANEOUS. This Warrant and any terms hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of such change, waiver, discharge
or termination is sought. This Warrant shall be construed and enforced in
accordance with and governed by the internal laws of the State of New York. The
headings in this Warrant are for purposes of reference only, and shall not limit
or otherwise affect any of the terms hereof. The invalidity or unenforceability
of any provision hereof shall in no way affect the validity or enforceability of
any other provision.
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
on its behalf by one of its officers thereunto duly authorized.
Dated: September 4, 1998 EQUALNET COMMUNICATIONS CORP.
By: ____________________________
Title: ____________________________
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<PAGE>
FORM OF SUBSCRIPTION
EQUALNET COMMUNICATIONS CORP.
(To be signed only on exercise of Warrant)
TO: American Stock Transfer & Trust Company,
as Transfer Agent
6201 Fifteenth Avenue
Brooklyn, New York 11219
1. The undersigned Holder of the attached original, executed Warrant
hereby elects to exercise its purchase right under such Warrant with respect to
______________ shares of Common Stock, as defined in the Warrant, of Equalnet
Communications Corp., a Texas corporation (the "Company").
2. The undersigned Holder (check one):
[ ] (a) elects to pay the aggregate purchase price for such shares
of Common Stock (the "Exercise Shares") (i) by lawful money of
the United States or the enclosed certified or official bank
check payable in United States dollars to the order of the
Company in the amount of $___________, or (ii) by wire transfer
of United States funds to the account of the Company in the
amount of $____________, which transfer has been made before or
simultaneously with the delivery of this Form of Subscription
pursuant to the instructions of the Company;
or
[ ] (b) elects to receive shares of Common Stock having a value
equal to the value of the Warrant calculated in accordance with
Section 1.2 of the Warrant.
3. Please issue a stock certificate or certificates representing the
appropriate number of shares of Common Stock in the name of the undersigned or
in such other names as is specified below:
4. The undersigned Holder hereby represents to the Company that the
exercise of the Warrant elected hereby does not violate Section 1.1(b) of the
Warrant.
Name: ___________________________
Address: ___________________________
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<PAGE>
Dated: ____________ ___, _____ __________________________________
(Signature must conform to name of
Holder as specified on the face of
the Warrant)
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<PAGE>
EXHIBIT 10.22
Draft of 9/3/98
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES HAVE BEEN ACQUIRED FOR
INVESTMENT AND MAY NOT BE RESOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR AN OPINION OF COUNSEL THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT.
Right to Purchase 333,116 Shares of Common
Stock of Equalnet Communications Corp.
EQUALNET COMMUNICATIONS CORP.
COMMON STOCK PURCHASE WARRANT
NO. W-1
EQUALNET COMMUNICATIONS CORP., a Texas corporation (the "Company"),
hereby certifies that, for value received, Willis Group, LLC or registered
assigns (the "Holder"), is entitled, subject to the terms set forth below, to
purchase from the Company at any time or from time to time after the date
hereof, and before 5:00 p.m., New York City time, on the Expiration Date (as
defined herein), 333,116 fully paid and nonassessable shares of Common Stock (as
defined herein) at a purchase price per share equal to the Purchase Price (as
hereinafter defined). The number of such shares of Common Stock and the
Purchase Price are subject to adjustment as provided in this Warrant.
As used herein the following terms, unless the context otherwise
requires, have the following respective meanings:
"AMEX" means the American Stock Exchange, Inc.
"Common Stock" includes the Company's Common Stock, $.01 par value per
share, as authorized on the date hereof, and any other securities into which or
for which the Common Stock may be converted or exchanged pursuant to a plan of
recapitalization, reorganization, merger, sale of assets or otherwise.
"Company" shall include Equalnet Communications Corp. and any
corporation that shall succeed to or assume the obligation of Equalnet
Communications Corp. hereunder in accordance with the terms hereof.
"Expiration Date" means September 4, 2003.
"Issuance Date" means the first date of original issuance of this
Warrant.
<PAGE>
"Maximum Share Amount" shall have the meaning provided in the Note.
"Nasdaq" means the Nasdaq National Market.
"Nasdaq SmallCap" means the Nasdaq SmallCap Market.
"1934 Act" means the Securities Exchange Act of 1934, as amended.
"1933 Act" means the Securities Act of 1933, as amended.
"Note" means the 6% Senior Secured Convertible Note due 2001 issued by
the Company, all 6% Senior Secured Convertible Notes due 2001 issued by the
Company upon transfer, re-registration or split-up thereof and all Interest
Notes, as defined therein.
"Note Purchase Agreement" means the Note Purchase Agreement or the
Note Purchase and Exchange Agreement, as the case may be, dated as of July 31
1998, by and between the Company and the original Holder of this Warrant, as
amended from time to time in accordance with its terms.
"NYSE" shall mean the New York Stock Exchange, Inc.
"Other Securities" refers to any stock (other than Common Stock) and
other securities of the Company or any other person (corporate or otherwise)
which the Holder at any time shall be entitled to receive, or shall have
received, on the exercise of this Warrant, in lieu of or in addition to Common
Stock, or which at any time shall be issuable or shall have been issued in
exchange for or in replacement of Common Stock or Other Securities pursuant to
Section 4.
"Purchase Price" shall mean $.9006 per share, subject to adjustment as
provided in this Warrant.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of July 31, 1998, by and between the Company and the
original Holder of this Warrant, as amended from time to time in accordance with
its terms.
"Stockholder Approval" means the approval by a majority of the votes
cast by the holders of shares of Common Stock (in person or by proxy) at a
meeting of the stockholders of the Company (duly convened at which a quorum was
present), or a written consent of holders of shares of Common Stock entitled to
such number of votes given without a meeting, of the issuance by the Company of
20% or more of the outstanding Common Stock of the Company for less than the
greater of the book or market value of such Common Stock on conversion of this
Note and the Other Notes, as and to the extent required under Rule 4460(i) of
Nasdaq as in effect at such time (or any successor or replacement provision
thereof).
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<PAGE>
"Trading Day" means a day on which the principal securities market for
the Common Stock is open for general trading of securities.
1. EXERCISE OF WARRANT.
1.1 EXERCISE. (a) This Warrant may be exercised by the Holder
hereof in full or in part at any time or from time to time during the exercise
period specified in the first paragraph hereof until the Expiration Date by
surrender of this Warrant and the subscription form annexed hereto (duly
executed by the Holder), to the Company's transfer agent and registrar for the
Common Stock, and by making payment, in cash or by certified or official bank
check payable to the order of the Company, in the amount obtained by multiplying
(a) the number of shares of Common Stock designated by the Holder in the
subscription form by (b) the Purchase Price then in effect. On any partial
exercise the Company will forthwith issue and deliver to or upon the order of
the Holder hereof a new Warrant or Warrants of like tenor, in the name of the
Holder hereof or as the Holder (upon payment by the Holder of any applicable
transfer taxes) may request, providing in the aggregate on the face or faces
thereof for the purchase of the number of shares of Common Stock for which such
Warrant or Warrants may still be exercised.
(b) Notwithstanding any other provision of this Warrant, in no event
shall the Holder be entitled at any time to purchase a number of shares of
Common Stock on exercise of this Warrant in excess of that number of shares upon
purchase of which the sum of (1) the number of shares of Common Stock
beneficially owned by the Holder and all persons whose beneficial ownership of
shares of Common Stock would be aggregated with the Holder's beneficial
ownership of shares of Common Stock for purposes of Section 13(d) of the 1934
Act and Regulation 13D-G thereunder, (each such person other than the Holder an
"Aggregated Person" and all such persons other than the Holder, collectively,
the "Aggregated Persons") (other than shares of Common Stock deemed beneficially
owned through the ownership by the Holder and all Aggregated Persons of the
Holder of the unexercised portion of this Warrant and any other security of the
Company which contains similar provisions) and (2) the number of shares of
Common Stock issuable upon exercise of the portion of this Warrant with respect
to which the determination in this sentence is being made, would result in
beneficial ownership by the Holder and all Aggregated Persons of the Holder of
more than 4.9% of the outstanding shares of Common Stock. For purposes of the
immediately preceding sentence, beneficial ownership shall be determined in
accordance with Section 13(d) of the 1934 Act and Regulation 13D-G thereunder,
except as otherwise provided in clause (1) of the immediately preceding
sentence. For purposes of the second preceding sentence, the Company shall be
entitled to rely, and shall be fully protected in relying, on any statement or
representation made by the Holder to the Company in connection with a particular
exercise of this Warrant, without any obligation on the part of the Company to
make any inquiry or investigation or to examine its records or the records of
any transfer agent for the Common Stock.
1.2 NET ISSUANCE. Notwithstanding anything to the contrary
contained in Section 1.1, the Holder may elect to exercise this Warrant in whole
or in part by receiving shares of Common Stock equal to the net issuance value
(as determined below) of this Warrant, or any
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<PAGE>
part hereof, upon surrender of this Warrant to the Company's transfer agent and
registrar for the Common Stock the principal office of the Company together with
the subscription form annexed hereto (duly executed by the Holder), in which
event the Company shall issue to the Holder a number of shares of Common Stock
computed using the following formula:
X = Y (A-B)
-------
A
Where: X = the number of shares of Common Stock to be issued to the
Holder
Y = the number of shares of Common Stock as to which
this Warrant is to be exercised
A = the current fair market value of one share of Common Stock
calculated as of the last trading day immediately
preceding the exercise of this Warrant
B = the Purchase Price
As used herein, current fair market value of Common Stock as of a
specified date shall mean with respect to each share of Common Stock the average
of the closing sale price of the Common Stock on the principal securities market
on which the Common Stock may at the time be listed or, if there have been no
sales on any such exchange on such day, the average of the highest bid and
lowest asked prices on the principal securities market at the end of such day,
or, if on such day the Common Stock is not so listed, the average of the
representative bid and asked prices quoted in the Nasdaq System as of 4:00 p.m.,
New York City time, or, if on such day the Common Stock is not quoted in the
Nasdaq System, the average of the highest bid and lowest asked price on such day
in the domestic over-the-counter market as reported by the National Quotation
Bureau, Incorporated, or any similar successor organization, in each such case
averaged over a period of five consecutive Trading Days consisting of the day as
of which the current fair market value of a share of Common Stock is being
determined (or if such day is not a Trading Day, the Trading Day next preceding
such day) and the four consecutive Trading Days prior to such day. If on the
date for which current fair market value is to be determined the Common Stock is
not listed on any securities exchange or quoted in the Nasdaq System or the
over-the-counter market, the current fair market value of Common Stock shall be
the highest price per share which the Company could then obtain from a willing
buyer (not a current employee or director) for shares of Common Stock sold by
the Company, from authorized but unissued shares, as determined in good faith by
the Board of Directors of the Company, unless prior to such date the Company has
become subject to a merger, acquisition or other consolidation pursuant to which
the Company is not the surviving party, in which case the current fair market
value of the Common Stock shall be deemed to be the value received by the
holders of the Company's Common Stock for each share thereof pursuant to the
Company's acquisition.
4
<PAGE>
1.3 LIMITATION ON SHARES ISSUABLE ON EXERCISE. Notwithstanding any
other provision herein, unless the Stockholder Approval shall have been obtained
from the stockholders of the Company or waived by the Nasdaq (or other
appropriate stock exchange or market), so long as the Common Stock is listed on
the Nasdaq, the Nasdaq SmallCap, the NYSE or the AMEX the Company shall not be
required to issue upon conversion of this Warrant a number of shares of Common
Stock in excess of the Maximum Share Amount. The Company shall maintain records
which show the number of shares of Common Stock issued by the Company upon
conversion from time to time of the Note and exercise of this Warrant, which
records shall be controlling in the absence of manifest error. Upon surrender of
this Warrant for transfer or re-registration hereof (or, at the option of the
Holder, for exercise of less than all of this Warrant), the Company shall make a
notation on the new Warrant issued upon such transfer or re-registration or
evidencing such unexercised portion of this Warrant, as the case may be, as to
the remaining number of shares of Common Stock from the Maximum Share Amount
remaining available for conversion of the Note and exercise of the Warrant
evidenced by such new certificate. If this Warrant is surrendered for split-up
into two or more Warrants representing the right to purchase an aggregate number
of shares equal to the number of shares which may be purchased upon exercise of
this Warrant at the time so surrendered (as reduced by any contemporaneous
exercise of this Warrant), each Warrant issued on such split-up shall bear a
notation of the portion of the Maximum Share Amount allocated thereto determined
by pro rata allocation from among the remaining Maximum Share Amount at the time
this Warrant is so surrendered.
2. DELIVERY OF STOCK CERTIFICATES, ETC., ON EXERCISE. As soon as
practicable after the exercise of this Warrant, and in any event within three
Trading Days thereafter, the Company at its expense (including the payment by it
of any applicable issue or stamp taxes) will cause to be issued in the name of
and delivered to the Holder hereof, or as the Holder (upon payment by the Holder
of any applicable transfer taxes) may direct, a certificate or certificates for
the number of fully paid and nonassessable shares of Common Stock (or Other
Securities) to which the Holder shall be entitled on such exercise, in such
denominations as may be requested by the Holder, plus, in lieu of any fractional
share to which the Holder would otherwise be entitled, cash equal to such
fraction multiplied by the then current fair market value (as determined in
accordance with subsection 1.2) of one full share, together with any other stock
or other securities any property (including cash, where applicable) to which the
Holder is entitled upon such exercise pursuant to Section 1 or otherwise. Upon
exercise of this Warrant as provided herein, the Company's obligation to issue
and deliver the certificates for Common Stock shall be absolute and
unconditional, irrespective of the absence of any action by the 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
Company to the Holder, or any setoff, counterclaim, recoupment, limitation or
termination, or any breach or alleged breach by the Holder or any other person
of any obligation to the Company, and irrespective of any other circumstance
which might otherwise limit such obligation of the Company to the Holder in
connection with such exercise. If the Company fails to issue and deliver the
certificates for the Common Stock to the Holder pursuant to the first sentence
of this paragraph as and when required to do so, in addition to any other
liabilities the Company may have hereunder and under applicable law, the Company
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<PAGE>
shall pay or reimburse the Holder on demand for all out-of-pocket expenses
including, without limitation, fees and expenses of legal counsel incurred by
the Holder as a result of such failure.
3. ADJUSTMENT FOR DIVIDENDS IN OTHER STOCK, PROPERTY, ETC.;
RECLASSIFICATION, ETC. In case at any time or from time to time, all the
holders of Common Stock (or Other Securities) shall have received, or (on or
after the record date fixed for the determination of stockholders eligible to
receive) shall have become entitled to receive, without payment therefor,
(a) other or additional stock or other securities or property
(other than cash) by way of dividend, or
(b) any cash (excluding cash dividends payable solely out of
earnings or earned surplus of the Company), or
(c) other or additional stock or other securities or property
(including cash) by way of spin-off, split-up, reclassification,
recapitalization, combination of shares or similar corporate rearrangement,
other than additional shares of Common Stock (or Other Securities) issued as a
stock dividend or in a stock-split (adjustments in respect of which are provided
for in Section 5), then and in each such case the Holder, on the exercise hereof
as provided in Section 1, shall be entitled to receive the amount of stock and
other securities and property (including cash in the cases referred to in
subdivisions (b) and (c) of this Section 3) which the Holder would hold on the
date of such exercise if on the date thereof the Holder had been the holder of
record of the number of shares of Common Stock called for on the face of this
Warrant and had thereafter, during the period from the date hereof to and
including the date of such exercise, retained such shares and all such other or
additional stock and other securities and property (including cash in the case
referred to in subdivisions (b) and (c) of this Section 3) receivable by the
Holder as aforesaid during such period, giving effect to all adjustments called
for during such period by Section 4.
4. EXERCISE UPON REORGANIZATION, CONSOLIDATION, MERGER, ETC. In case
at any time or from time to time, the Company shall (a) effect a reorganization,
(b) consolidate with or merge into any other person, or (c) transfer all or
substantially all of its properties or assets to any other person under any plan
or arrangement contemplating the dissolution of the Company, then, in each such
case, as a condition of such reorganization, consolidation, merger, sale or
conveyance, the Company shall give at least 30 days notice to the Holder of such
pending transaction whereby the Holder shall have the right to exercise this
Warrant prior to any such reorganization, consolidation, merger, sale or
conveyance. Any exercise of this Warrant pursuant to notice under this Section
shall be conditioned upon the closing of such reorganization, consolidation,
merger, sale or conveyance which is the subject of the notice and the exercise
of this Warrant shall not be deemed to have occurred until immediately prior to
the closing of such transaction.
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<PAGE>
5. ADJUSTMENT FOR EXTRAORDINARY EVENTS. In the event that the
Company shall (i) issue additional shares of the Common Stock as a dividend or
other distribution on outstanding Common Stock, (ii) subdivide or reclassify its
outstanding shares of Common Stock, or (iii) combine its outstanding shares of
Common Stock into a smaller number of shares of Common Stock, then, in each such
event, the Purchase Price shall, simultaneously with the happening of such
event, be adjusted by multiplying the Purchase Price in effect immediately prior
to such event by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to such event and the
denominator of which shall be the number of shares of Common Stock outstanding
immediately after such event, and the product so obtained shall thereafter be
the Purchase Price then in effect. The Purchase Price, as so adjusted, shall be
readjusted in the same manner upon the happening of any successive event or
events described herein in this Section 5. The Holder shall thereafter, on the
exercise hereof as provided in Section 1, be entitled to receive that number of
shares of Common Stock determined by multiplying the number of shares of Common
Stock which would be issuable on such exercise immediately prior to such
issuance by a fraction of which (i) the numerator is the Purchase Price in
effect immediately prior to such issuance and (ii) the denominator is the
Purchase Price in effect on the date of such exercise.
6. FURTHER ASSURANCES. The Company will take all action that
may be necessary or appropriate in order that the Company may validly and
legally issue fully paid and nonassessable shares of stock, free from all taxes,
liens and charges with respect to the issue thereof, on the exercise of all or
any portion of this Warrant from time to time outstanding.
7. NOTICES OF RECORD DATE, ETC. In the event of
(a) any taking by the Company of a record of the holders of any class
of securities for the purpose of determining the holders thereof who are
entitled to receive any dividend on, or any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other securities or
property, or to receive any other right, or
(b) any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company or any transfer of all or
substantially all of the assets of the Company to or consolidation or merger of
the Company with or into any other person, or
(c) any voluntary or involuntary dissolution, liquidation or winding-
up of the Company,
then and in each such event the Company will mail or cause to be mailed to the
Holder, at least ten days prior to such record date, a notice specifying (i) the
date on which any such record is to be taken for the purpose of such dividend,
distribution or right, and stating the amount and character of such dividend,
distribution or right, (ii) the date on which any such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding-up is to take place, and the time, if any is
to be fixed, as of which the holders of record of Common
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<PAGE>
Stock (or Other Securities) shall be entitled to exchange their shares of Common
Stock (or Other Securities) for securities or other property deliverable on such
reorganization, reclassification, recapitalization, transfer, consolidation,
merger, dissolution, liquidation or winding-up, and (iii) the amount and
character of any stock or other securities, or rights or options with respect
thereto, proposed to be issued or granted, the date of such proposed issue or
grant and the persons or class of persons to whom such proposed issue or grant
is to be offered or made. Such notice shall also state that the action in
question or the record date is subject to the effectiveness of a registration
statement under the 1933 Act, or a favorable vote of stockholders if either is
required. Such notice shall be mailed at least ten days prior to the date
specified in such notice on which any such action is to be taken or the record
date, whichever is earlier.
8. RESERVATION OF STOCK, ETC., ISSUABLE ON EXERCISE OF WARRANTS. The
Company will at all times reserve and keep available out of its authorized but
unissued shares of capital stock, solely for issuance and delivery on the
exercise of this Warrant, a sufficient number of shares of Common Stock (or
Other Securities) to effect the full exercise of this Warrant and the exercise,
conversion or exchange of any other warrant or security of the Company
exercisable for, convertible into, exchangeable for or otherwise entitling the
holder to acquire shares of Common Stock (or Other Securities), and if at any
time the number of authorized but unissued shares of Common Stock (or Other
Securities) shall not be sufficient to effect such exercise, conversion or
exchange, the Company shall take such action as may be necessary to increase its
authorized but unissued shares of Common Stock (or Other Securities) to such
number as shall be sufficient for such purposes.
9. TRANSFER OF WARRANT. This Warrant shall inure to the benefit of the
successors to and assigns of the Holder. This Warrant and all rights hereunder,
in whole or in part, are registrable at the office or agency of the Company
referred to below by the Holder hereof in person or by his duly authorized
attorney, upon surrender of this Warrant properly endorsed.
10. REGISTER OF WARRANTS. The Company shall maintain, at the principal
office of the Company (or such other office as it may designate by notice to the
Holder hereof), a register in which the Company shall record the name and
address of the person in whose name this Warrant has been issued, as well as the
name and address of each successor and prior owner of such Warrant. The Company
shall be entitled to treat the person in whose name this Warrant is so
registered as the sole and absolute owner of this Warrant for all purposes.
11. EXCHANGE OF WARRANT. This Warrant is exchangeable, upon the
surrender hereof by the Holder hereof at the office or agency of the Company
referred to in Section 10, for one or more new Warrants of like tenor
representing in the aggregate the right to subscribe for and purchase the number
of shares of Common Stock which may be subscribed for and purchased hereunder,
each of such new Warrants to represent the right to subscribe for and purchase
such number of shares as shall be designated by said Holder hereof at the time
of such surrender.
12. REPLACEMENT OF WARRANT. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of any
8
<PAGE>
such loss, theft or destruction of this Warrant, on delivery of an indemnity
agreement or security reasonably satisfactory in form and amount to the Company
or, in the case of any such mutilation, on surrender and cancellation of this
Warrant, the Company at its expense will execute and deliver, in lieu thereof, a
new Warrant of like tenor.
13. WARRANT AGENT. In accordance with the Transfer Agent Instruction,
dated September __, 1998, by and among the Company, American Stock Transfer &
Trust Company, as Transfer Agent and Registrar (the "Transfer Agent"), and the
original Holder of this Warrant and the other common stock purchase warrants of
like tenor issued by the Company in connection with the issuance of this Warrant
the Company has appointed the Transfer Agent as the exercise agent for purposes
of issuing shares of Common Stock (or Other Securities) on the exercise of this
Warrant pursuant to Section 1. The Company may, by notice to the Holder, appoint
an agent having an office in the United States of America for the purpose of
exchanging this Warrant pursuant to Section 11 and replacing this Warrant
pursuant to Section 12, or either of the foregoing, and thereafter any such
exchange or replacement, as the case may be, shall be made at such office by
such agent.
14. REMEDIES. The Company stipulates that the remedies at law of the
Holder in the event of any default or threatened default by the Company in the
performance of or compliance with any of the terms of this Warrant are not and
will not be adequate, and that such terms may be specifically enforced by a
decree for the specific performance of any agreement contained herein or by an
injunction against a violation of any of the terms hereof or otherwise.
15. NO RIGHTS OR LIABILITIES AS A STOCKHOLDER. This Warrant shall not
entitle the Holder hereof to any voting rights or other rights as a stockholder
of the Company. No provision of this Warrant, in the absence of affirmative
action by the Holder hereof to purchase Common Stock, and no mere enumeration
herein of the rights or privileges of the Holder hereof, shall give rise to any
liability of the Holder for the Purchase Price or as a stockholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.
16. NOTICES, ETC. All notices and other communications from the
Company to the registered Holder shall be mailed by first class certified mail,
postage prepaid, at such address as may have been furnished to the Company in
writing by the Holder or at the address shown for the Holder on the register of
Warrants referred to in Section 10.
17. TRANSFER RESTRICTIONS. By acceptance of this Warrant, the Holder
represents to the Company that this Warrant is being acquired for the Holder's
own account and for the purpose of investment and not with a view to, or for
sale in connection with, the distribution thereof, nor with any present
intention of distributing or selling the Warrant or the Common Stock issuable
upon exercise of the Warrant. The Holder acknowledges and agrees that this
Warrant and, except as otherwise provided in the Registration Rights Agreement,
the Common Stock issuable upon exercise of this Warrant (if any) have not been
(and at the time of acquisition by the Holder, will not have been or will not
be), registered under the 1933 Act or under the securities laws of any state, in
reliance upon certain exemptive provisions of such statutes. The Holder further
recognizes and acknowledges that because this Warrant and, except
9
<PAGE>
as provided in the Registration Rights Agreement, the Common Stock issuable upon
exercise of this Warrant (if any) are unregistered, they may not be eligible for
resale, and may only be resold in the future pursuant to an effective
registration statement under the 1933 Act and any applicable state securities
laws, or pursuant to a valid exemption from such registration requirements.
Unless the shares of Common Stock issuable upon exercise of this Warrant have
theretofore been registered for resale under the 1933 Act, the Company may
require, as a condition to the issuance of Common Stock upon the exercise of
this Warrant (i) in the case of an exercise in accordance with Section 1.1
hereof, a confirmation as of the date of exercise of the Holder's
representations pursuant to this Section 17, or (ii) in the case of an exercise
in accordance with Section 1.2 hereof, an opinion of counsel reasonably
satisfactory to the Company that the shares of Common Stock to be issued upon
such exercise may be issued without registration under the 1933 Act.
18. LEGEND. Unless theretofore registered for resale under the 1933
Act, each certificate for shares issued upon exercise of this Warrant shall bear
the following legend:
The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended. The securities have been
acquired for investment and may not be resold, transferred or assigned in
the absence of an effective registration statement for the securities under
the Securities Act of 1933, as amended, or an opinion of counsel that
registration is not required under said Act.
19. MISCELLANEOUS. This Warrant and any terms hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought. This Warrant shall be construed and enforced in accordance with and
governed by the internal laws of the State of New York. The headings in this
Warrant are for purposes of reference only, and shall not limit or otherwise
affect any of the terms hereof. The invalidity or unenforceability of any
provision hereof shall in no way affect the validity or enforceability of any
other provision.
10
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
on its behalf by one of its officers thereunto duly authorized.
Dated: September 4, 1998 EQUALNET COMMUNICATIONS CORP.
By:
------------------------------
Title:
---------------------------
11
<PAGE>
FORM OF SUBSCRIPTION
EQUALNET COMMUNICATIONS CORP.
(To be signed only on exercise of Warrant)
TO: American Stock Transfer & Trust Company,
as Transfer Agent
6201 Fifteenth Avenue
Brooklyn, New York 11219
1. The undersigned Holder of the attached original, executed Warrant
hereby elects to exercise its purchase right under such Warrant with respect to
______________ shares of Common Stock, as defined in the Warrant, of Equalnet
Communications Corp., a Texas corporation (the "Company").
2. The undersigned Holder (check one):
[ ] (a) elects to pay the aggregate purchase price for such shares
of Common Stock (the "Exercise Shares") (i) by lawful money of the United States
or the enclosed certified or official bank check payable in United States
dollars to the order of the Company in the amount of $___________, or (ii) by
wire transfer of United States funds to the account of the Company in the amount
of $____________, which transfer has been made before or simultaneously with the
delivery of this Form of Subscription pursuant to the instructions of the
Company;
or
[ ] (b) elects to receive shares of Common Stock having a value
equal to the value of the Warrant calculated in accordance with Section 1.2 of
the Warrant.
3. Please issue a stock certificate or certificates representing the
appropriate number of shares of Common Stock in the name of the undersigned or
in such other names as is specified below:
4. The undersigned Holder hereby represents to the Company that the
exercise of the Warrant elected hereby does not violate Section 1.1(b) of the
Warrant.
Name:
------------------------------
Address:
---------------------------
12
<PAGE>
Dated: ____________ ___,______ __________________________________
(Signature must conform to name of
Holder as specified on the face of the
Warrant)
13
<PAGE>
EXHIBIT 10.23
Draft of 9/3/98
NOTE PURCHASE AND EXCHANGE AGREEMENT
DATED AS OF JULY 31, 1998
BY AND BETWEEN
EQUALNET COMMUNICATIONS CORP.
AND
ADVANTAGE FUND LIMITED
____________________
6% SENIOR SECURED CONVERTIBLE NOTES DUE 2001
SERIES D CONVERTIBLE PREFERRED STOCK
AND
COMMON STOCK PURCHASE WARRANTS
<PAGE>
NOTE PURCHASE AND EXCHANGE AGREEMENT
6% SENIOR SECURED CONVERTIBLE NOTES DUE 2001
SERIES D CONVERTIBLE PREFERRED STOCK
AND
COMMON STOCK PURCHASE WARRANTS
EQUALNET COMMUNICATIONS CORP.
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
1. PURCHASE OF NOTE........................................ 1
(a) Purchase of Note............................... 1
(b) Exchange....................................... 1
(c) Certain Terms.................................. 2
(d) Deliveries and Form of Payment................. 2
(e) Method of Payment.............................. 2
2. BUYER REPRESENTATIONS, WARRANTIES, ETC.................. 3
(a) Purchase for Investment........................ 3
(b) Accredited Investor............................ 3
(c) Reoffers and Resales........................... 3
(d) Company Reliance............................... 3
(e) Information Provided........................... 3
(f) Absence of Approvals........................... 4
(g) Note Purchase and Exchange Agreement........... 4
3. COMPANY REPRESENTATIONS, WARRANTIES, ETC................ 4
(a) Organization and Authority..................... 4
(b) Capitalization................................. 4
(c) Concerning the Shares and the Common Stock..... 5
(d) Note Purchase and Exchange Agreement and Other
Transaction Documents........................ 5
(e) Non-contravention.............................. 6
(f) Approvals...................................... 6
(g) Information Provided........................... 6
(h) Absence of Certain Changes..................... 7
(i) Absence of Certain Proceedings................. 7
(j) Properties..................................... 7
(k) Labor Relations................................ 8
(l) SEC Filings.................................... 8
(m) Absence of Brokers, Finders, Etc............... 8
(n) No Solicitation................................ 9
(o) Certain Issuances of Securities................ 9
(p) Absence of Rights Agreement.................... 9
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
4. Certain Covenants and Acknowledgments................... 9
(a) Transfer Restrictions.......................... 9
(b) Restrictive Legend............................. 9
(c) Registration Rights Agreement.................. 11
(d) Form D......................................... 11
(e) Authorization for Trading...................... 11
(f) Use of Proceeds................................ 11
(g) Blue Sky Laws.................................. 11
(h) Certain Expenses............................... 12
(i) Certain Issuances of Securities................ 12
(j) Stockholder Approval........................... 12
(k) Commercially Reasonable Efforts................ 13
5. TRANSFER AGENT INSTRUCTION.............................. 13
(a) Transfer Agent Instruction..................... 13
(b) Conversion Procedure........................... 14
6. CLOSING DATE............................................ 14
7. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL AND
ISSUE................................................. 14
8. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE........ 14
9. MISCELLANEOUS........................................... 15
(a) Governing Law.................................. 15
(b) Counterparts................................... 15
(c) Headings, etc.................................. 15
(d) Severability................................... 15
(e) Amendments..................................... 16
(f) Waivers........................................ 16
(g) Notices........................................ 16
(h) Assignment..................................... 16
(i) Survival of Representations and Warranties..... 16
(j) Entire Agreement............................... 17
(k) Termination.................................... 17
(l) Further Assurances............................. 17
(m) Public Statements, Press Releases, Etc......... 17
(n) Construction................................... 18
SCHEDULES
Schedule 3(b)-1 Certain Antidilution Adjustments
Schedule 3(b)-2 Certain Registration Rights
</TABLE>
<PAGE>
Schedule 3(c)-1 Certain Nasdaq Matters
ANNEXES
Annex I Form of Senior Secured Convertible Note due 2001
Annex II Form of Statement of Resolution
Annex III Form of Common Stock Purchase Warrant
Annex IV Joint Escrow Instructions
Annex V Form of Registration Rights Agreement
Annex VI Form of Transfer Agent Instruction
Annex VII Form of Notice of Conversion of Series D Convertible Preferred
Stock
Annex VIII Form of Opinion of Counsel to Be Delivered on Closing Date
Annex IX Form of Opinion of General Counsel
<PAGE>
NOTE PURCHASE AND EXCHANGE AGREEMENT
THIS NOTE PURCHASE AND EXCHANGE AGREEMENT, dated as of July 31, 1998,
by and between EQUALNET COMMUNICATIONS CORP., a Texas corporation (the
"Company"), with headquarters located at 1250 Wood Branch Park Drive, Houston,
Texas 77079, and ADVANTAGE FUND LIMITED, a British Virgin Islands corporation
(the "Buyer").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Buyer wishes to purchase, upon the terms and subject to
the conditions of this Agreement, shares of non-voting, convertible preferred
stock of the Company which will be convertible into shares of Common Stock, $.01
par value (the "Common Stock"), of the Company and in connection therewith the
Company is to issue to the Buyer warrants to purchase shares of Common Stock as
provided in this Agreement;
WHEREAS, the Company and the Buyer are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by Rule 506 of Regulation D as promulgated by the Securities and Exchange
Commission (the "SEC") under the Securities Act of 1933, as amended (the "1933
Act"); and
WHEREAS, in connection with this Agreement and the transactions
contemplated hereby, the Company is executing and delivering a Note Purchase
Agreement, dated as of the date hereof, with the buyer named therein (the "Note
Purchase Agreement"), pursuant to which, among other things, the Company has
agreed, upon the terms and subject to the conditions of the Note Purchase
Agreement, to sell a senior secured convertible note to such buyer and in
connection therewith to issue to such buyer warrants to purchase shares of
Common Stock (the "Other Warrants");
NOW THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. PURCHASE OF NOTE; AGREEMENT TO EXCHANGE.
(a) PURCHASE OF NOTE; ISSUANCE OF WARRANTS. The Buyer hereby agrees
to purchase from the Company a 6% Senior Secured Convertible Note due 2001 in
the principal amount set forth on the signature page of this Agreement, having
the terms and conditions in the form thereof attached hereto as ANNEX I (the
"Note") for the aggregate purchase price set forth on the signature page of this
Agreement (the "Purchase Price"). In connection with the purchase of the Note
by the Buyer, the Company shall issue to the Buyer at the closing on the Closing
Date (as defined herein) Common Stock Purchase Warrants in the form attached
hereto as ANNEX III (the "Warrants") to purchase a number of shares of Common
Stock equal to the quotient obtained by dividing (i) the quotient obtained by
dividing (x) the Purchase Price by (y) the
Purchase Price (as
<PAGE>
defined in the Warrants) per share of Common Stock to be set forth in the
Warrants by (ii) 4.6666 (subject to adjustment after issuance of the Warrants as
provided in the Warrants).
(b) EXCHANGE. The Company and the Buyer hereby agree to exchange on
the Closing Date the number of shares (the "Preferred Shares") of Series D
Convertible Preferred Stock, $.01 par value (the "Preferred Stock"), of the
Company set forth on the signature page of this Agreement, having the terms and
conditions as set forth in the form of Statement of Resolution of Board of
Directors Establishing and Designating Series D Convertible Preferred Stock and
Fixing the Rights and Preferences of Such Series attached hereto as ANNEX II
(the "Statement of Resolution") for the number of outstanding shares of Common
Stock held by the Buyer and set forth on the signature page of this Agreement
(the "Exchange Shares") and in connection therewith and in consideration thereof
the Buyer shall pay to the Company an amount equal to $100,000.00.
(c) CERTAIN TERMS. The 6% Senior Secured Convertible Notes due 2001
issuable pursuant to Section 1.1 of the Note or such notes in payment of
interest on the Note and such notes are referred to herein as the "Interest
Notes." The shares of Preferred Stock issuable pursuant to Section 5 of the
Statement of Resolution as dividends on the Preferred Shares are referred to
herein as the "Dividend Shares." The shares of Common Stock issuable upon
exercise of the Warrants are referred to herein as the "Warrant Shares." The
Warrant Shares and the shares of Common Stock issuable upon conversion of the
Notes, the Interest Notes, the Preferred Shares, and the Dividend Shares are
referred to herein collectively as the "Common Shares." The Common Shares, the
Preferred Shares and the Dividend Shares are referred to herein collectively as
the "Shares." The Shares, the Notes, the Interest Notes, and the Warrants are
referred to herein collectively as the "Securities."
(d) DELIVERIES AND FORM OF PAYMENT. The Buyer shall pay the Purchase
Price by delivering good funds in United States Dollars to the escrow agent (the
"Escrow Agent") identified in the Joint Escrow Instructions attached hereto as
ANNEX IV (the "Joint Escrow Instructions"). Such delivery of funds shall be
made against delivery by the Company of the Note and the certificate for the
Warrants, registered in the name of the Buyer. Promptly following payment by
the Buyer to the Escrow Agent of the Purchase Price, but in any event prior to
the Closing Date, the Company shall deliver the Note and the certificate for the
Warrants, registered in the name of the Buyer or its nominee, to the Escrow
Agent. The Buyer shall arrange for delivery of the certificates for the
Exchange Shares to the Company at the closing by delivering the certificates for
the Exchange Shares to the Escrow Agent. Such delivery of Exchange Shares shall
be made against delivery by the Company of the certificates for the Preferred
Shares, registered in the name of the Buyer. Promptly following the delivery of
the Exchange Shares by the Buyer to the Escrow Agent, but in any event prior to
the Closing Date, the Company shall deliver certificates for the Preferred
Shares, registered in the name of the Buyer or its nominee, to the Escrow Agent.
The certificates for the Preferred Shares shall be delivered by the Company to
the Escrow Agent on a delivery against payment basis at the closing. By signing
this Agreement, the Buyer and the Company each agrees to all of the terms
and conditions of, and becomes a party to, the Joint Escrow Instructions, all of
the provisions of which are incorporated herein by this reference as if set
forth in full.
-6-
<PAGE>
(e) METHOD OF PAYMENT. Payment of the Purchase Price shall be made by
wire transfer of funds to:
Citibank, N.A.
153 East 53rd Street
New York, New York 10043
ABA#021000089
For credit to A/C#37179446
For credit to the account of Brian W. Pusch Attorney Escrow Account
Reference: Advantage/Equalnet
Not later than 4:00 p.m., New York City time, on the date which is one Business
Day after the Company shall have accepted this Agreement and returned a signed
counterpart of this Agreement to the Buyer or its legal counsel, the Buyer shall
deposit with the Escrow Agent an amount equal to the Purchase Price. As used in
this Agreement, the term "Business Day" means any day other than a Saturday,
Sunday or other day on which commercial banks in The City of New York are
authorized or required by law to remain closed.
2. BUYER REPRESENTATIONS, WARRANTIES, ETC.
The Buyer represents and warrants to, and covenants and agrees with,
the Company as follows:
(a) PURCHASE FOR INVESTMENT. The Buyer is purchasing the Note and the
Preferred Shares and acquiring the Warrants for its own account for investment
only and not with a view towards the public sale or distribution thereof;
(b) ACCREDITED INVESTOR. The Buyer is an "accredited investor" as
that term is defined in Rule 501 of the General Rules and Regulations under the
1933 Act by reason of Rule 501(a)(3);
(c) REOFFERS AND RESALES. All subsequent offers and sales of the
Securities by the Buyer shall be made pursuant to registration of the Securities
being offered and sold under the 1933 Act or pursuant to an exemption from
registration;
(d) COMPANY RELIANCE. The Buyer understands that the Note and the
Preferred Shares are being offered and sold, the Warrants are being issued, and
the Common Shares are being offered, in each case to it in reliance on specific
exemptions from the registration requirements of United States federal and state
securities laws and that the Company is relying upon the truth and accuracy of,
and the Buyer's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of the Buyer set forth herein in
order to determine the availability of such exemptions and the eligibility of
the Buyer to acquire the Note and the Preferred Shares and the Warrants and to
receive an offer of the Common Shares;
-7-
<PAGE>
(e) INFORMATION PROVIDED. The Buyer and its advisors, if any, have
been furnished with all materials relating to the business, finances and
operations of the Company and materials relating to the offer and sale of the
Note and the Preferred Shares and the issuance of the Warrants and the offer of
the Common Shares which have been requested by the Buyer; the Buyer and its
advisors, if any, have been afforded the opportunity to ask questions of the
Company and have received satisfactory answers to any such inquiries; without
limiting the generality of the foregoing, the Buyer has had the opportunity to
obtain and to review the Company's (1) Annual Report on Form 10-K for the fiscal
year ended June 30, 1997, as amended by Amendment No. 1 thereto on Form 10-K/A
filed with the SEC on September 30, 1997, Amendment No. 2 thereto on Form 10-K/A
filed with the SEC on October 28, 1997, Amendment No. 3 thereto filed with the
SEC on January 20, 1998, and Amendment No. 4 thereto on Form 10-K/A filed with
the SEC on January 30, 1998 (the "1997 10-K"), (2) Quarterly Reports on Form 10-
Q for the quarters ended September 30, 1997, December 31, 1997 and March 31,
1998, (3) definitive proxy statement for the Company's 1997 Annual Meeting of
Shareholders, (4) definitive proxy statement for a Special Meeting of
stockholders of the Company held on June 30, 1998, and (5) Current Reports on
Form 8-K dated July 10, 1997, July 23, 1997 and March 10, 1998, in each case as
filed with the SEC (collectively, the "SEC Reports"); and the Buyer understands
that its investment in the Securities involves a high degree of risk;
(f) ABSENCE OF APPROVALS. The Buyer understands that no United States
federal or state agency or any other government or governmental agency has
passed on or made any recommendation or endorsement of the Securities; and
(g) NOTE PURCHASE AND EXCHANGE AGREEMENT. This Agreement has been
duly and validly authorized, executed and delivered on behalf of the Buyer and
is a valid and binding agreement of the Buyer enforceable in accordance with its
terms, subject as to enforceability to general principles of equity and to
bankruptcy, insolvency, moratorium and other similar laws affecting the
enforcement of creditors' rights generally.
3. COMPANY REPRESENTATIONS, WARRANTIES, ETC.
The Company represents and warrants to, and covenants and agrees with,
the Buyer that as of August 31, 1998 except as otherwise specifically provided
herein:
(a) ORGANIZATION AND AUTHORITY. Each of the Company and its
subsidiaries listed in Exhibit 21 to the 1997 10-K (together with USC Telecom,
Inc. and Netco Acquisition Corp., the "Subsidiaries") is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation, and has all requisite corporate power and
authority (i) to own, lease and operate its properties and to carry on its
business as now being conducted, and (ii) to execute, deliver and perform its
obligations under this Agreement, the Note, the Statement of Resolution, the
Warrants, the Registration Rights Agreement, the form of
which is attached hereto as ANNEX V (the "Registration Rights Agreement"), the
Transfer Agent Instruction, the form of which is attached hereto as ANNEX VI
(the "Transfer Agent Instruction"), and the other agreements to be executed and
delivered by the Company in connection herewith, and to consummate the
transactions contemplated hereby and thereby. Each of the Company and the
-8-
<PAGE>
Subsidiaries is duly qualified to do business as a foreign corporation and is in
good standing in all jurisdictions wherein such qualification is necessary and
where failure so to qualify could have a material adverse effect on the
business, properties, operations, condition (financial or other), results of
operations or prospects of the Company and the Subsidiaries, taken as a whole.
The Company has no equity investment in any person other than the Subsidiaries.
(b) CAPITALIZATION. The authorized capital stock of the Company
consists of (a) 50,000,000 shares of Common Stock of which 21,393,070 shares
were outstanding on August 10, 1998, all of which are fully paid and
nonassessable; and (b) 5,000,000 shares of Preferred Stock, $.01 par value, of
which 2,000 shares have been designated Series A Convertible Preferred Stock and
of which 2000 shares are outstanding, 3,000 shares have been designated Series B
Senior Convertible Preferred Stock and of which 3,000 shares are outstanding, of
which 300,000 shares have been designated Series C Convertible Preferred Stock
(the "Series C Stock") and of which 195,073 shares are outstanding, and of which
6,500 shares will be designated as Series D Convertible Preferred Stock, of
which 5,000 shares will be issued pursuant to this Agreement and the other Note
Purchase and Exchange Agreements, dated as of the date hereof, being entered
into in connection herewith (the "Other Agreements"); and on the Closing Date
there will be (x) no material increase from August 10, 1998 in the number of
shares of Common Stock outstanding and (y) no issuances of preferred stock
except as issued pursuant to this Agreement and the Other Agreements. As of
August 10, 1998, the Company had outstanding options, warrants and similar
rights entitling the holders to purchase 14,563,462 shares of Common Stock.
Other than as set forth in the preceding sentence, the Company does not have
outstanding any material amount of securities (or obligations to issue any such
securities) convertible into, exchangeable for or otherwise entitling the
holders thereof to acquire shares of Common Stock, except as disclosed in the
SEC Reports. The Company has duly reserved from its authorized and unissued
shares of Common Stock the full number of shares required for (a) all options,
warrants, convertible securities and other rights to acquire shares of Common
Stock which are outstanding and (b) all shares of Common Stock and options and
other rights to acquire shares of Common Stock which may be issued or granted
under the stock option and similar plans which have been adopted by the Company
or any of the Subsidiaries. Each outstanding class or series of securities for
which any antidilution or similar adjustment arising by reason of the issuance
or conversion of the Note, the Interest Notes, the Preferred Shares, and the
Dividend Shares or the issuance or exercise of the Warrants or promissory notes
(the "Other Notes") and warrants to be issued pursuant to the Note Purchase
Agreement and the Other Agreements or the shares of Preferred Stock and warrants
to be issued pursuant to the Other Agreements will occur is identified on
SCHEDULE 3(b)-1 attached hereto, together with the amount of such antidilution
adjustment. The outstanding shares of Common Stock and outstanding options,
warrants and other securities convertible into, exchangeable for or otherwise
entitling the holder thereof to acquire shares of Common Stock have been duly
authorized and validly issued. None of such outstanding shares of Common Stock,
options, warrants and other securities has been issued in violation of the
preemptive rights of any securityholder of the Company. The offers and sales of
the outstanding shares of Common Stock and such options, warrants and other
securities were at all relevant times either registered under the 1933 Act and
applicable state securities laws or exempt from such requirements. No holder of
any of the Company's securities has any rights, "demand," "piggy-back" or
otherwise, to have such securities registered by reason of the
-9-
<PAGE>
intention to file, filing or effectiveness of the Registration Statement (as
defined in the Registration Rights Agreement), except as set forth on SCHEDULE
3(b)-2 attached hereto.
(c) CONCERNING THE SHARES AND THE COMMON STOCK. The Shares have been
duly authorized. The Preferred Shares, when issued and paid for in accordance
with this Agreement, the Dividend Shares, when issued as dividends on the
outstanding shares of Preferred Stock, and the Common Shares, when issued upon
conversion of the Notes, the Interest Notes, the Preferred Shares, or the
Dividend Shares or upon exercise of the Warrants, as the case may be, will be
duly and validly issued, fully paid and non-assessable and will not subject the
holder thereof to personal liability by reason of being such holder. There are
no preemptive or similar rights of any stockholder of the Company or any other
person to acquire any of the Securities. The Company has duly reserved
13,043,468 shares of Common Stock for conversion of the Note, the Interest
Notes, the Other Notes, and the shares of Preferred Stock and exercise of the
Warrants, the warrants issuable pursuant to the Other Agreements and the Other
Warrants, and such shares shall remain so reserved (subject to reduction from
time to time for shares of Common Stock issued upon conversion of the Note, the
Interest Notes, the Other Notes, and shares of Preferred Stock, redemption or
other permitted retirement of the Note, the Interest Notes, the Other Notes, and
shares of Preferred Stock and exercise of the Warrants, the warrants issuable
pursuant to the Other Agreements and the Other Warrants), and the Company shall
from time to time reserve such additional shares of Common Stock as shall be
required to be reserved pursuant to the Note, the Interest Notes, the Other
Notes and the Statement of Resolution, as long as the Note, the Interest Notes,
the Other Notes, and Preferred Stock are convertible, and pursuant to the
Warrants, as long as the Warrants are exercisable. The Common Stock is listed
for trading on the Nasdaq National Market ("Nasdaq") and (1) the Company and the
Common Stock meet the criteria for continued listing and trading on Nasdaq; (2)
except as set forth on SCHEDULE 3(c)-1 attached hereto, the Company has not been
notified since January 1, 1996 by Nasdaq of any failure or potential failure to
meet the criteria for continued listing and trading on Nasdaq and (3) no
suspension of trading in the Common Stock is in effect. The Company knows of no
reason that the Common Shares will not be eligible for listing on Nasdaq.
(d) NOTE PURCHASE AND EXCHANGE AGREEMENT AND OTHER TRANSACTION
DOCUMENTS. This Agreement, the Note, the Statement of Resolution, the
Registration Rights Agreement, the Warrants and the Transfer Agent Agreement and
the other agreements and instruments contemplated hereby and thereby have been
duly and validly authorized by the Company, this Agreement has been duly
executed and delivered by the Company and this Agreement is, and the
Registration Rights Agreement, the Warrants and the Transfer Agent Instruction
and such other agreements, when executed and delivered by the Company, and the
Statement of Resolution, when executed by the Company and filed with the
Secretary of State of the State of Texas, each will be, valid and binding
obligations of the Company enforceable in accordance with their respective
terms, subject as to enforceability to general principles of equity
and to bankruptcy, insolvency, moratorium and other similar laws affecting the
enforcement of creditors' rights generally.
(e) NON-CONTRAVENTION. The execution and delivery by the Company of
this Agreement and the other documents contemplated by this Agreement and the
consummation by the Company of
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the issuance of the Note, the Preferred Shares and the Warrants as contemplated
by this Agreement, and the other transactions contemplated by this Agreement,
the Note, the Statement of Resolution, the Registration Rights Agreement, the
Warrants and the Transfer Agent Instruction do not and will not, with or without
the giving of notice or the lapse of time, or both (i) result in any violation
of any terms of the Articles of Incorporation or By-laws of the Company or any
Subsidiary, (ii) conflict with or result in a breach by the Company or any
Subsidiary of any of the terms or provisions of, or constitute a default under,
or result in the modification, amendment, termination or cancellation of, result
in the acceleration of any obligation of the Company or any Subsidiary under, or
result in the creation or imposition of any lien, security interest, charge or
encumbrance upon any of the properties or assets of the Company or any
Subsidiary pursuant to, any indenture, mortgage, deed of trust or other
agreement or instrument to which the Company or any Subsidiary is a party or by
which the Company or any Subsidiary or any of their respective properties or
assets is bound or affected, (iii) violate or contravene any applicable law,
rule or regulation or any applicable decree, judgment or order of any court,
United States federal or state regulatory body, administrative agency or other
governmental body having jurisdiction over the Company or any Subsidiary or any
of their respective properties or assets, including, without limitation, any law
of the State of New York or the State of Texas relating to usury or the maximum
rate chargeable with respect to indebtedness, or (iv) have any material adverse
effect on any permit, certification, registration, approval, consent, license or
franchise necessary for the Company or any Subsidiary to own or lease and
operate any of their respective properties or to conduct any of their respective
businesses or the ability of the Company or any Subsidiary to make use thereof.
(f) APPROVALS. No authorization, approval or consent of, or filing
with, any court, governmental body, regulatory agency, self-regulatory
organization, or stock exchange or market or the stockholders of the Company is
required to be obtained or made by the Company for (1) the execution, delivery
and performance by the Company of this Agreement, the Registration Rights
Agreement, the Warrants, the Transfer Agent Instruction and the other agreements
and instruments contemplated hereby and thereby, (2) the execution and issuance
of the Note and the Interest Notes, (3) the execution, filing and performance by
the Company of the Statement of Resolution, (4) the issuance and sale of the
Note and the Preferred Shares, the issuance of the Interest Notes and the
Dividend Shares and the issuance of the Warrants as contemplated by this
Agreement, and (5) the issuance of Common Shares on conversion of the Note, the
Interest Notes, the Preferred Shares or the Dividend Shares or upon the exercise
of the Warrants or the issuance of Interest Notes in payment of interest on the
Note or Interest Notes or the issuance of Dividend Shares as dividends on shares
of Preferred Stock, other than (v) the filing of the Statement of Resolution
with the Secretary of State of the State of Texas, (w) listing of the Common
Shares on Nasdaq, (x) registration of the resale of the Common Shares under the
1933 Act as contemplated by the Registration Rights Agreement, (y) as may be
required under applicable state securities or "blue sky" laws and (z) filing of
one or more Forms D with respect to the Securities as required under Regulation
D.
(g) INFORMATION PROVIDED. The information provided by or on behalf of
the Company to the Buyer in connection with the transactions contemplated by
this Agreement, including, without limitation, the information referred to in
Section 2(e) of this Agreement, does not contain any
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untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements therein, in the light of the circumstances under
which they are made, not misleading, it being understood that, for purposes of
this Section 3(g), any statement contained in such information shall be deemed
to be modified or superseded for purposes of this Section 3(g) to the extent
that a statement in any document included in such information which was prepared
or filed with the SEC on a later date modifies or replaces such statement,
whether or not such later prepared or filed statement so states. The Company has
not filed any reports with the SEC under the Securities Exchange Act of 1934, as
amended (the "1934 Act"), since June 30, 1997 other than the SEC Reports.
(h) ABSENCE OF CERTAIN CHANGES. Since March 31, 1998, there has been
no material adverse change and no material adverse development in the business,
properties, operations, condition (financial or other), results of operations or
prospects of the Company and the Subsidiaries, taken as a whole, except as
disclosed in the SEC Reports or in SCHEDULE 3(h) attached hereto. Except as and
to the extent disclosed, reflected or reserved against in the financial
statements of the Company and the notes thereto included in the SEC Reports,
neither the Company nor any Subsidiary has any material (individually or in the
aggregate) liabilities, debts or obligations whether accrued, absolute,
contingent or otherwise, and whether due or to become due. Subsequent to March
31, 1998, neither the Company nor any Subsidiary has incurred any liabilities,
debts or obligations of any nature whatsoever which are individually or in the
aggregate material to the Company and the Subsidiaries, taken as a whole, other
than those incurred in the ordinary course of their respective businesses or
disclosed in the SEC Reports.
(i) ABSENCE OF CERTAIN PROCEEDINGS. Except as disclosed in the SEC
Reports or on SCHEDULE 3(i) attached hereto, there is no action, suit,
proceeding, inquiry or investigation before or by any court, public board or
body or governmental agency (collectively, an "Action") pending or, to the
knowledge of the Company or any Subsidiary, threatened against the Company or
any Subsidiary, in any such case wherein an unfavorable decision, ruling or
finding would have a material adverse effect on the business, properties,
condition (financial or other), results of operations or prospects of the
Company and the Subsidiaries, taken as a whole, or the transactions contemplated
by this Agreement or any of the documents contemplated hereby or which would
adversely affect the validity or enforceability of, or the authority or ability
of the Company to perform its obligations under, this Agreement or any of such
other documents; neither the Company or any Subsidiary nor any director or
officer thereof is or has been the subject of any Action involving a claim of
violation of or liability under federal or state securities laws or a claim of
breach of fiduciary duty; the Company does not have pending before the SEC any
request for confidential treatment of information and to the best of the
Company's knowledge no such request will be made by the Company prior to the
time the Registration Statement relating to the Common Shares which is
contemplated by the Registration Rights Agreement is first ordered effective by
the SEC; and there has not been, and to the best of the Company's knowledge
there is not pending or contemplated, any investigation by the SEC involving the
Company or any current or former director or officer of the Company.
(j) PROPERTIES. The Company and the Subsidiaries have good title to
all property real and personal (tangible and intangible) and other assets owned
by them, free and clear of all security
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interests, charges, mortgages, liens or other encumbrances, except those in
favor of RFC Capital Corporation or Greyrock Business Credit, Finova Capital
Corporation, Willis Group, LLC and Netco LLC and such as are described in the
SEC Reports or such as do not materially interfere with the use of such property
made, or proposed to be made, by the Company or any Subsidiary. The leases,
licenses or other contracts or instruments under which the Company and the
Subsidiaries lease, hold or are entitled to use any property, real or personal,
are valid, subsisting and enforceable with only such exceptions as do not
materially interfere with the use of such property made, or proposed to be made,
by the Company or any Subsidiary. Neither the Company nor any Subsidiary has
received notice of any material violation of any applicable law, ordinance,
regulation, order or requirement relating to its owned or leased properties. The
Company does not have any knowledge of, and the Company has not given or
received any notice of, any pending conflicts with or infringement of the rights
of others with respect to any Company Proprietary Rights (as defined herein) or
with respect to any license of Company Proprietary Rights. No action, suit,
arbitration, or legal, administrative or other proceeding or investigation is
pending, or, to the best knowledge of the Company, threatened, which involves
any Company Proprietary Rights. Neither the Company nor any Subsidiary is
subject to any judgment, order, writ, injunction or decree of any court or any
federal, state, local, foreign or other governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, or any
arbitrator, or has entered into or is a party to any contract which restricts or
impairs the use of any such Company Proprietary Rights in a manner which would
have a material adverse effect on the use by the Company or any Subsidiary of
any of the Company Proprietary Rights. To the best knowledge of the Company, no
Company Proprietary Rights and no services or products sold by the Company or
any Subsidiary, conflict with or infringe upon any proprietary rights available
to any third party. Neither the Company nor any Subsidiary has received written
notice of any pending conflict with or infringement upon such third-party
proprietary rights. Neither the Company nor any Subsidiary has entered into any
consent, indemnification, forbearance to sue or settlement agreement with
respect to Company Proprietary Rights other than in the ordinary course of
business. No claims have been asserted by any person with respect to the
validity of the Company's or any Subsidiary's ownership or right to use the
Company Proprietary Rights and, to the best knowledge of the Company, there is
no reasonable basis for any such claim to be successful. To the best knowledge
of the Company, the Company Proprietary Rights are valid and enforceable. No
registration relating to the Company Proprietary Rights has lapsed, expired or
been abandoned or canceled or is the subject of cancellation or other
adversarial proceedings, and all applications therefor are pending and are in
good standing, except for such lapses, expirations, abandonments, cancellations,
adversarial proceedings or failures to be in good standing which would not,
singly or in the aggregate, have a material adverse effect on the business,
properties, operations, condition (financial or otherwise), results of
operations or prospects of the Company and the Subsidiaries, taken as a whole.
The Company and the Subsidiaries have complied, in all material respects, with
their respective contractual obligations relating to the protection of the
Company Proprietary Rights used pursuant to licenses. To the best knowledge of
the Company, no person is infringing on or violating the Company Proprietary
Rights. As used herein, the term "Company Proprietary Rights" means all patents,
patent applications, inventions, trademarks, trade names, applications for
registration of trademarks, service marks, service mark applications,
copyrights, know-how, manufacturing processes, formulae, trade secrets, licenses
and rights in any thereof and any other
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intangible property and assets which are material to the businesses of the
Company and the Subsidiaries as now conducted, as proposed to be conducted or as
described in this Agreement.
(k) LABOR RELATIONS. No material labor problem exists or, to the
knowledge of the Company or any Subsidiary, is imminent with respect to any of
the employees of the Company or any Subsidiary.
(l) SEC FILINGS. The Company has timely filed all required forms,
reports and other documents required to be filed with the SEC under the 1934 Act
since January 1, 1997. All of such forms, reports and other documents complied,
when filed, in all material respects, with all applicable requirements of the
1933 Act and the 1934 Act.
(m) ABSENCE OF BROKERS, FINDERS, ETC. No broker, finder or similar
person is entitled to any commission, fee or other compensation in respect of
the transactions contemplated by this Agreement by reason of any action or
conduct of the Company or any Subsidiary or any person acting on behalf of any
of them, and the Company shall pay, and indemnify and hold harmless the Buyer
from, any claim made against the Buyer by any person for any such commission,
fee or other compensation.
(n) NO SOLICITATION. No form of general solicitation or general
advertising was used by the Company or, to the best of its knowledge, any other
person acting on behalf of the Company, in respect of or in connection with the
offer and sale of the Securities. Neither the Company nor, to its knowledge,
any person acting on behalf of the Company has, either directly or indirectly,
sold or offered for sale to any person any of the Note, the Preferred Shares or
the Warrants or, within the six months prior to the date hereof, any other
similar security of the Company except for the Series C Stock and as
contemplated by this Agreement, the Other Agreements and the Note Purchase
Agreement; and neither the Company nor any person authorized to act on its
behalf will sell or offer for sale any promissory notes, shares of Preferred
Stock or shares of Common Stock or Warrants, or solicit any offers to buy any
promissory notes, shares of Preferred Stock or shares of Common Stock or
Warrants, so as thereby to cause the issuance or sale of any of the Securities
to be in violation of Section 5 of the 1933 Act.
(o) CERTAIN ISSUANCES OF SECURITIES. The Company has not issued any
shares of Common Stock or shares of any series of preferred stock or other
securities convertible into, exchangeable for or otherwise entitling the holder
to acquire shares of Common Stock which are subject to Rule 4460(i) of Nasdaq
(or any successor, replacement or similar provision thereof or of any other
market on which the Common Stock is listed for trading) and which would be
integrated with the sale of the Note and the Preferred Shares to the Buyer,
Interest Notes in payment of interest on the Note or the Interest Notes or the
Dividend Shares in payment of dividends on the Preferred Stock or the issuance
of Common Shares upon conversion thereof or upon exercise of the Warrants for
purposes of such Rule 4460(i) (or any successor, replacement or similar
provision thereof or of any other market on which the Common Stock is listed for
trading).
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(P) ABSENCE OF RIGHTS AGREEMENT. The Company has not adopted a shareholder
rights plan or similar arrangement relating to accumulations of beneficial
ownership of Common Stock or a change in control of the Company.
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
(A) TRANSFER RESTRICTIONS. The Company and the Buyer acknowledge and
agree that (1) the Note, Preferred Shares and the Warrants have not been and are
not being registered under the provisions of the 1933 Act and, except as
provided in the Registration Rights Agreement with respect to the resale of the
Common Shares, the Common Shares have not been and are not being registered for
resale under the 1933 Act, and the Securities may not be transferred unless (A)
subsequently registered for resale thereunder or (B) the Buyer shall have
delivered to the Company an opinion of counsel, reasonably satisfactory in form,
scope and substance to the Company, to the effect that the Securities to be sold
or transferred may be sold or transferred pursuant to an exemption from such
registration; (2) any resale of the Securities made in reliance on Rule 144
promulgated under the 1933 Act may be made only in accordance with the terms of
said Rule and further, if said Rule is not applicable, any such resale of
Securities under circumstances in which the seller, or the person through whom
the sale is made, may be deemed to be an underwriter, as that term is used in
the 1933 Act, may require compliance with some other exemption under the 1933
Act or the rules and regulations of the SEC thereunder; and (3) neither the
Company nor any other person is under any obligation to register the Securities
(other than pursuant to the Registration Rights Agreement) under the 1933 Act or
to comply with the terms and conditions of any exemption thereunder (other than
pursuant to Section 4(d) hereof and pursuant to the Registration Rights
Agreement).
(B) RESTRICTIVE LEGEND. (1) The Buyer acknowledges and agrees that the
Note shall bear a restrictive legend in substantially the following form (and a
stop-transfer order may be placed against transfer of the Note):
This Note has not been registered under the Securities Act of 1933, as
amended (the "1933 Act"). The issuance to the holder of this Note of
the shares of Common Stock issuable upon conversion of this Note and
in payment of interest on this Note are not covered by a registration
statement under the 1933 Act. This Note has been acquired, and such
shares must be acquired, for investment only and may not be sold,
transferred or assigned in the absence of registration of the resale
thereof under the 1933 Act or an opinion of counsel reasonably
satisfactory in form, scope and substance to the Company that such
registration is not required.
(2) The Buyer acknowledges and agrees that the Preferred Shares shall bear
a restrictive legend in substantially the following form (and a stop-transfer
order may be placed against transfer of the Preferred Shares):
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended. The
securities have been acquired for investment and may not be sold,
transferred or assigned in the absence of an effective registration
statement for
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the securities under the Securities Act of 1933, as amended, or an
opinion of counsel that registration is not required under said Act.
The number of shares constituting the portion of the Maximum Share
Amount, as defined in the Statement of Resolution of Series D
Convertible Preferred Stock (the "Statement of Resolution"), allocated
to the shares represented by this certificate for purposes of
conversion thereof is .
Section 10(b)(3)(a) of the Statement of Resolution permits a holder of
the securities represented by this certificate to convert such
securities in accordance with the Statement of Resolution without
being required to surrender this certificate to the Company unless all
of the securities represented hereby are so converted. Consequently,
following conversion of any of the securities represented by this
certificate, the number of shares represented by this certificate may
be less than the number of shares stated hereon. Upon request of any
proposed transferee of this certificate, the Company will provide
confirmation of the number of shares evidenced by this certificate.
(3) The Buyer further acknowledges and agrees that the Warrants
shall bear a restrictive legend in substantially the following form (and a stop-
transfer order may be placed against transfer of the Warrants):
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended. The
securities have been acquired for investment and may not be resold,
transferred or assigned in the absence of an effective registration
statement for the securities under the Securities Act of 1933, as
amended, or an opinion of counsel that registration is not required
under said Act.
(4) The Buyer further acknowledges and agrees that until such time
as the Common Shares have been registered for resale under the 1933 Act as
contemplated by the Registration Rights Agreement, the certificates for the
Common Shares may bear a restrictive legend in substantially the following form
(and a stop-transfer order may be placed against transfer of the certificates
for the Common Shares):
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended. The
securities have been acquired for investment and may not be resold,
transferred or assigned in the absence of an effective registration
statement for the securities under the Securities Act of 1933, as
amended, or an opinion of counsel that registration is not required
under said Act.
(5) Once the Registration Statement required to be filed by the
Company pursuant to Section 2 of the Registration Rights Agreement has been
declared effective, thereafter (1) upon request of the Buyer the Company will
substitute certificates without restrictive legend for certificates for any
Common Shares issued prior to the date such Registration Statement is declared
effective by the SEC which bear such restrictive legend and remove any stop-
transfer restriction relating thereto promptly, but in no event later than three
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trading days after surrender of such certificates by the Buyer and (2) the
Company shall not place any restrictive legend on certificates for Common Shares
issued on conversion of or as dividends on the Preferred Shares or upon exercise
of the Warrants or impose any stop-transfer restriction thereon.
(C) REGISTRATION RIGHTS AGREEMENT. The parties hereto agree to enter into
the Registration Rights Agreement in the form attached hereto as ANNEX V on or
before the Closing Date.
(D) FORM D. The Company agrees to file a Form D with respect to the
Securities as required under Regulation D and to provide a copy thereof to the
Buyer promptly after such filing. The Buyer agrees to cooperate with the Company
in connection with such filing and, upon request of the Company, to provide all
information relating to the Buyer reasonably required for such filing.
(E) AUTHORIZATION FOR TRADING; REPORTING STATUS. On or before the Closing
Date, the Company shall file a notification for listing of additional shares
with the Nasdaq relating to the Common Shares and shall provide evidence of such
filing to the Buyer. So long as the Buyer beneficially owns any of the Note, the
Interest Notes, the Preferred Shares, the Dividend Shares, the Warrants, or the
Common Shares, the Company shall file all reports required to be filed with the
SEC pursuant to Section 13 or 15(d) of the 1934 Act and the Company shall not
terminate its status as an issuer required to file reports under the 1934 Act
even if the 1934 Act or the rules and regulations thereunder would permit such
termination.
(F) USE OF PROCEEDS. Neither the Company nor any Subsidiary owns or has
any present intention of acquiring any "margin stock" as defined in Regulation G
(12 CFR Part 207) of the Board of Governors of the Federal Reserve System
("margin stock"). The proceeds of sale of the Note will be used for general
working capital purposes and in the operation of the Company's business. None of
such proceeds will be used, directly or indirectly (1) to make any loan to or
investment in any other person (other than financing the Company's subsidiaries
in the ordinary course of business) or (2) for the purpose, whether immediate,
incidental or ultimate, of purchasing or carrying any margin stock or for the
purpose of maintaining, reducing or retiring any indebtedness which was
originally incurred to purchase or carry any stock that is currently a margin
stock or for any other purpose which might constitute the transactions
contemplated by this Agreement a "purpose credit" within the meaning of such
Regulation G. Neither the Company nor any agent acting on its behalf has taken
or will take any action which might cause this Agreement or the transactions
contemplated hereby to violate Regulation G, Regulation T or any other
regulation of the Board of Governors of the Federal Reserve System or to violate
the 1934 Act, in each case as in effect now or as the same may hereafter be in
effect.
(G) BLUE SKY LAWS. On or before the Closing Date, the Company shall take
such action as shall be necessary to qualify, or to obtain an exemption for, the
Note and the Preferred Shares for sale to the Buyer and the Warrants for
issuance to the Buyer pursuant to this Agreement and the Common Shares for
issuance to the Buyer on conversion of the Note and the Preferred Shares under
such of the securities or "blue sky" laws of jurisdictions as shall be
applicable to the sale of the Note and the Preferred Shares and the issuance of
the Warrants pursuant to this Agreement and the issuance to the Buyer of Common
Shares on conversion of the Note and the Preferred
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Shares and exercise of the Warrants. The Company shall furnish copies of all
filings, applications, orders and grants or confirmations of exemptions relating
to such securities or "blue sky" laws on or prior to the Closing Date.
(h) CERTAIN EXPENSES. Whether or not the closing occurs, the Company
shall pay or reimburse the Buyer for all reasonable expenses (including, without
limitation, legal fees and expenses of counsel to the Buyer) incurred by the
Buyer in connection with this Agreement and the transactions contemplated
hereby. The Company shall pay on demand all reasonable expenses incurred by the
Buyer, including reasonable attorneys' fees and expenses, as a consequence of,
or in connection with (1) the negotiation, preparation or execution of any
amendment, modification or waiver of this Agreement, the Note, the Statement of
Resolution, the Registration Rights Agreement, the Warrants, the Transfer Agent
Instruction and the other agreements and instruments contemplated hereby and
thereby requested by the Company, (2) any default or breach of any of the
Company's obligations set forth in any of such agreements or instruments and (3)
the enforcement or restructuring of any right of, including the collection of
any payments due, the Buyer under any of such agreements or instruments,
including any action or proceeding relating to such enforcement or any order,
injunction or other process seeking to restrain the Company from paying any
amount due the Buyer, in which the Buyer prevails.
(i) CERTAIN ISSUANCES OF SECURITIES. (1) Unless the Company obtains the
Stockholder Approval (as defined in the Note and Statement of Resolution) or a
waiver thereof from the Nasdaq, the Company will not issue any shares of Common
Stock or shares of any other series of preferred stock or other securities
convertible into, exchangeable for, or otherwise entitling the holder to
acquire, shares of Common Stock which would be subject to the requirements of
Rule 4460(i) of Nasdaq (or any successor, replacement, or similar provision
thereof or of any other market on which the Common Stock is listed for trading)
and which would be integrated with the sale of the Note and the Preferred Shares
and issuance of the Warrants to the Buyer or the issuance of Common Shares upon
conversion of the Note, the Interest Notes, the Preferred Shares or the Dividend
Shares or upon exercise of the Warrants for purposes of Rule 4460(i) of Nasdaq
(or any successor, replacement or similar provision thereof or of any other
market on which the Common Stock is listed for trading).
(2) Subject to the restrictions in Section 4(i)(1), during the
period from the date of execution and delivery of this Agreement to the date
which is one year after the Closing Date, the Company shall not offer, sell,
contract to sell or issue (or engage any person to assist the Company in taking
any such action) any equity securities or securities convertible into,
exchangeable for or otherwise entitling the holder to acquire, any Common Stock
at a price below the market price of the Common Stock on the date of such
issuance or the date of conversion, exchange or other exercise thereof
(collectively, "Discounted Securities") without giving the Buyer the first right
to acquire all or any portion, as determined by the Buyer in its discretion, of
such Discounted Securities on the same terms as the Discounted Securities are to
be offered to other investors. In each instance of proposed issuance of
Discounted Securities the Company shall give notice to the Buyer of the detailed
terms of such Discounted Securities proposed to be issued and, promptly after
requested by the Buyer, such other information as requested by the Buyer. The
Buyer may, by notice to the Company, exercise such right of first
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refusal at any time until the later of (x) ten Business Days after such notice
from the Company to the Buyer and (y) three Business Days after the Company
provides such additional information as shall have been requested by the Buyer.
(j) STOCKHOLDER APPROVAL. The Company shall seek and use its best efforts
to obtain, on or before the date which is 120 days after the Closing Date, the
Stockholder Approval of the issuance of the Note, the Interest Notes, the
Preferred Shares, the Dividend Shares, the Warrants and the Common Shares. The
Company shall call a meeting of stockholders to be held within 120 days after
the Closing Date, shall prepare and file with the SEC as promptly as practical,
but in no event later than 45 days after the Closing Date, preliminary proxy
materials which set forth a proposal to seek such Stockholder Approval and shall
recommend approval thereof by its stockholders. The Company shall provide the
Buyer an opportunity to review and comment on such proxy materials by providing
copies of such proxy materials and any revised preliminary proxy materials to
the Buyer a reasonable period of time prior to their filing with the SEC. The
Company shall furnish to the Buyer and its counsel a copy of its definitive
proxy materials for such meeting of stockholders and any amendments or
supplements thereto promptly after the same are mailed to stockholders or filed
with the SEC, shall inform the Buyer of the progress of solicitation of proxies
for such meeting and shall inform the Buyer of any adjournment of such meeting
and shall report the result of the vote of any stockholders on such proposition
on the day such vote is taken. If for any reason the Company fails to obtain
such Stockholder Approval, the Company shall be required to redeem the Note in
accordance with Sections 5.1 and 5.2 thereof and the Preferred Shares in
accordance with Section 11 of the Statement of Resolution. As used herein,
"Stockholder Approval" shall have the meaning to be provided or provided in the
Note and the Statement of Resolution.
(k) NASDAQ DETERMINATION. The Company shall promptly seek and use its
best efforts to obtain a written determination from Nasdaq that neither the
Warrants and the issuance of shares of Common Stock upon exercise of the
Warrants nor the Preferred Shares and the issuance of shares of Common Stock
upon conversion of the Preferred Shares need to be integrated with the Note and
the issuance of shares of Common Stock upon conversion of the Note for purposes
of Rule 4460(i) of the Nasdaq (or any successor, replacement or similar
provision thereof or of any other market on which the Common Stock is listed for
trading).
(l) OPINION. The Company shall deliver an opinion of Weil, Gotshal and
Manges, LLP, counsel for the Company, addressed to the Buyer, in substantially
the form set forth in ANNEX X attached hereto, on or before the date which is
seven (7) Business Days after the Closing Date.
(m) COMMERCIALLY REASONABLE EFFORTS. Each of the parties shall use its
commercially reasonable efforts timely to satisfy each of the conditions to the
other party's obligations to sell and purchase the Note and the Preferred Shares
set forth in Section 7 or 8, as the case may be, of this Agreement on or before
the Closing Date.
5. TRANSFER AGENT INSTRUCTION; CONVERSION PROCEDURE.
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(a) TRANSFER AGENT INSTRUCTION. Prior to the Closing Date, the Company
will (1) execute and deliver the Transfer Agent Instruction in the form attached
hereto as ANNEX VI and thereby irrevocably instruct, American Stock Transfer &
Trust Company, as Transfer Agent and Registrar (the "Transfer Agent"), to issue
certificates for the Common Shares from time to time upon conversion of the
Note, the Interest Notes, the Preferred Shares and the Dividend Shares and
exercise of the Warrants in such amounts as specified from time to time to the
Transfer Agent in the Notices of Conversion of 6% Senior Secured Convertible
Notes due 2001 in the form attached to the Note, the Notices of Conversion
surrendered in connection with conversions of Preferred Shares and referred to
in Section 5(b) of this Agreement and the Form of Subscription in the form
attached to the Warrants and (2) appoint the Transfer Agent the conversion agent
for the Note, the Interest Notes and the Preferred Stock and the exercise agent
for the Warrants. The certificates for the Common Shares may bear the
restrictive legend specified in Section 4(b) of this Agreement prior to
registration of the resale of the Common Shares under the 1933 Act. The
certificates for the Common Shares shall be registered in the name of the Buyer
or its designee and in such denominations to be specified by the Buyer in
connection with each conversion of the Note, the Interest Notes, the Preferred
Shares or Dividend Shares or exercise of the Warrants. The Company warrants that
no instruction other than (x) such instructions referred to in this Section 5,
(y) stop transfer instructions to give effect to Section 4(a) prior to
registration of the resale of the Common Shares under the 1933 Act and (z) the
instructions required by Section 3(n) of the Registration Rights Agreement will
be given by the Company to the Transfer Agent and that the Common Shares shall
otherwise be freely transferable on the books and records of the Company as and
to the extent provided in this Agreement. Nothing in this Section 5(a) shall
limit in any way the Buyer's obligations and agreement to comply with the
registration requirements of the 1933 Act upon resale of the Common Shares. If
the Buyer provides the Company with an opinion of counsel, reasonably
satisfactory in form, scope and substance to the Company and its legal counsel,
that registration of a resale by the Buyer of any of the Securities is not
required under the 1933 Act, the Company shall permit the transfer of such
Securities and, in the case of the Common Shares, in accordance with clause
(1)(B) of Section 4(a) of this Agreement, promptly instruct the Company's
transfer agent to issue upon transfer one or more share certificates in such
name and in such denominations as specified by the Buyer within three trading
days after receipt of such opinion. Nothing in this Section 5(a) shall limit the
obligations of the Company under Section 3(n) of the Registration Rights
Agreement.
(b) CONVERSION PROCEDURE. In connection with the exercise of conversion
rights relating to the Preferred Shares and the Dividend Shares, the Buyer or
any subsequent holder of the Preferred Shares (the Buyer and each such holder, a
"Holder") shall complete, sign and furnish to the Transfer Agent a Notice of
Conversion of Series D Convertible Preferred Stock duly acknowledged by the
Company in the form attached hereto as ANNEX VII (the "Preferred Conversion
Notice"), which shall be deemed to satisfy all requirements of the Statement of
Resolution.
(c) COMMON SHARES ISSUABLE UPON CONVERSION. As set forth in Section
10(b)(3) of the Statement of Resolution, the number of Common Shares to be
issued in connection with a particular conversion of Preferred Shares is,
absent manifest error, conclusively the number of
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<PAGE>
Common Shares stated in the applicable Preferred Conversion Notice. If in
connection with a particular conversion of Preferred Shares the Company
determines that manifest error has been made by virtue of the conversion price
or other information set forth in the applicable Preferred Conversion Notice,
the Company shall have the right within one trading day after the Holder gives
such Preferred Conversion Notice to notify the Transfer Agent and such Holder of
such error, which notice shall state the number of Common Shares in dispute,
and, notwithstanding such notice from the Company, the Transfer Agent shall
issue and deliver the number of Common Shares not in dispute as and when
required by this letter. A Preferred Conversion Notice shall be deemed for all
purposes to be in proper form unless the Company otherwise notifies the Holder
by telephone line facsimile transmission within three trading days after a
Preferred Conversion Notice has been given (which notice from the Company shall
specify all defects in the Preferred Conversion Notice), and any Preferred
Conversion Notice containing any such defect shall nonetheless be effective on
the date given if the Holder promptly undertakes to correct all such defects
promptly. If the Company shall have notified the Transfer Agent and such Holder
of any such manifest error, and the Company and such Holder do not agree as to a
resolution of such manifest error on or before the date of such notice by the
Company of an error in such Preferred Conversion Notice, the Company shall on
the date such notice is given submit the dispute to Ernst & Young LLP or another
firm of independent public accountants of recognized national standing (the
"Auditors") for determination and shall instruct the Auditors to resolve such
dispute and to notify the Company, the Transfer Agent and such Holder within one
trading day after such dispute is submitted to the Auditors. Immediately after
receipt of timely notice of the Auditors' determination (but in any event within
three trading days after the applicable Preferred Conversion Notice is given to
the Transfer Agent), the Transfer Agent shall issue to the converting Holder any
additional Common Shares to which such Holder is entitled based on the
determination of the Auditors. The Transfer Agent is authorized and directed to
rely on the Auditors' determination. If the Auditors shall fail to notify the
Transfer Agent of their determination within three trading days after the
applicable Preferred Conversion Notice is given to the Transfer Agent, then the
Transfer Agent shall, within three trading days after receipt of the applicable
Preferred Conversion Notice, issue to the converting Holder any additional
shares of Common Stock to which such Holder is entitled based on the applicable
Preferred Conversion Notice. Such immediate and prompt action shall be taken by
all the parties hereto in order to assure that there shall be full compliance
with the Company's unqualified obligation that all Common Shares issuable upon
such conversion be issued by the due date therefor as provided herein and in the
Statement of Resolution.The provisions of this Section 5(c) shall be binding on
and inure to the benefit of the Company and each Holder.
6. CLOSING DATE.
Subject to the satisfaction or waiver of the conditions set forth
in Sections 7 and 8, the date and time of the issuance and sale of the Preferred
Shares (the "Closing Date") shall be 12:00 noon, New York City time, on or
before the date which is three Business Days after the date the Buyer has
deposited the Purchase Price with the Escrow Agent in accordance with Section
1(c), or such other mutually agreed to time. The closing shall occur on the
Closing Date at the Law Offices of Brian W Pusch, Penthouse Suite, 29 West 57th
Street, New York, New York 10019.
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<PAGE>
7. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL AND ISSUE.
The Buyer understands that the Company's obligation to sell the Note and
the Preferred Shares and issue the Warrants to the Buyer pursuant to this
Agreement is conditioned upon the satisfaction of the following conditions
precedent on or before the Closing Date (any or all of which may be waived by
the Company in its sole discretion):
(a) The receipt and acceptance by the Company of this Agreement as
evidenced by execution of this Agreement by the Company and delivery of an
executed counterpart of this Agreement to the Buyer or its legal counsel;
(b) Delivery by the Buyer to the Escrow Agent of good funds as
payment in full of an amount equal to the Purchase Price in accordance with
Section 1(d) hereof and delivery of the Exchange Shares to the Escrow Agent;
and
(c) The accuracy on the Closing Date of the representations and
warranties of the Buyer contained in this Agreement as if made on the Closing
Date and the performance by the Buyer on or before the Closing Date of all
covenants and agreements of the Buyer required to be performed on or before the
Closing Date.
8. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The Company understands that the Buyer's obligation to purchase the Note
and the Preferred Shares and acquire the Warrants on the Closing Date is
conditioned upon the satisfaction of the following conditions precedent on or
before the Closing Date (any or all of which may be waived by the Buyer in its
sole discretion):
(a) Delivery by the Company to the Escrow Agent of the Note and the
certificates for the Preferred Shares and the Warrants in accordance with this
Agreement;
(b) The accuracy on the Closing Date of the representations and
warranties of the Company contained in this Agreement as if made on the Closing
Date and the performance by the Company on or before the Closing Date of all
covenants and agreements of the Company required to be performed on or before
the Closing Date and receipt by the Buyer of a certificate, dated the Closing
Date, of the Chief Executive Officer or the Chief Financial Officer of the
Company confirming such matters and such other matters as the Buyer may
reasonably request;
(c) The receipt by the Buyer of confirmation of the filing with the
Secretary of State of the State of Texas of the Statement of Resolution;
(d) The receipt by the Buyer of a certificate, dated the Closing Date, of
the Secretary of the Company certifying (1) the Articles of Incorporation and
By-Laws of the Company as in effect on the Closing Date, (2) all resolutions of
the Board of Directors (and
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<PAGE>
committees thereof) of the Company relating to this Agreement and the
transactions contemplated hereby and (3) such other matters as reasonably
requested by the Buyer;
(e) The Transfer Agent shall have acknowledged receipt of the Transfer
Agent Instruction in the form attached hereto as ANNEX VI and shall not have
objected to or declined to follow the instructions contained therein;
(f) Receipt by the Buyer on the Closing Date of an opinion of Weil,
Gotschal & Manges, LLP, counsel for the Company, dated the Closing Date, in
form, scope and substance reasonably satisfactory to the Buyer, to the effect
set forth in ANNEX VIII attached hereto; and
(g) Receipt by the Buyer on the Closing Date of an opinion of Dean H.
Fisher, Senior Vice President, General Counsel and Secretary of the Company,
dated the Closing Date in form, scope and substance reasonably satisfactory to
the Buyer, to the effect set forth in ANNEX IX attached hereto.
9. MISCELLANEOUS.
(a) GOVERNING LAW. This Agreement shall be governed by and interpreted in
accordance with the laws of the State of New York.
(b) COUNTERPARTS. This Agreement may be executed in counterparts and by
the parties hereto on separate counterparts, all of which together shall
constitute one and the same instrument. A facsimile transmission of this
Agreement bearing a signature on behalf of a party hereto shall be legal
and binding on such party. Although this Agreement is dated as of the date
first set forth above, the actual date of execution and delivery of this
Agreement by each party is the date set forth below such party's signature
on the signature page hereof. Any reference in this Agreement or in any of
the documents executed and delivered by the parties hereto in connection
herewith to (1) the date of execution and delivery of this Agreement by the
Buyer shall be deemed a reference to the date set forth below the Buyer's
signature on the signature page hereof, (2) the date of execution and
delivery of this Agreement by the Company shall be deemed a reference to
the date set forth below the Company's signature on the signature page
hereof and (3) the date of execution and delivery of this Agreement or the
date of execution and delivery of this Agreement by the Buyer and the
Company shall be deemed a reference to the later of the dates set forth
below the signatures of the parties on the signature page hereof. The
Company and the Buyer hereby represent, warrant, covenant and agree that
this Agreement has been signed and delivered in the State of New York and
it is the intention of the Company and the Buyer that this Agreement shall
be construed accordingly for all purposes.
(c) HEADINGS, ETC.. The headings, captions and footers of this Agreement
are for convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement.
(d) SEVERABILITY. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of
-23-
<PAGE>
the remainder of this Agreement or the validity or enforceability of this
Agreement in any other jurisdiction.
(e) AMENDMENTS. No amendment, modification, waiver, discharge or
termination of any provision of this Agreement nor consent to any departure by
the Buyer or the Company therefrom shall in any event be effective unless the
same shall be in writing and signed by the party to be charged with enforcement,
and then shall be effective only in the specific instance and for the purpose
for which given. No course of dealing between the parties hereto shall operate
as an amendment of this Agreement.
(f) WAIVERS. Failure of any party to exercise any right or remedy under
this Agreement or otherwise, or delay by a party in exercising such right or
remedy, or any course of dealings between the parties, shall not operate as a
waiver thereof or an amendment hereof, nor shall any single or partial exercise
of any such right or power, or any abandonment or discontinuance of steps to
enforce such a right or power, preclude any other or further exercise thereof or
exercise of any other right or power.
(g) NOTICES. Any notices required or permitted to be given under the
terms of this Agreement shall be delivered personally (which shall include
telephone line facsimile transmission with answer back confirmation) or by
courier and shall be effective upon receipt, if delivered personally or by
courier, in the case of the Company addressed to the Company at its address
shown in the introductory paragraph of this Agreement, Attention: Chief
Executive Officer (telephone line facsimile transmission number (281) 529-4650
or, in the case of the Buyer, at its address or telephone line facsimile
transmission number shown on the signature page of this Agreement, with a copy
to Genesee International, Inc., 10500 N.E. 8th Street, Suite 1920, Bellevue,
Washington 98004-4332 (telephone line facsimile transmission number
(425) 462-4645) or such other address or telephone line facsimile transmission
number as a party shall have provided by notice to the other party in accordance
with this provision. The Buyer hereby designates as its address for any notice
required or permitted to be given to the Buyer pursuant to the Note or the
Statement of Resolution the address shown on the signature page of this
Agreement, with a copy to: Advantage Fund Limited, c/o Genesee International,
Inc., 10500 N.E. 8th Street, Suite 1920, Bellevue, Washington 98004-4332
(facsimile number (425) 462-4645), until the Buyer shall designate another
address for such purpose.
(h) ASSIGNMENT. Prior to the Closing Date, with the prior written consent
of the Company, which consent will not be unreasonably withheld, the Buyer shall
have the right to assign its rights and obligations under this Agreement with
respect to the purchase of all or any portion of the Note or the Preferred
Shares and the issuance of the related Warrants, provided any such assignee, by
written instrument duly executed by such assignee, assumes all obligations of
the Buyer hereunder with respect to the purchase of the portion of the Note or
the Preferred Shares and the acquisition of the Warrants so assigned and makes
the same representations and warranties with respect thereto as the Buyer makes
in this Agreement, whereupon the Buyer shall be relieved of any further
obligations, responsibilities and liabilities with respect to the purchase of
all or the portion of the Note or the Preferred Shares and acquisition of the
related Warrants the obligation for the purchase or acquisition of which has
been so assigned. In the case of any
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<PAGE>
such assignment, the Company shall agree in writing with such assignee to make
available to such assignee the benefits of the Registration Rights Agreement
with respect to the Common Shares issuable on conversion of the Note or the
Preferred Shares and exercise of the Warrants with respect to which the purchase
under this Agreement has been so assigned. Any transfer of the Note, the
Preferred Shares or the Warrants by the Buyer after the Closing Date shall be
made in accordance with Section 4(a). After the Closing Date, the Buyer shall
have the right to assign its rights and obligations under this Agreement in
connection with any transfer of the Buyer's rights under the Registration Rights
Agreement by compliance with the provisions of Section 9 of the Registration
Rights Agreement.
(i) SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The respective
representations, warranties, covenants and agreements of the Buyer and the
Company contained in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement shall survive the delivery of payment
for the Preferred Shares and shall remain in full force and effect regardless of
any investigation made by or on behalf of them or any person controlling or
advising any of them.
(j) ENTIRE AGREEMENT. This Agreement and its Schedule and Annexes set
forth the entire agreement between the parties hereto with respect to the
subject matter hereof and supersede all prior agreements and understandings,
whether written or oral, with respect thereto.
(k) TERMINATION. (1) The Buyer shall have the right to terminate this
Agreement by giving notice to the Company at any time at or prior to the Closing
Date if:
(A) the Company shall have failed, refused, or been unable at or
prior to the date of such termination of this Agreement to perform any of its
obligations hereunder;
(B) any other condition of the Buyer's obligations hereunder
is not fulfilled when required to be fulfilled; or/
(C) the closing shall not have occurred on a Closing Date on or
before September 5, 1998, other than solely by reason of a breach of this
Agreement by the Buyer.
Any such termination shall be effective upon the giving of notice thereof by
the Buyer. Upon such termination, neither the Buyer nor the Company shall have
any further obligation hereunder or in connection herewith one to the other.
(2) The Company shall have the right to terminate this Agreement by giving
notice to the Buyer at any time at or prior to the Closing Date if:
(A) the Buyer shall have failed, refused, or been unable at or prior
to the date of such termination of this Agreement to perform any of its
obligations hereunder;
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<PAGE>
(B) any other condition of the Company's obligations hereunder is not
fulfilled when required to be fulfilled; or
(C) the closing shall not have occurred on a Closing Date on or
before September 5, 1998, other than solely by reason of a breach of this
Agreement by the Company.
Any such termination shall be effective upon the giving of notice thereof by
the Company. Upon such termination, neither the Company nor the Buyer shall
have any further obligation hereunder or in connection herewith one to the
other.
(l) FURTHER ASSURANCES. Each party to this Agreement will perform any and
all acts and execute any and all documents as may be necessary and proper under
the circumstances in order to accomplish the intents and purposes of this
Agreement and to carry out its provisions.
(m) PUBLIC STATEMENTS, PRESS RELEASES, ETC. The Company and the Buyer
shall have the right to approve before issuance any press releases or any other
public statements with respect to the transactions contemplated hereby;
provided, however, that the Company shall be entitled, without the prior
approval of the Buyer, to make any press release or other public disclosure with
respect to such transactions as is required by applicable law or Nasdaq
regulation (although the Buyer shall be consulted by the Company in connection
with any such press release or other public disclosure prior to its release and
shall be provided with a copy thereof).
(n) CONSTRUCTION. The language used in this Agreement will be deemed to
be the language chosen by the parties to express their mutual intent, and no
rules of strict construction will be applied against any party.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by the Buyer and
the Company by their respective officers or other representatives thereunto duly
authorized on the respective dates set forth below.
PRINCIPAL AMOUNT OF NOTE: $
PURCHASE PRICE: $
NUMBER OF PREFERRED SHARES:
NUMBER OF EXCHANGE SHARES:
ADVANTAGE FUND LIMITED
By:
------------------------------------
W.R. Weber
President
Date:
----------------------------------
Address: c/o CITCO
Kaya Flamboyan 9
Curacao, Netherlands Antilles
Facsimile No.: 011-599-9732-2008
EQUALNET COMMUNICATIONS CORP.
By:
-------------------------------------
Name:
Title:
Date:
-----------------------------------
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<PAGE>
SCHEDULE 3(b)-1
CERTAIN ANTIDILUTION ADJUSTMENTS
--------------------------------
[To come from the Company]
<PAGE>
SCHEDULE 3(b)-2
CERTAIN REGISTRATION RIGHTS
-----------------------------
1. Holders of the Company's Series A Convertible Preferred Stock have
demand and piggyback registration rights.
2. Holders of Series C Preferred Stock have demand registration rights.
3. RFC Capital Corp. has demand and piggyback registration rights.
<PAGE>
SCHEDULE 3(c)-1
CERTAIN NASDAQ MATTERS
-----------------------
[To come from the Company]
<PAGE>
SCHEDULE 3(i)
CERTAIN LEGAL PROCEEDINGS
-------------------------
[To come from the Company]
<PAGE>
EXHIBIT 10.24
Draft of 9/3/98
NOTE PURCHASE AND EXCHANGE AGREEMENT
DATED AS OF JULY 31, 1998
BY AND BETWEEN
EQUALNET COMMUNICATIONS CORP.
AND
WILLIS GROUP, LLC
____________________
6% SENIOR SECURED CONVERTIBLE NOTES DUE 2001
SERIES D CONVERTIBLE PREFERRED STOCK
AND
COMMON STOCK PURCHASE WARRANTS
<PAGE>
NOTE PURCHASE AND EXCHANGE AGREEMENT
6% SENIOR SECURED CONVERTIBLE NOTES DUE 2001
SERIES D CONVERTIBLE PREFERRED STOCK
AND
COMMON STOCK PURCHASE WARRANTS
EQUALNET COMMUNICATIONS CORP.
PAGE
----
1. PURCHASE OF NOTE.......................................... 1
(a) Purchase of Note...................................... 1
(b) Exchange.............................................. 1
(c) Certain Terms......................................... 2
(d) Deliveries and Form of Payment........................ 2
(e) Method of Payment..................................... 2
2. BUYER REPRESENTATIONS, WARRANTIES, ETC.................... 3
(a) Purchase for Investment............................... 3
(b) Accredited Investor................................... 3
(c) Reoffers and Resales.................................. 3
(d) Company Reliance...................................... 3
(e) Information Provided.................................. 3
(f) Absence of Approvals.................................. 4
(g) Note Purchase and Exchange Agreement.................. 4
3. COMPANY REPRESENTATIONS, WARRANTIES, ETC.................. 4
(a) Organization and Authority............................ 4
(b) Capitalization........................................ 4
(c) Concerning the Shares and the Common Stock............ 5
(d) Note Purchase and Exchange Agreement and Other
Transaction Documents................................. 5
(e) Non-contravention..................................... 6
(f) Approvals............................................. 6
(g) Information Provided.................................. 6
(h) Absence of Certain Changes............................ 7
(i) Absence of Certain Proceedings........................ 7
(j) Properties............................................ 7
(k) Labor Relations....................................... 8
(l) SEC Filings........................................... 8
(m) Absence of Brokers, Finders, Etc...................... 8
(n) No Solicitation....................................... 9
(o) Certain Issuances of Securities....................... 9
(p) Absence of Rights Agreement........................... 9
<PAGE>
4. Certain Covenants and Acknowledgments..................... 9
(a) Transfer Restrictions................................. 9
(b) Restrictive Legend.................................... 9
(c) Registration Rights Agreement......................... 11
(d) Form D................................................ 11
(e) Authorization for Trading............................. 11
(f) Use of Proceeds....................................... 11
(g) Blue Sky Laws......................................... 11
(h) Certain Expenses...................................... 12
(i) Certain Issuances of Securities....................... 12
(j) Stockholder Approval.................................. 12
(k) Commercially Reasonable Efforts....................... 13
5. TRANSFER AGENT INSTRUCTION................................ 13
(a) Transfer Agent Instruction............................ 13
(b) Conversion Procedure.................................. 14
6. CLOSING DATE.............................................. 14
7. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL AND ISSUE.. 14
8. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.......... 14
9. MISCELLANEOUS............................................. 15
(a) Governing Law......................................... 15
(b) Counterparts.......................................... 15
(c) Headings, etc......................................... 15
(d) Severability.......................................... 15
(e) Amendments............................................ 16
(f) Waivers............................................... 16
(g) Notices............................................... 16
(h) Assignment............................................ 16
(i) Survival of Representations and Warranties............ 16
(j) Entire Agreement...................................... 17
(k) Termination........................................... 17
(l) Further Assurances.................................... 17
(m) Public Statements, Press Releases, Etc................ 17
(n) Construction.......................................... 18
SCHEDULES
Schedule 3(b)-1 Certain Antidilution Adjustments
Schedule 3(b)-2 Certain Registration Rights
Schedule 3(c)-1 Certain Nasdaq Matters
<PAGE>
ANNEXES
Annex I Form of Senior Secured Convertible Note due 2001
Annex II Form of Statement of Resolution
Annex III Form of Common Stock Purchase Warrant
Annex IV Joint Escrow Instructions
Annex V Form of Registration Rights Agreement
Annex VI Form of Transfer Agent Instruction
Annex VII Form of Notice of Conversion of Series D Convertible Preferred
Stock
Annex VIII Form of Opinion of Counsel to Be Delivered on Closing Date
Annex IX Form of Opinion of General Counsel
<PAGE>
NOTE PURCHASE AND EXCHANGE AGREEMENT
THIS NOTE PURCHASE AND EXCHANGE AGREEMENT, dated as of July 31, 1998,
by and between EQUALNET COMMUNICATIONS CORP., a Texas corporation (the
"Company"), with headquarters located at 1250 Wood Branch Park Drive, Houston,
Texas 77079, and WILLIS GROUP, LLC, a Texas limited liability company (the
"Buyer").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Buyer wishes to purchase, upon the terms and subject to
the conditions of this Agreement, shares of non-voting, convertible preferred
stock of the Company which will be convertible into shares of Common Stock, $.01
par value (the "Common Stock"), of the Company and in connection therewith the
Company is to issue to the Buyer warrants to purchase shares of Common Stock as
provided in this Agreement;
WHEREAS, the Company and the Buyer are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by Rule 506 of Regulation D as promulgated by the Securities and Exchange
Commission (the "SEC") under the Securities Act of 1933, as amended (the "1933
Act"); and
WHEREAS, in connection with this Agreement and the transactions
contemplated hereby, the Company is executing and delivering a Note Purchase
Agreement, dated as of the date hereof, with the buyer named therein (the "Note
Purchase Agreement"), pursuant to which, among other things, the Company has
agreed, upon the terms and subject to the conditions of the Note Purchase
Agreement, to sell a senior secured convertible note to such buyer and in
connection therewith to issue to such buyer warrants to purchase shares of
Common Stock (the "Other Warrants");
NOW THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. PURCHASE OF NOTE; AGREEMENT TO EXCHANGE.
(a) PURCHASE OF NOTE; ISSUANCE OF WARRANTS. The Buyer hereby agrees
to purchase from the Company a 6% Senior Secured Convertible Note due 2001 in
the principal amount set forth on the signature page of this Agreement, having
the terms and conditions in the form thereof attached hereto as ANNEX I (the
"Note") for the aggregate purchase price set forth on the signature page of this
Agreement (the "Purchase Price"). In connection with the purchase of the Note
by the Buyer, the Company shall issue to the Buyer at the closing on the Closing
Date (as defined herein) Common Stock Purchase Warrants in the form attached
hereto as ANNEX III (the "Warrants") to purchase a number of shares of Common
Stock equal to the quotient obtained by dividing (i) the quotient obtained by
dividing (x) the Purchase Price by (y) the Purchase Price (as
<PAGE>
defined in the Warrants) per share of Common Stock to be set forth in the
Warrants by (ii) 4.6666 (subject to adjustment after issuance of the Warrants as
provided in the Warrants).
(b) EXCHANGE. The Company and the Buyer hereby agree to exchange on
the Closing Date the number of shares (the "Preferred Shares") of Series D
Convertible Preferred Stock, $.01 par value (the "Preferred Stock"), of the
Company set forth on the signature page of this Agreement, having the terms and
conditions as set forth in the form of Statement of Resolution of Board of
Directors Establishing and Designating Series D Convertible Preferred Stock and
Fixing the Rights and Preferences of Such Series attached hereto as ANNEX II
(the "Statement of Resolution") for the number of outstanding shares of Common
Stock held by the Buyer and set forth on the signature page of this Agreement
(the "Exchange Shares") and in connection therewith and in consideration thereof
the Buyer shall pay to the Company an amount equal to $100,000.00.
(c) CERTAIN TERMS. The 6% Senior Secured Convertible Notes due 2001
issuable pursuant to Section 1.1 of the Note or such notes in payment of
interest on the Note and such notes are referred to herein as the "Interest
Notes." The shares of Preferred Stock issuable pursuant to Section 5 of the
Statement of Resolution as dividends on the Preferred Shares are referred to
herein as the "Dividend Shares." The shares of Common Stock issuable upon
exercise of the Warrants are referred to herein as the "Warrant Shares." The
Warrant Shares and the shares of Common Stock issuable upon conversion of the
Notes, the Interest Notes, the Preferred Shares, and the Dividend Shares are
referred to herein collectively as the "Common Shares." The Common Shares, the
Preferred Shares and the Dividend Shares are referred to herein collectively as
the "Shares." The Shares, the Notes, the Interest Notes, and the Warrants are
referred to herein collectively as the "Securities."
(d) DELIVERIES AND FORM OF PAYMENT. The Buyer shall pay the Purchase
Price by delivering good funds in United States Dollars to the escrow agent (the
"Escrow Agent") identified in the Joint Escrow Instructions attached hereto as
ANNEX IV (the "Joint Escrow Instructions"). Such delivery of funds shall be
made against delivery by the Company of the Note and the certificate for the
Warrants, registered in the name of the Buyer. Promptly following payment by
the Buyer to the Escrow Agent of the Purchase Price, but in any event prior to
the Closing Date, the Company shall deliver the Note and the certificate for the
Warrants, registered in the name of the Buyer or its nominee, to the Escrow
Agent. The Buyer shall arrange for delivery of the certificates for the
Exchange Shares to the Company at the closing by delivering the certificates for
the Exchange Shares to the Escrow Agent. Such delivery of Exchange Shares shall
be made against delivery by the Company of the certificates for the Preferred
Shares, registered in the name of the Buyer. Promptly following the delivery of
the Exchange Shares by the Buyer to the Escrow Agent, but in any event prior to
the Closing Date, the Company shall deliver certificates for the Preferred
Shares, registered in the name of the Buyer or its nominee, to the Escrow Agent.
The certificates for the Preferred Shares shall be delivered by the Company to
the Escrow Agent on a delivery against payment basis at the closing. By signing
this Agreement, the Buyer and the Company each agrees to all of the terms and
conditions of, and becomes a party to, the Joint Escrow Instructions, all of the
provisions of which are incorporated herein by this reference as if set forth in
full.
<PAGE>
(e) METHOD OF PAYMENT. Payment of the Purchase Price shall be made by
wire transfer of funds to:
Citibank, N.A.
153 East 53rd Street
New York, New York 10043
ABA#021000089
For credit to A/C#37179446
For credit to the account of Brian W. Pusch Attorney Escrow Account
Reference: Advantage/Equalnet
Not later than 4:00 p.m., New York City time, on the date which is one Business
Day after the Company shall have accepted this Agreement and returned a signed
counterpart of this Agreement to the Buyer or its legal counsel, the Buyer shall
deposit with the Escrow Agent an amount equal to the Purchase Price. As used in
this Agreement, the term "Business Day" means any day other than a Saturday,
Sunday or other day on which commercial banks in The City of New York are
authorized or required by law to remain closed.
2. BUYER REPRESENTATIONS, WARRANTIES, ETC.
The Buyer represents and warrants to, and covenants and agrees with,
the Company as follows:
(a) PURCHASE FOR INVESTMENT. The Buyer is purchasing the Note and the
Preferred Shares and acquiring the Warrants for its own account for investment
only and not with a view towards the public sale or distribution thereof;
(b) ACCREDITED INVESTOR. The Buyer is an "accredited investor" as
that term is defined in Rule 501 of the General Rules and Regulations under the
1933 Act by reason of Rule 501(a)(3);
(c) REOFFERS AND RESALES. All subsequent offers and sales of the
Securities by the Buyer shall be made pursuant to registration of the Securities
being offered and sold under the 1933 Act or pursuant to an exemption from
registration;
(d) COMPANY RELIANCE. The Buyer understands that the Note and the
Preferred Shares are being offered and sold, the Warrants are being issued, and
the Common Shares are being offered, in each case to it in reliance on specific
exemptions from the registration requirements of United States federal and state
securities laws and that the Company is relying upon the truth and accuracy of,
and the Buyer's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of the Buyer set forth herein in order to
determine the availability of such exemptions and the eligibility of the Buyer
to acquire the Note and the Preferred Shares and the Warrants and to receive an
offer of the Common Shares;
<PAGE>
(e) INFORMATION PROVIDED. The Buyer and its advisors, if any, have
been furnished with all materials relating to the business, finances and
operations of the Company and materials relating to the offer and sale of the
Note and the Preferred Shares and the issuance of the Warrants and the offer of
the Common Shares which have been requested by the Buyer; the Buyer and its
advisors, if any, have been afforded the opportunity to ask questions of the
Company and have received satisfactory answers to any such inquiries; without
limiting the generality of the foregoing, the Buyer has had the opportunity to
obtain and to review the Company's (1) Annual Report on Form 10-K for the fiscal
year ended June 30, 1997, as amended by Amendment No. 1 thereto on Form 10-K/A
filed with the SEC on September 30, 1997, Amendment No. 2 thereto on Form 10-K/A
filed with the SEC on October 28, 1997, Amendment No. 3 thereto filed with the
SEC on January 20, 1998, and Amendment No. 4 thereto on Form 10-K/A filed with
the SEC on January 30, 1998 (the "1997 10-K"), (2) Quarterly Reports on Form
10-Q for the quarters ended September 30, 1997, December 31, 1997 and March 31,
1998, (3) definitive proxy statement for the Company's 1997 Annual Meeting of
Shareholders, (4) definitive proxy statement for a Special Meeting of
stockholders of the Company held on June 30, 1998, and (5) Current Reports on
Form 8-K dated July 10, 1997, July 23, 1997 and March 10, 1998, in each case as
filed with the SEC (collectively, the "SEC Reports"); and the Buyer understands
that its investment in the Securities involves a high degree of risk;
(f) ABSENCE OF APPROVALS. The Buyer understands that no United States
federal or state agency or any other government or governmental agency has
passed on or made any recommendation or endorsement of the Securities; and
(g) NOTE PURCHASE AND EXCHANGE AGREEMENT. This Agreement has been
duly and validly authorized, executed and delivered on behalf of the Buyer and
is a valid and binding agreement of the Buyer enforceable in accordance with its
terms, subject as to enforceability to general principles of equity and to
bankruptcy, insolvency, moratorium and other similar laws affecting the
enforcement of creditors' rights generally.
3. COMPANY REPRESENTATIONS, WARRANTIES, ETC.
The Company represents and warrants to, and covenants and agrees with,
the Buyer that as of August 31, 1998 except as otherwise specifically provided
herein:
(a) ORGANIZATION AND AUTHORITY. Each of the Company and its
subsidiaries listed in Exhibit 21 to the 1997 10-K (together with USC Telecom,
Inc. and Netco Acquisition Corp., the "Subsidiaries") is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation, and has all requisite corporate power and
authority (i) to own, lease and operate its properties and to carry on its
business as now being conducted, and (ii) to execute, deliver and perform its
obligations under this Agreement, the Note, the Statement of Resolution, the
Warrants, the Registration Rights Agreement, the form of which is attached
hereto as ANNEX V (the "Registration Rights Agreement"), the Transfer Agent
Instruction, the form of which is attached hereto as ANNEX VI (the "Transfer
Agent Instruction"), and the other agreements to be executed and delivered by
the Company in connection herewith, and to consummate the transactions
contemplated hereby and thereby. Each of the Company and the
<PAGE>
Subsidiaries is duly qualified to do business as a foreign corporation and is in
good standing in all jurisdictions wherein such qualification is necessary and
where failure so to qualify could have a material adverse effect on the
business, properties, operations, condition (financial or other), results of
operations or prospects of the Company and the Subsidiaries, taken as a whole.
The Company has no equity investment in any person other than the Subsidiaries.
(b) CAPITALIZATION. The authorized capital stock of the Company
consists of (a) 50,000,000 shares of Common Stock of which 21,393,070 shares
were outstanding on August 10, 1998, all of which are fully paid and
nonassessable; and (b) 5,000,000 shares of Preferred Stock, $.01 par value, of
which 2,000 shares have been designated Series A Convertible Preferred Stock and
of which 2000 shares are outstanding, 3,000 shares have been designated Series B
Senior Convertible Preferred Stock and of which 3,000 shares are outstanding, of
which 300,000 shares have been designated Series C Convertible Preferred Stock
(the "Series C Stock") and of which 195,073 shares are outstanding, and of which
6,500 shares will be designated as Series D Convertible Preferred Stock, of
which 5,000 shares will be issued pursuant to this Agreement and the other Note
Purchase and Exchange Agreements, dated as of the date hereof, being entered
into in connection herewith (the "Other Agreements"); and on the Closing Date
there will be (x) no material increase from August 10, 1998 in the number of
shares of Common Stock outstanding and (y) no issuances of preferred stock
except as issued pursuant to this Agreement and the Other Agreements. As of
August 10, 1998, the Company had outstanding options, warrants and similar
rights entitling the holders to purchase 14,563,462 shares of Common Stock.
Other than as set forth in the preceding sentence, the Company does not have
outstanding any material amount of securities (or obligations to issue any such
securities) convertible into, exchangeable for or otherwise entitling the
holders thereof to acquire shares of Common Stock, except as disclosed in the
SEC Reports. The Company has duly reserved from its authorized and unissued
shares of Common Stock the full number of shares required for (a) all options,
warrants, convertible securities and other rights to acquire shares of Common
Stock which are outstanding and (b) all shares of Common Stock and options and
other rights to acquire shares of Common Stock which may be issued or granted
under the stock option and similar plans which have been adopted by the Company
or any of the Subsidiaries. Each outstanding class or series of securities for
which any antidilution or similar adjustment arising by reason of the issuance
or conversion of the Note, the Interest Notes, the Preferred Shares, and the
Dividend Shares or the issuance or exercise of the Warrants or promissory notes
(the "Other Notes") and warrants to be issued pursuant to the Note Purchase
Agreement and the Other Agreements or the shares of Preferred Stock and warrants
to be issued pursuant to the Other Agreements will occur is identified on
SCHEDULE 3(b)-1 attached hereto, together with the amount of such antidilution
adjustment. The outstanding shares of Common Stock and outstanding options,
warrants and other securities convertible into, exchangeable for or otherwise
entitling the holder thereof to acquire shares of Common Stock have been duly
authorized and validly issued. None of such outstanding shares of Common Stock,
options, warrants and other securities has been issued in violation of the
preemptive rights of any securityholder of the Company. The offers and sales of
the outstanding shares of Common Stock and such options, warrants and other
securities were at all relevant times either registered under the 1933 Act and
applicable state securities laws or exempt from such requirements. No holder of
any of the Company's securities has any rights, "demand," "piggy-back" or
otherwise, to have such securities registered by reason of the
<PAGE>
intention to file, filing or effectiveness of the Registration Statement (as
defined in the Registration Rights Agreement), except as set forth on SCHEDULE
3(b)-2 attached hereto.
(c) CONCERNING THE SHARES AND THE COMMON STOCK. The Shares have been
duly authorized. The Preferred Shares, when issued and paid for in accordance
with this Agreement, the Dividend Shares, when issued as dividends on the
outstanding shares of Preferred Stock, and the Common Shares, when issued upon
conversion of the Notes, the Interest Notes, the Preferred Shares, or the
Dividend Shares or upon exercise of the Warrants, as the case may be, will be
duly and validly issued, fully paid and non-assessable and will not subject the
holder thereof to personal liability by reason of being such holder. There are
no preemptive or similar rights of any stockholder of the Company or any other
person to acquire any of the Securities. The Company has duly reserved
13,043,468 shares of Common Stock for conversion of the Note, the Interest
Notes, the Other Notes, and the shares of Preferred Stock and exercise of the
Warrants, the warrants issuable pursuant to the Other Agreements and the Other
Warrants, and such shares shall remain so reserved (subject to reduction from
time to time for shares of Common Stock issued upon conversion of the Note, the
Interest Notes, the Other Notes, and shares of Preferred Stock, redemption or
other permitted retirement of the Note, the Interest Notes, the Other Notes, and
shares of Preferred Stock and exercise of the Warrants, the warrants issuable
pursuant to the Other Agreements and the Other Warrants), and the Company shall
from time to time reserve such additional shares of Common Stock as shall be
required to be reserved pursuant to the Note, the Interest Notes, the Other
Notes and the Statement of Resolution, as long as the Note, the Interest Notes,
the Other Notes, and Preferred Stock are convertible, and pursuant to the
Warrants, as long as the Warrants are exercisable. The Common Stock is listed
for trading on the Nasdaq National Market ("Nasdaq") and (1) the Company and the
Common Stock meet the criteria for continued listing and trading on Nasdaq; (2)
except as set forth on SCHEDULE 3(c)-1 attached hereto, the Company has not been
notified since January 1, 1996 by Nasdaq of any failure or potential failure to
meet the criteria for continued listing and trading on Nasdaq and (3) no
suspension of trading in the Common Stock is in effect. The Company knows of no
reason that the Common Shares will not be eligible for listing on Nasdaq.
(d) NOTE PURCHASE AND EXCHANGE AGREEMENT AND OTHER TRANSACTION
DOCUMENTS. This Agreement, the Note, the Statement of Resolution, the
Registration Rights Agreement, the Warrants and the Transfer Agent Agreement and
the other agreements and instruments contemplated hereby and thereby have been
duly and validly authorized by the Company, this Agreement has been duly
executed and delivered by the Company and this Agreement is, and the
Registration Rights Agreement, the Warrants and the Transfer Agent Instruction
and such other agreements, when executed and delivered by the Company, and the
Statement of Resolution, when executed by the Company and filed with the
Secretary of State of the State of Texas, each will be, valid and binding
obligations of the Company enforceable in accordance with their respective
terms, subject as to enforceability to general principles of equity and to
bankruptcy, insolvency, moratorium and other similar laws affecting the
enforcement of creditors' rights generally.
(e) NON-CONTRAVENTION. The execution and delivery by the Company of
this Agreement and the other documents contemplated by this Agreement and the
consummation by the Company of
<PAGE>
the issuance of the Note, the Preferred Shares and the Warrants as contemplated
by this Agreement, and the other transactions contemplated by this Agreement,
the Note, the Statement of Resolution, the Registration Rights Agreement, the
Warrants and the Transfer Agent Instruction do not and will not, with or without
the giving of notice or the lapse of time, or both (i) result in any violation
of any terms of the Articles of Incorporation or By-laws of the Company or any
Subsidiary, (ii) conflict with or result in a breach by the Company or any
Subsidiary of any of the terms or provisions of, or constitute a default under,
or result in the modification, amendment, termination or cancellation of, result
in the acceleration of any obligation of the Company or any Subsidiary under, or
result in the creation or imposition of any lien, security interest, charge or
encumbrance upon any of the properties or assets of the Company or any
Subsidiary pursuant to, any indenture, mortgage, deed of trust or other
agreement or instrument to which the Company or any Subsidiary is a party or by
which the Company or any Subsidiary or any of their respective properties or
assets is bound or affected, (iii) violate or contravene any applicable law,
rule or regulation or any applicable decree, judgment or order of any court,
United States federal or state regulatory body, administrative agency or other
governmental body having jurisdiction over the Company or any Subsidiary or any
of their respective properties or assets, including, without limitation, any law
of the State of New York or the State of Texas relating to usury or the maximum
rate chargeable with respect to indebtedness, or (iv) have any material adverse
effect on any permit, certification, registration, approval, consent, license or
franchise necessary for the Company or any Subsidiary to own or lease and
operate any of their respective properties or to conduct any of their respective
businesses or the ability of the Company or any Subsidiary to make use thereof.
(f) APPROVALS. No authorization, approval or consent of, or filing
with, any court, governmental body, regulatory agency, self-regulatory
organization, or stock exchange or market or the stockholders of the Company is
required to be obtained or made by the Company for (1) the execution, delivery
and performance by the Company of this Agreement, the Registration Rights
Agreement, the Warrants, the Transfer Agent Instruction and the other agreements
and instruments contemplated hereby and thereby, (2) the execution and issuance
of the Note and the Interest Notes, (3) the execution, filing and performance by
the Company of the Statement of Resolution, (4) the issuance and sale of the
Note and the Preferred Shares, the issuance of the Interest Notes and the
Dividend Shares and the issuance of the Warrants as contemplated by this
Agreement, and (5) the issuance of Common Shares on conversion of the Note, the
Interest Notes, the Preferred Shares or the Dividend Shares or upon the exercise
of the Warrants or the issuance of Interest Notes in payment of interest on the
Note or Interest Notes or the issuance of Dividend Shares as dividends on shares
of Preferred Stock, other than (v) the filing of the Statement of Resolution
with the Secretary of State of the State of Texas, (w) listing of the Common
Shares on Nasdaq, (x) registration of the resale of the Common Shares under the
1933 Act as contemplated by the Registration Rights Agreement, (y) as may be
required under applicable state securities or "blue sky" laws and (z) filing of
one or more Forms D with respect to the Securities as required under
Regulation D.
(g) INFORMATION PROVIDED. The information provided by or on behalf of
the Company to the Buyer in connection with the transactions contemplated by
this Agreement, including, without limitation, the information referred to in
Section 2(e) of this Agreement, does not contain any
<PAGE>
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements therein, in the light of the circumstances under
which they are made, not misleading, it being understood that, for purposes of
this Section 3(g), any statement contained in such information shall be deemed
to be modified or superseded for purposes of this Section 3(g) to the extent
that a statement in any document included in such information which was prepared
or filed with the SEC on a later date modifies or replaces such statement,
whether or not such later prepared or filed statement so states. The Company has
not filed any reports with the SEC under the Securities Exchange Act of 1934, as
amended (the "1934 Act"), since June 30, 1997 other than the SEC Reports.
(h) ABSENCE OF CERTAIN CHANGES. Since March 31, 1998, there has been
no material adverse change and no material adverse development in the business,
properties, operations, condition (financial or other), results of operations or
prospects of the Company and the Subsidiaries, taken as a whole, except as
disclosed in the SEC Reports or in SCHEDULE 3(h) attached hereto. Except as and
to the extent disclosed, reflected or reserved against in the financial
statements of the Company and the notes thereto included in the SEC Reports,
neither the Company nor any Subsidiary has any material (individually or in the
aggregate) liabilities, debts or obligations whether accrued, absolute,
contingent or otherwise, and whether due or to become due. Subsequent to March
31, 1998, neither the Company nor any Subsidiary has incurred any liabilities,
debts or obligations of any nature whatsoever which are individually or in the
aggregate material to the Company and the Subsidiaries, taken as a whole, other
than those incurred in the ordinary course of their respective businesses or
disclosed in the SEC Reports.
(i) ABSENCE OF CERTAIN PROCEEDINGS. Except as disclosed in the SEC
Reports or on SCHEDULE 3(I) attached hereto, there is no action, suit,
proceeding, inquiry or investigation before or by any court, public board or
body or governmental agency (collectively, an "Action") pending or, to the
knowledge of the Company or any Subsidiary, threatened against the Company or
any Subsidiary, in any such case wherein an unfavorable decision, ruling or
finding would have a material adverse effect on the business, properties,
condition (financial or other), results of operations or prospects of the
Company and the Subsidiaries, taken as a whole, or the transactions contemplated
by this Agreement or any of the documents contemplated hereby or which would
adversely affect the validity or enforceability of, or the authority or ability
of the Company to perform its obligations under, this Agreement or any of such
other documents; neither the Company or any Subsidiary nor any director or
officer thereof is or has been the subject of any Action involving a claim of
violation of or liability under federal or state securities laws or a claim of
breach of fiduciary duty; the Company does not have pending before the SEC any
request for confidential treatment of information and to the best of the
Company's knowledge no such request will be made by the Company prior to the
time the Registration Statement relating to the Common Shares which is
contemplated by the Registration Rights Agreement is first ordered effective by
the SEC; and there has not been, and to the best of the Company's knowledge
there is not pending or contemplated, any investigation by the SEC involving the
Company or any current or former director or officer of the Company.
(j) PROPERTIES. The Company and the Subsidiaries have good title to
all property real and personal (tangible and intangible) and other assets owned
by them, free and clear of all security
<PAGE>
interests, charges, mortgages, liens or other encumbrances, except those in
favor of RFC Capital Corporation or Greyrock Business Credit, Finova Capital
Corporation, Willis Group, LLC and Netco LLC and such as are described in the
SEC Reports or such as do not materially interfere with the use of such property
made, or proposed to be made, by the Company or any Subsidiary. The leases,
licenses or other contracts or instruments under which the Company and the
Subsidiaries lease, hold or are entitled to use any property, real or personal,
are valid, subsisting and enforceable with only such exceptions as do not
materially interfere with the use of such property made, or proposed to be made,
by the Company or any Subsidiary. Neither the Company nor any Subsidiary has
received notice of any material violation of any applicable law, ordinance,
regulation, order or requirement relating to its owned or leased properties. The
Company does not have any knowledge of, and the Company has not given or
received any notice of, any pending conflicts with or infringement of the rights
of others with respect to any Company Proprietary Rights (as defined herein) or
with respect to any license of Company Proprietary Rights. No action, suit,
arbitration, or legal, administrative or other proceeding or investigation is
pending, or, to the best knowledge of the Company, threatened, which involves
any Company Proprietary Rights. Neither the Company nor any Subsidiary is
subject to any judgment, order, writ, injunction or decree of any court or any
federal, state, local, foreign or other governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, or any
arbitrator, or has entered into or is a party to any contract which restricts or
impairs the use of any such Company Proprietary Rights in a manner which would
have a material adverse effect on the use by the Company or any Subsidiary of
any of the Company Proprietary Rights. To the best knowledge of the Company, no
Company Proprietary Rights and no services or products sold by the Company or
any Subsidiary, conflict with or infringe upon any proprietary rights available
to any third party. Neither the Company nor any Subsidiary has received written
notice of any pending conflict with or infringement upon such third-party
proprietary rights. Neither the Company nor any Subsidiary has entered into any
consent, indemnification, forbearance to sue or settlement agreement with
respect to Company Proprietary Rights other than in the ordinary course of
business. No claims have been asserted by any person with respect to the
validity of the Company's or any Subsidiary's ownership or right to use the
Company Proprietary Rights and, to the best knowledge of the Company, there is
no reasonable basis for any such claim to be successful. To the best knowledge
of the Company, the Company Proprietary Rights are valid and enforceable. No
registration relating to the Company Proprietary Rights has lapsed, expired or
been abandoned or canceled or is the subject of cancellation or other
adversarial proceedings, and all applications therefor are pending and are in
good standing, except for such lapses, expirations, abandonments, cancellations,
adversarial proceedings or failures to be in good standing which would not,
singly or in the aggregate, have a material adverse effect on the business,
properties, operations, condition (financial or otherwise), results of
operations or prospects of the Company and the Subsidiaries, taken as a whole.
The Company and the Subsidiaries have complied, in all material respects, with
their respective contractual obligations relating to the protection of the
Company Proprietary Rights used pursuant to licenses. To the best knowledge of
the Company, no person is infringing on or violating the Company Proprietary
Rights. As used herein, the term "Company Proprietary Rights" means all
patents, patent applications, inventions, trademarks, trade names, applications
for registration of trademarks, service marks, service mark applications,
copyrights, know-how, manufacturing processes, formulae, trade secrets, licenses
and rights in any thereof and any other
<PAGE>
intangible property and assets which are material to the businesses of the
Company and the Subsidiaries as now conducted, as proposed to be conducted or as
described in this Agreement.
(k) LABOR RELATIONS. No material labor problem exists or, to the
knowledge of the Company or any Subsidiary, is imminent with respect to any of
the employees of the Company or any Subsidiary.
(l) SEC FILINGS. The Company has timely filed all required forms,
reports and other documents required to be filed with the SEC under the 1934 Act
since January 1, 1997. All of such forms, reports and other documents complied,
when filed, in all material respects, with all applicable requirements of the
1933 Act and the 1934 Act.
(m) ABSENCE OF BROKERS, FINDERS, ETC. No broker, finder or similar
person is entitled to any commission, fee or other compensation in respect of
the transactions contemplated by this Agreement by reason of any action or
conduct of the Company or any Subsidiary or any person acting on behalf of any
of them, and the Company shall pay, and indemnify and hold harmless the Buyer
from, any claim made against the Buyer by any person for any such commission,
fee or other compensation.
(n) NO SOLICITATION. No form of general solicitation or general
advertising was used by the Company or, to the best of its knowledge, any other
person acting on behalf of the Company, in respect of or in connection with the
offer and sale of the Securities. Neither the Company nor, to its knowledge,
any person acting on behalf of the Company has, either directly or indirectly,
sold or offered for sale to any person any of the Note, the Preferred Shares or
the Warrants or, within the six months prior to the date hereof, any other
similar security of the Company except for the Series C Stock and as
contemplated by this Agreement, the Other Agreements and the Note Purchase
Agreement; and neither the Company nor any person authorized to act on its
behalf will sell or offer for sale any promissory notes, shares of Preferred
Stock or shares of Common Stock or Warrants, or solicit any offers to buy any
promissory notes, shares of Preferred Stock or shares of Common Stock or
Warrants, so as thereby to cause the issuance or sale of any of the Securities
to be in violation of Section 5 of the 1933 Act.
(o) CERTAIN ISSUANCES OF SECURITIES. The Company has not issued any
shares of Common Stock or shares of any series of preferred stock or other
securities convertible into, exchangeable for or otherwise entitling the holder
to acquire shares of Common Stock which are subject to Rule 4460(i) of Nasdaq
(or any successor, replacement or similar provision thereof or of any other
market on which the Common Stock is listed for trading) and which would be
integrated with the sale of the Note and the Preferred Shares to the Buyer,
Interest Notes in payment of interest on the Note or the Interest Notes or the
Dividend Shares in payment of dividends on the Preferred Stock or the issuance
of Common Shares upon conversion thereof or upon exercise of the Warrants for
purposes of such Rule 4460(i) (or any successor, replacement or similar
provision thereof or of any other market on which the Common Stock is listed for
trading).
<PAGE>
(p) ABSENCE OF RIGHTS AGREEMENT. The Company has not adopted a
shareholder rights plan or similar arrangement relating to accumulations of
beneficial ownership of Common Stock or a change in control of the Company.
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
(a) TRANSFER RESTRICTIONS. The Company and the Buyer acknowledge and
agree that (1) the Note, Preferred Shares and the Warrants have not been and are
not being registered under the provisions of the 1933 Act and, except as
provided in the Registration Rights Agreement with respect to the resale of the
Common Shares, the Common Shares have not been and are not being registered for
resale under the 1933 Act, and the Securities may not be transferred unless (A)
subsequently registered for resale thereunder or (B) the Buyer shall have
delivered to the Company an opinion of counsel, reasonably satisfactory in form,
scope and substance to the Company, to the effect that the Securities to be sold
or transferred may be sold or transferred pursuant to an exemption from such
registration; (2) any resale of the Securities made in reliance on Rule 144
promulgated under the 1933 Act may be made only in accordance with the terms of
said Rule and further, if said Rule is not applicable, any such resale of
Securities under circumstances in which the seller, or the person through whom
the sale is made, may be deemed to be an underwriter, as that term is used in
the 1933 Act, may require compliance with some other exemption under the 1933
Act or the rules and regulations of the SEC thereunder; and (3) neither the
Company nor any other person is under any obligation to register the Securities
(other than pursuant to the Registration Rights Agreement) under the 1933 Act or
to comply with the terms and conditions of any exemption thereunder (other than
pursuant to Section 4(d) hereof and pursuant to the Registration Rights
Agreement).
(b) RESTRICTIVE LEGEND. (1) The Buyer acknowledges and agrees that
the Note shall bear a restrictive legend in substantially the following form
(and a stop-transfer order may be placed against transfer of the Note):
This Note has not been registered under the Securities Act of 1933, as
amended (the "1933 Act"). The issuance to the holder of this Note of the
shares of Common Stock issuable upon conversion of this Note and in payment
of interest on this Note are not covered by a registration statement under
the 1933 Act. This Note has been acquired, and such shares must be
acquired, for investment only and may not be sold, transferred or assigned
in the absence of registration of the resale thereof under the 1933 Act or
an opinion of counsel reasonably satisfactory in form, scope and substance
to the Company that such registration is not required.
(2) The Buyer acknowledges and agrees that the Preferred Shares shall
bear a restrictive legend in substantially the following form (and a stop-
transfer order may be placed against transfer of the Preferred Shares):
The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended. The securities have been
acquired for investment and may not be sold, transferred or assigned in the
absence of an effective registration statement for
<PAGE>
the securities under the Securities Act of 1933, as amended, or an opinion
of counsel that registration is not required under said Act.
The number of shares constituting the portion of the Maximum Share Amount,
as defined in the Statement of Resolution of Series D Convertible Preferred
Stock (the "Statement of Resolution"), allocated to the shares represented
by this certificate for purposes of conversion thereof is
______________________.
Section 10(b)(3)(a) of the Statement of Resolution permits a holder of the
securities represented by this certificate to convert such securities in
accordance with the Statement of Resolution without being required to
surrender this certificate to the Company unless all of the securities
represented hereby are so converted. Consequently, following conversion of
any of the securities represented by this certificate, the number of shares
represented by this certificate may be less than the number of shares
stated hereon. Upon request of any proposed transferee of this
certificate, the Company will provide confirmation of the number of shares
evidenced by this certificate.
(3) The Buyer further acknowledges and agrees that the Warrants shall
bear a restrictive legend in substantially the following form (and a stop-
transfer order may be placed against transfer of the Warrants):
The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended. The securities have been
acquired for investment and may not be resold, transferred or assigned in
the absence of an effective registration statement for the securities under
the Securities Act of 1933, as amended, or an opinion of counsel that
registration is not required under said Act.
(4) The Buyer further acknowledges and agrees that until such time as
the Common Shares have been registered for resale under the 1933 Act as
contemplated by the Registration Rights Agreement, the certificates for the
Common Shares may bear a restrictive legend in substantially the following form
(and a stop-transfer order may be placed against transfer of the certificates
for the Common Shares):
The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended. The securities have been
acquired for investment and may not be resold, transferred or assigned in
the absence of an effective registration statement for the securities under
the Securities Act of 1933, as amended, or an opinion of counsel that
registration is not required under said Act.
(5) Once the Registration Statement required to be filed by the
Company pursuant to Section 2 of the Registration Rights Agreement has been
declared effective, thereafter (1) upon request of the Buyer the Company will
substitute certificates without restrictive legend for certificates for any
Common Shares issued prior to the date such Registration Statement is declared
effective by the SEC which bear such restrictive legend and remove any stop-
transfer restriction relating thereto promptly, but in no event later than three
<PAGE>
trading days after surrender of such certificates by the Buyer and (2) the
Company shall not place any restrictive legend on certificates for Common Shares
issued on conversion of or as dividends on the Preferred Shares or upon exercise
of the Warrants or impose any stop-transfer restriction thereon.
(c) REGISTRATION RIGHTS AGREEMENT. The parties hereto agree to enter
into the Registration Rights Agreement in the form attached hereto as ANNEX V on
or before the Closing Date.
(d) FORM D. The Company agrees to file a Form D with respect to the
Securities as required under Regulation D and to provide a copy thereof to the
Buyer promptly after such filing. The Buyer agrees to cooperate with the
Company in connection with such filing and, upon request of the Company, to
provide all information relating to the Buyer reasonably required for such
filing.
(e) AUTHORIZATION FOR TRADING; REPORTING STATUS. On or before the
Closing Date, the Company shall file a notification for listing of additional
shares with the Nasdaq relating to the Common Shares and shall provide evidence
of such filing to the Buyer. So long as the Buyer beneficially owns any of the
Note, the Interest Notes, the Preferred Shares, the Dividend Shares, the
Warrants, or the Common Shares, the Company shall file all reports required to
be filed with the SEC pursuant to Section 13 or 15(d) of the 1934 Act and the
Company shall not terminate its status as an issuer required to file reports
under the 1934 Act even if the 1934 Act or the rules and regulations thereunder
would permit such termination.
(f) USE OF PROCEEDS. Neither the Company nor any Subsidiary owns or
has any present intention of acquiring any "margin stock" as defined in
Regulation G (12 CFR Part 207) of the Board of Governors of the Federal Reserve
System ("margin stock"). The proceeds of sale of the Note will be used for
general working capital purposes and in the operation of the Company's business.
None of such proceeds will be used, directly or indirectly (1) to make any loan
to or investment in any other person (other than financing the Company's
subsidiaries in the ordinary course of business) or (2) for the purpose, whether
immediate, incidental or ultimate, of purchasing or carrying any margin stock or
for the purpose of maintaining, reducing or retiring any indebtedness which was
originally incurred to purchase or carry any stock that is currently a margin
stock or for any other purpose which might constitute the transactions
contemplated by this Agreement a "purpose credit" within the meaning of such
Regulation G. Neither the Company nor any agent acting on its behalf has taken
or will take any action which might cause this Agreement or the transactions
contemplated hereby to violate Regulation G, Regulation T or any other
regulation of the Board of Governors of the Federal Reserve System or to violate
the 1934 Act, in each case as in effect now or as the same may hereafter be in
effect.
(g) BLUE SKY LAWS. On or before the Closing Date, the Company shall
take such action as shall be necessary to qualify, or to obtain an exemption
for, the Note and the Preferred Shares for sale to the Buyer and the Warrants
for issuance to the Buyer pursuant to this Agreement and the Common Shares for
issuance to the Buyer on conversion of the Note and the Preferred Shares under
such of the securities or "blue sky" laws of jurisdictions as shall be
applicable to the sale of the Note and the Preferred Shares and the issuance of
the Warrants pursuant to this Agreement and the issuance to the Buyer of Common
Shares on conversion of the Note and the Preferred
<PAGE>
Shares and exercise of the Warrants. The Company shall furnish copies of all
filings, applications, orders and grants or confirmations of exemptions relating
to such securities or "blue sky" laws on or prior to the Closing Date.
(h) CERTAIN EXPENSES. Whether or not the closing occurs, the Company
shall pay or reimburse the Buyer for all reasonable expenses (including, without
limitation, legal fees and expenses of counsel to the Buyer) incurred by the
Buyer in connection with this Agreement and the transactions contemplated
hereby. The Company shall pay on demand all reasonable expenses incurred by the
Buyer, including reasonable attorneys' fees and expenses, as a consequence of,
or in connection with (1) the negotiation, preparation or execution of any
amendment, modification or waiver of this Agreement, the Note, the Statement of
Resolution, the Registration Rights Agreement, the Warrants, the Transfer Agent
Instruction and the other agreements and instruments contemplated hereby and
thereby requested by the Company, (2) any default or breach of any of the
Company's obligations set forth in any of such agreements or instruments and (3)
the enforcement or restructuring of any right of, including the collection of
any payments due, the Buyer under any of such agreements or instruments,
including any action or proceeding relating to such enforcement or any order,
injunction or other process seeking to restrain the Company from paying any
amount due the Buyer, in which the Buyer prevails.
(i) CERTAIN ISSUANCES OF SECURITIES. (1) Unless the Company obtains
the Stockholder Approval (as defined in the Note and Statement of Resolution) or
a waiver thereof from the Nasdaq, the Company will not issue any shares of
Common Stock or shares of any other series of preferred stock or other
securities convertible into, exchangeable for, or otherwise entitling the holder
to acquire, shares of Common Stock which would be subject to the requirements of
Rule 4460(i) of Nasdaq (or any successor, replacement, or similar provision
thereof or of any other market on which the Common Stock is listed for trading)
and which would be integrated with the sale of the Note and the Preferred Shares
and issuance of the Warrants to the Buyer or the issuance of Common Shares upon
conversion of the Note, the Interest Notes, the Preferred Shares or the Dividend
Shares or upon exercise of the Warrants for purposes of Rule 4460(i) of Nasdaq
(or any successor, replacement or similar provision thereof or of any other
market on which the Common Stock is listed for trading).
(2) Subject to the restrictions in Section 4(i)(1), during the period
from the date of execution and delivery of this Agreement to the date which is
one year after the Closing Date, the Company shall not offer, sell, contract to
sell or issue (or engage any person to assist the Company in taking any such
action) any equity securities or securities convertible into, exchangeable for
or otherwise entitling the holder to acquire, any Common Stock at a price below
the market price of the Common Stock on the date of such issuance or the date of
conversion, exchange or other exercise thereof (collectively, "Discounted
Securities") without giving the Buyer the first right to acquire all or any
portion, as determined by the Buyer in its discretion, of such Discounted
Securities on the same terms as the Discounted Securities are to be offered to
other investors. In each instance of proposed issuance of Discounted Securities
the Company shall give notice to the Buyer of the detailed terms of such
Discounted Securities proposed to be issued and, promptly after requested by the
Buyer, such other information as requested by the Buyer. The Buyer may, by
notice to the Company, exercise such right of first
<PAGE>
refusal at any time until the later of (x) ten Business Days after such notice
from the Company to the Buyer and (y) three Business Days after the Company
provides such additional information as shall have been requested by the Buyer.
(j) STOCKHOLDER APPROVAL. The Company shall seek and use its best
efforts to obtain, on or before the date which is 120 days after the Closing
Date, the Stockholder Approval of the issuance of the Note, the Interest Notes,
the Preferred Shares, the Dividend Shares, the Warrants and the Common Shares.
The Company shall call a meeting of stockholders to be held within 120 days
after the Closing Date, shall prepare and file with the SEC as promptly as
practical, but in no event later than 45 days after the Closing Date,
preliminary proxy materials which set forth a proposal to seek such Stockholder
Approval and shall recommend approval thereof by its stockholders. The Company
shall provide the Buyer an opportunity to review and comment on such proxy
materials by providing copies of such proxy materials and any revised
preliminary proxy materials to the Buyer a reasonable period of time prior to
their filing with the SEC. The Company shall furnish to the Buyer and its
counsel a copy of its definitive proxy materials for such meeting of
stockholders and any amendments or supplements thereto promptly after the same
are mailed to stockholders or filed with the SEC, shall inform the Buyer of the
progress of solicitation of proxies for such meeting and shall inform the Buyer
of any adjournment of such meeting and shall report the result of the vote of
any stockholders on such proposition on the day such vote is taken. If for any
reason the Company fails to obtain such Stockholder Approval, the Company shall
be required to redeem the Note in accordance with Sections 5.1 and 5.2 thereof
and the Preferred Shares in accordance with Section 11 of the Statement of
Resolution. As used herein, "Stockholder Approval" shall have the meaning to be
provided or provided in the Note and the Statement of Resolution.
(k) NASDAQ DETERMINATION. The Company shall promptly seek and use its
best efforts to obtain a written determination from Nasdaq that neither the
Warrants and the issuance of shares of Common Stock upon exercise of the
Warrants nor the Preferred Shares and the issuance of shares of Common Stock
upon conversion of the Preferred Shares need to be integrated with the Note and
the issuance of shares of Common Stock upon conversion of the Note for purposes
of Rule 4460(i) of the Nasdaq (or any successor, replacement or similar
provision thereof or of any other market on which the Common Stock is listed for
trading).
(l) OPINION. The Company shall deliver an opinion of Weil, Gotshal
and Manges, LLP, counsel for the Company, addressed to the Buyer, in
substantially the form set forth in ANNEX X attached hereto, on or before the
date which is seven (7) Business Days after the Closing Date.
(m) COMMERCIALLY REASONABLE EFFORTS. Each of the parties shall use
its commercially reasonable efforts timely to satisfy each of the conditions to
the other party's obligations to sell and purchase the Note and the Preferred
Shares set forth in Section 7 or 8, as the case may be, of this Agreement on or
before the Closing Date.
<PAGE>
5. TRANSFER AGENT INSTRUCTION; CONVERSION PROCEDURE.
(a) TRANSFER AGENT INSTRUCTION. Prior to the Closing Date, the
Company will (1) execute and deliver the Transfer Agent Instruction in the form
attached hereto as ANNEX VI and thereby irrevocably instruct, American Stock
Transfer & Trust Company, as Transfer Agent and Registrar (the "Transfer
Agent"), to issue certificates for the Common Shares from time to time upon
conversion of the Note, the Interest Notes, the Preferred Shares and the
Dividend Shares and exercise of the Warrants in such amounts as specified from
time to time to the Transfer Agent in the Notices of Conversion of 6% Senior
Secured Convertible Notes due 2001 in the form attached to the Note, the Notices
of Conversion surrendered in connection with conversions of Preferred Shares and
referred to in Section 5(b) of this Agreement and the Form of Subscription in
the form attached to the Warrants and (2) appoint the Transfer Agent the
conversion agent for the Note, the Interest Notes and the Preferred Stock and
the exercise agent for the Warrants. The certificates for the Common Shares may
bear the restrictive legend specified in Section 4(b) of this Agreement prior to
registration of the resale of the Common Shares under the 1933 Act. The
certificates for the Common Shares shall be registered in the name of the Buyer
or its designee and in such denominations to be specified by the Buyer in
connection with each conversion of the Note, the Interest Notes, the Preferred
Shares or Dividend Shares or exercise of the Warrants. The Company warrants
that no instruction other than (x) such instructions referred to in this Section
5, (y) stop transfer instructions to give effect to Section 4(a) prior to
registration of the resale of the Common Shares under the 1933 Act and (z) the
instructions required by Section 3(n) of the Registration Rights Agreement will
be given by the Company to the Transfer Agent and that the Common Shares shall
otherwise be freely transferable on the books and records of the Company as and
to the extent provided in this Agreement. Nothing in this Section 5(a) shall
limit in any way the Buyer's obligations and agreement to comply with the
registration requirements of the 1933 Act upon resale of the Common Shares. If
the Buyer provides the Company with an opinion of counsel, reasonably
satisfactory in form, scope and substance to the Company and its legal counsel,
that registration of a resale by the Buyer of any of the Securities is not
required under the 1933 Act, the Company shall permit the transfer of such
Securities and, in the case of the Common Shares, in accordance with clause
(1)(B) of Section 4(a) of this Agreement, promptly instruct the Company's
transfer agent to issue upon transfer one or more share certificates in such
name and in such denominations as specified by the Buyer within three trading
days after receipt of such opinion. Nothing in this Section 5(a) shall limit
the obligations of the Company under Section 3(n) of the Registration Rights
Agreement.
(b) CONVERSION PROCEDURE. In connection with the exercise of
conversion rights relating to the Preferred Shares and the Dividend Shares, the
Buyer or any subsequent holder of the Preferred Shares (the Buyer and each such
holder, a "Holder") shall complete, sign and furnish to the Transfer Agent a
Notice of Conversion of Series D Convertible Preferred Stock duly acknowledged
by the Company in the form attached hereto as ANNEX VII (the "Preferred
Conversion Notice"), which shall be deemed to satisfy all requirements of the
Statement of Resolution.
(c) COMMON SHARES ISSUABLE UPON CONVERSION. As set forth in Section
10(b)(3) of the Statement of Resolution, the number of Common Shares to be
issued in connection with a particular conversion of Preferred Shares is, absent
manifest error, conclusively the number of
<PAGE>
Common Shares stated in the applicable Preferred Conversion Notice. If in
connection with a particular conversion of Preferred Shares the Company
determines that manifest error has been made by virtue of the conversion price
or other information set forth in the applicable Preferred Conversion Notice,
the Company shall have the right within one trading day after the Holder gives
such Preferred Conversion Notice to notify the Transfer Agent and such Holder of
such error, which notice shall state the number of Common Shares in dispute,
and, notwithstanding such notice from the Company, the Transfer Agent shall
issue and deliver the number of Common Shares not in dispute as and when
required by this letter. A Preferred Conversion Notice shall be deemed for all
purposes to be in proper form unless the Company otherwise notifies the Holder
by telephone line facsimile transmission within three trading days after a
Preferred Conversion Notice has been given (which notice from the Company shall
specify all defects in the Preferred Conversion Notice), and any Preferred
Conversion Notice containing any such defect shall nonetheless be effective on
the date given if the Holder promptly undertakes to correct all such defects
promptly. If the Company shall have notified the Transfer Agent and such Holder
of any such manifest error, and the Company and such Holder do not agree as to a
resolution of such manifest error on or before the date of such notice by the
Company of an error in such Preferred Conversion Notice, the Company shall on
the date such notice is given submit the dispute to Ernst & Young LLP or another
firm of independent public accountants of recognized national standing (the
"Auditors") for determination and shall instruct the Auditors to resolve such
dispute and to notify the Company, the Transfer Agent and such Holder within one
trading day after such dispute is submitted to the Auditors. Immediately after
receipt of timely notice of the Auditors' determination (but in any event within
three trading days after the applicable Preferred Conversion Notice is given to
the Transfer Agent), the Transfer Agent shall issue to the converting Holder any
additional Common Shares to which such Holder is entitled based on the
determination of the Auditors. The Transfer Agent is authorized and directed to
rely on the Auditors' determination. If the Auditors shall fail to notify the
Transfer Agent of their determination within three trading days after the
applicable Preferred Conversion Notice is given to the Transfer Agent, then the
Transfer Agent shall, within three trading days after receipt of the applicable
Preferred Conversion Notice, issue to the converting Holder any additional
shares of Common Stock to which such Holder is entitled based on the applicable
Preferred Conversion Notice. Such immediate and prompt action shall be taken by
all the parties hereto in order to assure that there shall be full compliance
with the Company's unqualified obligation that all Common Shares issuable upon
such conversion be issued by the due date therefor as provided herein and in the
Statement of Resolution.The provisions of this Section 5(c) shall be binding on
and inure to the benifit of the Company and each Holder.
6. CLOSING DATE.
Subject to the satisfaction or waiver of the conditions set forth in
Sections 7 and 8, the date and time of the issuance and sale of the Preferred
Shares (the "Closing Date") shall be 12:00 noon, New York City time, on or
before the date which is three Business Days after the date the Buyer has
deposited the Purchase Price with the Escrow Agent in accordance with Section
1(c), or such other mutually agreed to time. The closing shall occur on the
Closing Date at the Law Offices of Brian W Pusch, Penthouse Suite, 29 West 57th
Street, New York, New York 10019.
<PAGE>
7. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL AND ISSUE.
The Buyer understands that the Company's obligation to sell the Note
and the Preferred Shares and issue the Warrants to the Buyer pursuant to this
Agreement is conditioned upon the satisfaction of the following conditions
precedent on or before the Closing Date (any or all of which may be waived by
the Company in its sole discretion):
(a) The receipt and acceptance by the Company of this Agreement as
evidenced by execution of this Agreement by the Company and delivery of an
executed counterpart of this Agreement to the Buyer or its legal counsel;
(b) Delivery by the Buyer to the Escrow Agent of good funds as payment
in full of an amount equal to the Purchase Price in accordance with Section 1(d)
hereof and delivery of the Exchange Shares to the Escrow Agent; and
(c) The accuracy on the Closing Date of the representations and
warranties of the Buyer contained in this Agreement as if made on the Closing
Date and the performance by the Buyer on or before the Closing Date of all
covenants and agreements of the Buyer required to be performed on or before the
Closing Date.
8. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The Company understands that the Buyer's obligation to purchase the
Note and the Preferred Shares and acquire the Warrants on the Closing Date is
conditioned upon the satisfaction of the following conditions precedent on or
before the Closing Date (any or all of which may be waived by the Buyer in its
sole discretion):
(a) Delivery by the Company to the Escrow Agent of the Note and the
certificates for the Preferred Shares and the Warrants in accordance with this
Agreement;
(b) The accuracy on the Closing Date of the representations and
warranties of the Company contained in this Agreement as if made on the Closing
Date and the performance by the Company on or before the Closing Date of all
covenants and agreements of the Company required to be performed on or before
the Closing Date and receipt by the Buyer of a certificate, dated the Closing
Date, of the Chief Executive Officer or the Chief Financial Officer of the
Company confirming such matters and such other matters as the Buyer may
reasonably request;
(c) The receipt by the Buyer of confirmation of the filing with the
Secretary of State of the State of Texas of the Statement of Resolution;
(d) The receipt by the Buyer of a certificate, dated the Closing Date,
of the Secretary of the Company certifying (1) the Articles of Incorporation and
By-Laws of the Company as in effect on the Closing Date, (2) all resolutions of
the Board of Directors (and
<PAGE>
committees thereof) of the Company relating to this Agreement and the
transactions contemplated hereby and (3) such other matters as reasonably
requested by the Buyer;
(e) The Transfer Agent shall have acknowledged receipt of the Transfer
Agent Instruction in the form attached hereto as ANNEX VI and shall not have
objected to or declined to follow the instructions contained therein;
(f) Receipt by the Buyer on the Closing Date of an opinion of Weil,
Gotschal & Manges, LLP, counsel for the Company, dated the Closing Date, in
form, scope and substance reasonably satisfactory to the Buyer, to the effect
set forth in ANNEX VIII attached hereto; and
(g) Receipt by the Buyer on the Closing Date of an opinion of Dean H.
Fisher, Senior Vice President, General Counsel and Secretary of the Company,
dated the Closing Date in form, scope and substance reasonably satisfactory to
the Buyer, to the effect set forth in ANNEX IX attached hereto.
9. MISCELLANEOUS.
(a) GOVERNING LAW. This Agreement shall be governed by and interpreted in
accordance with the laws of the State of New York.
(b) COUNTERPARTS. This Agreement may be executed in counterparts and
by the parties hereto on separate counterparts, all of which together shall
constitute one and the same instrument. A facsimile transmission of this
Agreement bearing a signature on behalf of a party hereto shall be legal and
binding on such party. Although this Agreement is dated as of the date first
set forth above, the actual date of execution and delivery of this Agreement by
each party is the date set forth below such party's signature on the signature
page hereof. Any reference in this Agreement or in any of the documents
executed and delivered by the parties hereto in connection herewith to (1) the
date of execution and delivery of this Agreement by the Buyer shall be deemed a
reference to the date set forth below the Buyer's signature on the signature
page hereof, (2) the date of execution and delivery of this Agreement by the
Company shall be deemed a reference to the date set forth below the Company's
signature on the signature page hereof and (3) the date of execution and
delivery of this Agreement or the date of execution and delivery of this
Agreement by the Buyer and the Company shall be deemed a reference to the later
of the dates set forth below the signatures of the parties on the signature page
hereof. The Company and the Buyer hereby represent, warrant, covenant and agree
that this Agreement has been signed and delivered in the State of New York and
it is the intention of the Company and the Buyer that this Agreement shall be
construed accordingly for all purposes.
(c) HEADINGS, ETC.. The headings, captions and footers of this Agreement
are for convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement.
(d) SEVERABILITY. If any provision of this Agreement shall be invalid
or unenforceable in any jurisdiction, such invalidity or unenforceability shall
not affect the validity or enforceability of
<PAGE>
the remainder of this Agreement or the validity or enforceability of this
Agreement in any other jurisdiction.
(e) AMENDMENTS. No amendment, modification, waiver, discharge or
termination of any provision of this Agreement nor consent to any departure by
the Buyer or the Company therefrom shall in any event be effective unless the
same shall be in writing and signed by the party to be charged with enforcement,
and then shall be effective only in the specific instance and for the purpose
for which given. No course of dealing between the parties hereto shall operate
as an amendment of this Agreement.
(f) WAIVERS. Failure of any party to exercise any right or remedy
under this Agreement or otherwise, or delay by a party in exercising such right
or remedy, or any course of dealings between the parties, shall not operate as a
waiver thereof or an amendment hereof, nor shall any single or partial exercise
of any such right or power, or any abandonment or discontinuance of steps to
enforce such a right or power, preclude any other or further exercise thereof or
exercise of any other right or power.
(g) NOTICES. Any notices required or permitted to be given under the
terms of this Agreement shall be delivered personally (which shall include
telephone line facsimile transmission with answer back confirmation) or by
courier and shall be effective upon receipt, if delivered personally or by
courier, in the case of the Company addressed to the Company at its address
shown in the introductory paragraph of this Agreement, Attention: Chief
Executive Officer (telephone line facsimile transmission number (281) 529-4650
or, in the case of the Buyer, at its address or telephone line facsimile
transmission number shown on the signature page of this Agreement, with a copy
to Genesee International, Inc., 10500 N.E. 8th Street, Suite 1920, Bellevue,
Washington 98004-4332 (telephone line facsimile transmission number
(425) 462-4645) or such other address or telephone line facsimile transmission
number as a party shall have provided by notice to the other party in accordance
with this provision. The Buyer hereby designates as its address for any notice
required or permitted to be given to the Buyer pursuant to the Note or the
Statement of Resolution the address shown on the signature page of this
Agreement, with a copy to: Advantage Fund Limited, c/o Genesee International,
Inc., 10500 N.E. 8th Street, Suite 1920, Bellevue, Washington 98004-4332
(facsimile number (425) 462-4645), until the Buyer shall designate another
address for such purpose.
(h) ASSIGNMENT. Prior to the Closing Date, with the prior written
consent of the Company, which consent will not be unreasonably withheld, the
Buyer shall have the right to assign its rights and obligations under this
Agreement with respect to the purchase of all or any portion of the Note or the
Preferred Shares and the issuance of the related Warrants, provided any such
assignee, by written instrument duly executed by such assignee, assumes all
obligations of the Buyer hereunder with respect to the purchase of the portion
of the Note or the Preferred Shares and the acquisition of the Warrants so
assigned and makes the same representations and warranties with respect thereto
as the Buyer makes in this Agreement, whereupon the Buyer shall be relieved of
any further obligations, responsibilities and liabilities with respect to the
purchase of all or the portion of the Note or the Preferred Shares and
acquisition of the related Warrants the obligation for the purchase or
acquisition of which has been so assigned. In the case of any
<PAGE>
such assignment, the Company shall agree in writing with such assignee to make
available to such assignee the benefits of the Registration Rights Agreement
with respect to the Common Shares issuable on conversion of the Note or the
Preferred Shares and exercise of the Warrants with respect to which the purchase
under this Agreement has been so assigned. Any transfer of the Note, the
Preferred Shares or the Warrants by the Buyer after the Closing Date shall be
made in accordance with Section 4(a). After the Closing Date, the Buyer shall
have the right to assign its rights and obligations under this Agreement in
connection with any transfer of the Buyer's rights under the Registration Rights
Agreement by compliance with the provisions of Section 9 of the Registration
Rights Agreement.
(i) SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The respective
representations, warranties, covenants and agreements of the Buyer and the
Company contained in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement shall survive the delivery of payment
for the Preferred Shares and shall remain in full force and effect regardless of
any investigation made by or on behalf of them or any person controlling or
advising any of them.
(j) ENTIRE AGREEMENT. This Agreement and its Schedule and Annexes set
forth the entire agreement between the parties hereto with respect to the
subject matter hereof and supersede all prior agreements and understandings,
whether written or oral, with respect thereto.
(k) TERMINATION. (1) The Buyer shall have the right to terminate this
Agreement by giving notice to the Company at any time at or prior to the Closing
Date if:
(A) the Company shall have failed, refused, or been unable at or prior
to the date of such termination of this Agreement to perform any of its
obligations hereunder;
(B) any other condition of the Buyer's obligations hereunder is not
fulfilled when required to be fulfilled; or
(C) the closing shall not have occurred on a Closing Date on or before
September 5, 1998, other than solely by reason of a breach of this
Agreement by the Buyer.
Any such termination shall be effective upon the giving of notice thereof by the
Buyer. Upon such termination, neither the Buyer nor the Company shall have any
further obligation hereunder or in connection herewith one to the other.
(2) The Company shall have the right to terminate this Agreement by
giving notice to the Buyer at any time at or prior to the Closing Date if:
(A) the Buyer shall have failed, refused, or been unable at or prior
to the date of such termination of this Agreement to perform any of its
obligations hereunder;
<PAGE>
(B) any other condition of the Company's obligations hereunder is not
fulfilled when required to be fulfilled; or
(C) the closing shall not have occurred on a Closing Date on or before
September 5, 1998, other than solely by reason of a breach of this
Agreement by the Company.
Any such termination shall be effective upon the giving of notice thereof by the
Company. Upon such termination, neither the Company nor the Buyer shall have
any further obligation hereunder or in connection herewith one to the other.
(l) FURTHER ASSURANCES. Each party to this Agreement will perform any
and all acts and execute any and all documents as may be necessary and proper
under the circumstances in order to accomplish the intents and purposes of this
Agreement and to carry out its provisions.
(m) PUBLIC STATEMENTS, PRESS RELEASES, ETC. The Company and the Buyer
shall have the right to approve before issuance any press releases or any other
public statements with respect to the transactions contemplated hereby;
provided, however, that the Company shall be entitled, without the prior
approval of the Buyer, to make any press release or other public disclosure with
respect to such transactions as is required by applicable law or Nasdaq
regulation (although the Buyer shall be consulted by the Company in connection
with any such press release or other public disclosure prior to its release and
shall be provided with a copy thereof).
(n) CONSTRUCTION. The language used in this Agreement will be deemed
to be the language chosen by the parties to express their mutual intent, and no
rules of strict construction will be applied against any party.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by the Buyer
and the Company by their respective officers or other representatives thereunto
duly authorized on the respective dates set forth below.
PRINCIPAL AMOUNT OF NOTE: $
PURCHASE PRICE: $
NUMBER OF PREFERRED SHARES:
NUMBER OF EXCHANGE SHARES:
WILLIS GROUP, LLC
By:
----------------------------------
Name:
Title:
Date:
---------------------------------
Address:
Facsimile No.:
EQUALNET COMMUNICATIONS CORP.
By:
-----------------------------------
Name:
Title:
Date:
--------------------------------
<PAGE>
SCHEDULE 3(b)-1
CERTAIN ANTIDILUTION ADJUSTMENTS
--------------------------------
[To come from the Company]
<PAGE>
SCHEDULE 3(b)-2
CERTAIN REGISTRATION RIGHTS
---------------------------
1. Holders of the Company's Series A Convertible Preferred Stock
have demand and piggyback registration rights.
2. Holders of Series C Preferred Stock have demand registration
rights.
3. RFC Capital Corp. has demand and piggyback registration rights.
<PAGE>
SCHEDULE 3(b)-1
CERTAIN NASDAQ MATTERS
----------------------
[To come from the Company]
<PAGE>
SCHEDULE 3(i)
CERTAIN LEGAL PROCEEDINGS
-------------------------
[To come from the Company]
<PAGE>
EXHIBITS 10.25
AND 10.34
Draft of 9/3/98
ANNEX I ANNEX I
TO TO
NOTE PURCHASE NOTE PURCHASE
AND EXCHANGE AGREEMENT
AGREEMENT
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "1933 ACT"). THE ISSUANCE TO THE HOLDER OF THIS NOTE OF THE SHARES OF
COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE AND IN PAYMENT OF INTEREST ON
THIS NOTE ARE NOT COVERED BY A REGISTRATION STATEMENT UNDER THE 1933 ACT. THIS
NOTE HAS BEEN ACQUIRED, AND SUCH SHARES MUST BE ACQUIRED, FOR INVESTMENT ONLY
AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF REGISTRATION OF
THE RESALE THEREOF UNDER THE 1933 ACT OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY IN FORM, SCOPE AND SUBSTANCE TO THE COMPANY THAT SUCH REGISTRATION
IS NOT REQUIRED.
EQUALNET COMMUNICATIONS CORP.
6% SENIOR SECURED CONVERTIBLE NOTE DUE 2001
No. 2 $1,500,000.00
New York, New York
September 4, 1998
FOR VALUE RECEIVED, EQUALNET COMMUNICATIONS CORP., a Texas corporation
(hereinafter called the "Company"), hereby promises to pay to WILLIS GROUP LLC,
5005 Woodway, Suite 350, Houston, Texas 77056, or registered assigns (the
"Holder") or order, the sum of One Million Five Hundred Thousand Dollars
($1,500,000.00), on the Maturity Date, and to pay interest on the unpaid
principal balance hereof at the Applicable Rate from the date hereof, until the
same becomes due and payable, whether at maturity or upon acceleration or by
repurchase in accordance with the terms hereof or otherwise. Any amount of
principal of or interest on this Note which is not paid when due shall bear
interest at the Default Rate from the due date thereof until the same is paid
("Default Interest"). Interest shall be payable in arrears on each Interest
Payment Date, commencing on November 15, 1998, on the principal amount
outstanding on such date. Interest on this Note shall be computed on the basis
of a 360-day year of 12 30-day months and actual days elapsed. No interest
shall be payable on an Interest Payment Date on any portion of the principal
amount of this Note which shall have been converted or redeemed prior to such
Interest Payment Date so long as the Company shall have complied in full with
its obligations with respect to such conversion or redemption.
<PAGE>
All payments of principal of and premium, if any, and interest on this
Note shall be made in lawful money of the United States of America, or, at the
option of the Company and subject to the provisions of this Note, interest
payable on the Interest Payment Dates may be paid in whole or in part in
Interest Notes. All cash payments shall be made by wire transfer of immediately
available funds to such account as the Holder may from time to time designate by
written notice in accordance with the provisions of this Note. Whenever any
amount expressed to be due by the terms of this Note is due on any day which is
not a Business Day, the same shall instead be due on the next succeeding day
which is a Business Day and, in the case of any Interest Payment Date which is
not the date on which this Note is paid in full, the extension of the due date
thereof shall not be taken into account for purposes of determining the amount
of interest due on such date. Certain capitalized terms used in this Note are
defined in Article VI.
The obligations of the Company under this Note shall rank in right of
payment on a parity with all other unsubordinated obligations of the Company for
indebtedness for borrowed money or the purchase price of property. This Note is
issued pursuant to the Note Purchase Agreement and the Holder of this Note and
this Note are subject to the terms of the Note Purchase Agreement. The
obligations of the Company under this Note are secured pursuant to, and the
Holder of this Note is entitled to the benefits of, the Security Agreement.
This Note is one of the several 6% Senior Secured Convertible Notes due 2001 in
the original aggregate principal amount of $3,000,000.00 issued by the Company
pursuant to the Master Purchase Agreement, the Note Purchase Agreement and the
Other Note Purchase Agreements.
The following terms shall apply to this Note:
ARTICLE I
INTEREST NOTES; NO PREPAYMENT
1.1 ISSUANCE OF INTEREST NOTES IN LIEU OF CASH INTEREST. (a) If the
Company exercises its option to make a payment of interest on this Note wholly
or partly in Interest Notes (herein sometimes called the "Interest Note Payment
Option"), the issuance of Interest Notes upon such exercise of the Interest Note
Payment Option shall have been authorized by the Board of Directors of the
Company.
(b) The Company shall not be permitted to exercise the Interest Note
Payment Option with respect to any payment of interest on this Note if:
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<PAGE>
(i) the number of shares of Common Stock authorized, unissued and
unreserved for all purposes, or held in the Company's treasury, is
insufficient to permit the conversion in full of the Interest Notes to be
so issued;
(ii) the issuance or delivery of such Interest Note or the public
resale of the shares of Common Stock issuable upon conversion of such
Interest Note by the Holder would require registration with or approval of
any governmental authority under any law or regulation, and such
registration or approval has not been effected or obtained or is not in
effect or the Registration Statement is unavailable for use by the Holder
for the resale of such shares of Common Stock; provided, however, that
this limitation shall not be deemed to be applicable prior to the date
which is 105 days after the Issuance Date, if the Registration Statement is
on Form S-3, or the date which is 120 days after the Issuance Date, if the
Registration Statement is on Form S-1, if this limitation otherwise would
be applicable solely because the Registration Statement shall not yet have
been declared effective, so long as the Company shall be in compliance in
all material respects with its obligations under the Registration Rights
Agreement;
(iii) the shares of Common Stock issuable upon conversion of such
Interest Note shall not at the time of issuance have been authorized for
listing, upon official notice of issuance, on the principal securities
exchange on which the Common Stock is then listed and traded;
(iv) an Event of Default has occurred and is continuing;
(v) any Repurchase Event shall have occurred and the Holder or the
holder of any Other Note shall have executed repurchase rights by reason
thereof and the Company shall not have paid the Repurchase Price hereof or
the repurchase price thereof; or
(vi) the Common Stock is neither (i) listed or admitted for trading on
a national securities exchange nor (ii) quoted on the Nasdaq or the Nasdaq
SmallCap.
(c) If the Interest Note Payment Option is elected, the Company shall
issue and deliver or cause to be delivered to the Holder on or before the due
date of such interest payment an Interest Note, duly executed on behalf of the
Company, in the principal amount equal to the total amount of lawful money of
the United States of America which the Holder would receive if the aggregate
amount of interest on this Note which is being paid in such Interest Note were
being paid in such lawful money; provided, however, that if in connection with
any such election the Company shall have failed to deliver such Interest Note to
the Holder within three Trading Days after the applicable Interest Payment Date,
then the Company shall not be entitled to use the
-3-
<PAGE>
Interest Note Payment Option in respect of such Interest Payment Date, such cash
interest shall be immediately due and payable and the Company shall pay the
interest for such Interest Payment Date in cash with Default Interest, at the
rate provided in this Note, from such Interest Payment Date until paid.
(d) If the Company exercises the Interest Note Payment Option with
respect to a payment of interest on this Note, the Company shall deliver to the
Holder, on or prior to the date on which such Interest Note is to be received by
the Holder, a Company Certificate setting forth (i) the total amount of the
interest payment to which the Holder is entitled, (ii) the portion of the
interest payment being made in an Interest Note and (iii) a brief statement that
none of the conditions set forth in Section 1.1(b) has occurred and is existing.
Each Interest Note shall be issued in the name of the Holder or its nominee. In
addition, on or before the date of issuance of each Interest Note the Company
shall notify the Transfer Agent of the issuance of such Interest Note, the
principal amount thereof and the name of the registered holder thereof.
(e) Each Interest Note, when issued pursuant to and in compliance with
this Section 1.1, shall be, and for all purposes shall be deemed to be, duly
authorized and a legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, and the shares of Common Stock
issuable upon conversion of such Interest Note, when so issued, shall be, and
for all purposes shall be deemed to be, validly issued, fully paid and
nonassessable shares of Common Stock; the issuance and delivery of such Interest
Note and such shares is in all respects authorized; and the issuance of such
Interest Note will be, and for all purposes shall be deemed to be, in full
discharge and satisfaction of the Company's obligation to pay the interest on
this Note to which such Interest Note relates.
1.2 OPTIONAL REDEMPTION. If (1) the Company shall be in compliance
in all material respects with its obligations to the Holder and the holders of
the Other Notes (including, without limitation, its obligations under the
Transaction Documents), (2) on the date the Company Optional Redemption Notice
is given and at all times until the Redemption Date, the Registration Statement
is effective and available for use by the Holder and each holder of Other Notes
for the resale of shares of Common Stock acquired by the Holder upon conversion
of this Note or by such other holders upon conversion of the Other Notes and (3)
no Repurchase Event shall have occurred with respect to which, on the date a
Redemption Notice is to be given or on the Redemption Date, the Holder or any
holder of Other Notes shall have exercised optional repurchase rights under
Sections 5.1 and 5.2 (or the comparable provisions of any Interest Note or Other
Note) by reason of such Repurchase Event and the Company shall not have paid the
Repurchase Price to the Holder or the repurchase price has not been paid to such
holder, as the case may be, then the Company shall have the right, exercisable
by giving a Company Optional Redemption Notice not less than 30 days or more
than 60 days prior to the Redemption Date the Holders, at any time to redeem all
or from time to
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<PAGE>
time to redeem any part of the outstanding principal amount of this Note in
accordance with this Section 1.2. The Company Optional Redemption Notice shall
state that: (1) the Company is exercising its right to redeem this Note in
accordance with this Section 1.3, (2) the principal amount of this Note to be
redeemed, (3) the Redemption Event Redemption Price and (4) the Redemption Event
Redemption Date. If the Company shall redeem less than all the outstanding
principal amount of this Note, such redemption shall be made as nearly as
practical pro rata from the Holder and all holders of Other Notes. Any Company
Optional Redemption Notice under this Section 1.2 shall be given to the Holder
at its address appearing on the records of the Company. On the Redemption Date
(or such later date as the Holder surrenders this Note to the Company), the
Company shall make payment of the applicable Redemption Price to the Holder in
immediately available funds to such account as specified by the Holder in
writing to the Company at least one Business Day prior to the Redemption Date.
The Holder shall be entitled to convert this Note or the portion hereof to be
redeemed in accordance with Article II through the day prior to the Redemption
Date and (2) if the Company shall fail to pay the Redemption Price of this Note
or the portion hereof to be redeemed when due, at any time after the due date
thereof until such date as the Company pays the Redemption Price of this Note or
the portion hereof to be redeemed. This Note or any portion hereof as to which
the Holder exercises the right of conversion pursuant to Article II or the
optional repurchase right pursuant to Sections 5.1 and 5.2 may be redeemed by
the Company pursuant to this Section 1.2 on or after the date of exercise of
such conversion right or optional repurchase right, as the case may be,
regardless of whether the Company Optional Redemption Notice shall have been
given prior to, or on or after, the date of exercise of such conversion right or
optional redemption right, as the case may be.
1.3 OPTIONAL REDEMPTION BY COMPANY FOR OPTIONAL REDEMPTION EVENT.
(a) If an Optional Redemption Event occurs the Company shall have the right to
redeem at any one time with respect to such Optional Redemption Event all of the
outstanding principal amount of this Note at the Redemption Event Redemption
Price pursuant to this Section 1.3 on any Redemption Event Redemption Date, so
long as (x) on the date the Redemption Event Redemption Notice is given and at
all times to and including the applicable Redemption Event Redemption Date, no
Event of Default has occurred and is continuing and no Repurchase Event has
occurred with respect to which the Holder or the holder of any Other Note has
exercised repurchase rights pursuant to Sections 5.1 and 5.2 (or the comparable
provisions of any Interest Note or Other Note) and the Repurchase Price has not
been paid to the Holder or the repurchase price has not been paid to such
holder, as the case may be, and (y) on the date a Redemption Event Redemption
Notice is given and at all times to and including the applicable Redemption
Event Redemption Date, the Company is in compliance in all material respects
with its obligations to the Holder and the holders of the Other Notes
(including, without limitation, its obligations under the Transaction
Documents). In order to exercise its right of redemption under this Section
1.3, the Company shall
-5-
<PAGE>
give a Redemption Event Redemption Notice to the Holder not later than ten days
after an Optional Redemption Event occurs and not less than 20 days or more than
30 days prior to the Redemption Event Redemption Date stating that: (1) the
Company is exercising its right to redeem this Note in accordance with this
Section 1.3, (2) the principal amount of this Note to be redeemed, (3) the
Redemption Event Redemption Price and (4) the Redemption Event Redemption Date.
On the applicable Redemption Event Redemption Date (or such later date as the
Holder surrenders this Note to the Company) the Company shall pay to or upon the
order of the Holder by wire transfer of immediately available funds to such
account as shall be specified for such purpose by the Holder at least one
Business Day prior to the Redemption Event Redemption Date an amount equal to
the Redemption Event Redemption Price of this Note.
(b) The Company shall not be entitled to give a Redemption Event
Redemption Notice or to redeem any portion of this Note with respect to which
the Holder has given a Conversion Notice. Notwithstanding the giving of a
Redemption Event Redemption Notice, the Holder shall be entitled to convert this
Note in accordance with the terms of this Note by giving a Conversion Notice at
any time prior to the later of (1) the date which is one Business Day prior to
the applicable Redemption Event Redemption Date and (2) the date on which the
Company pays the Redemption Event Redemption Price of this Note to the Holder.
The Redemption Event Redemption Price set forth in an Redemption Event
Redemption Notice shall be adjusted to reflect the reduced outstanding principal
amount of this Note and related accrued interest and Default Interest on the
Redemption Event Redemption Date resulting from any permitted conversions of
this Note after the Redemption Event Redemption Notice is given.
(c) Any redemption of this Note pursuant to this Section 1.3 shall be
made at the same time as a redemption by the Company of the Interest Notes and
the Other Notes. The Company shall not redeem any of the Interest Notes or the
Other Notes pursuant to the provisions thereof similar to this Section 1.3 or
repurchase or otherwise acquire any of the Interest Notes or the Other Notes
(other than a mandatory redemption pursuant to provisions of the Interest Notes
or the Other Notes comparable to Section 2.4) unless the Company offers
simultaneously to redeem, repurchase or otherwise acquire a pro rata portion
(based on outstanding principal amount) of this Note for cash at the same price
as the Interest Note or Interest Notes or the Other Note or Other Notes.
1.4 NO PREPAYMENT. Except as otherwise specifically provided in
Section 1.2 and 1.3, this Note may not be prepaid, redeemed or repurchased at
the option of the Company prior to September 4, 2001.
-6-
<PAGE>
ARTICLE II
CONVERSION; CERTAIN MANDATORY REDEMPTION
RIGHTS AND OBLIGATIONS
2.1 CONVERSION RIGHT. Upon the terms and subject to the limitations
contained herein, the Holder shall have the right at any time on or after the
earlier of (x) the SEC Effective Date and (y) the date which is 90 days on and
after the Issuance Date, and in either such case at any time prior to the
payment in full of this Note, to convert at any time all or from time to time
any part of the outstanding and unpaid principal amount of this Note, and
accrued and unpaid interest on the principal amount to be converted and Default
Interest on any such interest, into fully paid and nonassessable shares of
Common Stock at the Conversion Price in effect on the date the applicable
Conversion Notice is given in accordance with this Note. Notwithstanding any
other provision of this Note, in no event shall the Holder be entitled at any
time to convert any portion of the principal amount of this Note (and accrued
and unpaid interest thereon and Default Interest on any such interest) in excess
of that portion of the principal amount of this Note (and accrued and unpaid
interest thereon and Default Interest on any such interest) upon conversion of
which the sum of (1) the number of shares of Common Stock beneficially owned by
the Holder (including shares of Common Stock beneficially owned by all
Aggregated Persons) (other than shares of Common Stock deemed beneficially owned
by the Holder or any Aggregated Person of the Holder through the ownership of
(x) the unconverted portion of the principal amount of this Note, any Interest
Notes and the Other Notes and accrued and unpaid interest thereon and on any
such interest and (y) the unconverted or unexercised portion of the Warrants or
any instrument which contains limitations similar to those set forth in this
sentence) and (2) the number of shares of Common Stock issuable upon conversion
of the portion of the principal amount of this Note and accrued and unpaid
interest thereon and Default Interest on any such interest with respect to which
the determination in this sentence is being made, would result in beneficial
ownership by the Holder and all Aggregated Persons of the Holder of more than
4.9% of the outstanding shares of Common Stock. For purposes of the immediately
preceding sentence, beneficial ownership shall be determined in accordance with
Section 13(d) of the 1934 Act, and Regulation 13D-G thereunder, except as
otherwise provided in clause (1) of the immediately preceding sentence. For
purposes of the second preceding sentence, the Company shall be entitled to
rely, and shall be fully protected in relying, on any statement or
representation made by the Holder to the Company in connection with a particular
conversion, without any obligation on the part of the Company to make any
inquiry or investigation or to examine its records or the records of any
transfer agent for the Common Stock and without any liability of the Company
with respect thereto. The number of shares of Common Stock to be issued upon
each conversion of this Note shall be determined by dividing the sum of (1) that
portion of the principal amount of this Note to be converted plus (2) accrued
and unpaid interest on such principal amount to the date the Conversion Notice
for such conversion is
-7-
<PAGE>
given plus (3) accrued and unpaid Default Interest, if any, on the amount
referred to in the immediately preceding clause (2) to the date such Conversion
Notice is given, by the Conversion Price in effect on the date the Conversion
Notice for such conversion is given.
2.2 AUTHORIZED SHARES. The Company covenants that, during the period
the conversion rights exist, the Company will reserve from its authorized,
unissued and otherwise unreserved Common Stock free from preemptive and similar
rights 13,043,468 shares (such amount to be subject to equitable adjustment from
time to time on terms reasonably acceptable to the Holder for stock splits,
stock dividends, combinations, capital reorganizations and similar events
relating to the Common Stock occurring on or after the Issuance Date) to provide
for the issuance of Common Stock upon the conversion in full of this Note, the
Interest Notes and the Other Notes, subject to reduction from time to time by
the number of shares of Common Stock issued on conversion of this Note, the
Interest Notes and the Other Notes. The Company shall, from time to time,
authorize and reserve additional shares of Common Stock, free from preemptive
and similar rights, to be issuable pursuant to the terms of this Note as shall
be necessary to ensure that an adequate number of shares of Common Stock are at
all times authorized and reserved for issuance upon conversion in full of this
Note, the Interest Notes and the Other Notes. The Company shall notify the
Holder promptly, but in no event more than ten Business Days, after the Company
so reserves additional shares of Common Stock, which notice shall set forth the
number of additional shares of Common Stock so reserved. If at any time the
number of authorized but unissued shares of Common Stock not reserved or
required to be reserved for any other purpose shall be insufficient to effect
the conversion of this Note, all Interest Notes and all Other Notes, the Company
promptly shall seek, and use its best efforts to obtain and complete, such
corporate action as may, in the opinion of its counsel, be necessary to increase
its authorized but unissued shares of Common Stock to such number of shares as
shall be sufficient for such purpose. The Company represents and warrants that
upon issuance, such shares of Common Stock will be duly and validly issued,
fully paid and non-assessable. The Company agrees that its issuance of this
Note shall constitute full authority to its officers and agents who are charged
with the duty of executing stock certificates to execute and issue the necessary
certificates for shares of Common Stock upon the conversion of this Note.
2.3 METHOD OF CONVERSION. (a) The right of the Holder to convert
this Note shall be exercised by delivering (which may be made by telephone line
facsimile transmission) to the Transfer Agent at the addresses or telephone line
facsimile transmission number provided in or pursuant to the Transfer Agent
Instruction, a Conversion Notice. On the date the Conversion Notice is
delivered, the Company shall acknowledge the Conversion Notice and forward the
Conversion Notice as so acknowledged to the Transfer Agent. The number of
shares of Common Stock to be issued upon each conversion of this Note shall be
the number set forth in the applicable
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<PAGE>
Conversion Notice, which number shall be conclusive absent manifest error. The
Company shall notify the Holder of any claim by the Company of manifest error in
a Conversion Notice within one Trading Day after the Holder gives such
Conversion Notice and no such claim of error shall limit or delay performance of
the Company'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 for
all purposes to be in proper form unless the Company notifies the Holder by
telephone line facsimile transmission within one Trading Day after a Conversion
Notice has been given (which notice from the Company 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 Holder promptly
undertakes to correct all such defects. If the Company shall have notified the
Transfer Agent and such holder of any such manifest error, and the Company and
such holder do not agree as to a resolution of such manifest error on or before
the date of such notice by the Company of an error in such Conversion Notice,
the Company shall on the date such notice is given submit the dispute to Ernst &
Young LLP or another firm of independent public accountants of recognized
national standing (the "Auditors") for determination and shall instruct the
Auditors to resolve such dispute and to notify the Company, the Transfer Agent
and such holder within one Trading Day after such dispute is submitted to the
Auditors. Immediately after receipt of timely notice of the Auditors'
determination (but in any event within three Trading Days after the applicable
Conversion Notice is given to the Transfer Agent), the Transfer Agent shall
issue to the converting Holder any additional shares of Common Stock to which
such holder is entitled based on the determination of the Auditors. The Transfer
Agent is authorized and directed to rely on the Auditors' determination. If the
Auditors shall fail to notify the Transfer Agent of their determination within
three Trading Days after the applicable Conversion Notice is given to the
Transfer Agent, then the Transfer Agent shall, within three Trading Days after
receipt of the applicable Conversion Notice, issue to the converting holder any
additional shares of Common Stock to which such Holder is entitled based on the
applicable Conversion Notice. The Company shall pay any transfer or issuance
taxable payable in connection with any conversion of this Note except that the
Company shall not be required to pay any tax which may be payable in respect of
any transfer involved in the issuance and delivery of shares of Common Stock or
other securities or property on conversion of this Note in a name other than
that of the Holder, and the Company shall not be required to issue or deliver
any such shares or other securities or property unless and until the person or
persons requesting the issuance thereof shall have paid to the Company the
amount of any such tax or shall have established to the satisfaction of the
Company that such tax has been paid. The Holder shall be responsible for the
amount of any withholding tax payable in connection with any conversion of this
Note.
(b) If the Holder elects to convert this Note in accordance with
Section 2.1(a), the Holder shall not be required to surrender this Note
physically unless the entire unpaid principal amount of this Note is so
converted. The Company shall
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<PAGE>
maintain records showing the principal amount so converted and the dates of such
conversions or shall use such other method, reasonably satisfactory to the
Holder, so as not to require physical surrender of this Note upon each such
conversion. In the event of any dispute or discrepancy, such records of the
Company shall be controlling and determinative in the absence of manifest error.
Notwithstanding the foregoing, if any portion of this Note is converted without
physical surrender of this Note to the Company as aforesaid, the Holder may not
transfer this Note unless (1) the Holder first physically surrenders this Note
to the Company, whereupon the Company will forthwith issue and deliver upon the
order of the Holder a new note of like tenor, registered as the Holder (upon
payment by the Holder of any applicable transfer taxes) may request,
representing in the aggregate the remaining unpaid principal amount of this Note
and (2) such transfer is otherwise in compliance with Section 7.7 hereof. The
Company may by notice to the Holder from time to time require the Holder to
surrender this Note in exchange for the issuance by the Company of a new Note in
a principal amount equal to the outstanding principal amount of this Note and
otherwise having terms identical to this Note. Such new Note shall be delivered
by the Company to the Holder within three Trading Days after the Company
receives this Note from the Holder in response to such notice. The Holder and
any assignee, by acceptance of this Note, acknowledge and agree that, by reason
of the provisions of this paragraph, following conversion of a portion of this
Note, the unpaid and unconverted principal amount of this Note represented by
this Note may be less than the amount stated on the face hereof.
(c) In case of any consolidation or merger of the Company with any
other corporation (other than a wholly-owned subsidiary of the Company) in which
the Company is not the surviving corporation, or in case of any sale or transfer
of all or substantially all of the assets of the Company, 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 Company shall make
appropriate provision or cause appropriate provision to be made so that the
Holder shall have the right thereafter to convert this Note into the kind of
shares of stock and other securities and property receivable upon such
consolidation, merger, sale, transfer or share exchange by the persons who were
holders of Common Stock 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 Holder on a
basis as nearly as practical as such rights existed prior to such consolidation,
merger, sale, transfer or share exchange. 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 either securities, cash or other
assets upon completion of such transaction, the Company shall provide or cause
to be provided to the Holder the right to elect the securities, cash or other
assets into which this Note 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
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<PAGE>
elect, limitations on the period in which such election shall be made, and the
effect of failing to exercise the election). The Company 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.
Whenever the Company shall propose to take any of the actions
specified in this Section 2.3(c), the Company shall cause a notice to be mailed
to the Holder at least 20 days prior to the date on which the books of the
Company will close or on which a record will be taken for such action. Such
notice shall specify the action proposed to be taken by the Company 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.
(d) Upon receipt by the Transfer Agent from the Holder of a Conversion
Notice meeting the requirements for conversion as provided in Section 2.1(a) and
this Section 2.3, the Company shall issue and deliver or cause to be issued and
delivered to the Holder certificates for the Common Stock issuable upon such
conversion by the close of business on the third Trading Day after the date of
such receipt, and as of the close of business on the date of receipt of such
Conversion Notice the Holder shall be deemed to be the holder of record of the
Common Stock issuable upon such conversion, the outstanding principal amount and
the amount of accrued and unpaid interest and Default Interest on this Note
shall be reduced to reflect such conversion, and all rights with respect to the
portion of this Note being so converted shall forthwith terminate except the
right to receive the Common Stock or other securities, cash or other assets, as
herein provided, on such conversion except as otherwise provided herein. If the
Holder shall have given a Conversion Notice in accordance with the terms of this
Note, the Company's obligation to issue and deliver the certificates for Common
Stock shall be absolute and unconditional, irrespective of any action or
inaction by the 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 Company to the Holder, or any setoff, counterclaim,
recoupment, limitation or termination, or any breach or alleged breach by the
Holder or any other person of any obligation to the Company or any violation or
alleged violation of law by the Holder or any other person, and irrespective of
any other circumstance which might otherwise limit such obligation of the
Company to the Holder in connection with such conversion. The occurrence of an
event which requires an equitable adjustment of the Market Price as contemplated
by the definition thereof in Section 6.1 shall in no way restrict or delay the
right of the Holder to receive shares of Common Stock upon conversion of this
Note and the Company shall use its best efforts to implement such adjustment on
terms reasonably acceptable to the Holder within two Business Days after such
occurrence. If the Company fails to issue and deliver the certificates for the
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Common Stock to the Holder pursuant to the first sentence of this Section 2.3(d)
as and when required to do so, in addition to any other liabilities the Company
may have hereunder and under applicable law (1) the Company shall pay or
reimburse the Holder on demand for all out-of-pocket expenses, including,
without limitation, fees and expenses of legal counsel, incurred by the Holder
as a result of such failure, (2) the Conversion Percentage used to determine the
Conversion Price applicable to such conversion shall be reduced by one
percentage point from the Conversion Percentage otherwise used to calculate the
Conversion Price applicable to such conversion or, if such conversion is based
on the Ceiling Price, the ceiling price used to determine the Conversion Price
applicable to such conversion shall be reduced by one percentage point from the
amount that the Conversion Price otherwise would have been without reduction
pursuant hereto, in either case, for each Trading Day after such third Trading
Day until such shares of Common Stock are delivered to the Holder and (3) the
Holder may by notice (which may be given by mail, courier, personal service or
telephone line facsimile transmission) or oral notice (promptly confirmed in
writing) given at any time prior to delivery to the Holder of the shares of
Common Stock issuable upon such conversion of this Note, rescind such
conversion, whereupon the Holder shall have the right to convert this Note
thereafter in accordance herewith.
(e) No fractional shares of Common Stock shall be issued upon
conversion of this Note but, in lieu of any fraction of a share of Common Stock
which would otherwise be issuable in respect of the aggregate number of such
shares converted at one time by the same holder, the Company may round the
number of shares of Common Stock issued on such conversion up to the next
highest whole share or may pay lawful money of the United States of America for
such fractional share, based on a value of one share of Common Stock being equal
to the Market Price, as reported by Bloomberg, L.P, of the Common Stock on the
date the applicable Conversion Notice is given to the Company.
2.4 LIMITATION ON SHARES ISSUABLE ON CONVERSION; MANDATORY
REDEMPTION. (a) Notwithstanding any other provision herein, unless the
Stockholder Approval shall have been obtained from the stockholders of the
Company or waived by Nasdaq (or other appropriate stock exchange or market), so
long as the Common Stock is listed on the Nasdaq, the Nasdaq SmallCap, the NYSE
or the AMEX the Company shall not be required to issue upon conversion of this
Note and the Interest Notes a number of shares of Common Stock in excess of the
Maximum Share Amount. The Company shall maintain records which show the number
of shares of Common Stock issued by the Company upon conversion from time to
time of this Note and any Interest Notes, which records shall be controlling in
the absence of manifest error. The Company shall maintain records which show
the principal amount of Interest Notes issued by the Company pursuant to Section
1.1 in payment of interest on this Note and issued pursuant to any Interest Note
in payment of interest thereon, which records shall be controlling in the
absence of manifest error. Each Interest Note shall be allocated a
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portion of the Maximum Share Amount allocated to this Note and the other
Interest Notes outstanding at the time of issuance of such Interest Note, based
on the outstanding principal amounts thereof at the time of such issuance, and
the certificate for such Interest Note shall bear a notation as to the
certificate number of this Note. Upon surrender of this Note for transfer or re-
registration hereof (or, at the option of the Holder, for conversion pursuant to
Section 2.1(a) of less than all of this Note), the Company shall make a notation
on the new Note issued upon such transfer or re-registration or evidencing such
unconverted portion of this Note, as the case may be, as to the remaining number
of shares of Common Stock from the Maximum Share Amount remaining available for
conversion of the Note evidenced by such new certificate. If this Note is
surrendered for split-up into two or more Notes representing an aggregate
principal amount equal to the principal amount of this Note at the time so
surrendered (as reduced by any contemporaneous conversion of this Note), each
Note issued on such split-up shall bear a notation of the portion of the Maximum
Share Amount allocated thereto determined by pro rata allocation from among the
remaining Maximum Share Amount at the time this Note is so surrendered. If this
Note is converted in full, repaid, repurchased or redeemed, all of the Maximum
Share Amount which remains unissued after such conversion, repayment, repurchase
or redemption shall be re-allocated (1) to all Interest Notes and Other Notes
held by the Holder at the close of business on the Conversion Date for such
conversion, based on the outstanding principal amounts thereof, and (2) if the
Holder does not hold any Interest Notes or Other Notes at the close of business
on such Conversion Date, to the Other Notes, based on the principal amounts
thereof outstanding at the close of business on such Conversion Date. If any
Other Note is converted in full, repaid, repurchased or redeemed, all of the
portion of the Maximum Share Amount (as defined in such Other Note) of such
Other Note not re-allocated to Other Notes held by the holder of such Other Note
and which remains unissued after such conversion, repayment, repurchase or
redemption shall be re-allocated to this Note, the Interest Notes and the Other
Notes outstanding at the close of business on the date of such conversion,
repayment, repurchase or redemption of the Other Note so converted, repaid,
repurchased or redeemed pro rata based on the principal amounts outstanding at
the close of business on such date.
(b) (1) If on or after December 16, 1998 and on or prior to September
4, 2001 a Maximum Share Amount Inconvertibility occurs, then the Company shall
promptly, but in no event later than five Business Days after each such
occurrence, give an Inconvertibility Notice to the Holder (by telephone line
facsimile transmission at such number as the Holder has specified in writing to
the Company for such purposes or, if the Holder shall not have specified any
such number, by overnight courier at the Holder's address as the same appears on
the records of the Company) and the Holder may at any time after such occurrence
give an Inconvertibility Notice to the Company. If the Company shall have given
or been required to give any Inconvertibility Notice, or if the Holder shall
have given any Inconvertibility Notice, then within the applicable
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Redemption Election Period the Holder shall have the right by a Redemption
Election given to the Company (which may be contained in the Inconvertibility
Notice given by the Holder) to direct the Company to redeem the portion of this
Note (which, if applicable, shall be all of this Note) as shall not, on the
Business Day prior to the applicable Share Limitation Redemption Date be
convertible into shares of Common Stock by reason of the limitations set forth
in Section 2.4(a) on the applicable Share Limitation Redemption Date, at a price
equal to the Share Limitation Redemption Price, payable on the date which is
five Business Days after the Holder gives such Redemption Election. If the
Holder directs the Company to redeem this Note or any portion hereof and, prior
to the date the Company is required to redeem this Note or such portion hereof,
the Company would have been able, within the limitations set forth in Section
2.4(a), to convert all of this Note (determined without regard to the
limitation, if any, on beneficial ownership of shares of Common Stock by the
Holder contained in the second sentence of Section 2.1) on any ten Trading Days
within any period of 15 consecutive Trading Days commencing after the period of
20 consecutive Trading Days which gave rise to the applicable Inconvertibility
Notice from the Company or the Holder, as the case may be, had the Holder
exercised its right to convert this Note in full on each of such ten Trading
Days within such 15 Trading Day period, then the Company shall not be required
to redeem any of this Note by reason of such Inconvertibility Notice.
(2) An Inconvertibility Notice or a Redemption Election given by the
Holder shall be deemed for all purposes to be in proper form unless the Company
notifies the Holder in writing within three Business Days after an
Inconvertibility Notice or a Redemption Election has been given (which notice
shall specify all defects in the Inconvertibility Notice or Redemption
Election), and any Inconvertibility Notice or Redemption Election containing any
such defect shall nonetheless be effective on the date given if the Holder
promptly undertakes to correct all such defects. Whether or not the Holder has
given such undertaking, no such claim of error shall limit or delay performance
of the Company's obligation to redeem the full amount of the portion of this
Note as to which a Redemption Election has been given and which is not in
dispute.
(c) Notwithstanding the giving of any Inconvertibility Notice by the
Company to the Holder or the giving or the absence of any Inconvertibility
Notice or Redemption Election by the Holder or any redemption of an
inconvertible portion of this Note pursuant to Section 2.4(b), thereafter the
provision of Section 2.4(b) shall continue to be applicable on any occasion
unless the Stockholder Approval shall have been obtained or waived by the
Nasdaq.
(d) On each Share Limitation Redemption Date, the Company shall make
payment in immediately available funds of the applicable Share Limitation
Redemption Price to or upon the order of the Holder as specified by the Holder
in writing to the Company at least one Business Day prior to such Share
Limitation
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Redemption Date. If the Company is required to redeem this Note or any portion
hereof pursuant to this Section 2.4, the Company shall make payment to the
Holder of an amount equal to the Share Limitation Redemption Price. Upon
redemption of less than all of this Note, promptly, but in no event later than
three Business Days after surrender of this Note to the Company, the Company
shall issue a replacement Note of like tenor having a principal amount equal to
the principal amount of this Note remaining after such redemption.
ARTICLE III
CERTAIN COVENANTS
So long as the Company shall have any obligation under this Note:
3.1 CERTAIN REPURCHASES. (a) The Company shall not itself, and
shall not permit any Subsidiary to redeem, repurchase or otherwise acquire in
any one transaction or series of related transactions any shares of Common Stock
if the number of shares so repurchased, redeemed or otherwise acquired in such
transaction or series of related transactions (excluding any Option Share
Surrender) is more than either (x) 5.0% of the number of shares of Common Stock
outstanding immediately prior to such transaction or series of related
transactions or (y) 1% of the number of shares of Common Stock 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 Company or such Subsidiary offers to purchase for
cash from the Holder at the time of such redemption, repurchase or acquisition
the same percentage of the outstanding principal amount of this Note as the
percentage of the number of outstanding shares of Common Stock to be so
redeemed, repurchased or acquired at a purchase price equal to the greater of
(i) the Premium Price on the date of purchase pursuant to this Section 3.1(a)
and (ii) the Converted Market Price on the date of purchase pursuant to this
Section 3.1(a); provided, however, that if in connection with any determination
of the purchase price payable pursuant to this Section 3.1 the amount specified
in clause (y) of the definition of the term Converted Market Price is greater
than 200% of the Ceiling Price on the date as of which such amount is
determined, then for purposes of computing the purchase price payable pursuant
to this Section 3.1 in such instance, the amount otherwise specified in clause
(y) of the definition of the term Converted Market Price shall be reduced by 20%
of the amount by which (A) the amount otherwise specified in clause (y) of the
definition of the term Converted Market Price exceeds (B) the Ceiling Price on
the date as of which such amount is determined.
(b) The Company shall not, and shall not permit any Subsidiary,
directly or indirectly to repurchase, redeem or otherwise acquire any shares of
its
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capital stock other than Common Stock other than repurchases or redemptions
of the Company's Series A Preferred Stock or Series D Convertible Preferred
Stock which are required to be made by the Company in accordance with the terms
thereof as in effect on the Issuance Date or as proposed to be amended pursuant
to the Amendment Agreement.
3.2 CERTAIN TENDER OFFERS. The Company shall not itself, and shall
not permit any Subsidiary to (1) make any Tender Offer for outstanding shares of
Common Stock unless the Company 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 Company or any Subsidiary, unless such
person agrees with the Company to make an offer, in either such case, to the
Holder to purchase the same percentage of the outstanding principal amount of
this Note held by the Holder as the percentage of outstanding shares of Common
Stock offered to be purchased in such Tender Offer, at a price equal to the
greater of (i) the Premium Price on the date of purchase pursuant to this
Section 3.2 and (ii) the greater of (x) the Converted Market Price on the date
of purchase pursuant to this Section 3.2 and (y) the greater of (A) the
Converted Market Price on the date of the first public announcement of such
Tender Offer and (B) the Converted Market Price on the date of purchase pursuant
to this Section 3.2.
3.3 PAYMENT OF OBLIGATIONS. The Company will pay and discharge, and
will cause each Subsidiary to pay and discharge when due, all their respective
obligations and liabilities which are material to the Company and the
Subsidiaries, taken as a whole, including, without limitation, tax liabilities,
except where the same may be contested in good faith by appropriate proceedings
and for which appropriate reserves have been made on the books of the Company or
such Subsidiary.
3.4 MAINTENANCE OF PROPERTY; INSURANCE. (a) The Company will keep,
and will cause each Subsidiary to keep, all property useful and necessary in its
business in good working order and condition, ordinary wear and tear excepted.
(b) The Company will maintain, and will cause each Subsidiary to
maintain, with financially sound and responsible insurance companies, insurance
against loss or damage by fire or other casualty and such other insurance,
including but not limited to, product liability insurance, in such amounts and
covering such risks as is reasonably adequate for the conduct of their
businesses and the value of their properties in at least such amounts and
against such risks as is reasonably adequate for the conduct of their respective
businesses and the value of their respective properties.
3.5 CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE. The Company
will continue, and will cause each Subsidiary to continue, to engage in business
of the same general type as conducted by the Company and the Subsidiaries
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on the Issuance Date, and will preserve, renew and keep in full force and
effect, and will cause each Subsidiary to preserve, renew and keep in full force
and effect, their respective corporate existence and their respective rights,
privileges and franchises necessary or desirable in the normal conduct of
business.
3.6 COMPLIANCE WITH LAWS. The Company will comply, and will cause
each Subsidiary to comply, in all material respects with all applicable laws,
ordinances, rules, regulations, decisions, orders and requirements of
governmental authorities and courts (including, without limitation,
environmental laws) except (i) where compliance therewith is contested in good
faith by appropriate proceedings or (ii) where non-compliance therewith could
not reasonably be expected to have a material adverse effect on the business,
condition (financial or otherwise), operations, performance, properties or
prospects of the Company and the Subsidiaries, taken as a whole.
3.7 INVESTMENT COMPANY ACT. The Company will not be or become an
open-end investment trust, unit investment trust or face-amount certificate
company that is or is required to be registered under Section 8 of the
Investment Company Act of 1940, as amended.
3.8 TRANSACTIONS WITH AFFILIATES. The Company will not, and will not
permit any Subsidiary, directly or indirectly, to pay any funds to or for the
account of, make any investment (whether by acquisition of stock or
Indebtedness, by loan, advance, transfer of property, guarantee or other
agreement to pay, purchase or service, directly or indirectly, any Indebtedness,
or otherwise) in, lease, sell, transfer or otherwise dispose of any assets,
tangible or intangible, to, or participate in, or effect any transaction in
connection with, any joint enterprise or other joint arrangement with, any
Affiliate of the Company or any Affiliate of any Subsidiary, except, on terms to
the Company or such Subsidiary no less favorable than terms that could be
obtained by the Company or such Subsidiary from a Person that is not an
Affiliate of the Company or an Affiliate of any Subsidiary, as determined in
good faith by the Board of Directors.
3.9 COMPLIANCE. The Company shall (a) use its commercially
reasonable best efforts to obtain knowledge of any failure or default by the
Company in the timely performance of any material obligation to the Holder or
the holder of any Interest Note or Other Note under the terms of this Note or
any other Transaction Document and (b) shall notify the Holder promptly, but in
no event later than three Business Days after the Company first learns of any
such failure or default.
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ARTICLE IV
EVENTS OF DEFAULT
If any of the following events of default (each, an "Event of
Default") shall occur:
4.1 FAILURE TO PAY PRINCIPAL OR INTEREST. The Company fails (a) to
pay the principal, Redemption Price, Redemption Event Redemption Price or
Repurchase Price hereof or of any Interest Note when due, whether at maturity,
upon redemption, upon acceleration or otherwise, as applicable, or (b) to pay
any installment of interest hereon or on any Interest Note when due and, in the
case of this clause (b) of this Section 4.1 only, such failure continues for a
period of three Business Days after the due date thereof; or
4.2 CONVERSION AND THE SHARES. The Company fails to issue or cause
to be issued shares of Common Stock to the Holder upon exercise by the Holder of
the conversion rights of the Holder in accordance with the terms of this Note or
upon exercise of the Warrants or fails to transfer any certificate for shares of
Common Stock issued to the Holder upon conversion of this Note or any Interest
or upon exercise of the Warrants as and when required by this Note, the Interest
Notes, the Note Purchase Agreement, the Transfer Agent Instruction and the
Warrants; or
4.3 BREACH OF COVENANT. The Company (a) fails to comply with Section
3.1, 3.2 or 3.9 or (b) fails to comply in any material respect with any
provision of Article III of this Note (other than Section 3.1, 3.2 or 3.9) or
breaches any other material covenant or other material term or condition of this
Note (other than as specifically provided in Sections 4.1, 4.2, 4.3(a)), the
Note Purchase Agreement, the Security Agreement, the Transfer Agent Instruction
or the Warrants, and in the case of this clause (b) of this Section 4.3 only,
such breach continues for a period of 20 days after written notice thereof to
the Company from the Holder; or
4.4 BREACH OF REPRESENTATIONS AND WARRANTIES. Any material
representation or warranty of the Company made herein or in any agreement,
statement or certificate given in writing pursuant hereto or in connection
herewith (including, without limitation, the Note Purchase Agreement, the
Security Agreement, the Transfer Agent Instruction and the Warrants) shall be
false or misleading in any material respect when made; or
4.5 CERTAIN VOLUNTARY PROCEEDINGS. The Company or any Subsidiary
shall commence a voluntary case or other proceeding seeking liquidation,
reorganization or other relief with respect to itself or its debts under any
bankruptcy, insolvency or other similar law now or hereafter in effect or
seeking the appointment of a trustee, receiver, liquidator, custodian or other
similar official of it or any substantial part of its property, or shall consent
to any such relief or to the appointment of or taking possession by any such
official in an involuntary case or other proceeding commenced against it, or
shall make a general assignment for the benefit of creditors, or shall fail
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generally to pay its debts as they become due or shall admit in writing its
inability generally to pay its debts as they become due; or
4.6 CERTAIN INVOLUNTARY PROCEEDINGS. An involuntary case or other
proceeding shall be commenced against the Company or any Subsidiary seeking
liquidation, reorganization or other relief with respect to it or its debts
under any bankruptcy, insolvency or other similar law now or hereafter in effect
or seeking the appointment of a trustee, receiver, liquidator, custodian or
other similar official of it or any substantial part of its property, and such
involuntary case or other proceeding shall remain undismissed and unstayed for a
period of 60 consecutive days; or
4.7 JUDGMENTS. Any court of competent jurisdiction shall enter one
or more final judgments against the Company or any Subsidiary or any of their
respective properties or other assets in an aggregate amount in excess of
$100,000, which is not vacated, bonded, stayed, discharged, satisfied or waived
for a period of 30 consecutive days; or
4.8 DEFAULT UNDER OTHER AGREEMENTS. Except as otherwise agreed in
writing by the Company and the original Holder of this Note (which agreement
shall be binding on any subsequent Holder of this Note or any Interest Note)
(a) the Company or any Subsidiary shall default in any payment with respect to
any indebtedness for borrowed money (other than this Note) which indebtedness
has an outstanding principal amount in excess of $100,000 individually or
$200,000 in the aggregate for the Company and the Subsidiaries, beyond the
period of grace, if any, provided in the instrument or agreement under which
such indebtedness was created; provided, however, that the events and conditions
described in the preceding clause shall not constitute an Event of Default
unless and until the Company fails to take the action necessary to correct such
event or condition within five (5) Business Days of becoming aware of such event
or condition; or (b) any indebtedness of the Company or any Subsidiary which has
an outstanding principal amount in excess of $100,000 individually or $200,000
in the aggregate shall, in accordance with its terms, be declared to be due and
payable, or required to be prepaid other than by a regularly scheduled or
required payment prior to the stated maturity thereof;
4.9 DELISTING OF COMMON STOCK. The Common Stock shall cease to be
listed on any of Nasdaq, the NYSE or the AMEX and shall remain unlisted for a
period of three Trading Days; or
4.10 FAILURE TO OBTAIN OPINION. The Company fails to deliver an
opinion of its counsel, Weil, Gotshal & Manges LLP addressed to the Holder as
provided in Section 4(l) of the Note Purchase Agreement within seven (7)
Business Days of the issuance of this Note;
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then, (X) upon the occurrence and during the continuation of any Event of
Default specified in Section 4.1, 4.2, 4.3, 4.4, 4.7, 4.8, 4.9 or 4.10, at the
option of the Holder the Company shall, and upon the occurrence of any Event of
Default specified in Section 4.5 or 4.6, the Company shall, pay to the Holder an
amount equal to the Premium Price on the date of such payment, (Y) all other
amounts payable hereunder shall immediately become due and payable, all without
demand, presentment or notice, all of which hereby are expressly waived,
together with all costs, including, without limitation, reasonable legal fees
and expenses, of collection, and (Z) the Holder shall be entitled to exercise
all other rights and remedies available at law or in equity, including all
rights and remedies under or in connection with the Security Agreement;
provided, however, that if in connection with any Event of Default the Company
shall not at such time be in compliance with its obligations under Section 1.2,
3.1 or 3.2 or shall be obligated, or to cause another Person, to redeem,
repurchase or purchase all or any portion of this Note, then in lieu of payment
of the amount provided in the preceding clause (X) the Company shall pay to the
Holder an amount equal to the amount which would be payable to the Holder upon
redemption, repurchase or purchase of this Note in accordance with Section 1.2,
3.1 or 3.2 as if the Company had exercised its right to redeem or repurchase
this Note (or such Person had become obligated to purchase this Note) pursuant
thereto on the date of such payment pursuant hereto.
ARTICLE V
REPURCHASE UPON A REPURCHASE EVENT
5.1 REPURCHASE RIGHT UPON REPURCHASE EVENT. If a Repurchase Event
occurs, then the Holder shall have the right, at the Holder's option, to require
the Company to repurchase all of this Note, or any portion hereof (in a minimum
principal amount of $100,000 or integral multiples thereof (or such lesser
remaining principal amount of this Note)), on the repurchase date that is five
Business Days after the date of the Holder Notice delivered with respect to such
Repurchase Event. The Holder shall have the right to require the Company to
repurchase all or any such portion of this Note if a Repurchase Event occurs at
any time while any portion of the principal amount of this Note is outstanding
at a price equal to the Repurchase Price.
5.2 NOTICES; METHOD OF EXERCISING REPURCHASE RIGHTS, ETC. (a) On or
before the fifth Business Day after the occurrence of a Repurchase Event, the
Company shall give to the Holder a Company Notice of the occurrence of the
Repurchase Event and of the repurchase right set forth herein arising as a
result thereof. Such Company Notice shall set forth:
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(i) a statement that a Repurchase Event has occurred, the date of such
occurrence and the type of Repurchase Event (by reference to the applicable
clause of the definition of such term);
(ii) the date by which the repurchase right must be exercised, and
(iii) a description of the procedure (set forth in this Section 5.2)
which the Holder must follow to exercise the repurchase right.
No failure of the Company to give a Company Notice or defect therein shall limit
the Holder's right to exercise the repurchase right or affect the validity of
the proceedings for the repurchase of this Note or portion hereof.
(b) To exercise the repurchase right, the Holder shall deliver to the
Company on or before the 30th day after a Company Notice (or if no such Company
Notice has been given, within 40 days after the Holder first learns of the
Repurchase Event) (i) a Holder Notice setting forth the name of the Holder and
the principal amount of this Note to be repurchased, and (ii) this Note, duly
endorsed for transfer to the Company of the portion of the principal amount of
this Note to be repurchased. A Holder Notice may be revoked by the Holder at
any time prior to the time the Company pays the applicable Repurchase Price to
the Holder.
(c) If the Holder shall have given a Holder Notice, on the date which
is five Business Days after the date such Holder Notice is given (or such later
date as the Holder surrenders this Note) the Company shall make payment in
immediately available funds of the applicable Repurchase Price to such account
as specified by the Holder in writing to the Company at least one Business Day
prior to the applicable repurchase date.
5.3 OTHER. (a) If the Company fails to repurchase on the applicable
repurchase date this Note (or portion hereof) as to which the repurchase right
has been properly exercised pursuant to this Article V, then the Repurchase
Price for the portion (which, if applicable, may be all) of this Note which is
required to have been so repurchased shall bear interest to the extent not
prohibited by applicable law from the applicable repurchase date until paid at
the Default Rate.
(b) If a portion of this Note is to be repurchased, upon surrender of
this Note to the Company in accordance with the terms of this Article V, the
Company shall execute and deliver to the Holder without service charge, a new
Note or Notes, having the same date hereof and containing identical terms and
conditions, in such denomination or denominations as requested by the Holder in
aggregate principal amount equal to, and in exchange for, the unrepurchased
portion of the principal amount of the Note so surrendered.
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(c) A Holder Notice given by the Holder shall be deemed for all
purposes to be in proper form unless the Company notifies the Holder within
three Business Days after such Holder Notice has been given (which notice shall
specify all defects in the Holder Notice), and any Holder Notice containing any
such defect shall nonetheless be effective on the date given if the Holder
promptly undertakes to correct all such defects. No such claim of defect shall
limit or delay performance of the Company's obligation to repurchase any portion
of this Note, the repurchase of which is not in dispute.
ARTICLE VI
DEFINITIONS
6.1 CERTAIN DEFINED TERMS. (a) All the agreements or instruments
herein defined shall mean such agreements or instruments as the same may from
time to time be supplemented or amended or the terms thereof waived or modified
to the extent permitted by, and in accordance with, the terms thereof and of
this Note.
(b) The following terms shall have the following meanings (such
meanings to be equally applicable to both the singular and plural forms of the
terms defined):
"Affiliate" means, with respect to any Person, any other Person that
directly, or indirectly through one or more intermediaries, controls, is
controlled by or under common control with the subject Person. For purposes of
the term "Affiliate", the term "control" (including the terms "controlling",
"controlled by" and "under common control with") means the possession, direct or
indirect, of the power to direct or to cause the direction of the management and
policies of a Person, whether through the ownership of securities, by contract
or otherwise.
"Aggregated Person" means any person whose beneficial ownership of
shares of Common Stock would be aggregated with the Holder's beneficial
ownership of shares of Common Stock for purposes of Section 13(d) of the 1934
Act and Regulation 13D-G thereunder.
"Amendment Agreement" means the Amendment Agreement, dated as of July
31, 1998, by and between the Company and MCM Partners, relating to amendment of
the rights and preferences of the Series A Preferred Stock.
"AMEX" means the American Stock Exchange, Inc.
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"Applicable Rate" means six percent per annum.
"Average Market Price" for any date means the arithmetic average of
the Market Price on each of the five Trading Days, whether or not consecutive,
during the applicable Measurement Period having the lowest Market Prices.
"Business Day" shall mean any day other than a Saturday, Sunday or a
day on which commercial banks in The City of New York are authorized or required
by law or executive order to remain closed.
"Ceiling Price" means $.9006 (subject to equitable adjustments from
time to time on terms reasonably acceptable to the Majority Holders for stock
splits, stock dividends, combinations, recapitalizations, reclassifications and
similar events occurring or with respect to which "ex-" trading commences on or
after the Issuance Date); provided, however, that, notwithstanding any other
provision hereof, the Ceiling Price applicable to a particular conversion shall
be subject to reduction as provided in Section 2.3(d); provided further,
however, that if a Registration Event occurs, then, in addition to any other
right or remedy of the Holder, thereafter the Ceiling Price shall be permanently
reduced on each Computation Date by an amount equal to two percent of the amount
that the Ceiling Price otherwise would have been without any reduction pursuant
to this proviso (pro rated in the case of any Computation Date which is less
than 30 days after a Registration Event occurs or less than 30 days after
another Computation Date).
"Common Stock" shall mean the Common Stock, $.01 par value, or any
shares of capital stock into which such stock shall be changed or reclassified
after the Issuance Date.
"Company" shall have the meaning provided in the first paragraph of
this Note.
"Company Certificate" means a certificate of the Company signed by an
Officer.
"Company Notice" means a notice from the Company to the Holder setting
forth the information provided in Section 5.2.
"Company Optional Redemption Notice" means a notice from the Company
to the Holder setting forth the information required by Section 1.2.
"Computation Date" means, if a Registration Event occurs, any of (1)
the date which is 30 days after such Registration Event occurs, if any
Registration Event is continuing on such date, (2) each date which is 30 days
after a Computation Date, if any
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Registration Event is continuing on such date, and (3) the date on which all
Registration Events cease to continue.
"Conversion Date" means the date on which a Conversion Notice is
actually received by the Transfer Agent, whether by mail, courier, personal
service, telephone line facsimile transmission or other means.
"Conversion Notice" means a Notice of Conversion of 6% Senior
Convertible Note due 2001 substantially in the form attached hereto as EXHIBIT
A, given by the Holder.
"Conversion Percentage" means 85%; provided, however, that,
notwithstanding any other provision hereof, if a Registration Event occurs, then
such percentage stated above shall be permanently reduced by two percentage
points on each Computation Date (pro rated in the case of any Computation Date
which is less than 30 days after a Registration Event occurs or less than 30
days after another Computation Date).
"Conversion Price" means the lesser of:
(1) the product of (a) the Average Market Price for such date times
(b) the applicable Conversion Percentage; and
(2) the Ceiling Price;
provided, however, that the Conversion Price applicable to a particular
conversion shall be subject to reduction as provided in Section 2.3(d).
"Converted Market Price" means, for this Note or any portion hereof as
of any date of determination, an amount equal to the product obtained by
multiplying (x) the number of shares of Common Stock which would, at the time of
such determination, be issuable on conversion in accordance with Article II of
this Note or such portion hereof and any accrued and unpaid interest hereon and
any accrued and unpaid Default Interest hereon if a Conversion Notice were given
by the Holder on the date of such determination (determined without regard to
any limitation on conversion based on beneficial ownership contained in Section
2.1 times (y) the arithmetic average of the Market Price of the Common Stock for
the five consecutive Trading Days ending on the Trading Day prior to the date of
such determination.
"Default Interest" shall have the meaning provided in the first
paragraph of this Note.
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"Default Rate" means 14 percent per annum (or such lesser rate equal
to the highest rate permitted by applicable law).
"Event of Default" shall have the meaning provided in Article IV.
"Generally Accepted Accounting Principles" for any Person means the
generally accepted accounting principles and practices applied by such Person
from time to time in the preparation of its audited financial statements.
"Holder" shall have the meaning provided in the first paragraph of
this Note.
"Holder Notice" means a Holder Notice in the form attached hereto as
EXHIBIT E.
"Inconvertibility Notice" means a notice from the Company to the
Holder in the form set forth in EXHIBIT B or a notice from the Holder to the
Company in the form set forth in EXHIBIT C.
"Indebtedness" as used in reference to any Person means all
indebtedness of such person for borrowed money, the deferred purchase price of
property, goods and services and obligations under leases which are required to
be capitalized in accordance with Generally Accepted Accounting Principles and
shall include all such indebtedness guaranteed in any manner by such person or
in effect guaranteed by such person through a contingent agreement to purchase
and all indebtedness for the payment or purchase of which such person has
contingently agreed to advance or supply funds and all indebtedness secured by
mortgage or other lien upon property owned by such person, although such person
has not assumed or become liable for the payment of such indebtedness, and, for
all purposes hereof, such indebtedness shall be treated as though it has been
assumed by such person.
"Interest Note" means any 6% Senior Convertible Note due 2001 of like
tenor with this Note which is issued by the Company in payment of interest on
this Note or any Interest Note in accordance with the terms hereof or thereof.
"Interest Note Payment Option" shall have the meaning provided in
Section 1.1(a).
"Interest Payment Dates" shall mean each February 15, May 15, August
15 and November 15 and the Maturity Date.
"Issuance Date" means the date this Note was issued to the original
Holder of this Note.
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"Majority Holders" means at any time the holders of this Note,
Interest Notes and the Other Notes which hold Notes, Interest Notes and Other
Notes which, based on the outstanding principal amounts thereof, represent a
majority of the aggregate outstanding principal amount of this Note, the
Interest Notes and the Other Notes.
"Market Price" of the Common Stock on any date means the lowest sale
price (regular way) for one share of Common Stock on such date on the first
applicable among the following: (a) the national securities exchange on which
the shares of Common Stock are listed which constitutes the principal securities
market for the Common Stock, (b) the Nasdaq, if the Nasdaq constitutes the
principal market for the Common Stock on such date, or (c) the Nasdaq SmallCap,
if the Nasdaq SmallCap constitutes the principal securities market for the
Common Stock on such date, in any such case as reported by Bloomberg, L.P.;
provided, however, that if during any Measurement Period or other period during
which the Market Price is being determined:
(i) The Company shall declare or pay a dividend or make a distribution
to all holders of the outstanding Common Stock in shares of Common Stock or
fix any record date for any such action, then the Market Price for each day
in such Measurement Period or such other period which day is prior to the
earlier of (1) the date fixed for the determination of stockholders
entitled to receive such dividend or other distribution and (2) the date on
which ex-dividend trading in the Common Stock with respect to such dividend
or distribution begins shall be reduced by multiplying the Market Price
(determined without regard to this proviso) for each such day in such
Measurement Period or such other period by a fraction, the numerator of
which shall be the number of shares of Common Stock outstanding at the
close of business on the earlier of (1) the record date fixed for such
determination and (2) the date on which ex-dividend trading in the Common
Stock with respect to such dividend or distribution begins and the
denominator of which shall be the sum of such number of shares and the
total number of shares constituting such dividend or other distribution;
(ii) The Company shall issue rights or warrants to all holders of its
outstanding shares of Common Stock, or fix a record date for such issuance,
which rights or warrants entitle such holders (for a period expiring within
forty-five (45) days after the date fixed for the determination of
stockholders entitled to receive such rights or warrants) to subscribe for
or purchase shares of Common Stock at a price per share less than the
Market Price (determined without regard to this proviso) for any day in
such Measurement Period or such other period which day is prior to the end
of such 45-day period, then the Market Price for
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each such day shall be reduced so that the same shall equal the price
determined by multiplying the Market Price (determined without regard to
this proviso) by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding at the close of business on the record
date fixed for the determination of stockholders entitled to receive such
rights or warrants plus the number of shares which the aggregate offering
price of the total number of shares so offered would purchase at such
Market Price, and the denominator of which shall be the number of shares of
Common Stock outstanding on the close of business on such record date plus
the total number of additional shares of Common Stock so offered for
subscription or purchase. In determining whether any rights or warrants
entitle the holders to subscribe for or purchase shares of Common Stock at
less than the Market Price (determined without regard to this proviso), and
in determining the aggregate offering price of such shares of Common Stock,
there shall be taken into account any consideration received for such
rights or warrants, the value of such consideration, if other than cash, to
be determined in good faith by a resolution of the Board of Directors of
the Corporation;
(iii) The outstanding shares of Common Stock shall be subdivided into
a greater number of shares of Common Stock or a record date for any such
subdivision shall be fixed, then the Market Price of the Common Stock for
each day in such Measurement Period or such other period which day is prior
to the earlier of (1) the day upon which such subdivision becomes effective
and (2) the date on which ex-dividend trading in the Common Stock with
respect to such subdivision begins shall be proportionately reduced, and
conversely, in case the outstanding shares of Common Stock shall be
combined into a smaller number of shares of Common Stock, the Market Price
each trade (regular way) on for each day in such Measurement Period or such
other period which day is prior to the earlier of (1) the date on which
such combination becomes effective and (2) the date on which trading in the
Common Stock on a basis which gives effect to such combination begins,
shall be proportionately increased;
(iv) The Company shall, by dividend or otherwise, distribute to all
holders of its Common Stock shares of any class of capital stock of the
Company (other than any dividends or distributions to which clause (i) of
this proviso applies) or evidences of its indebtedness, cash or other
assets (including securities, but excluding any rights or warrants referred
to in clause (ii) of this proviso and dividends and distributions paid
exclusively in cash and excluding any capital stock, evidences of
indebtedness, cash or assets distributed upon a merger or consolidation)
(the foregoing hereinafter in this clause (iv) of this proviso called the
"Securities"), or fix a record date for any such distribution, then, in
each such case, the Market Price for each day in such Measurement Period or
such other period which day is prior to the earlier of (1) the record date
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for such distribution and (2) the date on which ex-dividend trading in the
Common Stock with respect to such distribution begins shall be reduced so
that the same shall be equal to the price determined by multiplying the
Market Price (determined without regard to this proviso) by a fraction, the
numerator of which shall be the Market Price (determined without regard to
this proviso) for such date less the fair market value (as determined in
good faith by resolution of the Board of Directors of the Company) on such
date of the portion of the Securities so distributed or to be distributed
applicable to one share of Common Stock and the denominator of which shall
be the Market Price (determined without regard to this proviso) for such
date; provided, however, that in the event the then fair market value (as
so determined) of the portion of the Securities so distributed applicable
to one share of Common Stock is equal to or greater than the Market Price
(determined without regard to this clause (iv) of this proviso) for any
such Trading Day, in lieu of the foregoing adjustment, adequate provision
shall be made so that the Holder shall have the right to receive upon
conversion of this Note the amount of Securities the Holder would have
received had the holders of shares of Series C Preferred Stock converted
the shares of Series C Preferred Stock immediately prior to the record date
for such distribution. If the Board of Directors of the Corporation
determines the fair market value of any distribution for purposes of this
clause (iv) by reference to the actual or when issued trading market for
any securities comprising all or part of such distribution, it must in
doing so consider the prices in such market on the same day for which an
adjustment in the Market Price is being determined.
For purposes of this clause (iv) and clauses (i) and (ii) of this
proviso, any dividend or distribution to which this clause (iv) is
applicable that also includes shares of Common Stock, or rights or warrants
to subscribe for or purchase shares of Common Stock to which clause (i) or
(ii) of this proviso applies (or both), shall be deemed instead to be (1) a
dividend or distribution of the evidences of indebtedness, assets, shares
of capital stock, rights or warrants other than such shares of Common Stock
or rights or warrants to which clause (i) or (ii) of this proviso applies
(and any Market Price reduction required by this clause (iv) with respect
to such dividend or distribution shall then be made) immediately followed
by (2) a dividend or distribution of such shares of Common Stock or such
rights or warrants (and any further Market Price reduction required by
clauses (i) and (ii) of this proviso with respect to such dividend or
distribution shall then be made), except that any shares of Common Stock
included in such dividend or distribution shall not be deemed "outstanding
at the close of business on the date fixed for such determination" within
the meaning of clause (i) of this proviso;
(v) The Company or any Subsidiary shall (x) by dividend or otherwise,
distribute to all holders of its Common Stock cash in (or fix any record
date for
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any such distribution), or (y) repurchase or reacquire shares of its Common
Stock (other than an Option Share Surrender) for, in either case, an
aggregate amount that, combined with (1) the aggregate amount of any other
such distributions to all holders of its Common Stock made exclusively in
cash after the Issuance Date and within the 12 months preceding the date of
payment of such distribution, and in respect of which no adjustment
pursuant to this clause (v) has been made, (2) the aggregate amount of any
cash plus the fair market value (as determined in good faith by a
resolution of the Board of Directors of the Company) of consideration paid
in respect of any repurchase or other reacquisition by the Company or any
Subsidiary of any shares of Common Stock (other than an Option Share
Surrender) made after the Issuance Date and within the 12 months preceding
the date of payment of such distribution or making of such repurchase or
reacquisition, as the case may be, and in respect of which no adjustment
pursuant to this clause (v) has been made, and (3) the aggregate of any
cash plus the fair market value (as determined in good faith by a
resolution of the Board of Directors of the Company) of consideration
payable in respect of any Tender Offer by the Company or any Subsidiary for
all or any portion of the Common Stock concluded within the 12 months
preceding the date of payment of such distribution or completion of such
repurchase or reacquisition, as the case may be, and in respect of which no
adjustment pursuant to clause (vi) of this proviso has been made (such
aggregate amount combined with the amounts in clauses (1), (2) and (3)
above being the "Combined Amount"), exceeds 10% of the product of the
Market Price (determined without regard to this proviso) for any day in
such Measurement Period or such other period which day is prior to the
earlier of (A) the record date with respect to such distribution and (B)
the date on which ex-dividend trading in the Common Stock with respect to
such distribution begins or the date of such repurchase or reacquisition,
as the case may be, times the number of shares of Common Stock outstanding
on such date, then, and in each such case, the Market Price for each such
day shall be reduced so that the same shall equal the price determined by
multiplying the Market Price (determined without regard to this proviso)
for such day by a fraction (i) the numerator of which shall be equal to the
Market Price (determined without regard to this proviso) for such day less
an amount equal to the quotient of (x) the excess of such Combined Amount
over such 10% and (y) the number of shares of Common Stock outstanding on
such day and (ii) the denominator of which shall be equal to the Market
Price (determined without regard to this proviso) for such day; provided,
however, that in the event the portion of the cash so distributed or paid
for the repurchase or reacquisition of shares (determined per share based
on the number of shares of Common Stock outstanding) applicable to one
share of Common Stock is equal to or greater than the Market Price
(determined without regard to this clause (v) of this proviso) of the
Common Stock for any such day, then in lieu of the foregoing adjustment
with respect to such day, adequate provision shall be made so that the
Holder shall
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have the right to receive upon conversion of this Note the amount of cash
the Holders would have received had the Holder converted this Note
immediately prior to the record date for such distribution or the payment
date of such repurchase, as applicable; or
(vi) A Tender Offer made by the Company or any Subsidiary for all or
any portion of the Common Stock shall expire and such Tender Offer (as
amended upon the expiration thereof) shall require the payment to
stockholders (based on the acceptance (up to any maximum specified in the
terms of the Tender Offer) of Purchased Shares (as defined herein)) of an
aggregate consideration having a fair market value (as determined in good
faith by resolution of the Board of Directors of the Company) that combined
together with (1) the aggregate of the cash plus the fair market value (as
determined in good faith by a resolution of the Board of Directors of the
Company), as of the expiration of such Tender Offer, of consideration
payable in respect of any other Tender Offers, by the Company or any
Subsidiary for all or any portion of the Common Stock expiring within the
12 months preceding the expiration of such Tender Offer and in respect of
which no adjustment pursuant to this clause (vi) has been made, (2) the
aggregate amount of any cash plus the fair market value (as determined in
good faith by a resolution of the Board of Directors of the Company) of
consideration paid in respect of any repurchase or other reacquisition by
the Company or any Subsidiary of any shares of Common Stock (other than an
Option Share Surrender) made after the Issuance Date and within the 12
months preceding the expiration of such Tender Offer and in respect of
which no adjustment pursuant to clause (v) of this proviso has been made,
and (3) the aggregate amount of any distributions to all holders of Common
Stock made exclusively in cash within 12 months preceding the expiration of
such Tender Offer and in respect of which no adjustment pursuant to clause
(v) of this proviso has been made, exceeds 10% of the product of the Market
Price (determined without regard to this proviso) for any day in such
period times the number of shares of Common Stock outstanding on such day,
then, and in each such case, the Market Price for such day shall be reduced
so that the same shall equal the price determined by multiplying the Market
Price (determined without regard to this proviso) for such day by a
fraction, the numerator of which shall be the number of shares of Common
Stock outstanding on such day multiplied by the Market Price (determined
without regard to this proviso) for such day and the denominator of which
shall be the sum of (x) the fair market value (determined as aforesaid) of
the aggregate consideration payable to stockholders based on the acceptance
(up to any maximum specified in the terms of the Tender Offer) of all
shares validly tendered and not withdrawn as of the last time tenders could
have been made pursuant to such Tender Offer (the "Expiration Time") (the
shares deemed so accepted, up to any such maximum, being referred to as the
"Purchased Shares") and (y) the product of the number of shares of
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Common Stock outstanding (less any Purchased Shares) on such day times the
Market Price (determined without regard to this proviso) of the Common
Stock on the Trading Day next succeeding the Expiration Time. If the
application of this clause (vi) to any Tender Offer would result in an
increase in the Market Price (determined without regard to this proviso)
for any trade, no adjustment shall be made for such Tender Offer under this
clause (vi) for such day.
"Master Purchase Agreement" means the Master Purchase Agreement, dated
as of July 31,1998, by and between the Company Genesee Fund Limited-Portfolio B,
a British Virgin Islands corporation, Willis Group, LLC, a Texas limited
liability company and Advantage Fund Limited, a British Virgin Islands
corporation.
"Maturity Date" means September 4, 2001.
"Maximum Share Amount" means 142,620 shares, less from time to time
the number of shares issued upon exercise of the Warrants, or such greater
number as permitted by the rules of Nasdaq (such amount to be subject to
equitable adjustment from time to time on terms reasonably acceptable to the
Majority Holders for stock splits, stock dividends, combinations, capital
reorganizations and similar events relating to the Common Stock occurring after
the Issuance Date) of Common Stock; provided, however, that if for purposes of
Rule 4460(i) of the Nasdaq (or any successor or replacement provision of any
stock exchange or stock market on which the Common Stock is listed or traded)
the (x) issuance of the Warrants and the shares of Common Stock issuable upon
exercise of the Warrants or (y) the issuance of shares of Series D Convertible
Preferred Stock and the issuance of shares of Common Stock upon conversion
thereof or (z) the issuance of the common stock purchase warrants issued in
connection with the issuance of the Series D Convertible Preferred Stock and the
issuance of shares of Common Stock upon exercise thereof is not required to be
integrated with the issuance of this Note and the Other Notes and the issuance
of shares of Common Stock upon conversion thereof, then in each such case the
"Maximum Share Amount" shall mean such greater number as equals the maximum
number of shares of Common Stock as are permitted by the rules of the Nasdaq or
such exchange or market (determined by pro rata allocation of any increase
thereof among the Note and the Other Notes based on the original principal
amounts thereof) (such amount to be subject to equitable adjustment in terms
reasonably acceptable to the Majority Holders from time to time for stock
splits, stock dividends, combinations, capital reorganizations and similar
events relating to the Common Stock occurring after the Issuance Date).
"Maximum Share Amount Inconvertibility" means the occurrence within
any period of ten consecutive Trading Days of five or more Trading Days on which
all or any portion of this Note is inconvertible due to the restrictions in
Section 2.4.
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"Measurement Period" means with respect to any date the period of 25
consecutive Trading Days ending on the Trading Day prior to such date.
"Nasdaq" means the Nasdaq National Market.
"Nasdaq SmallCap" means the Nasdaq SmallCap Market.
"1933 Act" means the Securities Act of 1933, as amended.
"1934 Act" means the Securities Exchange Act of 1934, as amended.
"Note" means this instrument as originally executed, or if later
amended or supplemented in accordance with its terms, then as so amended or
supplemented.
"Note Purchase Agreement" shall mean the Note Purchase Agreement or
Note Purchase and Exchange Agreement, as the case may be, dated as of July 31,
1998, by and between the Company and the original Holder of this Note.
"NYSE" shall mean the New York Stock Exchange, Inc.
"Officer" means the Chairman of the Board, the Chief Executive
Officer, the President or the Chief Financial Officer of the Company.
"Optional Redemption Event" means that on each Trading Day in any
period of 20 consecutive Trading Days commencing on or after the date which is
730 days after the Issuance Date, the Market Price of the Common Stock shall
have been not less than 200% of the Ceiling Price in effect on such Trading Day.
"Option Share Surrender" means the surrender of shares of Common Stock
to the Company in payment of the exercise price or tax obligations incurred in
connection with the exercise of a stock option granted by the Company to any of
its employees, directors or consultants.
"Other Notes" means the several 6% Senior Convertible Notes due 2001
issued by the Company pursuant to the Other Note Purchase Agreements and any
other promissory notes of like tenor issued by the Company in payment of
interest thereon or on any Other Note so issued.
"Other Note Purchase Agreements" means the several Note Purchase and
Exchange Agreements or the Note Purchase Agreement, as the case may be, dated as
of the date of the Note Purchase Agreement, by and between the Company and the
several buyers named therein.
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"Permitted Transferee" means any person who is an "accredited
investor" as defined in Regulation D under the 1933 Act.
"Person" means any natural person, corporation, partnership, limited
liability company, trust, incorporated organization, unincorporated association
or similar entity or any government, governmental agency or political
subdivision.
"Premium Percentage" means 115%.
"Premium Price" means, for this Note or any portion hereof as of any
date of determination, the product obtained by multiplying (a) the sum of (1)
the outstanding principal amount of this Note or such portion hereof plus (2) an
amount equal to the accrued but unpaid interest on this Note or such portion
hereof to the date of determination, plus (3) an amount equal to the accrued and
unpaid Default Interest on this Note or such portion hereof to the date of
determination times (b) the Premium Percentage.
"Redemption Date" means the date of a redemption of this Note or a
portion hereof pursuant to Section 1.2, determined in accordance herewith.
"Redemption Election" means (1) a notice by the Holder to the Company
substantially in the form set forth in EXHIBIT D or (2) a notice by the Holder
to the Company included in the form of Inconvertibility Notice set forth in
EXHIBIT C.
"Redemption Election Period" means, with respect to a particular
inconvertibility of this Note pursuant to Section 2.4, the period of ten
Business Days after the later of (x) the date an Inconvertibility Notice with
respect to such inconvertibility is given or (y) the date such Inconvertibility
Notice was required to have been given by the Company.
"Redemption Event Redemption Date" means any Business Day during the
period commencing on the date which is 730 days after the Issuance Date and
ending on September 4, 2001.
"Redemption Event Redemption Notice" means a Redemption Event
Redemption Notice setting forth the information required by Section 1.3(a).
"Redemption Event Redemption Price" means an amount in cash equal to
the sum of (1) the outstanding principal amount of this Note on the Redemption
Event Redemption Date plus (2) accrued and unpaid interest on such principal
amount to the Redemption Event Redemption Date plus (3) accrued and unpaid
Default Interest, if any, on the amount referred to in the immediately preceding
clause (2) at the rate provided in this Note to the Redemption Event Redemption
Date.
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"Redemption Price" means the greater of:
(1) the Premium Price on the applicable Redemption Date; and
(2) the Converted Market Price on the applicable Redemption Date;
provided, however, that if in connection with any determination of the
Redemption Price the amount specified in clause (y) of the definition of
the term Converted Market Price is greater than 200% of the Ceiling Price
on the date as of which such amount is determined, then for purposes of
computing the Redemption Price in such instance, the amount otherwise
specified in clause (y) of the definition of the term Converted Market
Price shall be reduced by 20% of the amount by which (A) the amount
otherwise specified in clause (y) of the definition of the term Converted
Market Price exceeds (B) the Ceiling Price on the date as of which such
amount is determined.
"Registration Event" shall mean (1) the Registration Statement is not
effective within 105 days after the Issuance Date, if the Registration Statement
is on Form S-3, or 120 days after the Issuance Date, if the Registration
Statement is on Form S-1, (2) the Company fails to file the Registration
Statement with the SEC within 60 days after the Issuance Date, (3) the Company
fails to submit a request for acceleration of the effective date of the
Registration Statement in accordance with Section 3(a) of the Registration
Rights Agreement, (4) the Registration Statement shall cease to be available for
use by the Holder for any reason (including, without limitation, by reason of an
SEC stop order, a material misstatement or omission in the Registration
Statement or the information contained in the Registration Statement having
become outdated); provided, however, that no Registration Event pursuant to this
clause (4) shall be deemed to occur prior to the SEC Effective Date, (5) the
Common Stock is not listed for trading on any of the NYSE, the AMEX, the Nasdaq
or the Nasdaq SmallCap, or (6) the Holder having become unable to convert this
Note in accordance with Article II for any reason (other than by reason of the
4.9% limitation on beneficial ownership set forth therein or a redemption or
repurchase thereof).
"Registration Rights Agreements" means the several Registration Rights
Agreements entered into between the Company and the original Holder and the
original holders of the Other Notes, as amended or modified from time to time in
accordance with their respective terms.
"Registration Statement" means the Registration Statement required to
be filed by the Company with the SEC pursuant to Section 2(a) of the
Registration Rights Agreements.
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"Repurchase Event" means the occurrence on or before September 4, 2001
of any one or more of the following events:
(1) For any period of five consecutive Trading Days following the date
hereof there shall be no reported sale price of the Common Stock on the
Nasdaq, the Nasdaq SmallCap, the NYSE or the AMEX;
(2) The Common Stock is not listed for trading on any of the Nasdaq,
the Nasdaq SmallCap, the NYSE or the AMEX;
(3) The inability for 45 or more days (whether or not consecutive) of
the Holder or the holder of any Other Note to sell shares of Common Stock
issued or issuable on conversion of this Note, any Interest Note or any
Other Note pursuant to the Registration Statement for any reason on each of
such 45 days;
(4) The Company shall (A) default in the timely performance of the
obligation to issue shares of Common Stock upon conversion of this Note,
any Interest Note or any Other Note as and when required by hereby or
thereby or the timely performance of its obligations under Section 3.9 or
(B) the Company shall fail or default in the timely performance of any
material obligation (other than as specifically set forth elsewhere in this
definition) to the Holder or the holder of any Other Note under the terms
of this Note, any Interest Note, any Other Note or any of the other
Transaction Documents, as such instruments may be amended from time to
time, and in the case of this clause (B) only, such failure or default
shall continue for ten Business Days after notice thereof from the Holder
to the Company;
(5) Any consolidation or merger of the Company with or into another
entity (other than a merger or consolidation of a Subsidiary into the
Company or a wholly-owned Subsidiary) where the stockholders of the Company
immediately prior to such transaction do not collectively own at least 51%
of the outstanding voting securities of the surviving corporation of such
consolidation or merger immediately following such transaction or the
common stock of such surviving corporation is not listed for trading on the
NYSE, the AMEX, the Nasdaq or the Nasdaq SmallCap, or any sale or other
transfer of all or substantially all of the assets of the Company;
(6) The taking of any action, including any amendment to the Company's
Articles of Incorporation, without the consent of the Majority Holders
which materially and adversely affects the rights of the Holder or any
holder of Other Notes;
-35-
<PAGE>
(7) The Stockholder Approval shall not have been obtained on or before
the date which is 120 days after the Issuance Date; or
(8) The occurrence of any Event of Default specified in Article IV of
this Note.
"Repurchase Price" means with respect to any repurchase pursuant to
Sections 5.1 and 5.2 an amount in cash equal to the Premium Price on the
applicable repurchase date.
"SEC" means the Securities and Exchange Commission.
"SEC Effective Date" means the date on which the Registration
Statement is first declared effective by the SEC.
"Security Agreement" means the Security Agreement, dated as of
September 4, 1998, by and between the Company and the original Holder of this
Note.
"Series A Preferred Stock" means the Company's Series A Convertible
Preferred Stock, $.01 par value.
"Share Limitation Redemption Date" shall mean each date on which the
Company is required to redeem this Note or any portion hereof as provided in
Section 2.4(b).
"Share Limitation Redemption Price" means an amount in cash equal to
the Premium Price on the applicable Share Limitation Redemption Date.
"Stockholder Approval" means the approval by a majority of the votes
cast by the holders of shares of Common Stock (in person or by proxy) at a
meeting of the stockholders of the Company (duly convened at which a quorum was
present), or a written consent of holders of shares of Common Stock entitled to
such number of votes given without a meeting, of the issuance by the Company of
20% or more of the outstanding Common Stock of the Company for less than the
greater of the book or market value of such Common Stock on conversion of this
Note and the Other Notes, as and to the extent required under Rule 4460(i) of
Nasdaq as in effect at such time (or any successor or replacement provision
thereof).
"Subsidiary" means any corporation or other entity of which a majority
of the capital stock or other ownership interests having ordinary voting power
to elect a majority of the board of directors or other persons performing
similar functions are at the time directly or indirectly owned by the Company.
-36-
<PAGE>
"Tender Offer" means a tender offer or exchange offer.
"Trading Day" means a day on whichever of (x) the national securities
exchange, (y) Nasdaq or (z) the Nasdaq SmallCap which at the time constitutes
the principal securities market for the Common Stock is open for general trading
of securities.
"Transaction Documents" means this Note, the Interest Notes, the Other
Notes, the Note Purchase Agreement, the Other Note Purchase Agreements, the
Security Agreement, the Transfer Agent Instruction from the Company to the
Transfer Agent for the benefit of, among others, the Holder of this Note and the
Holders of the Other Notes, as contemplated by the Note Purchase Agreement.
"Transfer Agent" means American Stock Transfer & Trust Company, its
successor or such other person who shall be serving as transfer agent and
registrar for the Common Stock and who shall have been authorized by the Company
to act as conversion agent for this Note in accordance with the Transfer Agent
Instruction and the name, address and telephone number of whom shall have been
given to the Holder by notice from the Company.
"Transfer Agent Instruction" means the Transfer Agent Instruction from
the Company to the Transfer Agent for the benefit of, among others, the Holder
of this Note and the holders of the Other Notes, as contemplated by the Note
Purchase Agreement.
"Warrants" means the Common Stock Purchase Warrants of the Company
issued to the original Holder of this Note pursuant to the Note Purchase
Agreement and to the original holders of the Other Notes pursuant to the Other
Note Purchase Agreements.
ARTICLE VII
MISCELLANEOUS
7.1 FAILURE OR INDULGENCY NOT WAIVER. No failure or delay on the
part of the Holder in the exercise of any power, right or privilege hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
any such power, right or privilege preclude other or further exercise thereof or
of any other right, power or privileges. All rights and remedies existing
hereunder are cumulative to, and not exclusive of, any rights or remedies
otherwise available.
-37-
<PAGE>
7.2 NOTICES. Except as otherwise specifically provided herein, any
notice herein required or permitted to be given shall be in writing and may be
personally served, sent by telephone line facsimile transmission or delivered by
courier or sent by United States mail and shall be deemed to have been given
upon receipt if personally served, sent by telephone line facsimile transmission
or sent by courier or three (3) days after being deposited in the United States
mail, certified, with postage pre-paid and properly addressed, if sent by mail.
For the purposes hereof, the address of the Holder shall be as shown on the
records of the Company (telephone line facsimile transmission number 011-599-
932-2008, with a copy to Genesee International, Inc., 10500 N.E. 8th Street,
Suite 1920, Bellevue, Washington 98004-4332 (telephone line facsimile number
(425) 462-4645); and the address of the Company shall be 1250 Wood Branch Park
Drive, Houston, Texas 77079, Attention: Chief Executive Officer (telephone line
facsimile transmission number (281) 529-4650). The Holder or the Company may
change its address for service by service of written notice to the other as
herein provided.
7.3 AMENDMENT, WAIVERS, ETC.. (a) Neither this Note, any Interest
Note or any Other Note nor the Security Agreement nor any terms hereof or
thereof may be changed, waived, discharged or terminated unless such change,
waiver, discharge or termination is in writing signed by the Majority Holders,
provided that no such change, waiver, discharge or termination shall, without
the consent of the Holder and the holders of the Other Notes affected thereby
(i) extend the scheduled final maturity of this Note, any Interest Note or any
Other Note, or reduce the rate or extend the time of payment of interest (other
than as a result of waiving the applicability of any post-default increase in
interest rates) hereon or thereon or reduce the principal amount hereof or
thereof or the Redemption Price, the Redemption Event Redemption Price, the
Share Limitation Redemption Price or the Repurchase Price, (ii) release the
collateral or reduce the amount of collateral required to be deposited or
maintained by the Company pursuant to the Security Agreement except as expressly
provided in the Security Agreement, (iii) amend, modify or waive any provision
of this Section 7.3, (iv) reduce any percentage specified in, or otherwise
modify, the definition of Majority Holders or (v) except as provided in this
Note, change the method of calculating the Conversion Price in a manner adverse
to the Holder.
(b) Notwithstanding any other provision of this Note or the Note
Purchase Agreement, in addition to the requirements of Section 7.3(a), any
amendment of (x) the second or third sentence of Section 2.1, (y) the definition
of the term Aggregated Person or (z) this Section 7.3(b) shall require approval
by the affirmative vote of the holders of a majority of the outstanding shares
of Common Stock, present in person or represented by proxy at a duly convened
meeting of stockholders of the Company, and entitled to vote or the consent
thereto in writing by holders of a majority of the outstanding shares of Common
Stock, and the stockholders of the Company are hereby expressly made third party
beneficiaries of this Section 7.3(b).
-38-
<PAGE>
7.4 ASSIGNABILITY. This Note shall be binding upon the Company and
its successors, and shall inure to the benefit of and be binding upon the Holder
and its successors and permitted assigns. The Company may not assign its rights
or obligations under this Note.
7.5 CERTAIN EXPENSES. The Company shall pay on demand all expenses
incurred by the Holder, including reasonable attorneys' fees and expenses, as a
consequence of, or in connection with (x) any amendment, modification, waiver or
consent relating to this Note, (y) any default or breach of any of the Company's
obligations set forth in the Transaction Documents and (z) the enforcement or
restructuring of any right of, including the collection of any payments due, the
Holder under the Transaction Documents, including any action or proceeding
relating to such enforcement or any order, injunction or other process seeking
to restrain the Company from paying any amount due the Holder.
7.6 GOVERNING LAW; EXECUTION, ISSUANCE AND DELIVERY. This Note shall
be governed by the internal laws of the State of New York, without regard to the
principles of conflict of laws. This Note has been signed, issued and delivered
in the State of New York and it is the intention of the Company and the Holder
that this Note shall be construed accordingly for all purposes.
7.7 TRANSFER OF NOTE. This Note has not been and is not being
registered under the provisions of the 1933 Act or any state securities laws and
this Note may not be transferred unless (1) the transferee is a Permitted
Transferee and (2) the Holder shall have delivered to the Company an opinion of
counsel, reasonably satisfactory in form, scope and substance to the Company, to
the effect that this Note may be sold or transferred without registration under
the 1933 Act. Prior to any such transfer, such transferee shall have
represented in writing to the Company that such transferee has requested and
received from the Company all information relating to the business, properties,
operations, condition (financial or other), results of operations or prospects
of the Company and the Subsidiaries deemed relevant by such transferee; that
such transferee has been afforded the opportunity to ask questions of the
Company concerning the foregoing and has had the opportunity to obtain and
review the Registration Statement and the prospectus included therein, each as
amended or supplemented to the date of transfer to such transferee, and the
reports and other information concerning the Company which at the time of such
transfer have been filed by the Company with the SEC pursuant to the 1934 Act
and which are incorporated by reference in such prospectus as of the date of
such transfer. If such transfer is intended to assign the rights and
obligations under (x) Sections 4, 5 and 9 of the Note Purchase Agreement, such
transfer shall otherwise be made in compliance with Section 9(h) of the Note
Purchase Agreement and (y) the Registration Rights Agreement to which the
-39-
<PAGE>
Holder is entitled to the benefits such transfer shall otherwise be made in
compliance with Section 9 of such Registration Rights Agreement.
7.8 ENFORCEABLE OBLIGATION. The Company represents and warrants that
at the time of the original issuance of this Note it received the full purchase
price payable pursuant to the Note Purchase Agreement in an amount at least
equal to the original principal amount of this Note, and that this Note is an
enforceable obligation of the Company which is not subject to any offset,
reduction, counterclaim or disallowance of any sort.
7.9 CERTAIN AMOUNTS. Whenever pursuant to this Note the Company is
required to pay an amount in excess of the outstanding principal amount (or the
portion thereof required to be paid at that time) plus accrued and unpaid
interest plus Default Interest on such interest, the Company and the Holder
agree that the actual damages to the Holder from the receipt of cash payment on
this Note may be difficult to determine and the amount to be so paid by the
Company represents stipulated damages and not a penalty and is intended to
compensate the Holder in part for loss of the opportunity to convert this Note
and to earn a return from the sale of shares of Common Stock acquired upon
conversion of this Note at a price in excess of the price paid for such shares
pursuant to this Note. The Company and the Holder hereby agree that such amount
of stipulated damages is not plainly disproportionate to the possible loss to
the Holder from the receipt of a cash payment without the opportunity to convert
this Note into shares of Common Stock.
7.10 REPLACEMENT OF NOTES. Upon receipt by the Company of evidence
reasonably satisfactory to it of the ownership of and the loss, theft,
destruction or mutilation of this Note and (a) in the case of loss, theft or
destruction, of indemnity from the Holder reasonably satisfactory in form to the
Company (and without the requirement to post any bond or other security) or (b)
in the case of mutilation, upon surrender and cancellation of this Note, the
Company will execute and deliver to the Holder a new Note of like tenor without
charge to the Holder.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-40-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Note to be signed in
its name by its duly authorized officer on the day and in the year first above
written.
EQUALNET COMMUNICATIONS CORP.
By:
--------------------------------------
Name:
Title:
-41-
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
OF 6% SENIOR SECURED CONVERTIBLE NOTE DUE 2001
OF EQUALNET COMMUNICATIONS CORP.
To: American Stock Transfer & Trust Company,
as Transfer Agent
6201 Fifteen Avenue
Third Floor
Brooklyn, New York 11219
Attention: Mr. Barry Rosenthal
Facsimile No.: (718) 259-1144
(1) Pursuant to the terms of the 6% Senior Secured Convertible Note
due 2001 (the "Note"), the undersigned hereby elects to convert
$_________________ of the Note, equal to the sum of $_________________ principal
amount of the Note, $________________ of accrued and unpaid interest on such
principal amount and $________________ of Default Interest on such interest into
shares of Common Stock of Equalnet Communications Corp., a Texas corporation
(the "Company"), at a Conversion Price per share equal to $_____________.
Capitalized terms used herein and not otherwise defined herein have the
respective meanings provided in the Note.
(2) The number of shares of Common Stock issuable upon the conversion
of the Note to which this Notice relates is ___________________.
(3) If the conversion of the Note by this Notice is based on the
Market Prices during a Measurement Period, set forth below or on a schedule
which accompanies this Notice are the Market Prices during the Measurement
Period applicable to this Notice and an indication of the five Market Prices
used to determine the Conversion Price set forth above.
Date Trading Price
---- -------------
1. _______________, _______ $_________________
2. _______________, _______ $_________________
3. _______________, _______ $_________________
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<PAGE>
4. _______________, _______ $_________________
5. _______________, _______ $_________________
6. _______________, _______ $_________________
7. _______________, _______ $_________________
8. _______________, _______ $_________________
9. _______________, _______ $_________________
10. _______________, _______ $_________________
11. _______________, _______ $_________________
12. _______________, _______ $_________________
13. _______________, _______ $_________________
14. _______________, _______ $_________________
15. _______________, _______ $_________________
16. _______________, _______ $_________________
17. _______________, _______ $_________________
18. _______________, _______ $_________________
19. _______________, _______ $_________________
20. _______________, _______ $_________________
21. _______________, _______ $_________________
22. _______________, _______ $_________________
23. _______________, _______ $_________________
24. _______________, _______ $_________________
25. _______________, _______ $_________________
-43-
<PAGE>
(4) Please issue a certificate or certificates for ____________ shares
of Common Stock in the name(s) specified immediately below or, if additional
space is necessary, on an attachment hereto:
- - ----------------------------- --------------------------
Name Name
- - ----------------------------- ---------------------------
Address Address
- - ----------------------------- ---------------------------
SS or Tax ID Number SS or Tax ID Number
Delivery Instructions
for Common Stock:
---------------------------
(5) The Holder hereby represents to the Company that the exercise of
conversion rights contained herein does not violate the provisions of Section
2.1(a) of the Note relating to beneficial ownership in excess of 4.9% of the
Common Stock.
(6) If this Notice is given on or prior to the date which is two years
after the Issuance Date and the shares of Common Stock issuable upon conversion
of the Note have not been registered under the Securities Act of 1933, as
amended (the "Act"), the undersigned represents and warrants that (i) the shares
of Common Stock issuable upon the conversion of the Note to which this Notice
relates are being acquired for the account of the undersigned for investment,
and not with a view to, or for resale in connection with, the distribution
thereof and (ii) the undersigned is an "accredited investor" as defined in
Regulation D under the 1933 Act. The undersigned further agrees that (A) such
shares shall not be sold or transferred unless either (i) they first shall have
been registered under the 1933 Act and applicable state securities laws or (ii)
the Company shall have been furnished with an opinion of legal counsel
reasonably satisfactory to the Company to the effect that such sale or transfer
is exempt from the
-44-
<PAGE>
registration requirements of the 1933 Act and (B) until such shares are
registered under the 1933 Act, the Company may place a legend on the
certificate(s) for the shares to that effect and place a stop-transfer
restriction in its records relating to the shares.
NAME:
---------------------------------
Date ---------------------------------
------------------------- Signature of Registered Holder
(Must be signed exactly as name
appears in the Note.)
-45-
<PAGE>
EXHIBIT B
COMPANY INCONVERTIBILITY NOTICE
(SECTION 2.4(b) OF 6% SENIOR SECURED CONVERTIBLE NOTE DUE 2001)
TO: ___________________________
(Name of Holder)
(1) Pursuant to the terms of the 6% Senior Secured Convertible Note
due 2001 (the "Note"), Equalnet Communications Corp., a Texas corporation (the
"Company"), hereby notifies the above-named Holder:
(a) On ___________________ (fill in date) five Inconvertibility Days
had occurred in a period of ten Trading Days and on such date
$_______________ (fill in amount) of principal of the Note and the related
interest, if any, became inconvertible by reason of the occurrence of five
Inconvertibility Days within a period of ten consecutive Trading Days.
(b) The five Inconvertibility Days covered by this Notice and the
applicable Conversion Price on each such day are as follows:
___________ , _______ $_____________
___________ , _______ $_____________
___________ , _______ $_____________
___________ , _______ $_____________
___________ , _______ $_____________
(2) Capitalized terms used herein and not otherwise defined herein
have the respective meanings provided in the Note.
Date EQUALNET COMMUNICATIONS CORP.
________________________
By
---------------------------------
-46-
<PAGE>
EXHIBIT C
HOLDER INCONVERTIBILITY NOTICE
(SECTION 2.4(b) OF 6% SENIOR SECURED CONVERTIBLE NOTE DUE 2001)
TO: EQUALNET COMMUNICATIONS CORP.
(1) Pursuant to the terms of the 6% Senior Secured Convertible Note
due 2001 (the "Note"), the undersigned (the "Holder"), hereby notifies Equalnet
Communications Corp., a Texas corporation (the "Company"):
(a) On __________________ (fill in date) five Inconvertibility Days
had occurred in a period of ten Trading Days and on such date
$_______________ (fill in amount) of principal of the Note and the related
interest, if any, became inconvertible by reason of the occurrence of five
Trading Days on which all or a portion of this Note was inconvertible
within a period of ten consecutive Trading Days.
(b) The five Trading Days on which all or a portion of this Note was
inconvertible and which are covered by this Notice and the applicable
Conversion Price on each such day are as follows:
___________ , _______ $_____________
___________ , _______ $_____________
___________ , _______ $_____________
___________ , _______ $_____________
___________ , _______ $_____________
(2) If the following date and amounts are completed in this Notice,
the Holder hereby directs the Company to redeem the principal amount set forth
below (and the related interest) in accordance with Section 7(a) of the
Certificate of Designations set forth below:
(a) Principal amount of Note to be redeemed: ______________ (fill in)
(b) On __________________ (fill in Redemption Date), the Company shall
pay the Holder the Share Limitation Redemption Price of the portion (which,
if applicable, may be all) of the Note to be redeemed.
-47-
<PAGE>
(3) Capitalized terms used herein and not otherwise defined herein
have the respective meanings provided in the Note.
Date NAME OF HOLDER:
------------------------
--------------------------------
By
-----------------------------
Title:
-48-
<PAGE>
EXHIBIT D
HOLDER REDEMPTION ELECTION
(SECTION 2.4(b) OF 6% SENIOR
SECURED CONVERTIBLE NOTE DUE 2001)
TO: EQUALNET COMMUNICATIONS CORP.
(1) Pursuant to the terms of the 6% Senior Secured Convertible Note
due 2001 (the "Note"), the undersigned (the "Holder") hereby notifies Equalnet
Communications Corp., a Texas corporation (the "Company"), that the Holder is
exercising its right to require the Company to redeem a portion (which, if
applicable, may be all) of the Note as set forth below in accordance with
Section 2.4(b) of the Note. On ________________________ (fill in Redemption
Date), the Company shall pay the Holder the Share Limitation Redemption Price
for redemption of $________________________ principal amount of the Note and the
related interest.
(2) Capitalized terms used herein and not otherwise defined herein
have the respective meanings provided in the Note.
Date NAME OF HOLDER:
------------------------
By
------------------------------
-49-
<PAGE>
EXHIBIT E
HOLDER NOTICE
(SECTION 5.2(b) OF 6% SENIOR SECURED CONVERTIBLE NOTE DUE 2001)
TO: EQUALNET COMMUNICATIONS CORP.
(1) Pursuant to the terms of the 6% Senior Secured Convertible Note
due 2001 (the "Note"), the undersigned Holder hereby elects to exercise its
right to require repurchase by the Company pursuant to Sections 5.2(a) and
5.2(b) of $_________________________ of the Note, equal to the sum of
$____________________ principal amount of the Note, $____________________ of
accrued and unpaid interest on such principal amount and $____________________
of Default Interest on such interest at the Repurchase Price provided in the
Note.
(2) Capitalized terms used herein and not otherwise defined herein
have the respective meanings provided in the Note.
Date: NAME OF HOLDER:
-----------------------
By
---------------------------------
Signature of Registered Holder
(Must be signed exactly as name
appears in the Note.)
-50-
<PAGE>
EXHIBIT 10.26
Draft of 8/21/98
ANNEX II
TO
NOTE PURCHASE
AND EXCHANGE
AGREEMENT
EQUALNET COMMUNICATIONS CORP.
STATEMENT OF RESOLUTION OF BOARD OF DIRECTORS ESTABLISHING AND
DESIGNATING SERIES D CONVERTIBLE PREFERRED STOCK AND FIXING THE
RIGHTS AND PREFERENCES OF SUCH SERIES
-------------------------------------------------
TO THE SECRETARY OF STATE
OF THE STATE OF TEXAS:
Equalnet Communications Corp., pursuant to the provisions of Articles
2.13 and 2.19B of the Texas Business Corporation Act, submits the following
statement for the purpose of establishing and designating a series of shares and
fixing and determining the relative rights and preferences thereof:
1. The name of the Corporation is Equalnet Communications Corp.
2. The following is a true and correct copy of an extract from the
minutes of a meeting of the Board of Directors of the Corporation held on August
11, 1998, and includes a true and correct copy of certain resolutions duly
adopted thereat.
RESOLVED, that pursuant to authority vested in the Board of Directors
by the Articles of Incorporation of the Corporation, the Board of Directors does
hereby provide for the creation of a series of the Preferred Stock, $.01 par
value (hereinafter called the "Preferred Stock"), of the Corporation, and to the
extent that the voting powers and the designations, preferences and relative,
participating, optional or other special rights thereof and the qualifications,
limitations or restrictions of such rights have not been set forth in the
Articles of Incorporation of the Corporation, does hereby fix the same as
follows:
SERIES D CONVERTIBLE PREFERRED STOCK
SECTION 1. DEFINITIONS. As used herein, the following terms shall
have the following meanings:
"Affiliate" means, with respect to any person, any other person that
directly, or indirectly through one or more intermediaries, controls, is
controlled by or is under common
<PAGE>
control with the subject person; for purposes of this definition, "control"
(including, with correlative meanings, the terms "controlled by" and "under
common control with"), as used with respect to any person, shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such person, whether through the
ownership of voting securities or by contract or otherwise.
"Aggregated Person" means, with respect to any person, any person
whose beneficial ownership of shares of Common Stock would be aggregated with
the beneficial ownership of shares of Common Stock by such person for purposes
of Section 13(d) of the Exchange Act, and Regulation 13D-G thereunder.
"AMEX" means the American Stock Exchange, Inc.
"Average Market Price" for any date means the arithmetic average of
the Market Price on each of the five Trading Days, whether or not consecutive,
during the applicable Measurement Period having the lowest Market Prices.
"Board of Directors" or "Board" means the Board of Directors of the
Corporation.
"Ceiling Price" means $1.228 (subject to equitable adjustments from
time to time on terms reasonably acceptable to the Majority Holders for stock
splits, stock dividends, combinations, recapitalizations, reclassifications and
similar events occurring or with respect to which "ex-" trading commences on or
after the date of filing of this Statement of Resolution with the Secretary of
State of the State of Texas); provided, however, that, notwithstanding any other
provision hereof, the Ceiling Price applicable to a particular conversion shall
be subject to reduction as provided in Section 10(b)(6); provided further,
however, that if a Registration Event occurs, then, in addition to any other
right or remedy of any holder of shares of Series D Convertible Preferred Stock
thereafter the Ceiling Price shall be permanently reduced on each Computation
Date by an amount equal to two percent of the amount that the Ceiling Price
otherwise would have been without any reduction pursuant to this proviso (pro
rated in the case of any Computation Date which is less than 30 days after a
Registration Event occurs or less than 30 days after another Computation Date).
"Common Stock" means the Common Stock, $.01 par value, of the
Corporation.
"Computation Date" means, if a Registration Event occurs, any of (1)
the date which is 30 days after such Registration Event occurs, if any
Registration Event is continuing on such date, (2) each date which is 30 days
after a Computation Date, if any Registration Event is continuing on such date,
and (3) the date on which all Registration Events cease to continue.
"Conversion Agent" means American Stock Transfer & Trust Company, or
its duly appointed successor, as conversion agent for the Series D Convertible
Preferred Stock pursuant to the Transfer Agent Instruction.
-2-
<PAGE>
"Conversion Amount" initially shall be equal to $1,000.00, subject to
adjustment as herein provided.
"Conversion Date" means, with respect to each conversion of shares of
Series D Convertible Preferred Stock pursuant to Section 10, the date on which
the Conversion Notice relating to such conversion is actually received by the
Conversion Agent, whether by mail, courier, personal service, telephone line
facsimile transmission or other means.
"Conversion Notice" means a written notice, duly signed by or on
behalf of a holder of shares of Series D Convertible Preferred Stock, stating
the number of shares of Series D Convertible Preferred Stock to be converted in
the form specified in the Exchange Agreements.
"Conversion Percentage" means 85%; provided, however, that,
notwithstanding any other provision hereof, if a Registration Event occurs, then
such percentage stated above shall be permanently reduced by two percentage
points on each Computation Date (pro rated in the case of any Computation Date
which is less than 30 days after a Registration Event occurs or less than 30
days after another Computation Date).
"Conversion Price" means the lesser of:
(1) the product of (a) the Average Market Price for such date times
(b) the applicable Conversion Percentage; and
(2) the Ceiling Price;
provided, however, that the Conversion Price applicable to a particular
conversion shall be subject to reduction as provided in Section 10(b)(6).
"Conversion Rate" shall have the meaning provided in Section 10(a).
"Converted Market Price" means, for any share of Series D Convertible
Preferred Stock as of any date of determination, an amount equal to the product
obtained by multiplying (x) the number of shares of Common Stock which would, at
the time of such determination, be issuable on conversion in accordance with
Section 10(a) of one share of Series D 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 D Convertible Preferred Stock on the date of such
determination (determined without regard to any limitation on conversion based
on beneficial ownership contained in Section 10(a)) times (y) the arithmetic
average of the Market Price of the Common Stock for the five consecutive Trading
Days ending on the Trading Day prior to the date of such determination.
"Corporation Optional Redemption Notice" means a notice given by the
Corporation to the holders of shares of Series D Convertible Preferred Stock
pursuant to Section
-3-
<PAGE>
9(a) which notice shall state (1) that the Corporation is exercising its right
to redeem all or a portion of the outstanding shares of Series D Convertible
Preferred Stock pursuant to Section 9(a), (2) the number of shares of Series D
Convertible Preferred Stock held by such holder which are to be redeemed, (3)
the Redemption Price per share of Series D Convertible Preferred Stock to be
redeemed or the formula for determining the same, determined in accordance
herewith, and (4) the applicable Redemption Date.
"Current Price" means with respect to any date the arithmetic average
of the Market Price of the Common Stock on the 30 consecutive Trading Days
commencing 45 Trading Days before such date.
"Dividend Shares" means shares of Series D Convertible Preferred Stock
issued as dividends on outstanding shares of Series D Convertible Preferred
Stock in accordance with Section 5(b).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Agreements" means the several Note Purchase and Exchange
Agreements by and between the Corporation and the original holders of shares of
Series D Convertible Preferred Stock pursuant to which the shares of Series D
Convertible Preferred Stock were issued.
"Final Redemption Date" means the date of redemption of shares of
Series D Convertible Preferred Stock pursuant to Section 9(b), determined in
accordance therewith.
"Final Redemption Notice" means a notice given by the Corporation to
each holder of Series D Convertible Preferred Stock pursuant to Section 9(b),
which notice shall state (1) that the Corporation is exercising its right to
redeem all outstanding shares of Series D Convertible Preferred Stock pursuant
to Section 9(b), (2) the number of shares of Series D Convertible Preferred
Stock held by such holder which are to be redeemed, (3) the Final Redemption
Price per share of Series D Convertible Preferred Stock held by such holder
which are to be redeemed, determined in accordance herewith, and (4) the Final
Redemption Date.
"Final Redemption Price" on any date means an amount equal to the
product obtained by multiplying (a) the sum of (1) $1,000 plus (2) an amount
equal to the accrued but unpaid dividends on the share of Series D Convertible
Preferred Stock to be redeemed to the Final Redemption Date, plus (3) an amount
equal to the accrued and unpaid interest on dividends in arrears on such share
of Series D Convertible Preferred Stock to the Final Redemption Date (determined
as provided in Section 5) times (b) the Premium Percentage.
"Inconvertibility Notice" shall have the meaning provided in Section
7(a)(2).
"Issuance Date" means the first date of original issuance of any
shares of Series D Convertible Preferred Stock.
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"Junior Dividend Stock" means, collectively, the Common Stock and any
other class or series of capital stock of the Corporation ranking junior as to
dividends to the Series D Convertible Preferred Stock.
"Junior Liquidation Stock" means the Common Stock or any other class
or series of the Corporation's capital stock ranking junior as to liquidation
rights to the Series D Convertible Preferred Stock.
"Liquidation Preference" means, for each share of Series D Convertible
Preferred Stock, 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 5(a)) to the date of
such distribution, and (iii) $1,000.00.
"Majority Holders" means at any time the holders of shares of Series D
Preferred Stock which shares constitute a majority of the outstanding shares of
Series D Preferred Stock.
"Market Price" of the Common Stock on any date means the lowest sale
price (regular way) for one share of Common Stock on such date on the first
applicable among the following: (a) the national securities exchange on which
the shares of Common Stock are listed which constitutes the principal securities
market for the Common Stock, (b) the Nasdaq, if the Nasdaq constitutes the
principal market for the Common Stock on such date, or (c) the Nasdaq SmallCap,
if the Nasdaq SmallCap constitutes the principal securities market for the
Common Stock on such date, in any such case as reported by Bloomberg, L.P.;
provided, however, that if during any Measurement Period or other period during
which the Market Price is being determined:
(i) The Corporation shall declare or pay a dividend or make a
distribution to all holders of the outstanding Common Stock in shares of
Common Stock or fix any record date for any such action, then the Market
Price for each day in such Measurement Period or such other period which
day is prior to the earlier of (1) the date fixed for the determination of
stockholders entitled to receive such dividend or other distribution and
(2) the date on which ex-dividend trading in the Common Stock with respect
to such dividend or distribution begins shall be reduced by multiplying the
Market Price (determined without regard to this proviso) for each such day
in such Measurement Period or such other period by a fraction, the
numerator of which shall be the number of shares of Common Stock
outstanding at the close of business on the earlier of (1) the record date
fixed for such determination and (2) the date on which ex-dividend trading
in the Common Stock with respect to such dividend or distribution begins
and the denominator of which shall be the sum of such number of shares and
the total number of shares constituting such dividend or other
distribution;
(ii) The Corporation shall issue rights or warrants to all holders of
its outstanding shares of Common Stock, or fix a record date for such
issuance, which rights or warrants entitle such holders (for a period
expiring within forty-five (45) days after the date fixed for the
determination of stockholders entitled to receive such rights or
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warrants) to subscribe for or purchase shares of Common Stock at a price
per share less than the Market Price (determined without regard to this
proviso) for any day in such Measurement Period or such other period which
day is prior to the end of such 45-day period, then the Market Price for
each such day shall be reduced so that the same shall equal the price
determined by multiplying the Market Price (determined without regard to
this proviso) by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding at the close of business on the record
date fixed for the determination of stockholders entitled to receive such
rights or warrants plus the number of shares which the aggregate offering
price of the total number of shares so offered would purchase at such
Market Price, and the denominator of which shall be the number of shares of
Common Stock outstanding on the close of business on such record date plus
the total number of additional shares of Common Stock so offered for
subscription or purchase. In determining whether any rights or warrants
entitle the holders to subscribe for or purchase shares of Common Stock at
less than the Market Price (determined without regard to this proviso), and
in determining the aggregate offering price of such shares of Common Stock,
there shall be taken into account any consideration received for such
rights or warrants, the value of such consideration, if other than cash, to
be determined in good faith by a resolution of the Board of Directors of
the Corporation;
(iii) The outstanding shares of Common Stock shall be subdivided into
a greater number of shares of Common Stock or a record date for any such
subdivision shall be fixed, then the Market Price of the Common Stock for
each day in such Measurement Period or such other period which day is prior
to the earlier of (1) the day upon which such subdivision becomes effective
and (2) the date on which ex-dividend trading in the Common Stock with
respect to such subdivision begins shall be proportionately reduced, and
conversely, in case the outstanding shares of Common Stock shall be
combined into a smaller number of shares of Common Stock, the Market Price
each trade (regular way) on for each day in such Measurement Period or such
other period which day is prior to the earlier of (1) the date on which
such combination becomes effective and (2) the date on which trading in the
Common Stock on a basis which gives effect to such combination begins,
shall be proportionately increased;
(iv) The Corporation shall, by dividend or otherwise, distribute to
all holders of its Common Stock shares of any class of capital stock of the
Corporation (other than any dividends or distributions to which clause (i)
of this proviso applies) or evidences of its indebtedness, cash or other
assets (including securities, but excluding any rights or warrants referred
to in clause (ii) of this proviso and dividends and distributions paid
exclusively in cash and excluding any capital stock, evidences of
indebtedness, cash or assets distributed upon a merger or consolidation)
(the foregoing hereinafter in this clause (iv) of this proviso called the
"Securities"), or fix a record date for any such distribution, then, in
each such case, the Market Price for each day in such Measurement Period or
such other period which day is prior to the earlier of (1) the record date
for such distribution and (2) the date on which ex-dividend trading in the
Common Stock with respect to such distribution begins shall be reduced so
that the same shall be equal to the price determined by multiplying the
Market Price (determined without regard to this proviso) by a fraction, the
numerator of which shall be the Market Price (determined without regard to
this proviso) for such date less the fair market value (as determined in
good faith by resolution of the Board of Directors of the Corporation) on
such date of the portion of the Securities so distributed or to be
distributed applicable to one share of Common Stock and the denominator of
which shall be the Market Price (determined without regard to this
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proviso) for such date; provided, however, that in the event the then fair
market value (as so determined) of the portion of the Securities so
distributed applicable to one share of Common Stock is equal to or greater
than the Market Price (determined without regard to this clause (iv) of
this proviso) for any such Trading Day, in lieu of the foregoing
adjustment, adequate provision shall be made so that the holders of shares
of Series D Preferred Stock shall have the right to receive upon conversion
of the shares of Series D Preferred Stock the amount of Securities the
holders of shares of Series D Preferred Stock would have received had the
holders of shares of Series D Preferred Stock converted the shares of
Series D Preferred Stock immediately prior to the record date for such
distribution. If the Board of Directors of the Corporation determines the
fair market value of any distribution for purposes of this clause (iv) by
reference to the actual or when issued trading market for any securities
comprising all or part of such distribution, it must in doing so consider
the prices in such market on the same day for which an adjustment in the
Market Price is being determined.
For purposes of this clause (iv) and clauses (i) and (ii) of this
proviso, any dividend or distribution to which this clause (iv) is
applicable that also includes shares of Common Stock, or rights or warrants
to subscribe for or purchase shares of Common Stock to which clause (i) or
(ii) of this proviso applies (or both), shall be deemed instead to be (1) a
dividend or distribution of the evidences of indebtedness, assets, shares
of capital stock, rights or warrants other than such shares of Common Stock
or rights or warrants to which clause (i) or (ii) of this proviso applies
(and any Market Price reduction required by this clause (iv) with respect
to such dividend or distribution shall then be made) immediately followed
by (2) a dividend or distribution of such shares of Common Stock or such
rights or warrants (and any further Market Price reduction required by
clauses (i) and (ii) of this proviso with respect to such dividend or
distribution shall then be made), except that any shares of Common Stock
included in such dividend or distribution shall not be deemed "outstanding
at the close of business on the date fixed for such determination" within
the meaning of clause (i) of this proviso;
(v) The Corporation or any subsidiary of the Corporation shall (x) by
dividend or otherwise, distribute to all holders of its Common Stock cash
in (or fix any record date for any such distribution), or (y) repurchase or
reacquire shares of its Common Stock (other than an Option Share Surrender)
for, in either case, an aggregate amount that, combined with (1) the
aggregate amount of any other such distributions to all holders of its
Common Stock made exclusively in cash after the Issuance Date and within
the 12 months preceding the date of payment of such distribution, and in
respect of which no adjustment pursuant to this clause (v) has been made,
(2) the aggregate amount of any cash plus the fair market value (as
determined in good faith by a resolution of the Board of Directors of the
Corporation) of consideration paid in respect of any repurchase or
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other reacquisition by the Corporation or any subsidiary of the Corporation
of any shares of Common Stock (other than an Option Share Surrender) made
after the Issuance Date and within the 12 months preceding the date of
payment of such distribution or making of such repurchase or reacquisition,
as the case may be, and in respect of which no adjustment pursuant to this
clause (v) has been made, and (3) the aggregate of any cash plus the fair
market value (as determined in good faith by a resolution of the Board of
Directors of the Corporation) of consideration payable in respect of any
Tender Offer by the Corporation or any of its subsidiaries for all or any
portion of the Common Stock concluded within the 12 months preceding the
date of payment of such distribution or completion of such repurchase or
reacquisition, as the case may be, and in respect of which no adjustment
pursuant to clause (vi) of this proviso has been made (such aggregate
amount combined with the amounts in clauses (1), (2) and (3) above being
the "Combined Amount"), exceeds 10% of the product of the Market Price
(determined without regard to this proviso) for any day in such Measurement
Period or such other period which day is prior to the earlier of (A) the
record date with respect to such distribution and (B) the date on which ex-
dividend trading in the Common Stock with respect to such distribution
begins or the date of such repurchase or reacquisition, as the case may be,
times the number of shares of Common Stock outstanding on such date, then,
and in each such case, the Market Price for each such day shall be reduced
so that the same shall equal the price determined by multiplying the Market
Price (determined without regard to this proviso) for such day by a
fraction (i) the numerator of which shall be equal to the Market Price
(determined without regard to this proviso) for such day less an amount
equal to the quotient of (x) the excess of such Combined Amount over such
10% and (y) the number of shares of Common Stock outstanding on such day
and (ii) the denominator of which shall be equal to the Market Price
(determined without regard to this proviso) for such day; provided,
however, that in the event the portion of the cash so distributed or paid
for the repurchase or reacquisition of shares (determined per share based
on the number of shares of Common Stock outstanding) applicable to one
share of Common Stock is equal to or greater than the Market Price
(determined without regard to this clause (v) of this proviso) of the
Common Stock for any such day, then in lieu of the foregoing adjustment
with respect to such day, adequate provision shall be made so that the
holders of shares of Series D Preferred Stock shall have the right to
receive upon conversion of shares of Series D Preferred Stock the amount of
cash the holders of shares of Series D Preferred Stock would have received
had the holders of shares of Series D Preferred Stock converted shares of
Series D Preferred Stock immediately prior to the record date for such
distribution or the payment date of such repurchase, as applicable; or
(vi) A Tender Offer made by the Corporation or any of its subsidiaries
for all or any portion of the Common Stock shall expire and such Tender
Offer (as amended upon the expiration thereof) shall require the payment to
stockholders (based on the acceptance (up to any maximum specified in the
terms of the Tender Offer) of Purchased Shares (as defined below)) of an
aggregate consideration having a fair market value (as determined in good
faith by resolution of the Board of Directors of the Corporation) that
combined together with (1) the aggregate of the cash plus the fair market
value (as determined in good faith by a resolution of the Board of
Directors of the Corporation), as of the
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<PAGE>
expiration of such Tender Offer, of consideration payable in respect of any
other Tender Offers, by the Corporation or any of its subsidiaries for all
or any portion of the Common Stock expiring within the 12 months preceding
the expiration of such Tender Offer and in respect of which no adjustment
pursuant to this clause (vi) has been made, (2) the aggregate amount of any
cash plus the fair market value (as determined in good faith by a
resolution of the Board of Directors of the Corporation) of consideration
paid in respect of any repurchase or other reacquisition by the Corporation
or any subsidiary of the Corporation of any shares of Common Stock (other
than an Option Share Surrender) made after the Issuance Date and within the
12 months preceding the expiration of such Tender Offer and in respect of
which no adjustment pursuant to clause (v) of this proviso has been made,
and (3) the aggregate amount of any distributions to all holders of Common
Stock made exclusively in cash within 12 months preceding the expiration of
such Tender Offer and in respect of which no adjustment pursuant to clause
(v) of this proviso has been made, exceeds 10% of the product of the Market
Price (determined without regard to this proviso) for any day in such
period times the number of shares of Common Stock outstanding on such day,
then, and in each such case, the Market Price for such day shall be reduced
so that the same shall equal the price determined by multiplying the Market
Price (determined without regard to this proviso) for such day by a
fraction, the numerator of which shall be the number of shares of Common
Stock outstanding on such day multiplied by the Market Price (determined
without regard to this proviso) for such day and the denominator of which
shall be the sum of (x) the fair market value (determined as aforesaid) of
the aggregate consideration payable to stockholders based on the acceptance
(up to any maximum specified in the terms of the Tender Offer) of all
shares validly tendered and not withdrawn as of the last time tenders could
have been made pursuant to such Tender Offer (the "Expiration Time") (the
shares deemed so accepted, up to any such maximum, being referred to as the
"Purchased Shares") and (y) the product of the number of shares of Common
Stock outstanding (less any Purchased Shares) on such day times the Market
Price (determined without regard to this proviso) of the Common Stock on
the Trading Day next succeeding the Expiration Time. If the application of
this clause (vi) to any Tender Offer would result in an increase in the
Market Price (determined without regard to this proviso) for any trade, no
adjustment shall be made for such Tender Offer under this clause (vi) for
such day.
"Maximum Share Amount" means 1,932,562 shares, (such amount to be
subject to equitable adjustment from time to time on terms reasonably acceptable
to the Majority Holders for stock splits, stock dividends, combinations, capital
reorganizations and similar events relating to the Common Stock occurring or
with respect to which "ex-" trading commences after the date of filing this
Statement of Resolution with the Secretary of State of the State of Texas), of
Common Stock, or such greater number as permitted by the rules of the Nasdaq;
provided, however, that if for purposes of Rule 4460(i) of the Nasdaq (or any
successor or replacement provision of any stock exchange or stock market on
which the Common Stock is listed or traded) the (x) the issuance of the Notes
and the issuance of shares of Common Stock upon conversion thereof or (y) the
issuance of the common stock purchase warrants issued in connection with the
issuance of the Notes and the issuance of shares of Common Stock upon exercise
thereof is not required to be integrated with the issuance of the shares of
Series D
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<PAGE>
Convertible Preferred Stock and the issuance of shares of Common Stock upon
conversion thereof, then in each such case the "Maximum Share Amount" shall mean
such greater number as equals the maximum number of shares of Common Stock
permitted by the rules of the Nasdaq (determined by pro rata allocation of any
increase thereof among the shares of Series D Convertible Preferred Stock based
on the number of shares of Series D Convertible Preferred Stock originally
represented by each certificate therefor) (such amount to be subject to
equitable adjustment in terms reasonably acceptable to the Majority Holders from
time to time for stock splits, stock dividends, combinations, capital
reorganizations and similar events relating to the Common Stock occurring after
the date of filing of this Statement of Resolution with the Secretary of State
of the State of Texas).
"Measurement Period" means, with respect to any date, the period of 25
consecutive Trading Days ending on the Trading Day prior to such date.
"Nasdaq" means the Nasdaq National Market.
"Nasdaq SmallCap" means the Nasdaq SmallCap Market.
"NYSE" means the New York Stock Exchange, Inc.
"Option Share Surrender" means the surrender of shares of Common Stock
to the Corporation in payment of the exercise price or tax obligations incurred
in connection with the exercise of a stock option granted by the Corporation to
any of its employees, directors or consultants.
"Optional Redemption Event" means the occurrence on or before [INSERT
MONTH AND DAY OF CLOSING], 2001 of any one of the following events:
(1) For any period of five consecutive Trading Days there shall be no
reported sale price of the Common Stock on the Nasdaq, the Nasdaq SmallCap,
the NYSE or the AMEX;
(2) The Common Stock is not listed for trading on any of the NYSE, the
AMEX, the Nasdaq or the Nasdaq SmallCap;
(3) The inability for 45 or more days (whether or not consecutive) of
any holder of shares of Series D Convertible Preferred Stock to sell shares
of Common Stock issued or issuable on conversion of shares of Series D
Convertible Preferred Stock pursuant to the Registration Statement for any
reason on each of such 45 days;
(4) The Corporation shall (A) default in the timely performance of the
obligation to issue shares of Common Stock upon conversion of shares of
Series D Convertible Preferred Stock as and when required by Section 10 or
shall default in the timely performance of its obligations under Section
12(d)(7) or (B) the Corporation shall fail or default in the timely
performance of any material obligation (other than as
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specifically set forth elsewhere in this definition) to a holder of shares
of Series D Convertible Preferred Stock under the terms of this Statement
of Resolution or under the Registration Rights Agreements or any other
agreement or document entered into in connection with the issuance of
shares of Series D Convertible Preferred Stock, as such instruments may be
amended from time to time and such failure or default shall continue for
ten business days after notice thereof from any holder of shares of Series
D Convertible Preferred Stock to the Corporation;
(5) Any consolidation or merger of the Corporation with or into
another entity (other than a merger or consolidation of a subsidiary of the
Corporation into the Corporation or a wholly-owned subsidiary of the
Corporation) where the shareholders of the Corporation immediately prior to
such transaction do not collectively own at least 51% of the outstanding
voting securities of the surviving corporation of such consolidation or
merger immediately following such transaction or the common stock of such
surviving corporation is not listed for trading on the NYSE, the AMEX, the
Nasdaq or the Nasdaq SmallCap or any sale or other transfer of all or
substantially all of the assets of the Corporation;
(6) The taking of any action, including any amendment to the
Corporation's Articles of Incorporation, without the consent of the
Majority Holders which materially and adversely affects the rights of any
holder of shares of Series D Convertible Preferred Stock; or
(7) The Stockholder Approval shall not have been obtained on or before
the date which is 120 days after the Issuance Date.
"Optional Redemption Notice" means a notice from a holder of shares of
Series D Convertible Preferred Stock to the Corporation which states (1) that
the holder delivering such notice is thereby requiring the Corporation to redeem
shares of Series D Convertible Preferred Stock pursuant to Section 11, (2) in
general terms the Optional Redemption Event giving rise to such redemption, and
(3) the number of shares of Series D Convertible Preferred Stock held by such
holder which are to be redeemed.
"Optional Redemption Price" means the Premium Price on the applicable
redemption date.
"Parity Dividend Stock" means any class or series or the Corporation's
capital stock ranking, as to dividends, on a parity with the Series D
Convertible Preferred Stock.
"Parity Liquidation Stock" means any class or series of the
Corporation's capital stock having parity as to liquidation rights with the
Series D Convertible Preferred Stock.
"Premium Percentage" means 115%.
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"Premium Price" means, for any share of Series D Convertible Preferred
Stock as of any date of determination, the product obtained by multiplying (a)
the sum of (1) the Conversion Amount plus (2) an amount equal to the accrued but
unpaid dividends on such share of Series D Convertible Preferred Stock to the
date of determination, plus (3) an amount equal to the accrued and unpaid
interest on dividends in arrears (as provided in Section 5) to the date of
determination times (b) the Premium Percentage.
"Redemption Date" means the date of a redemption of shares of Series D
Convertible Preferred Stock pursuant to Section 9(a) determined in accordance
therewith.
"Redemption Price" means the greater of:
(1) the Premium Price on the applicable Redemption Date; and
(2) the Converted Market Price on the applicable Redemption Date;
provided, however, that if in connection with any determination of the
Redemption Price the amount specified in clause (y) of the definition of
the term Converted Market Price is greater than 200% of the Ceiling Price
on the date as of which such amount is determined, then for purposes of
computing the Redemption Price in such instance, the amount otherwise
specified in clause (y) of the definition of the term Converted Market
Price shall be reduced by 20% of the amount by which (A) the amount
otherwise specified in clause (y) of the definition of the term Converted
Market Price exceeds (B) the Ceiling Price on the date as of which such
amount is determined.
"Registration Event" shall mean (1) the Registration Statement is not
effective within 105 days of the Issuance Date, if the Registration Statement is
on Form S-3, or 120 days after the Issuance Date, if the Registration Statement
is on Form S-1, (2) the Company fails to file the Registration Statement with
the SEC within 60 days after the Issuance Date, (3) the Company fails to submit
a request for acceleration of the effective date of the Registration Statement
in accordance with Section 3(a) of the Registration Rights Agreement, (4) the
Registration Statement shall cease to be available for use by any holder of
shares of Series D Convertible Preferred Stock who is named therein as a selling
stockholder for any reason (including, without limitation, by reason of an SEC
stop order, a material misstatement or omission in the Registration Statement or
the information contained in the Registration Statement having become outdated);
provided, however, that no Registration Event pursuant to this clause (4) shall
be deemed to occur prior to the SEC Effective Date, (5) the Common Stock is not
listed for trading on any of the NYSE, the AMEX, the Nasdaq or the Nasdaq
SmallCap, or (6) a holder of shares of Series D Preferred Stock having become
unable to convert any shares of Series D Preferred Stock in accordance with
Section 10(a) for any reason (other than by reason of the 4.9% limitation on
beneficial ownership set forth therein or a redemption or repurchase thereof).
"Registration Rights Agreements" means the several Registration Rights
Agreements entered into between the Corporation and the original holders of the
shares of Series
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D Convertible Preferred Stock, as amended or modified from time to time in
accordance with their respective terms.
"Registration Statement" means the Registration Statement required to
be filed by the Corporation with the SEC pursuant to Section 2(a) of the
Registration Rights Agreements.
"SEC" means the United States Securities and Exchange Commission.
"SEC Effective Date" means the date the Registration Statement is
first declared effective by the SEC.
"Senior Dividend Stock" means any class or series of capital stock of
the Corporation ranking senior as to dividends to the Series D Convertible
Preferred Stock.
"Senior Liquidation Stock" means any class or series of capital stock
of the Corporation ranking senior as to liquidation rights to the Series D
Convertible Preferred Stock.
"Series D Convertible Preferred Stock" means the Series D Convertible
Preferred Stock, $.01 par value, of the Corporation.
"Share Limitation Redemption Date" shall mean each date on which the
Corporation is required to redeem shares of Series D Convertible Preferred Stock
as provided in Section 7(a).
"Share Limitation Redemption Price" means the Premium Price on the
applicable Share Limitation Redemption Date.
"Stockholder Approval" shall mean the approval by a majority of the
votes cast by the holders of shares of Common Stock (in person or by proxy) at a
meeting of the stockholders of the Corporation (duly convened at which a quorum
was present), or a written consent of holders of shares of Common Stock entitled
to such number of votes given without a meeting, of the issuance by the
Corporation of 20% or more of the Common Stock of the Corporation outstanding on
the Issuance Date for less than the greater of the book or market value of such
Common Stock on conversion of the Series D Convertible Preferred Stock, as and
to the extent required under Rule 4460(i) of the Nasdaq as in effect from time
to time or any successor provision.
"Tender Offer" means a tender offer or exchange offer.
"Trading Day" means a day on whichever of (x) the national securities
exchange, (y) the Nasdaq or (z) the Nasdaq SmallCap which at the time
constitutes the principal securities market for the Common Stock is open for
general trading of securities.
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"Transfer Agent Instruction" means the Transfer Agent Instruction from
the Corporation to the Conversion Agent for the benefit of the holders from time
to time of shares of Series D Convertible Preferred Stock, provided for in the
Exchange Agreements.
SECTION 2. DESIGNATION AND AMOUNT. The shares of such series shall
be designated as "Series D Convertible Preferred Stock", and the number of
shares constituting the Series D Convertible Preferred Stock shall be 6,500, and
shall not be subject to increase. Of the authorized shares of Series D
Convertible Preferred Stock, 1,500 shares may be issued only as dividends on the
outstanding shares of Series D Convertible Preferred Stock.
SECTION 3. SERIES D PREFERRED STOCK CAPITAL. The amount to be
represented in the Series D Convertible Preferred Stock capital of the
Corporation at all times for each outstanding share of Series D Convertible
Preferred Stock shall be the greater of (i) the Premium Price and (ii) the
Converted Market Price. The Corporation shall take such action as may be
required to maintain the amount required by this Section 3 to be represented in
stated capital for the Series D Convertible Preferred Stock capital not less
frequently than monthly.
SECTION 4. RANK. All Series D Convertible Preferred Stock shall rank
(i) senior to the Common Stock, now or hereafter issued, as to payment of
dividends and distribution of assets upon liquidation, dissolution, or winding
up of the Corporation, whether voluntary or involuntary, (ii) junior to the
Series A Convertible Preferred Stock, Series B Senior Convertible Preferred
Stock and Series C Convertible Preferred Stock of the Corporation, both as to
payment of dividends and as to distributions of assets upon liquidation,
dissolution, or winding up of the Corporation, whether voluntary or involuntary
and (iii) senior to any additional series of the class of Preferred Stock which
series the Board of Directors may from time to time authorize and any additional
class of preferred stock (or series of preferred stock of such class) which the
Board of Directors or the stockholders may from time to time authorize in
accordance herewith.
SECTION 5. DIVIDENDS AND DISTRIBUTIONS. (a) The holders of shares of
Series D Convertible Preferred Stock shall be entitled to receive, when, as, and
if declared by the Board of Directors out of funds legally available for such
purpose, dividends at the rate of $60.00 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
of each share of Series D Convertible Preferred Stock and shall be payable
quarterly on February 15, May 15, August 15, and November 15 of each year
commencing November 15, 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 D
Convertible Preferred Stock shall be paid in cash or, subject to the limitations
in Section 5(b) hereof, Dividend Shares or any combination of cash and Dividend
Shares, at the option of the Corporation as hereinafter provided. The amount of
the dividends payable per share of Series D Convertible Preferred Stock for each
quarterly dividend period shall be computed by dividing the annual dividend
amount by four. The amount of dividends
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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 14% per annum
until paid (or such lesser rate as shall be the maximum rate allowable by
applicable law). No dividends or other distributions, other than the dividends
payable solely in shares of any 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 (except for Option Share Surrenders), unless and until
all accrued and unpaid dividends on the Series D 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.
If at any time any dividend on any Senior Dividend Stock shall be in
arrears, in whole or in part, no dividend shall be paid or declared and set
apart for payment on the Series D Convertible Preferred Stock unless and until
all accrued and unpaid dividends with respect to the Senior Dividend Stock,
including the full dividends for the then current dividend period, shall have
been paid or declared and set apart for payment, without interest. No full
dividends shall be paid or declared and set apart for payment on any 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 D Convertible Preferred Stock. No full dividends shall be paid or
declared and set apart for payment on the Series D 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 D Convertible Preferred Stock and the Parity Dividend Stock, all
dividends paid or declared and set apart for payment upon shares of Series D
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 D 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 D
Convertible Preferred Stock and the Parity Dividend Stock bear to each other.
Any references to "distribution" contained in this Section 5 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) If the Corporation elects in the exercise of its sole discretion
to issue Dividend Shares in payment of dividends on the Series D Convertible
Preferred Stock in respect of any dividend payment date, the Corporation shall
issue and deliver, or cause to be issued and delivered, by the third Trading Day
after such dividend payment date to each holder of shares of Series D
Convertible Preferred Stock a certificate representing the number of whole
Dividend Shares arrived at by dividing (x) the total amount of cash dividends
such holder would be entitled to receive if the aggregate dividends on the
Series D Convertible Preferred Stock held by
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such holder which are being paid in Dividend Shares were being paid in cash by
(y) $1,000.00; provided, however, that if certificates representing Dividend
Shares are issued and delivered to holders of Series D Convertible Preferred
Stock subsequent to the third Trading Day after a dividend payment date, the
amount so divided into such total amount of cash dividends will be reduced by
$10.00 for each Trading Day after the third Trading Day following such dividend
payment date to the date of delivery of Dividend Shares. No fractional Dividend
Shares shall be issued in payment of dividends. In lieu thereof, the Corporation
shall pay cash in an amount equal to the balance of such dividend which is not
paid in Dividend Shares. The Corporation shall not exercise its right to issue
Dividend Shares in payment of dividends on Series D Convertible Preferred Stock
if:
(i) the number of shares of Series D Convertible Preferred Stock at
the time authorized, unissued and unreserved for all purposes, or held in
the Corporation's treasury, is insufficient to permit the conversion of
such Dividend Shares into shares of Common Stock;
(ii) the issuance or delivery of Dividend Shares as a dividend payment
or the issuance of shares of Common Stock upon conversion of such Dividend
Shares by the holder thereof would require registration with or approval of
any governmental authority under any law or regulation, and such
registration or approval has not been effected or obtained or is not in
effect or the Registration Statement is unavailable for use by such holder
for the resale of such shares of Common Stock; provided, however, that this
limitation shall not be deemed to be applicable at any time prior to the
date which is 105 days after the Issuance Date, if the Registration
Statement is on Form S-3, or 120 days after the Issuance Date, if the
Registration Statement is on Form S-1, if this limitation otherwise would
be applicable solely because the Registration Statement shall not yet have
been declared effective, so long as the Corporation shall be in compliance
in all material respects with its obligations under the Registration Rights
Agreements;
(iii) the shares of Common Stock issuable upon conversion of such
Dividend Shares have not been authorized for listing, upon official notice
of issuance, on any securities exchange or market on which the Common Stock
is then listed; or have not been approved for quotation if the Common Stock
is traded in the over-the-counter market;
(iv) the number of shares of Common Stock registered pursuant to
Section 2(a) of the Registration Rights Agreements for resale upon issuance
upon conversion of Dividend Shares shall be sufficient (after taking into
account the number of shares of Common Stock issued or issuable upon
conversion of Dividend Shares theretofore issued) to prevent the resale
pursuant to the Registration Statement of the shares of Common Stock
issuable upon conversion of such Dividend Shares;
(v) the shares of Common Stock issuable upon conversion of such
Dividend Shares (A) cannot be sold or transferred without restriction by
unaffiliated holders who
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receive such Dividend Shares or (B) are no longer listed on any of the
NYSE, the AMEX, the Nasdaq or the Nasdaq SmallCap; or
(vi) an Optional Redemption Event shall have occurred and any holder
of shares of Series D Convertible Preferred Stock shall have exercised
optional redemption rights under Section 11 by reason of such Optional
Redemption Event and the Corporation shall not have paid the Optional
Redemption Price to each holder.
Dividend Shares issued in payment of dividends on Series D Convertible
Preferred Stock pursuant to this Section and shares of Common Stock issuable
upon conversion of such Dividend Shares shall be, and for all purposes shall be
deemed to be, validly issued, fully paid and nonassessable shares of the
Corporation; the issuance and delivery thereof is hereby authorized; and the
delivery will be, and for all purposes shall be deemed to be, payment in full of
the cumulative dividends to which holders are entitled on the applicable
dividend payment date.
(c) 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 if the number of shares so repurchased, redeemed or
otherwise acquired in such transaction or series of related transactions
(excluding any Option Share Surrender) 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 D
Convertible Preferred Stock at the time of such redemption, repurchase or
acquisition the same percentage of such holder's shares of Series D Convertible
Preferred Stock as the percentage of the number of outstanding shares of Common
Stock, Junior Dividend Stock or Junior Liquidation Stock, as the case may be, to
be so redeemed, repurchased or acquired at a purchase price per share of Series
D Convertible Preferred Stock equal to the greater of (i) the Premium Price in
effect on the date of purchase pursuant to this Section 5(c) and (ii) the
Converted Market Price on the date of purchase pursuant to this Section 5(c);
provided, however, that if in connection with any determination of the purchase
price payable pursuant to this Section 5(c) the amount specified in clause (y)
of the definition of the term Converted Market Price is greater than 200% of the
Ceiling Price on the date as of which such amount is determined, then for
purposes of computing the purchase price payable pursuant to this Section 5(c)
in such instance, the amount otherwise specified in clause (y) of the definition
of the term Converted Market Price shall be reduced by 20% of the amount by
which (A) the amount otherwise specified in clause (y) of the definition of the
term Converted Market Price exceeds (B) the Ceiling Price on the date as of
which such amount is determined.
(d) Neither the Corporation nor any subsidiary of the Corporation
shall (1) make any Tender Offer for outstanding shares of Common Stock, unless
the Corporation
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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 D Convertible Preferred Stock to purchase
for cash at the time of purchase in such Tender Offer the same percentage of
shares of Series D 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 D Convertible Preferred Stock equal
to the greater of (i) the Premium Price in effect on the date of purchase
pursuant to this Section 5(d) and (ii) the Converted Market Price on the date of
purchase pursuant to this Section 5(d).
SECTION 6. LIQUIDATION PREFERENCE. In the event of a liquidation,
dissolution, or winding up of the Corporation, whether voluntary or involuntary,
the holders of Series D 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 D Convertible
Preferred Stock equal to the Liquidation Preference, and no more, before any
payment shall be made or any assets distributed to the holders of Junior
Liquidation Stock; provided, however, that such rights shall accrue to the
holders of Series D Convertible Preferred Stock only in the event that the
Corporation's payments with respect to the liquidation preference of the holders
of Senior Liquidation Stock are fully met. After the liquidation preferences of
the 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 D Convertible Preferred Stock and any Parity Liquidation Stock in
proportion to the respective preferential amounts to which each is entitled (but
only to the extent of such preferential amounts). After payment in full of the
Liquidation Preference of the shares of Series D Convertible Preferred Stock and
the liquidation preference of the shares of 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 7. MANDATORY REDEMPTION.
(A) MANDATORY REDEMPTION BASED ON MAXIMUM SHARE AMOUNT. (1)
Notwithstanding any other provision herein, unless the Stockholder Approval
shall have been obtained from the stockholders of the Corporation or waived by
the Nasdaq, so long as the Common Stock is listed on the Nasdaq, the Nasdaq
SmallCap, the NYSE or the AMEX, the Corporation shall not be required to issue
upon conversion of shares of Series D Convertible Preferred Stock pursuant to
Section 10 more than the Maximum Share Amount. The Maximum Share Amount shall
be allocated among the shares of Series D Convertible Preferred Stock at the
time of initial issuance thereof pro rata based on the initial issuance of 5,000
shares of Series D Convertible Preferred Stock. Each certificate for shares of
Series D Convertible Preferred Stock initially issued shall bear a notation as
to the number of shares constituting the portion of the Maximum Share Amount
allocated to the shares of Series D Convertible Preferred Stock represented by
such certificate for purposes of conversion thereof. The Corporation shall
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maintain records which show the number of shares of Series D Convertible
Preferred Stock issued by the Corporation pursuant to Section 5 as dividends on
the shares of Series D Convertible Preferred Stock represented by each
certificate, which records shall be controlling in the absence of manifest
error. Each such additional share of Series D Convertible Preferred Stock shall
be allocated a portion of the Maximum Share Amount allocated to the shares of
Series D Convertible Preferred Stock in respect of which such additional shares
of Series D Convertible Preferred Stock are issued as a dividend and the
certificate for such additional shares of Series D Convertible Preferred Stock
shall bear a notation as to the certificate number of the share of Series D
Convertible Preferred Stock in respect of which such additional share of Series
D Convertible Preferred Stock is issued as a dividend. Upon surrender of any
certificate for shares of Series D Convertible Preferred Stock for transfer or
re-registration thereof (or, at the option of the holder, for conversion
pursuant to Section 10(a) of less than all of the shares of Series D Convertible
Preferred Stock represented thereby), the Corporation shall make a notation on
the new certificate issued upon such transfer or re-registration or evidencing
such unconverted shares, as the case may be, as to the remaining number of
shares of Common Stock from the Maximum Share Amount remaining available for
conversion of the shares of Series D Convertible Preferred Stock evidenced by
such new certificate. If any certificate for shares of Series D Convertible
Preferred Stock is surrendered for split-up into two or more certificates
representing an aggregate number of shares of Series D Convertible Preferred
Stock equal to the number of shares of Series D Convertible Preferred Stock
represented by the certificate so surrendered (as reduced by any contemporaneous
conversion of shares of Series D Convertible Preferred Stock represented by the
certificate so surrendered), each certificate issued on such split-up shall bear
a notation of the portion of the Maximum Share Amount allocated thereto
determined by pro rata allocation from among the remaining portion of the
Maximum Share Amount allocated to the certificate so surrendered. If any shares
of Series D Convertible Preferred Stock represented by a single certificate are
converted in full pursuant to Section 10, all of the portion of the Maximum
Share Amount allocated to such shares of Series D Convertible Preferred Stock
which remains unissued after such conversion shall be re-allocated pro rata to
the outstanding shares of Series D Convertible Preferred Stock held of record by
the holder of record at the close of business on the date of such conversion of
the shares of Series D Convertible Preferred Stock so converted, and if there
shall be no other shares of Series D Convertible Preferred Stock held of record
by such holder at the close of business on such date, then such portion of the
Maximum Share Amount shall be allocated pro rata among the shares of Series D
Convertible Preferred Stock outstanding on such date.
(2) The Corporation shall promptly, but in no event later than five
business days after the occurrence, give notice to each holder of shares of
Series D Convertible Preferred Stock (by telephone line facsimile transmission
at such number as such holder has specified in writing to the Corporation for
such purposes or, if such holder shall not have specified any such number, by
overnight courier or first class mail, postage prepaid, at such holder's address
as the same appears on the stock books of the Corporation) and any holder of
shares of Series D Convertible Preferred Stock may at any time after the
occurrence give notice to the Corporation, in either case, if at any time on or
after December 16, 1998 and on or prior to [INSERT MONTH AND DAY OF CLOSING],
2001 on any ten Trading Days within any period of 20 consecutive Trading Days
the Corporation would not have been required to convert shares of
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Series D Convertible Preferred Stock of such holder in accordance with Section
10(a) as a consequence of the limitations set forth in Section 7(a)(1) had the
shares of Series D Convertible Preferred Stock held by such holder been
converted in full into Common Stock on each such day, determined without regard
to the limitation, if any, on such holder contained in the proviso to the second
sentence of Section 10(a) (any such notice, whether given by the Corporation or
a holder, an "Inconvertibility Notice"). If the Corporation shall have given or
been required to give any Inconvertibility Notice, or if a holder shall have
given any Inconvertibility Notice, then within ten Trading Days after such
Inconvertibility Notice is given or was required to be given, the holder
receiving or giving, as the case may be, such Inconvertibility Notice shall have
the right by written notice to the Corporation (which written notice may be
contained in the Inconvertibility Notice given by such holder) to direct the
Corporation to redeem the portion of such holder's outstanding shares of Series
D Convertible Preferred Stock (which, if applicable, shall be all of such
holder's outstanding shares of Series D Convertible Preferred Stock) as shall
not, on the business day prior to the date of such redemption, be convertible
into shares of Common Stock by reason of the limitations set forth in Section
7(a)(1) (determined without regard to the limitation, if any, on beneficial
ownership of Common Stock by such holder contained in the proviso to the second
sentence of Section 10(a)), within ten business days after such holder so
directs the Corporation, at a price per share equal to the Share Limitation
Redemption Price. If a holder of shares of Series D Convertible Preferred Stock
directs the Corporation to redeem outstanding shares of Series D Convertible
Preferred Stock and, prior to the date the Corporation is required to redeem
such shares of Series D Convertible Preferred Stock, the Corporation would have
been able, within the limitations set forth in Section 7(a)(1), to convert all
of such holder's shares of Series D Convertible Preferred Stock (determined
without regard to the limitation, if any, on beneficial ownership of shares of
Common Stock by such holder contained in the proviso to the second sentence of
Section 10(a)) on any ten Trading Days within any period of 15 consecutive
Trading Days commencing after the period of 20 consecutive Trading Days which
gave rise to the applicable Inconvertibility Notice from the Corporation or such
holder of shares of Series D Convertible Preferred Stock, as the case may be,
had such holder exercised its right to convert all of such holder's shares of
Series D Convertible Preferred Stock into Common Stock on each of such ten
Trading Days within such 15 Trading Day period, then the Corporation shall not
be required to redeem any shares of Series D Convertible Preferred Stock by
reason of such Inconvertibility Notice.
(3) Notwithstanding the giving of any Inconvertibility Notice by the
Corporation to the holders of Series D Convertible Preferred Stock pursuant to
Section 7(a)(2) or the giving or the absence of any notice by the holders of the
Series D Convertible Preferred Stock in response thereto or any redemption of
shares of Series D Convertible Preferred Stock pursuant to Section 7(a)(2),
thereafter the provisions of Section 7(a)(2) shall continue to be applicable on
any occasion unless the Stockholder Approval shall have been obtained from the
stockholders of the Corporation or waived by the Nasdaq.
(4) On each Share Limitation Redemption Date (or such later date as a
holder of shares of Series D Convertible Preferred Stock shall surrender to the
Corporation the certificate(s) for the shares of Series D Convertible Preferred
Stock being redeemed pursuant to this Section 7(a)), the Corporation shall make
payment in immediately available funds of the
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applicable Share Limitation Redemption Price to such holder of shares of Series
D 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 such Share Limitation Redemption Date. Upon redemption of less than
all of the shares of Series D 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 a replacement certificate for the shares of Series D Convertible Preferred
Stock evidenced by such certificate which have not been redeemed. Only whole
shares of Series D Convertible Preferred Stock may be redeemed.
(B) NO OTHER MANDATORY REDEMPTION. The shares of Series D Convertible
Preferred Stock shall not be subject to mandatory redemption by the Corporation
except as provided in Section 7(a).
SECTION 8. NO SINKING FUND. The shares of Series D Convertible
Preferred Stock shall not be subject to the operation of a purchase, retirement
or sinking fund.
SECTION 9. OPTIONAL REDEMPTION.
(A) CORPORATION OPTIONAL REDEMPTION. If (1) the Corporation shall be
in compliance in all material respects with its obligations to the holders of
shares of Series D Convertible Preferred Stock (including, without limitation,
its obligations under the Exchange Agreement, the Registration Rights Agreements
and the provisions of this Statement of Resolution), (2) on the date the
Corporation Optional Redemption Notice is given and at all times until the
Redemption Date, the Registration Statement is effective and available for use
by each holder of shares of Series D Convertible Preferred Stock for the resale
of shares of Common Stock acquired by such holder upon conversion of all shares
of Series D Convertible Preferred Stock held by such holder and (3) no Optional
Redemption Event shall have occurred with respect to which, on the date a
Corporation Optional Redemption Notice is given or on the Redemption Date, any
holder of shares of Series D Convertible Preferred Stock shall have exercised
optional redemption rights under Section 11 by reason of such Optional
Redemption Event and the Corporation shall not have paid the Optional Redemption
Price to such holder, then the Corporation shall have the right, exercisable by
giving a Corporation Optional Redemption Notice not less than 30 days or more
than 60 days prior to the Redemption Date to all holders of record of the shares
of Series D Convertible Preferred Stock, at any time to redeem all or from time
to time to redeem any part of the outstanding shares of Series D Convertible
Preferred Stock in accordance with this Section 9(a). If the Corporation shall
redeem less than all outstanding shares of Series D Convertible Preferred Stock,
such redemption shall be made as nearly as practical pro rata from all holders
of shares of Series D Convertible Preferred Stock. Any Corporation Optional
Redemption Notice under this Section 9(a) shall be given to the holders of
record of the shares of Series D Convertible Preferred Stock at their addresses
appearing on the records of the Corporation; provided, however, that any failure
or defect in the giving of such notice to any such holder shall not affect the
validity of notice to or the redemption of shares of Series D Convertible
Preferred Stock of any other holder. On the Redemption Date (or such later date
as a holder of shares of Series D Convertible Preferred
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Stock surrenders to the Corporation the certificate(s) for shares of Series D
Convertible Preferred Stock to be redeemed pursuant to this Section 9(a)), the
Corporation shall make payment of the applicable Redemption Price to each holder
of shares of Series D Convertible Preferred Stock to be redeemed in immediately
available funds to such account as specified by such holder in writing to the
Corporation at least one business day prior to the Redemption Date. A holder of
shares of Series D Convertible Preferred Stock to be redeemed pursuant to this
Section 9(a) shall be entitled to convert such shares of Series D Convertible
Preferred Stock in accordance with Section 10(a) through the day prior to the
Redemption Date and (2) if the Corporation shall fail to pay the Redemption
Price of any share of Series D Convertible Preferred Stock when due, at any time
after the due date thereof until such date as the Corporation pays the
Redemption Price of such share of Series D Convertible Preferred Stock. No share
of Series D Convertible Preferred Stock as to which the holder exercises the
right of conversion pursuant to Section 10 or the optional redemption right
pursuant to Section 11 may be redeemed by the Corporation pursuant to this
Section 9(a) on or after the date of exercise of such conversion right or
optional redemption right, as the case may be, regardless of whether the
Corporation Optional Redemption Notice shall have been given prior to, or on or
after, the date of exercise of such conversion right or optional redemption
right, as the case may be.
(B) FINAL REDEMPTION. The Corporation shall have the right to redeem
all, but not less than all, outstanding shares of Series D Convertible Preferred
Stock at any time on or after the date which is 1,080 days after the Issuance
Date so long as (1) the Corporation shall be in compliance in all material
respects with its obligations to the holders of the Series D Convertible
Preferred Stock (including, without limitation, its obligations under the
Exchange Agreements, the Registration Rights Agreements and this Statement of
Resolution) and (2) no Optional Redemption Event shall have occurred with
respect to which on the date a Final Redemption Notice is to be given or on the
Final Redemption Date, any holder of shares of Series D Convertible Preferred
Stock shall have exercised optional redemption rights under Section 11 by reason
of such Optional Redemption Event and the Corporation shall not have paid the
Optional Redemption Price to such holder. In order to exercise its rights under
this Section 9(b), the Corporation shall give a Final Redemption Notice not less
than 20 or more than 40 Trading Days prior to the Final Redemption Date to all
holders of record of the shares of Series D Convertible Preferred Stock. Any
Final Redemption Notice shall be given to the holders of record of the shares of
Series D Convertible Preferred Stock by telephone line facsimile transmission to
such number as shown on the records of the Corporation for such purpose;
provided, however, that any failure or defect in the giving of such notice to
any such holder shall not affect the validity of notice to or the redemption of
shares of Series D Convertible Preferred Stock of any other holder. On the
Final Redemption Date (or such later date as a holder of shares of Series D
Convertible Preferred Stock surrenders to the Corporation the certificate(s) for
shares of Series D Convertible Preferred Stock to be redeemed pursuant to this
Section 9(b)), the Corporation shall make payment of the applicable Final
Redemption Price to each holder of shares of Series D Convertible Preferred
Stock to be redeemed in immediately available funds to such account as specified
by such holder in writing to the Corporation at least one business day prior to
the Final Redemption Date. A holder of shares of Series D Convertible Preferred
Stock to be redeemed pursuant to this Section 9(b) shall be entitled to convert
such shares of Series D Convertible Preferred Stock in accordance with Section
10 through the day prior to the Final
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Redemption Date and (2) if the Corporation shall fail to pay the Final
Redemption Price of any share of Series D Convertible Preferred Stock when due,
at any time after the due date thereof until such date as the Corporation pays
the Final Redemption Price of such share of Series D Convertible Preferred Stock
to such holder. No share of Series D Convertible Preferred Stock as to which a
holder exercises the right of conversion pursuant to Section 10 or the optional
redemption right pursuant to Section 11 may be redeemed by the Corporation
pursuant to this Section 9(b) on or after the date of exercise of such
conversion right or optional redemption right, as the case may be, regardless of
whether the Final Redemption Notice shall have been given prior to, or on or
after, the date of exercise of such conversion right or optional redemption
right, as the case may be. So long as during the period from the Issuance Date
through the date the Corporation pays the Final Redemption Price the Corporation
shall not have commenced a voluntary case or other proceeding, and no person
shall have commenced an involuntary case or other proceeding against the
Corporation, in any such case seeking liquidation, reorganization or other
relief with respect to the Corporation or its debts under any bankruptcy,
insolvency, receivership, moratorium, or other similar law now or hereafter in
effect or seeking the appointment of a trustee, receiver, liquidator, custodian,
or other similar official of the Corporation or any substantial part of the
Corporation's property, the Corporation shall not have consented to any such
relief or to the appointment of or taking possession by any such official in an
involuntary case or other proceeding commenced against it, and the Corporation
shall not have made a general assignment for the benefit of creditors, then the
Corporation shall have the right, exercisable by a statement to such effect in
the Final Redemption Notice, to pay the Final Redemption Price by the issuance
to the holders of shares of Series D Convertible Preferred Stock to be redeemed
of shares of Common Stock, valued for this purpose at the Conversion Price on
the Final Redemption Date, in lieu of payment of cash, so long as all shares of
Common Stock to be so issued would, if issued as dividends on shares of Series D
Convertible Preferred Stock, meet the criteria in clauses (i) through (vi) of
Section 5(b).
(C) NO OTHER OPTIONAL REDEMPTION. The shares of Series D Convertible
Preferred Stock shall not be subject to redemption at the option of the
Corporation except as provided in Sections 9(a) and 9(b).
SECTION 10. CONVERSION.
(A) CONVERSION AT OPTION OF HOLDER. The holders of the Series D
Convertible Preferred Stock may at any time on or after the earlier of (x) the
SEC Effective Date and (y) the date which is 90 days after the Issuance Date
convert at any time all or from time to time any part of their shares of Series
D Convertible Preferred Stock into fully paid and nonassessable shares of Common
Stock and such other securities and property as herein provided. Each share of
Series D Convertible Preferred Stock may be converted at the office of the
Conversion Agent or at such other additional office or offices, if any, as the
Board of Directors may designate, 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 D Convertible Preferred Stock being
converted, and (iii) accrued but unpaid interest on the dividends on the share
of Series D Convertible Preferred Stock
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being converted in arrears to the applicable Conversion Date at the rate
provided in Section 5 by (y) the Conversion Price for such Conversion Date (the
"Conversion Rate"); provided, however, that in no event shall any holder of
shares of Series D Convertible Preferred Stock be entitled to convert any shares
of Series D Convertible Preferred Stock in excess of that number of shares of
Series D Convertible Preferred Stock upon conversion of which the sum of (1) the
number of shares of Common Stock beneficially owned by such holder and all
Aggregated Persons of such holder (other than shares of Common Stock deemed
beneficially owned through the ownership of unconverted shares of Series D
Convertible Preferred Stock) and (2) the number of shares of Common Stock
issuable upon the conversion of the number of shares of Series D Convertible
Preferred Stock with respect to which the determination in this proviso is being
made, would result in beneficial ownership by such holder and all Aggregated
Persons of such holder of more than 4.9% of the outstanding shares of Common
Stock. For purposes of the proviso to the immediately preceding sentence,
beneficial ownership shall be determined in accordance with Section 13(d) of the
Exchange Act and Regulation 13D-G thereunder, except as otherwise provided in
clause (1) of the proviso to the immediately preceding sentence.
(B) OTHER PROVISIONS. (1) Notwithstanding anything in this Section
10(b) to the contrary, no change in the Conversion Amount pursuant to this
Section 10(b) shall actually be made until the cumulative effect of the
adjustments called for by this Section 10(b) 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 10(b) and not previously made. Notwithstanding anything in
this Section 10(b), no change in the Conversion Amount shall be made that would
result in the price at which a share of Series D Convertible Preferred Stock is
converted being less than the par value of the Common Stock into which shares of
Series D Convertible Preferred Stock are at the time convertible.
(2) The holders of shares of Series D Convertible Preferred Stock at
the close of business on the record date for any dividend payment to holders of
Series D Convertible Preferred Stock shall 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; provided, however, that the holder of shares of Series D
Convertible Preferred Stock surrendered 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 must pay to the
Corporation, within five days after receipt by such holder, an amount equal to
the dividend payable on such shares on such dividend payment date if such
dividend is paid by the Corporation to such holder. A holder of shares of Series
D 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 D 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 D
Convertible Preferred Stock. Except as provided above, no adjustment shall be
made in respect of cash
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dividends on Common Stock or Series D Convertible Preferred Stock that may be
accrued and unpaid at the date of surrender of shares of Series D Convertible
Preferred Stock.
(3) (A) The right of the holders of Series D Convertible Preferred
Stock to convert their shares shall be exercised by giving (which may be done by
telephone line facsimile transmission) a Conversion Notice to the Conversion
Agent. If a holder of Series D Convertible Preferred Stock elects to convert
any shares of Series D Convertible Preferred Stock in accordance with Section
10(a), such holder shall not be required to surrender the certificate(s)
representing such shares of Series D Convertible Preferred Stock to the
Corporation unless all of the shares of Series D Convertible Preferred Stock
represented thereby are so converted. Each holder of shares of Series D
Convertible Preferred Stock and the Corporation shall maintain records showing
the number of shares so converted and the dates of such conversions or shall use
such other method, satisfactory to such holder and the Corporation, so as to not
require physical surrender of such certificates upon each such conversion. In
the event of any dispute or discrepancy, such records of the Corporation shall
be controlling and determinative in the absence of manifest error.
Notwithstanding the foregoing, if any shares of Series D Convertible Preferred
Stock evidenced by a particular certificate therefor are converted as aforesaid,
the holder of Series D Convertible Preferred Stock may not transfer the
certificate(s) representing such shares of Series D Convertible Preferred Stock
unless such holder first physically surrenders such certificate(s) to the
Corporation, whereupon the Corporation will forthwith issue and deliver upon the
order of such holder of shares of Series D Convertible Preferred Stock new
certificate(s) of like tenor, registered as such holder of shares of Series D
Convertible Preferred Stock (upon payment by such holder of shares of Series D
Convertible Preferred Stock of any applicable transfer taxes) may request,
representing in the aggregate the remaining number of shares of Series D
Convertible Preferred Stock represented by such certificate(s). Each holder of
shares of Series D Convertible Preferred Stock, by acceptance of a certificate
for such shares, acknowledges and agrees that (1) by reason of the provisions of
this paragraph, following conversion of any shares of Series D Convertible
Preferred Stock represented by such certificate, the number of shares of Series
D Convertible Preferred Stock represented by such certificate may be less than
the number of shares stated on such certificate, and (2) the Corporation may
place a legend on the certificates for shares of Series D Convertible Preferred
Stock which refers to or describes the provisions of this paragraph.
(B) The Corporation shall pay any transfer tax arising in connection
with any conversion of shares of Series D Convertible Preferred Stock except
that the Corporation shall not, however, be required to pay any tax which may be
payable in respect of any transfer involved in the issue and delivery upon
conversion of shares of Common Stock or other securities or property in a name
other than that of the holder of the shares of the Series D Convertible
Preferred Stock being converted, and the Corporation shall not be required to
issue or deliver any such shares or other securities or property unless and
until the person or persons requesting the issuance thereof shall have paid to
the Corporation the amount of any such tax or shall have established to the
satisfaction of the Corporation that such tax has been paid. The number of
shares of Common Stock to be issued upon each conversion of shares of Series D
Convertible Preferred Stock shall be the number set forth in the applicable
Conversion Notice which number shall be conclusive absent manifest error. The
Corporation shall notify a holder
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who has given a Conversion Notice of any claim of manifest error within one
Trading Day 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 for all purposes to be in proper
form unless the Corporation notifies a holder of shares of Series D Convertible
Preferred Stock being converted within one Trading Day after a Conversion Notice
has been given (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 to
correct all such defects.
(4) The Corporation shall reserve from its authorized, unissued and
otherwise unreserved Common Stock free from preemptive and similar rights
7,246,371 shares (such amount to be subject to equitable adjustment from time to
time on terms reasonably acceptable to the Holder for stock splits, stock
dividends, combinations, capital reorganizations and similar events relating to
the Common Stock occurring on or after the Issuance Date) to provide for the
issuance of Common Stock upon the conversion in full of the Series D Convertible
Preferred Stock, subject to reduction from time to time by the number of shares
of Common Stock issued on conversion of the Series D Convertible Stock. The
Corporation (and any successor corporation) shall take all action necessary so
that a number of shares of the authorized but unissued Common Stock (or common
stock in the case of any successor corporation) sufficient to provide for the
conversion of the Series D 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 which
would change the number of shares of Common Stock into which each share of the
Series D 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 D Convertible Preferred Stock on the new basis. If at any
time the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all of the outstanding shares of Series D
Convertible Preferred Stock, the Corporation promptly shall seek, and use its
best efforts to obtain and complete, such corporate action as may, in the
opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purpose.
(5) In case of any consolidation or merger of the Corporation with any
other corporation (other than a wholly-owned subsidiary of the Corporation) in
which the Corporation is not the surviving corporation, or in case of any sale
or transfer of all or substantially all of the assets of the Corporation, or in
the case of any share exchange pursuant to which all of the outstanding shares
of Common Stock are converted into other securities or property, the Corporation
shall make appropriate provision or cause appropriate provision to be made so
that each holder of shares of Series D Convertible Preferred Stock then
outstanding shall have the right thereafter to convert such shares of Series D
Convertible Preferred Stock into the kind of shares of stock and other
securities and property receivable upon such consolidation, merger,
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sale, transfer, or share exchange by a holder of shares of Common Stock into
which such shares of Series D 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 D
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 D Convertible Preferred Stock the right to
elect the securities, cash, or other assets into which the Series D 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 D Convertible Preferred Stock, the Corporation shall issue and deliver to
such person certificates for the Common Stock issuable upon such conversion
within three Trading Days after such Conversion Notice is given and the person
converting shall be deemed to be the holder of record of the Common Stock
issuable upon such conversion, 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 such holder, or any setoff, counterclaim,
recoupment, limitation or termination, or any breach or alleged breach by such
holder or any other person of any obligation to the Corporation or any violation
or alleged violation of law by such holder or any other person, and irrespective
of any other circumstance which 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 D 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, reasonable fees and
expenses of legal counsel incurred by such holder as a result of such failure,
(2) the Conversion Percentage used to determine the Conversion Price applicable
to such conversion shall be reduced by one percentage point from the Conversion
Percentage otherwise used to calculate the Conversion Price applicable to such
conversion or, if such conversion is based on the Ceiling Price, the Ceiling
Price used to determine the Conversion Price applicable to such conversion shall
be reduced by one percentage point from the amount that the Conversion Price
otherwise would have been without reduction
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pursuant hereto, in either such case, for each Trading Day after such third
Trading Day until such shares of Common Stock are delivered to such holder and
(3) such holder may by written notice (which may be given by mail, courier,
personal service or telephone line facsimile transmission) 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 D Convertible Preferred Stock, rescind such
conversion, whereupon such holder shall have the right to convert such shares of
Series D Convertible Preferred Stock thereafter in accordance herewith.
(7) No fractional shares of Common Stock shall be issued upon
conversion of Series D Convertible Preferred Stock but, in lieu of any fraction
of a share of Common Stock to purchase fractional shares of Common Stock which
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 one share of Common Stock on the three consecutive Trading Days
ending on the Trading Day immediately preceding the Conversion Date times (ii)
such fraction of a share.
(8) The Conversion Amount shall be adjusted from time to time under
certain circumstances, subject to the provisions of Section 10(b)(1), as
follows:
(i) In case the Corporation shall issue rights or warrants on a pro
rata basis to all holders of the Common Stock entitling such holders to
subscribe for or purchase Common Stock on the record date referred to below at a
price per share less than the Current Price for such record date, then in each
such case the Conversion Amount in effect on such record date shall be adjusted
in accordance with the formula
C\\1\\ = C x O + N
-----
O + N x P
-----
M
where
C\\1\\ = 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).
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M = the Current Price per share of Common Stock on the record date.
Such adjustment shall become effective immediately after the record date for the
determination of stockholders 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 hereinafter defined) evidences
of its indebtedness or assets (including securities, but excluding any warrants
or subscription rights 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
C\\1\\ = C x M
-----
M - F
where
C\\1\\ = the adjusted Conversion Amount
C = the current Conversion Amount
M = the Current Price per share of Common Stock on the record date
mentioned below.
F = 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 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 stockholders 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 D 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 10(b)(5), the holder of any Series D 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.
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(9) Except as otherwise provided above in this Section 10, 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 D Convertible Preferred Stock and the transfer agent for 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 10, and any adjustment so evidenced, given in good
faith, shall be binding upon all stockholders and upon the Corporation.
Whenever the Conversion Amount is adjusted, the Corporation will give notice by
mail to the holders of record of Series D 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 10(b)(5) or in subparagraphs (i) or (ii) of Section
10(b)(8) which would result in any adjustment in the Conversion Amount under
this Section 10(b), 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 D 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.
SECTION 11. REDEMPTION AT OPTION OF HOLDERS.
(A) REDEMPTION RIGHT. If an Optional Redemption Event occurs, then,
in addition to any other right or remedy of any holder of shares of Series D
Convertible Preferred Stock, each holder of shares of Series D Convertible
Preferred Stock shall have the right, at such holder's option, to require the
Corporation to redeem all of such holder's shares of Series D Convertible
Preferred Stock, or any portion thereof, on the date that is 10 business days
after the date such holder gives the Corporation an Optional Redemption Notice
with respect to such Optional Redemption Event at any time while any of such
holder's shares of Series D Convertible Preferred Stock are outstanding, at a
price equal to the Optional Redemption Price.
(B) NOTICES; METHOD OF EXERCISING OPTIONAL REDEMPTION RIGHTS, ETC.
(1) On or before the fifth business day after the occurrence of an Optional
Redemption Event, the Corporation shall give to each holder of outstanding
shares of Series D Convertible Preferred
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<PAGE>
Stock a notice of the occurrence of such Optional Redemption Event and of the
redemption right set forth herein arising as a result thereof. Such notice from
the Corporation shall set forth:
(i) the date by which the optional redemption right must be exercised,
and
(ii) a description of the procedure (set forth below) which each such
holder must follow to exercise such holder's optional redemption right.
No failure of the Corporation to give such notice or defect therein shall limit
the right of any holder of shares of Series D Convertible Preferred Stock to
exercise the optional redemption right or affect the validity of the proceedings
for the redemption of such holder's shares of Series D Convertible Preferred
Stock.
(2) To exercise its optional redemption right, each holder of
outstanding shares of Series D Convertible Preferred Stock shall deliver to the
Corporation on or before the thirtieth day after the notice required by Section
11(b)(1) is given to such holder (or if no such notice has been given by the
Corporation to such holder, within forty days after such holder first learns of
such Optional Redemption Event) an Optional Redemption Notice to the
Corporation. An Optional Redemption Notice may be revoked by such holder giving
such Optional Redemption Notice by giving notice of such revocation to the
Corporation at any time prior to the time the Corporation pays the Optional
Redemption Price to such holder.
(3) If a holder of shares of Series D Convertible Preferred Stock
shall have given an Optional Redemption Notice, on the date which is three
business days after the date such Optional Redemption Notice is given (or such
later date as such holder surrenders such holder's certificates for the shares
of Series D Convertible Preferred Stock redeemed) the Corporation shall make
payment in immediately available funds of the applicable Optional Redemption
Price to such account as specified by such holder in writing to the Corporation
at least one business day prior to the applicable redemption date.
(C) OTHER. (1) In connection with a redemption pursuant to this
Section 11 of less than all of the shares of Series D Convertible Preferred
Stock evidenced by a particular certificate, promptly, but in no event later
than three Trading Days after surrender of such certificate to the Corporation,
the Corporation shall issue and deliver to such holder a replacement certificate
for the shares of Series D Convertible Preferred Stock evidenced by such
certificate which have not been redeemed.
(2) An Optional Redemption Notice given by a holder of shares of
Series D Convertible Preferred Stock shall be deemed for all purposes to be in
proper form unless the Corporation notifies such holder in writing within three
business days after such Optional Redemption Notice has been given (which notice
shall specify all defects in such Optional Redemption Notice), and any Optional
Redemption Notice containing any such defect shall nonetheless be effective on
the date given if such holder promptly undertakes to correct all such defects.
No such claim of error shall limit or delay performance of the Corporation's
obligation
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to redeem all shares of Series D Convertible Preferred Stock not in dispute
whether or not such holder makes such undertaking.
SECTION 12. VOTING RIGHTS; CERTAIN RESTRICTIONS.
(A) VOTING RIGHTS. Except as otherwise required by law or expressly
provided herein, shares of Series D Convertible Preferred Stock shall not be
entitled to vote on any matter.
(B) ARTICLES OF INCORPORATION; CERTAIN STOCK. The affirmative vote or
consent of the holders of a majority of the outstanding shares of the Series D
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 D Convertible Preferred Stock, or (2) the
creation and issuance of any Senior Dividend Stock or Senior 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 D Convertible Preferred Stock except as otherwise required by
law.
(C) REPURCHASES OF SERIES D CONVERTIBLE PREFERRED STOCK. The
Corporation shall not repurchase or otherwise acquire any shares of Series D
Convertible Preferred Stock (other than pursuant to Sections 7(a), 9(a), 9(b) or
11) unless the Corporation offers to repurchase or otherwise acquire
simultaneously a pro rata portion of each holder's shares of Series D
Convertible Preferred Stock for cash at the same price per share.
(D) OTHER. So long as any shares of Series D Convertible Preferred
Stock are outstanding:
(1) PAYMENT OF OBLIGATIONS. The Corporation will pay and discharge,
and will cause each subsidiary of the Corporation to pay and discharge, when due
all their respective obligations and liabilities which are material to the
Corporation and its subsidiaries taken as a whole, including, without
limitation, tax liabilities, except where the same may be contested in good
faith by appropriate proceedings.
(2) MAINTENANCE OF PROPERTY; INSURANCE. (A) The Corporation will
keep, and will cause each subsidiary of the Corporation to keep, all material
property useful and necessary in its business in good working order and
condition, ordinary wear and tear excepted.
(B) The Corporation will maintain, and will cause each subsidiary of
the Corporation to maintain, with financially sound and responsible insurance
companies, insurance against loss or damage by fire or other casualty and such
other insurance, including but not
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limited to, product liability insurance, in such amounts and covering such risks
as is reasonably adequate for the conduct of their businesses and the value of
their properties.
(3) CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE. The Corporation
will continue, and will cause each subsidiary of the Corporation to continue, to
engage in business of the same general type as conducted by the Corporation and
its operating subsidiaries at the time this Statement of Resolution filed with
the Secretary of State of the State of Texas, and will preserve, renew and keep
in full force and effect, and will cause each subsidiary of the Corporation to
preserve, renew and keep in full force and effect, their respective corporate
existence and their respective material rights, privileges and franchises
necessary or desirable in the normal conduct of business.
(4) COMPLIANCE WITH LAWS. The Corporation will comply, and will cause
each subsidiary of the Corporation to comply, in all material respects with all
applicable laws, ordinances, rules, regulations, decisions, orders and
requirements of governmental authorities and courts (including, without
limitation, environmental laws) except (i) where compliance therewith is
contested in good faith by appropriate proceedings or (ii) where non-compliance
therewith could not reasonably be expected to have a material adverse effect on
the business, condition (financial or otherwise), operations, performance,
properties or prospects of the Corporation and its subsidiaries, taken as a
whole.
(5) INVESTMENT COMPANY ACT. The Corporation will not be or become an
open-end investment trust, unit investment trust or face-amount certificate
company that is or is required to be registered under Section 8 of the
Investment Company Act of 1940, as amended, or any successor provision.
(6) TRANSACTIONS WITH AFFILIATES. The Corporation will not, and will
not permit any subsidiary of the Corporation, directly or indirectly, to pay any
funds to or for the account of, make any investment (whether by acquisition of
stock or indebtedness, by loan, advance, transfer of property, guarantee or
other agreement to pay, purchase or service, directly or indirectly, any
indebtedness, or otherwise) in, lease, sell, transfer or otherwise dispose of
any assets, tangible or intangible, to, or participate in, or effect any
transaction in connection with, any joint enterprise or other joint arrangement
with, any Affiliate of the Corporation, except, on terms to the Corporation or
such subsidiary no less favorable than terms that could be obtained by the
Corporation or such subsidiary from a person that is not an Affiliate of the
Corporation, as determined in good faith by the Board of Directors.
(7) COMPLIANCE. The Corporation shall (a) use its commercially
reasonable best efforts to obtain knowledge of any failure or default by the
Corporation in the timely performance of any material obligation to the holders
of the Series D Convertible Preferred Stock under the terms of this Statement of
Resolution, the Exchange Agreements, the Registration Rights Agreement, the
Transfer Agent Instruction or any other document or instrument executed and
delivered by the Corporation in connection herewith or therewith and (b) shall
notify the holders of the Series D Convertible Preferred Stock promptly, but in
no event later than three Business Days after the Corporation first learns of
any such failure or default.
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SECTION 13. OUTSTANDING SHARES. For purposes of this Statement of
Resolution, all shares of Series D Convertible Preferred Stock shall be deemed
outstanding except (i) from the applicable Conversion Date, each share of Series
D Convertible Preferred Stock converted into Common Stock, unless the
Corporation shall default in its obligation to issue and deliver shares of
Common Stock upon such conversion as and when required by Section 10; (ii) from
the date of registration of transfer, all shares of Series D Convertible
Preferred Stock held of record by the Corporation or any subsidiary or Affiliate
of the Corporation (other than any original holder of shares of Series D
Convertible Preferred Stock) and (iii) from the applicable Redemption Date,
Share Limitation Redemption Date, Final Redemption Date or date of redemption
pursuant to Section 11, all shares of Series D Convertible Preferred Stock which
are redeemed or repurchased, so long as in each case the Redemption Price, the
Share Limitation Redemption Price, the Final Redemption Price, the Optional
Redemption Price or other repurchase price, as the case may be, of such shares
of Series D Convertible Preferred Stock shall have been paid by the Corporation
as and when due hereunder.
SECTION 14. MISCELLANEOUS.
(A) NOTICES. Any notices required or permitted to be given under the
terms of this Statement of Resolution shall be in writing and shall be sent by
mail or delivered personally (which shall include telephone line facsimile
transmission) or by courier and shall be deemed given five days after being
placed in the mail, if mailed, or upon receipt, if delivered personally or by
courier (a) in the case of the Corporation, addressed to the Corporation at 1250
Wood Branch Park Drive, Houston, Texas, 77079, Attention: Chief Executive
Officer (telephone line facsimile transmission number (281) 529-4650), or, in
the case of any holder of shares of Series D Convertible Preferred Stock, at
such holder's address or telephone line facsimile transmission number shown on
the stock books maintained by the Corporation with respect to the Series D
Convertible Preferred Stock or such other address as the Corporation shall have
provided by notice to the holders of shares of Series D Convertible Preferred
Stock in accordance with this Section or any holder of shares of Series D
Convertible Preferred Stock shall have provided to the Corporation in accordance
with this Section.
(B) REPLACEMENT OF CERTIFICATES. Upon receipt by the Corporation of
evidence reasonably satisfactory to the Corporation of the ownership of and the
loss, theft, destruction or mutilation of any certificate for shares of Series D
Convertible Preferred Stock and (1) in the case of loss, theft or destruction,
of indemnity from the record holder of the certificate for such shares of Series
D Convertible Preferred Stock reasonably satisfactory in form to the Corporation
(and without the requirement to post any bond or other security) or (2) in the
case of mutilation, upon surrender and cancellation of the certificate for such
shares of Series D Convertible Preferred Stock, the Corporation will execute and
deliver to such holder a new certificate for such shares of Series D Convertible
Preferred Stock without charge to such holder.
(C) OVERDUE AMOUNTS. Except as otherwise specifically provided in
Section 5 with respect to dividends in arrears on the Series D Convertible
Preferred Stock, whenever any
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<PAGE>
amount which is due to any holder of shares of Series D Convertible Preferred
Stock is not paid to such holder when due, such amount shall bear interest at
the rate of 14% per annum ( or such other rate as shall be the maximum rate
allowable by applicable law) until paid in full.
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<PAGE>
IN WITNESS WHEREOF, Equalnet Communications Corp. has caused this
certificate to be signed by ________________________________________, its
__________________________, as of the _______ day of August, 1998.
EQUALNET COMMUNICATIONS CORP.
By:
-------------------------------------
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<PAGE>
STATE OF TEXAS )
)
COUNTY OF HARRIS )
SWORN AND SUBSCRIBED to this ____ day of August, 1998, by ______________
______________, ______________________________ of Equalnet Communications Corp.
NOTARY PUBLIC IN AND FOR
THE STATE OF TEXAS
My Commission Expires:
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<PAGE>
EXHIBITS 10.27
AND 10.35
Draft of 8/21/98
ANNEX II ANNEX III
TO TO
NOTE PURCHASE NOTE PURCHASE
AGREEMENT AND EXCHANGE
AGREEMENT
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES HAVE BEEN ACQUIRED FOR
INVESTMENT AND MAY NOT BE RESOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR AN OPINION OF COUNSEL THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT.
Right to Purchase ____________ Shares of Common Stock of Equalnet
Communications Corp.
EQUALNET COMMUNICATIONS CORP.
COMMON STOCK PURCHASE WARRANT
NO. W-1
EQUALNET COMMUNICATIONS CORP., a Texas corporation (the "Company"),
hereby certifies that, for value received, [NAME OF BUYER] or registered assigns
(the "Holder"), is entitled, subject to the terms set forth below, to purchase
from the Company at any time or from time to time after the date hereof, and
before 5:00 p.m., New York City time, on the Expiration Date (as defined
herein), [BEFORE ISSUANCE INSERT NUMBER OF SHARES OF COMMON STOCK DETERMINED IN
ACCORDANCE WITH NOTE PURCHASE AGREEMENT] fully paid and nonassessable shares of
Common Stock (as defined herein) at a purchase price per share equal to the
Purchase Price (as hereinafter defined). The number of such shares of Common
Stock and the Purchase Price are subject to adjustment as provided in this
Warrant.
As used herein the following terms, unless the context otherwise
requires, have the following respective meanings:
"AMEX" means the American Stock Exchange, Inc.
"Common Stock" includes the Company's Common Stock, $.01 par value per
share, as authorized on the date hereof, and any other securities into
which or for which the Common Stock may be converted or exchanged pursuant
to a plan of recapitalization, reorganization, merger, sale of assets or
otherwise.
<PAGE>
"Company" shall include Equalnet Communications Corp. and any
corporation that shall succeed to or assume the obligation of Equalnet
Communications Corp. hereunder in accordance with the terms hereof.
"Expiration Date" means August [INSERT CLOSING DAY], 2003.
"Issuance Date" means the first date of original issuance of this
Warrant.
"Maximum Share Amount" shall have the meaning provided in the Note.
"Nasdaq" means the Nasdaq National Market.
"Nasdaq SmallCap" means the Nasdaq SmallCap Market.
"1934 Act" means the Securities Exchange Act of 1934, as amended.
"1933 Act" means the Securities Act of 1933, as amended.
"Note" means the 6% Senior Convertible Note due 2001 issued by the
Company, all 6% Senior Convertible Notes due 2001 issued by the Company
upon transfer, re-registration or split-up thereof and all Interest Notes,
as defined therein.
"Note Purchase Agreement" means the Note Purchase Agreement or the
Note Purchase and Exchange Agreement, as the case may be, dated as of
August ____, 1998, by and between the Company and the original Holder of
this Warrant, as amended from time to time in accordance with its terms.
"NYSE" shall mean the New York Stock Exchange, Inc.
"Other Securities" refers to any stock (other than Common Stock) and
other securities of the Company or any other person (corporate or
otherwise) which the Holder at any time shall be entitled to receive, or
shall have received, on the exercise of this Warrant, in lieu of or in
addition to Common Stock, or which at any time shall be issuable or shall
have been issued in exchange for or in replacement of Common Stock or Other
Securities pursuant to Section 4.
"Purchase Price" shall mean $[INSERT 110% OF ARITHMETIC AVERAGE OF
CLOSING BID PRICE OF COMMON STOCK FOR FIVE TRADING DAYS PRIOR TO CLOSING
DATE] per share, subject to adjustment as provided in this Warrant.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of August _____, 1998, by and between the Company and
the original Holder of this Warrant, as amended from time to time in
accordance with its terms.
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<PAGE>
"Stockholder Approval" means the approval by a majority of the votes
cast by the holders of shares of Common Stock (in person or by proxy) at a
meeting of the stockholders of the Company (duly convened at which a quorum
was present), or a written consent of holders of shares of Common Stock
entitled to such number of votes given without a meeting, of the issuance
by the Company of 20% or more of the outstanding Common Stock of the
Company for less than the greater of the book or market value of such
Common Stock on conversion of this Note and the Other Notes, as and to the
extent required under Rule 4460(i) of Nasdaq as in effect at such time (or
any successor or replacement provision thereof).
"Trading Day" means a day on which the principal securities market for
the Common Stock is open for general trading of securities.
1. EXERCISE OF WARRANT.
1.1 EXERCISE. (a) This Warrant may be exercised by the Holder hereof
in full or in part at any time or from time to time during the exercise period
specified in the first paragraph hereof until the Expiration Date by surrender
of this Warrant and the subscription form annexed hereto (duly executed by the
Holder), to the Company's transfer agent and registrar for the Common Stock, and
by making payment, in cash or by certified or official bank check payable to the
order of the Company, in the amount obtained by multiplying (a) the number of
shares of Common Stock designated by the Holder in the subscription form by (b)
the Purchase Price then in effect. On any partial exercise the Company will
forthwith issue and deliver to or upon the order of the Holder hereof a new
Warrant or Warrants of like tenor, in the name of the Holder hereof or as the
Holder (upon payment by the Holder of any applicable transfer taxes) may
request, providing in the aggregate on the face or faces thereof for the
purchase of the number of shares of Common Stock for which such Warrant or
Warrants may still be exercised.
(b) Notwithstanding any other provision of this Warrant, in no event
shall the Holder be entitled at any time to purchase a number of shares of
Common Stock on exercise of this Warrant in excess of that number of shares upon
purchase of which the sum of (1) the number of shares of Common Stock
beneficially owned by the Holder and all persons whose beneficial ownership of
shares of Common Stock would be aggregated with the Holder's beneficial
ownership of shares of Common Stock for purposes of Section 13(d) of the 1934
Act and Regulation 13D-G thereunder, (each such person other than the Holder an
"Aggregated Person" and all such persons other than the Holder, collectively,
the "Aggregated Persons") (other than shares of Common Stock deemed beneficially
owned through the ownership by the Holder and all Aggregated Persons of the
Holder of the unexercised portion of this Warrant and any other security of the
Company which contains similar provisions) and (2) the number of shares of
Common Stock issuable upon exercise of the portion of this Warrant with respect
to which the determination in this sentence is being made, would result in
beneficial ownership by the Holder and all Aggregated Persons of the Holder of
more than 4.9% of the outstanding shares of Common Stock. For purposes of the
immediately preceding sentence, beneficial ownership shall be determined in
accordance with Section 13(d) of the 1934 Act and Regulation 13D-G thereunder,
except as otherwise provided in clause (1) of the immediately preceding
sentence.
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<PAGE>
For purposes of the second preceding sentence, the Company shall be entitled to
rely, and shall be fully protected in relying, on any statement or
representation made by the Holder to the Company in connection with a particular
exercise of this Warrant, without any obligation on the part of the Company to
make any inquiry or investigation or to examine its records or the records of
any transfer agent for the Common Stock.
1.2 NET ISSUANCE. Notwithstanding anything to the contrary contained
in Section 1.1, the Holder may elect to exercise this Warrant in whole or in
part by receiving shares of Common Stock equal to the net issuance value (as
determined below) of this Warrant, or any part hereof, upon surrender of this
Warrant to the Company's transfer agent and registrar for the Common Stock the
principal office of the Company together with the subscription form annexed
hereto (duly executed by the Holder), in which event the Company shall issue to
the Holder a number of shares of Common Stock computed using the following
formula:
X = Y (A-B)
-------
A
Where: X = the number of shares of Common Stock to be issued to the
Holder
Y = the number of shares of Common Stock as to which this
Warrant is to be exercised
A = the current fair market value of one share of Common Stock
calculated as of the last trading day immediately preceding
the exercise of this Warrant
B = the Purchase Price
As used herein, current fair market value of Common Stock as of a
specified date shall mean with respect to each share of Common Stock the average
of the closing sale price of the Common Stock on the principal securities market
on which the Common Stock may at the time be listed or, if there have been no
sales on any such exchange on such day, the average of the highest bid and
lowest asked prices on the principal securities market at the end of such day,
or, if on such day the Common Stock is not so listed, the average of the
representative bid and asked prices quoted in the Nasdaq System as of 4:00 p.m.,
New York City time, or, if on such day the Common Stock is not quoted in the
Nasdaq System, the average of the highest bid and lowest asked price on such day
in the domestic over-the-counter market as reported by the National Quotation
Bureau, Incorporated, or any similar successor organization, in each such case
averaged over a period of five consecutive Trading Days consisting of the day as
of which the current fair market value of a share of Common Stock is being
determined (or if such day is not a Trading Day, the Trading Day next preceding
such day) and the four consecutive Trading Days prior to such day. If on the
date for which current fair market value is to be determined the Common Stock is
not listed on any securities exchange or quoted in the Nasdaq System or the
over-the-counter market, the current fair market value of Common Stock shall be
the highest price per share which the Company could then obtain from a willing
buyer (not a current
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<PAGE>
employee or director) for shares of Common Stock sold by the Company, from
authorized but unissued shares, as determined in good faith by the Board of
Directors of the Company, unless prior to such date the Company has become
subject to a merger, acquisition or other consolidation pursuant to which the
Company is not the surviving party, in which case the current fair market value
of the Common Stock shall be deemed to be the value received by the holders of
the Company's Common Stock for each share thereof pursuant to the Company's
acquisition.
1.3 LIMITATION ON SHARES ISSUABLE ON EXERCISE. Notwithstanding any
other provision herein, unless the Stockholder Approval shall have been obtained
from the stockholders of the Company or waived by the Nasdaq (or other
appropriate stock exchange or market), so long as the Common Stock is listed on
the Nasdaq, the Nasdaq SmallCap, the NYSE or the AMEX the Company shall not be
required to issue upon conversion of this Warrant a number of shares of Common
Stock in excess of the Maximum Share Amount. The Company shall maintain records
which show the number of shares of Common Stock issued by the Company upon
conversion from time to time of the Note and exercise of this Warrant, which
records shall be controlling in the absence of manifest error. Upon surrender
of this Warrant for transfer or re-registration hereof (or, at the option of the
Holder, for exercise of less than all of this Warrant), the Company shall make a
notation on the new Warrant issued upon such transfer or re-registration or
evidencing such unexercised portion of this Warrant, as the case may be, as to
the remaining number of shares of Common Stock from the Maximum Share Amount
remaining available for conversion of the Note and exercise of the Warrant
evidenced by such new certificate. If this Warrant is surrendered for split-up
into two or more Warrants representing the right to purchase an aggregate number
of shares equal to the number of shares which may be purchased upon exercise of
this Warrant at the time so surrendered (as reduced by any contemporaneous
exercise of this Warrant), each Warrant issued on such split-up shall bear a
notation of the portion of the Maximum Share Amount allocated thereto determined
by pro rata allocation from among the remaining Maximum Share Amount at the time
this Warrant is so surrendered.
2. DELIVERY OF STOCK CERTIFICATES, ETC., ON EXERCISE. As soon as
practicable after the exercise of this Warrant, and in any event within three
Trading Days thereafter, the Company at its expense (including the payment by it
of any applicable issue or stamp taxes) will cause to be issued in the name of
and delivered to the Holder hereof, or as the Holder (upon payment by the Holder
of any applicable transfer taxes) may direct, a certificate or certificates for
the number of fully paid and nonassessable shares of Common Stock (or Other
Securities) to which the Holder shall be entitled on such exercise, in such
denominations as may be requested by the Holder, plus, in lieu of any fractional
share to which the Holder would otherwise be entitled, cash equal to such
fraction multiplied by the then current fair market value (as determined in
accordance with subsection 1.2) of one full share, together with any other stock
or other securities any property (including cash, where applicable) to which the
Holder is entitled upon such exercise pursuant to Section 1 or otherwise. Upon
exercise of this Warrant as provided herein, the Company's obligation to issue
and deliver the certificates for Common Stock shall be absolute and
unconditional, irrespective of the absence of any action by the Holder to
enforce the same, any waiver or consent with respect to any provision thereof,
the recovery of
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<PAGE>
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 Company to the
Holder, or any setoff, counterclaim, recoupment, limitation or termination, or
any breach or alleged breach by the Holder or any other person of any obligation
to the Company, and irrespective of any other circumstance which might otherwise
limit such obligation of the Company to the Holder in connection with such
exercise. If the Company fails to issue and deliver the certificates for the
Common Stock to the Holder pursuant to the first sentence of this paragraph as
and when required to do so, in addition to any other liabilities the Company may
have hereunder and under applicable law, the Company shall pay or reimburse the
Holder on demand for all out-of-pocket expenses including, without limitation,
fees and expenses of legal counsel incurred by the Holder as a result of such
failure.
3. ADJUSTMENT FOR DIVIDENDS IN OTHER STOCK, PROPERTY, ETC.;
RECLASSIFICATION, ETC. In case at any time or from time to time, all the
holders of Common Stock (or Other Securities) shall have received, or (on or
after the record date fixed for the determination of stockholders eligible to
receive) shall have become entitled to receive, without payment therefor,
(a) other or additional stock or other securities or property (other
than cash) by way of dividend, or
(b) any cash (excluding cash dividends payable solely out of earnings
or earned surplus of the Company), or
(c) other or additional stock or other securities or property
(including cash) by way of spin-off, split-up, reclassification,
recapitalization, combination of shares or similar corporate rearrangement,
other than additional shares of Common Stock (or Other Securities) issued as a
stock dividend or in a stock-split (adjustments in respect of which are provided
for in Section 5), then and in each such case the Holder, on the exercise hereof
as provided in Section 1, shall be entitled to receive the amount of stock and
other securities and property (including cash in the cases referred to in
subdivisions (b) and (c) of this Section 3) which the Holder would hold on the
date of such exercise if on the date thereof the Holder had been the holder of
record of the number of shares of Common Stock called for on the face of this
Warrant and had thereafter, during the period from the date hereof to and
including the date of such exercise, retained such shares and all such other or
additional stock and other securities and property (including cash in the case
referred to in subdivisions (b) and (c) of this Section 3) receivable by the
Holder as aforesaid during such period, giving effect to all adjustments called
for during such period by Section 4.
4. EXERCISE UPON REORGANIZATION, CONSOLIDATION, MERGER, ETC. In
case at any time or from time to time, the Company shall (a) effect a
reorganization, (b) consolidate with or merge into any other person, or (c)
transfer all or substantially all of its properties or assets to any other
person under any plan or arrangement contemplating the dissolution of the
Company, then, in each such case, as a condition of such reorganization,
consolidation, merger, sale or conveyance, the Company shall give at least 30
days notice to the Holder of such pending
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<PAGE>
transaction whereby the Holder shall have the right to exercise this Warrant
prior to any such reorganization, consolidation, merger, sale or conveyance. Any
exercise of this Warrant pursuant to notice under this Section shall be
conditioned upon the closing of such reorganization, consolidation, merger, sale
or conveyance which is the subject of the notice and the exercise of this
Warrant shall not be deemed to have occurred until immediately prior to the
closing of such transaction.
5. ADJUSTMENT FOR EXTRAORDINARY EVENTS. In the event that the
Company shall (i) issue additional shares of the Common Stock as a dividend or
other distribution on outstanding Common Stock, (ii) subdivide or reclassify its
outstanding shares of Common Stock, or (iii) combine its outstanding shares of
Common Stock into a smaller number of shares of Common Stock, then, in each such
event, the Purchase Price shall, simultaneously with the happening of such
event, be adjusted by multiplying the Purchase Price in effect immediately prior
to such event by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to such event and the
denominator of which shall be the number of shares of Common Stock outstanding
immediately after such event, and the product so obtained shall thereafter be
the Purchase Price then in effect. The Purchase Price, as so adjusted, shall be
readjusted in the same manner upon the happening of any successive event or
events described herein in this Section 5. The Holder shall thereafter, on the
exercise hereof as provided in Section 1, be entitled to receive that number of
shares of Common Stock determined by multiplying the number of shares of Common
Stock which would be issuable on such exercise immediately prior to such
issuance by a fraction of which (i) the numerator is the Purchase Price in
effect immediately prior to such issuance and (ii) the denominator is the
Purchase Price in effect on the date of such exercise.
6. FURTHER ASSURANCES. The Company will take all action that may be
necessary or appropriate in order that the Company may validly and legally issue
fully paid and nonassessable shares of stock, free from all taxes, liens and
charges with respect to the issue thereof, on the exercise of all or any portion
of this Warrant from time to time outstanding.
7. NOTICES OF RECORD DATE, ETC. In the event of
(a) any taking by the Company of a record of the holders of any class
of securities for the purpose of determining the holders thereof who are
entitled to receive any dividend on, or any right to subscribe for,
purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right, or
(b) any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company or any transfer of all
or substantially all of the assets of the Company to or consolidation or
merger of the Company with or into any other person, or
(c) any voluntary or involuntary dissolution, liquidation or winding-
up of the Company,
-7-
<PAGE>
then and in each such event the Company will mail or cause to be mailed to the
Holder, at least ten days prior to such record date, a notice specifying (i) the
date on which any such record is to be taken for the purpose of such dividend,
distribution or right, and stating the amount and character of such dividend,
distribution or right, (ii) the date on which any such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding-up is to take place, and the time, if any is
to be fixed, as of which the holders of record of Common Stock (or Other
Securities) shall be entitled to exchange their shares of Common Stock (or Other
Securities) for securities or other property deliverable on such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding-up, and (iii) the amount and character of
any stock or other securities, or rights or options with respect thereto,
proposed to be issued or granted, the date of such proposed issue or grant and
the persons or class of persons to whom such proposed issue or grant is to be
offered or made. Such notice shall also state that the action in question or
the record date is subject to the effectiveness of a registration statement
under the 1933 Act, or a favorable vote of stockholders if either is required.
Such notice shall be mailed at least ten days prior to the date specified in
such notice on which any such action is to be taken or the record date,
whichever is earlier.
8. RESERVATION OF STOCK, ETC., ISSUABLE ON EXERCISE OF WARRANTS.
The Company will at all times reserve and keep available out of its authorized
but unissued shares of capital stock, solely for issuance and delivery on the
exercise of this Warrant, a sufficient number of shares of Common Stock (or
Other Securities) to effect the full exercise of this Warrant and the exercise,
conversion or exchange of any other warrant or security of the Company
exercisable for, convertible into, exchangeable for or otherwise entitling the
holder to acquire shares of Common Stock (or Other Securities), and if at any
time the number of authorized but unissued shares of Common Stock (or Other
Securities) shall not be sufficient to effect such exercise, conversion or
exchange, the Company shall take such action as may be necessary to increase its
authorized but unissued shares of Common Stock (or Other Securities) to such
number as shall be sufficient for such purposes.
9. TRANSFER OF WARRANT. This Warrant shall inure to the benefit of
the successors to and assigns of the Holder. This Warrant and all rights
hereunder, in whole or in part, are registrable at the office or agency of the
Company referred to below by the Holder hereof in person or by his duly
authorized attorney, upon surrender of this Warrant properly endorsed.
10. REGISTER OF WARRANTS. The Company shall maintain, at the
principal office of the Company (or such other office as it may designate by
notice to the Holder hereof), a register in which the Company shall record the
name and address of the person in whose name this Warrant has been issued, as
well as the name and address of each successor and prior owner of such Warrant.
The Company shall be entitled to treat the person in whose name this Warrant is
so registered as the sole and absolute owner of this Warrant for all purposes.
11. EXCHANGE OF WARRANT. This Warrant is exchangeable, upon the
surrender hereof by the Holder hereof at the office or agency of the Company
referred to in Section 10, for one or more new Warrants of like tenor
representing in the aggregate the right to subscribe for
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<PAGE>
and purchase the number of shares of Common Stock which may be subscribed for
and purchased hereunder, each of such new Warrants to represent the right to
subscribe for and purchase such number of shares as shall be designated by said
Holder hereof at the time of such surrender.
12. REPLACEMENT OF WARRANT. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of any such loss, theft or destruction of this
Warrant, on delivery of an indemnity agreement or security reasonably
satisfactory in form and amount to the Company or, in the case of any such
mutilation, on surrender and cancellation of this Warrant, the Company at its
expense will execute and deliver, in lieu thereof, a new Warrant of like tenor.
13. WARRANT AGENT. In accordance with the Transfer Agent Agreement,
dated August __, 1998, by and among the Company, American Stock Transfer & Trust
Company, as Transfer Agent and Registrar (the "Transfer Agent"), and the
original Holder of this Warrant and the other common stock purchase warrants of
like tenor issued by the Company in connection with the issuance of this Warrant
the Company has appointed the Transfer Agent as the exercise agent for purposes
of issuing shares of Common Stock (or Other Securities) on the exercise of this
Warrant pursuant to Section 1. The Company may, by notice to the Holder,
appoint an agent having an office in the United States of America for the
purpose of exchanging this Warrant pursuant to Section 11 and replacing this
Warrant pursuant to Section 12, or either of the foregoing, and thereafter any
such exchange or replacement, as the case may be, shall be made at such office
by such agent.
14. REMEDIES. The Company stipulates that the remedies at law of the
Holder in the event of any default or threatened default by the Company in the
performance of or compliance with any of the terms of this Warrant are not and
will not be adequate, and that such terms may be specifically enforced by a
decree for the specific performance of any agreement contained herein or by an
injunction against a violation of any of the terms hereof or otherwise.
15. NO RIGHTS OR LIABILITIES AS A STOCKHOLDER. This Warrant shall
not entitle the Holder hereof to any voting rights or other rights as a
stockholder of the Company. No provision of this Warrant, in the absence of
affirmative action by the Holder hereof to purchase Common Stock, and no mere
enumeration herein of the rights or privileges of the Holder hereof, shall give
rise to any liability of the Holder for the Purchase Price or as a stockholder
of the Company, whether such liability is asserted by the Company or by
creditors of the Company.
16. NOTICES, ETC. All notices and other communications from the
Company to the registered Holder shall be mailed by first class certified mail,
postage prepaid, at such address as may have been furnished to the Company in
writing by the Holder or at the address shown for the Holder on the register of
Warrants referred to in Section 10.
17. TRANSFER RESTRICTIONS. By acceptance of this Warrant, the Holder
represents to the Company that this Warrant is being acquired for the Holder's
own account and for the purpose of investment and not with a view to, or for
sale in connection with, the
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distribution thereof, nor with any present intention of distributing or selling
the Warrant or the Common Stock issuable upon exercise of the Warrant. The
Holder acknowledges and agrees that this Warrant and, except as otherwise
provided in the Registration Rights Agreement, the Common Stock issuable upon
exercise of this Warrant (if any) have not been (and at the time of acquisition
by the Holder, will not have been or will not be), registered under the 1933 Act
or under the securities laws of any state, in reliance upon certain exemptive
provisions of such statutes. The Holder further recognizes and acknowledges that
because this Warrant and, except as provided in the Registration Rights
Agreement, the Common Stock issuable upon exercise of this Warrant (if any) are
unregistered, they may not be eligible for resale, and may only be resold in the
future pursuant to an effective registration statement under the 1933 Act and
any applicable state securities laws, or pursuant to a valid exemption from such
registration requirements. Unless the shares of Common Stock issuable upon
exercise of this Warrant have theretofore been registered for resale under the
1933 Act, the Company may require, as a condition to the issuance of Common
Stock upon the exercise of this Warrant (i) in the case of an exercise in
accordance with Section 1.1 hereof, a confirmation as of the date of exercise of
the Holder's representations pursuant to this Section 17, or (ii) in the case of
an exercise in accordance with Section 1.2 hereof, an opinion of counsel
reasonably satisfactory to the Company that the shares of Common Stock to be
issued upon such exercise may be issued without registration under the 1933 Act.
18. LEGEND. Unless theretofore registered for resale under the 1933
Act, each certificate for shares issued upon exercise of this Warrant shall bear
the following legend:
The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended. The securities have been
acquired for investment and may not be resold, transferred or assigned in
the absence of an effective registration statement for the securities under
the Securities Act of 1933, as amended, or an opinion of counsel that
registration is not required under said Act.
19. MISCELLANEOUS. This Warrant and any terms hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought. This Warrant shall be construed and enforced in accordance with and
governed by the internal laws of the State of New York. The headings in this
Warrant are for purposes of reference only, and shall not limit or otherwise
affect any of the terms hereof. The invalidity or unenforceability of any
provision hereof shall in no way affect the validity or enforceability of any
other provision.
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IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
on its behalf by one of its officers thereunto duly authorized.
Dated: August _____, 1998 EQUALNET COMMUNICATIONS CORP.
By: ____________________________
Title: _________________________
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<PAGE>
FORM OF SUBSCRIPTION
EQUALNET COMMUNICATIONS CORP.
(To be signed only on exercise of Warrant)
TO: American Stock Transfer & Trust Company,
as Exercise Agent
6201 Fifteenth Avenue
Brooklyn, New York 11219
1. The undersigned Holder of the attached original, executed Warrant
hereby elects to exercise its purchase right under such Warrant with respect to
______________ shares of Common Stock, as defined in the Warrant, of Equalnet
Communications Corp., a Texas corporation (the "Company").
2. The undersigned Holder (check one):
[ ] (a) elects to pay the aggregate purchase price for such shares of Common
Stock (the "Exercise Shares") (i) by lawful money of the United States
or the enclosed certified or official bank check payable in United
States dollars to the order of the Company in the amount of
$___________, or (ii) by wire transfer of United States funds to the
account of the Company in the amount of $____________, which transfer
has been made before or simultaneously with the delivery of this Form
of Subscription pursuant to the instructions of the Company;
or
[ ] (b) elects to receive shares of Common Stock having a value equal to the
value of the Warrant calculated in accordance with Section 1.2 of the
Warrant.
3. Please issue a stock certificate or certificates representing the
appropriate number of shares of Common Stock in the name of the undersigned or
in such other names as is specified below:
4. The undersigned Holder hereby represents to the Company that the
exercise of the Warrant elected hereby does not violate Section 1.1(b) of the
Warrant.
Name: ______________________________
Address: ___________________________
<PAGE>
Dated: ____________ ___, ____ ____________________________________
(Signature must conform to name of
Holder as specified on the face of
the Warrant)
<PAGE>
EXHIBIT 10.28
Draft of 9/1/98
ANNEX V
TO
NOTE PURCHASE
AND EXCHANGE
AGREEMENT
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of July 31, 1998 (this
"Agreement"), is made by and between EQUALNET COMMUNICATIONS CORP., a Texas
corporation (the "Company"), and the person named on the signature page hereto
(the "Initial Investor").
W I T N E S S E T H:
WHEREAS, in connection with the Note Purchase and Exchange Agreement,
dated as of July 31, 1998, by and between the Initial Investor and the Company
(the "Exchange Agreement"), the Company has agreed, upon the terms and subject
to the conditions of the Exchange Agreement, (1) to issue and sell to the
Initial Investor a 6% Senior Secured Convertible Note due 2001 (the "Note")
issued by the Company and (2) to issue to the Initial Investor shares (the
"Preferred Shares") of Series D Convertible Preferred Stock, $.01 par value (the
"Series D Preferred Stock"), of the Company in exchange for outstanding shares
of Common Stock, $.01 par value (the "Common Stock"), of the Company, as
provided in the Exchange Agreement, which Note and shares of Preferred Stock are
convertible into shares (the "Conversion Shares") of Common Stock and in
connection therewith to issue common stock purchase warrants (the "Warrants") to
purchase shares (the "Warrant Shares") of Common Stock; and
WHEREAS, to induce the Initial Investor to execute and deliver the
Exchange Agreement, the Company has agreed to provide certain registration
rights under the Securities Act of 1933, as amended, and the rules and
regulations thereunder, or any similar successor statute (collectively, the
"Securities Act"), and applicable state securities laws with respect to the
Conversion Shares, the Warrant Shares, the shares of Common Stock issuable upon
conversion of the Interest Notes, and the shares of Common Stock issuable upon
conversion of shares (the "Dividend Shares") of Series D Preferred Stock which
are issuable in payment of dividends on the Preferred Shares;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Initial Investor hereby agree as follows:
<PAGE>
1. DEFINITIONS.
(a) As used in this Agreement, the following terms shall have the
following meanings:
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Investor" means the Initial Investor and any transferee or assignee
who agrees to become bound by the provisions of this Agreement in accordance
with Section 9 hereof.
"Nasdaq" means the Nasdaq National Market.
"register," "registered," and "registration" refer to a registration
effected by preparing and filing a Registration Statement or Statements in
compliance with the Securities Act and pursuant to Rule 415 under the Securities
Act or any successor rule providing for offering securities on a continuous
basis ("Rule 415"), and the declaration or ordering of effectiveness of such
Registration Statement by the United States Securities and Exchange Commission
(the "SEC").
"Registrable Securities" means the Conversion Shares, the Warrant
Shares, any shares of Common Stock issued upon conversion of the Interest Notes,
and any shares of Common Stock issued by the Company to any Investor upon
conversion of any Dividend Shares.
"Registration Period" means the period from the Closing Date to the
earliest of (i) the date which is three years after the SEC Effective Date, (ii)
the date on which each Investor may sell all of its Registrable Securities
without registration under the Securities Act pursuant to Rule 144, without
restriction on the manner of sale or the volume of securities which may be sold
in any period and without the requirement for the giving of any notice to, or
the making of any filing with, the SEC and (iii) the date on which the Investors
no longer beneficially own any Registrable Securities.
"Registration Statement" means a registration statement of the Company
under the Securities Act, including any amendment thereto.
"Rule 144" means Rule 144 promulgated under the Securities Act or any
other similar rule or regulation of the SEC that may at any time permit a holder
of any securities to sell securities of the Company to the public without
registration under the Securities Act.
"SEC Effective Date" means the date the Registration Statement is
declared effective by the SEC.
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<PAGE>
"SEC Filing Date" means the date the Registration Statement is first
filed with the SEC pursuant to Section 2(a).
"Statement of Resolution" means the Statement of Resolution of Board
of Directors Establishing and Designating Series D Convertible Preferred Stock
and Fixing the Rights and Preferences of such Series as filed by the Company
with the Secretary of State of the State of Texas.
(b) As used in this Agreement, the term Investor includes (i) each
Investor (as defined above) and (ii) each person who is a permitted transferee
or assignee of the Registrable Securities pursuant to Section 9 of this
Agreement.
(c) Capitalized terms defined in the introductory paragraph or the
recitals to this Agreement shall have the respective meanings therein provided.
Capitalized terms used herein and not otherwise defined herein shall have the
respective meanings set forth in the Exchange Agreement.
2. REGISTRATION.
(A) MANDATORY REGISTRATION. The Company shall prepare, and on or
prior to the date which is 60 days after the Closing Date, file with the SEC a
Registration Statement on Form S-3 (or, if the Company does not meet the
requirements of Form S-3, then on Form S-1 or another appropriate form) which,
on the date of filing with the SEC, covers the resale by the Initial Investor of
a number of shares of Common Stock at least equal to
(1) if Rule 416 under the 1933 Act is applicable to the Note, the
Interest Notes, the Preferred Shares, and the Dividend Shares, the sum of
(x) the number of shares of Common Stock issuable upon conversion of the
Note and the Preferred Shares, determined as if the Note and the Preferred
Shares, together with accrued and unpaid interest and dividends thereon,
were converted in full on the SEC Filing Date (and determined without
regard to the limitations on conversion contained in the Note or the
Statement of Resolution or the limitations on beneficial ownership
contained in Section 2.1 of the Note and in the proviso to the second
sentence of Section 10(a) of the Statement of Resolution), plus (y) the
number of Warrant Shares (determined without regard to the limitation on
beneficial ownership contained in Section 1.1(b) of the Warrants) and the
resale of such additional number of shares of Common Stock as the Company
shall in its discretion determine to register to permit the issuance of
Interest Notes and Dividend Shares and the resale of the shares of Common
Stock issuable upon conversion thereof, and which Registration Statement
shall state that, in accordance with Rule 416 under the Securities Act,
such Registration Statement also covers such indeterminate number of
additional
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<PAGE>
shares of Common Stock as may become issuable upon conversion of the Note,
the Preferred Shares, the Interest Notes, and the Dividend Shares or
exercise of the Warrants to prevent dilution resulting from stock splits,
stock dividends or similar transactions in accordance with the terms
thereof and the resale of such additional number of shares of Common Stock
as the Company shall in its discretion determine to register to permit the
issuance of Interest Notes and Dividend Shares and the resale of the shares
of Common Stock issuable upon conversion thereof; or
(2) if Rule 416 under the 1933 Act is not applicable to the Note and
the Series D Preferred Stock, the sum of (x) a number of shares of Common
Stock equal to 175% of the number of shares of Common Stock issuable upon
conversion of the Note and the Preferred Shares, determined as if the Note
and the Preferred Shares, together with accrued and unpaid interest and
dividends thereon, were converted in full on the SEC Filing Date (and
determined without regard to the limitations on conversion contained in the
Note or the Statement of Resolution or the limitations on beneficial
ownership contained in Section 2.1 of the Note and in the proviso to the
second sentence of Section 10(a) of the Statement of Resolution) plus (y)
the number of Warrant Shares (determined without regard to the limitation
on beneficial ownership contained in Section 1.1(b) of the Warrants) and
the resale of such additional number of shares of Common Stock as the
Company shall in its discretion determine to register to permit the
issuance of Interest Notes and Dividend Shares and the resale of the shares
of Common Stock issuable upon conversion thereof.
If at any time the number of shares of Common Stock included in the Registration
Statement required to be filed as provided in the first sentence of this Section
2(a) shall be insufficient to cover the number of shares of Common Stock
issuable on conversion in full of the unconverted Note, Interest Notes,
Preferred Shares and Dividend Shares or the unexercised portion of the Warrants,
then promptly, but in no event later than 20 days after such insufficiency shall
occur, the Company shall file with the SEC an additional Registration Statement
on Form S-3 or, if the Company does not meet the requirements of Form S-3, then
on Form S-1 or another appropriate form (in any such case which shall not
constitute a post-effective amendment to the Registration Statement filed
pursuant to the first sentence of this Section 2(a)), covering such number of
shares of Common Stock as shall be sufficient to permit such conversion and
exercise. For all purposes of this Agreement such additional Registration
Statement shall be deemed to be the Registration Statement required to be filed
by the Company pursuant to Section 2(a) of this Agreement, and the Company and
the Investors shall have the same rights and obligations with respect to such
additional Registration Statement as they shall have with respect to the initial
Registration Statement required to be filed by the Company pursuant to this
Section 2(a).
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<PAGE>
(B) CERTAIN OFFERINGS. If any offering pursuant to a Registration
Statement pursuant to Section 2(a) hereof involves an underwritten offering,
Investors who hold a majority in interest of the Registrable Securities subject
to such underwritten offering shall have the right to select one legal counsel
and an investment banker or bankers and manager or managers to administer the
offering, which investment banker or bankers or manager or managers shall be
reasonably satisfactory to the Company. The Investors who hold the Registrable
Securities to be included in such underwriting shall pay all underwriting
discounts and commissions and other fees and expenses of such investment banker
or bankers and manager or managers so selected in accordance with this Section
2(b) (other than fees and expenses relating to registration of Registrable
Securities under federal or state securities laws, which are payable by the
Company pursuant to Section 5 hereof) with respect to their Registrable
Securities and the fees and expenses of such legal counsel so selected by the
Investors.
(C) ADJUSTMENTS OF CONVERSION TERMS. The Note, the Interest Notes and
the Statement of Resolution provide, among other things, that, if (1) the
Registration Statement covering the Registrable Securities which is required to
be filed by the Company pursuant to the first sentence of Section 2(a) (A) is
not filed with the SEC within 60 days after the Closing Date, (B) is not
effective within 105 days after the Closing Date, if the Registration Statement
is on Form S-3, or 120 days after the Closing Date, if the Registration
Statement is on Form S-1, or (C) shall cease to be available for use by any
holder of shares of the Note, Interest Notes or Series D Preferred Stock which
is named therein as a selling stockholder for any reason (including, without
limitation, by reason of an SEC stop order, a material misstatement or omission
in such Registration Statement or the information contained in such Registration
Statement having become outdated), or (2) a holder of the Note, Interest Notes
or shares of Series D Preferred Stock becomes unable to convert the Note, any
Interest Note or any shares of Series D Preferred Stock in accordance with
Section 10(a) of the Statement of Resolution (other than by reason of the 4.9%
limitation set forth therein), then the Conversion Percentage (as defined in the
Note, the Interest Notes and the Statement of Resolution) shall be adjusted as
provided in the Note, the Interest Notes and the Statement of Resolution.
(D) PIGGY-BACK REGISTRATIONS. If at any time the Company shall
determine to prepare and file with the SEC a Registration Statement relating to
an offering for its own account or the account of others under the Securities
Act of any of its equity securities, other than on Form S-4 or Form S-8 or their
then equivalents relating to equity securities to be issued solely in connection
with any acquisition of any entity or business or equity securities issuable in
connection with stock option or other employee benefit plans, the Company shall
send to each Investor who is entitled to registration rights under this Section
2(d) written notice of such determination and, if within ten (10) days after
receipt of such notice, such Investor shall so request in writing, the Company
shall include in such Registration Statement all or any part of the
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<PAGE>
Registrable Securities such Investor requests to be registered, except that if,
in connection with any underwritten public offering for the account of the
Company, the managing underwriter(s) thereof shall impose a limitation on the
number of shares of Common Stock which may be included in the Registration
Statement because, in such underwriter(s)' judgment, such limitation is
necessary to effect an orderly public distribution, then the Company shall be
obligated to include in such Registration Statement only such limited portion of
the Registrable Securities with respect to which such Investor has requested
inclusion hereunder. Any exclusion of Registrable Securities shall be made pro
rata among the Investors seeking to include Registrable Securities, in
proportion to the number of Registrable Securities sought to be included by such
Investors; provided, however, that the Company shall not exclude any Registrable
Securities unless the Company has first excluded all outstanding securities the
holders of which are not entitled by right to inclusion of securities in such
Registration Statement; and provided further, however, that, after giving effect
to the immediately preceding proviso, any exclusion of Registrable Securities
shall be made pro rata with holders of other securities having the right to
include such securities in the Registration Statement, based on the number of
securities for which registration is requested except to the extent such pro
rata exclusion of such other securities is prohibited under any written
agreement entered into by the Company with the holder of such other securities
prior to the date of this Agreement, in which case such other securities shall
be excluded, if at all, in accordance with the terms of such agreement. No
right to registration of Registrable Securities under this Section 2(d) shall be
construed to limit any registration required under Section 2(a) hereof. The
obligations of the Company under this Section 2(d) may be waived by Investors
holding a majority in interest of the Registrable Securities and shall expire
after the Company has afforded the opportunity for the Investors to exercise
registration rights under this Section 2(d) for two registrations; provided,
however, that any Investor who shall have had any Registrable Securities
excluded from any Registration Statement in accordance with this Section 2(d)
shall be entitled to include in an additional Registration Statement filed by
the Company the Registrable Securities so excluded. Notwithstanding any other
provision of this Agreement, if the Registration Statement required to be filed
pursuant to Section 2(a) of this Agreement shall have been ordered effective by
the SEC and the Company shall have maintained the effectiveness of such
Registration Statement as required by this Agreement and if the Company shall
otherwise have complied in all material respects with its obligations under this
Agreement, then the Company shall not be obligated to register any Registrable
Securities on such Registration Statement referred to in this Section 2(d).
(E) ELIGIBILITY FOR FORM S-3. The Company shall file all reports
required to be filed by the Company with the SEC in a timely manner so as to be
eligible for the use of Form S-3 for registration of the resale of the
Registrable Securities.
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<PAGE>
3. OBLIGATIONS OF THE COMPANY. In connection with the registration
of the Registrable Securities, the Company shall:
(a) prepare promptly, and file with the SEC not later than 60 days
after the Closing Date, a Registration Statement with respect to the number of
Registrable Securities provided in Section 2(a), and thereafter to use its best
efforts to cause each Registration Statement relating to Registrable Securities
to become effective as soon as possible after such filing, and keep the
Registration Statement effective pursuant to Rule 415 at all times during the
Registration Period; submit to the SEC, within three business days after the
Company learns that no review of the Registration Statement will be made by the
staff of the SEC or that the staff of the SEC has no further comments on the
Registration Statement, as the case may be, a request for acceleration of
effectiveness of the Registration Statement to a time and date not later than 48
hours after the submission of such request; notify the Investors of the
effectiveness of the Registration Statement on the date the Registration
Statement is declared effective; and the Company represents and warrants to, and
covenants and agrees with, the Investors that the Registration Statement
(including any amendments or supplements thereto and prospectuses contained
therein), at the time it is first filed with the SEC, at the time it is ordered
effective by the SEC and at all time during which it is required to be effective
hereunder (and each such amendment and supplement at the time it is filed with
the SEC and at all time during which it is available for use in connection with
the offer and sale of the Registrable Securities) shall not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein, or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading;
(b) prepare and file with the SEC such amendments (including post-
effective amendments) and supplements to the Registration Statement and the
prospectus used in connection with the Registration Statement as may be
necessary to keep the Registration Statement effective at all times during the
Registration Period, and, during the Registration Period, comply with the
provisions of the Securities Act with respect to the disposition of all
Registrable Securities of the Company covered by the Registration Statement
until such time as all of such Registrable Securities have been disposed of in
accordance with the intended methods of disposition by the seller or sellers
thereof as set forth in the Registration Statement;
(c) furnish to each Investor whose Registrable Securities are included
in the Registration Statement and its legal counsel, (1) promptly after the same
is prepared and publicly distributed, filed with the SEC or received by the
Company, one copy of the Registration Statement and any amendment thereto, each
preliminary prospectus and prospectus and each amendment or supplement thereto,
each letter written by or on behalf of the Company to the SEC or the staff of
the SEC and each item of correspondence from the SEC or the staff of the SEC
relating to such Registration
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<PAGE>
Statement (other than any portion of any thereof which contains information for
which the Company has sought confidential treatment) and (2) such number of
copies of a prospectus, including a preliminary prospectus, and all amendments
and supplements thereto and such other documents, as such Investor may
reasonably request in order to facilitate the disposition of the Registrable
Securities owned by such Investor;
(d) use reasonable efforts to (i) register and qualify the Registrable
Securities covered by the Registration Statement under such securities or blue
sky laws of such jurisdictions as the Investors who hold a majority in interest
of the Registrable Securities being offered reasonably request, (ii) prepare and
file in those jurisdictions such amendments (including post-effective
amendments) and supplements to such registrations and qualifications as may be
necessary to maintain the effectiveness thereof at all times until the end of
the Registration Period, (iii) take such other actions as may be necessary to
maintain such registrations and qualifications in effect at all times during the
Registration Period and (iv) take all other actions reasonably necessary or
advisable to qualify the Registrable Securities for sale in such jurisdictions;
provided, however, that the Company shall not be required in connection
therewith or as a condition thereto (I) to qualify to do business in any
jurisdiction where it would not otherwise be required to qualify but for this
Section 3(d), (II) to subject itself to general taxation in any such
jurisdiction, (III) to file a general consent to service of process in any such
jurisdiction, (IV) to provide any undertakings that cause more than nominal
expense or burden to the Company or (V) to make any change in its Articles of
Incorporation or by-laws, which in each case the Board of Directors of the
Company determines to be contrary to the best interests of the Company and its
stockholders;
(e) in the event that the Registrable Securities are being offered in
an underwritten offering, enter into and perform its obligations under an
underwriting agreement, in usual and customary form, including, without
limitation, customary indemnification and contribution obligations, with the
underwriters of such offering;
(f) as promptly as practicable after becoming aware of such event or
circumstance, notify each Investor of any event or circumstance of which the
Company has knowledge, as a result of which the prospectus included in the
Registration Statement, as then in effect, includes an untrue statement of a
material fact or omits to state 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, and use its best efforts promptly to
prepare a supplement or amendment to the Registration Statement to correct such
untrue statement or omission, file such supplement or amendment with the SEC at
such time as shall permit the Investors to sell Registrable Securities pursuant
to the Registration Statement as promptly as practical, and deliver a number of
copies of such supplement or amendment to each Investor as such Investor may
reasonably request;
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<PAGE>
(g) as promptly as practicable after becoming aware of such event,
notify each Investor who holds Registrable Securities being sold (or, in the
event of an underwritten offering, the managing underwriters) of the issuance by
the SEC of any stop order or other suspension of effectiveness of the
Registration Statement at the earliest possible time;
(h) permit a single firm of counsel designated as selling
stockholders' counsel by the Investors who hold a majority in interest of the
Registrable Securities being sold to review and comment on the Registration
Statement and all amendments and supplements thereto a reasonable period of time
prior to their filing with the SEC;
(i) make generally available to its security holders as soon as
practical, but not later than ninety (90) days after the close of the period
covered thereby, an earnings statement (in form complying with the provisions of
Rule 158 under the Securities Act) covering a twelve-month period beginning not
later than the first day of the Company's fiscal quarter next following the
effective date of the Registration Statement;
(j) at the request of the Investors who hold a majority in interest of
the Registrable Securities being sold, furnish on the date that Registrable
Securities are delivered to an underwriter, if any, for sale in connection with
the Registration Statement (i) a letter, dated such date, from the Company's
independent certified public accountants in form and substance as is customarily
given by independent certified public accountants to underwriters in an
underwritten public offering, addressed to the underwriters; and (ii) an
opinion, dated such date, from counsel representing the Company for purposes of
such Registration Statement, in form and substance as is customarily given in an
underwritten public offering, addressed to the underwriters and the Investors;
(k) make available for inspection by any Investor, any underwriter
participating in any disposition pursuant to the Registration Statement, and any
attorney, accountant or other agent retained by any such Investor or underwriter
(collectively, the "Inspectors"), all pertinent financial and other records,
pertinent corporate documents and properties of the Company (collectively, the
"Records"), as shall be reasonably necessary to enable each Investor to exercise
its due diligence responsibility, and cause the Company's officers, directors
and employees to supply all information which any Inspector may reasonably
request for purposes of such due diligence; provided, however, that each
Inspector shall hold in confidence and shall not make any disclosure (except to
an Investor) of any Record or other information which the Company determines in
good faith to be confidential, and of which determination the Inspectors are so
notified, unless (i) the disclosure of such Records is necessary to avoid or
correct a misstatement or omission in any Registration Statement, (ii) the
release of such Records is ordered pursuant to a subpoena or other order from a
court
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<PAGE>
or government body of competent jurisdiction or (iii) the information in such
Records has been made generally available to the public other than by disclosure
in violation of this or any other agreement. The Company shall not be required
to disclose any confidential information in such Records to any Inspector until
and unless such Inspector shall have entered into confidentiality agreements (in
form and substance satisfactory to the Company) with the Company with respect
thereto, substantially in the form of this Section 3(k). Each Investor agrees
that it shall, upon learning that disclosure of such Records is sought in or by
a court or governmental body of competent jurisdiction or through other means,
give prompt notice to the Company and allow the Company, at the Company's own
expense, to undertake appropriate action to prevent disclosure of, or to obtain
a protective order for, the Records deemed confidential. The Company shall hold
in confidence and shall not make any disclosure of information concerning an
Investor provided to the Company pursuant to Section 4(e) hereof unless (i)
disclosure of such information is necessary to comply with federal or state
securities laws, (ii) the disclosure of such information is necessary to avoid
or correct a misstatement or omission in any Registration Statement, (iii) the
release of such information is ordered pursuant to a subpoena or other order
from a court or governmental body of competent jurisdiction or (iv) such
information has been made generally available to the public other than by
disclosure in violation of this or any other agreement. The Company agrees that
it shall, upon learning that disclosure of such information concerning an
Investor is sought in or by a court or governmental body of competent
jurisdiction or through other means, give prompt notice to such Investor, at
such Investor's own expense, to undertake appropriate action to prevent
disclosure of, or to obtain a protective order for, such information;
(l) use its commercially reasonable best efforts (i) to cause all the
Registrable Securities covered by the Registration Statement to be listed on the
Nasdaq or such other principal securities market on which securities of the same
class or series issued by the Company are then listed or traded or (ii) if
securities of the same class or series as the Registrable Securities are not
then listed on Nasdaq or any such other securities market, to cause all of the
Registrable Securities covered by the Registration Statement to be listed on the
Nasdaq SmallCap Market;
(m) provide a transfer agent and registrar, which may be a single
entity, for the Registrable Securities not later than the effective date of the
Registration Statement;
(n) cooperate with the Investors who hold Registrable Securities being
offered and the managing underwriter or underwriters, if any, to facilitate the
timely preparation and delivery of certificates (not bearing any restrictive
legends) representing Registrable Securities to be offered pursuant to the
Registration Statement and enable such certificates to be in such denominations
or amounts as the case may be, as the managing underwriter or underwriters, if
any, or the Investors may reasonably
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<PAGE>
request and registered in such names as the managing underwriter or
underwriters, if any, or the Investors may request; and, within three business
days after a Registration Statement which includes Registrable Securities is
ordered effective by the SEC, the Company shall deliver to the transfer agent
for the Registrable Securities (with copies to the Investors whose Registrable
Securities are included in such Registration Statement) an instruction
substantially in the form attached hereto as EXHIBIT 1, shall cause legal
counsel selected by the Company to deliver to the Investors an opinion of such
counsel in the form attached hereto as EXHIBIT 2 (with a copy to the Company's
transfer agent) and shall cause the Company's General Counsel to deliver to the
Investors an opinion of such counsel in the form attached hereto as EXHIBIT 3;
(o) during the period the Company is required to maintain
effectiveness of the Registration Statement pursuant to Section 3(a), the
Company shall not bid for or purchase any Common Stock or any right to purchase
Common Stock or attempt to induce any person to purchase any such security or
right if such bid, purchase or attempt would in any way limit the right of the
Investors to sell Registrable Securities by reason of the limitations set forth
in Regulation M under the Exchange Act; and
(p) take all other reasonable actions necessary to expedite and
facilitate disposition by the Investors of the Registrable Securities pursuant
to the Registration Statement.
4. OBLIGATIONS OF THE INVESTORS. In connection with the
registration of the Registrable Securities, the Investors shall have the
following obligations:
(a) It shall be a condition precedent to the obligations of the
Company to complete the registration pursuant to this Agreement with respect to
the Registrable Securities of a particular Investor that such Investor shall
furnish to the Company such information regarding itself, the Registrable
Securities held by it and the intended method of disposition of the Registrable
Securities held by it as shall be reasonably required to effect the registration
of such Registrable Securities and shall execute such documents in connection
with such registration as the Company may reasonably request. At least four
days prior to the first anticipated filing date of the Registration Statement,
the Company shall notify each Investor of the information the Company requires
from each such Investor (the "Requested Information") if any of such Investor's
Registrable Securities are eligible for inclusion in the Registration Statement.
If at least one business day prior to the filing date the Company has not
received the Requested Information from an Investor (a "Non-Responsive
Investor"), then the Company may file the Registration Statement without
including Registrable Securities of such Non-Responsive Investor but shall not
be relieved of its obligation to file a Registration Statement with the SEC
relating to the Registrable Securities of such Non-Responsive
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Investor promptly after such Non-Responsive Investor provides the Requested
Information;
(b) Each Investor by such Investor's acceptance of the Registrable
Securities agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of the Registration
Statement hereunder, unless such Investor has notified the Company in writing of
such Investor's election to exclude all of such Investor's Registrable
Securities from the Registration Statement;
(c) In the event Investors holding a majority in interest of the
Registrable Securities being registered determine to engage the services of an
underwriter, each Investor agrees to enter into and perform such Investor's
obligations under an underwriting agreement, in usual and customary form,
including, without limitation, customary indemnification and contribution
obligations, with the managing underwriter of such offering and take such other
actions as are reasonably required in order to expedite or facilitate the
disposition of the Registrable Securities, unless such Investor has notified the
Company in writing of such Investor's election to exclude all of such Investor's
Registrable Securities from the Registration Statement;
(d) Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 3(f) or
3(g), such Investor will immediately discontinue disposition of Registrable
Securities pursuant to the Registration Statement covering such Registrable
Securities until such Investor's receipt of the copies of the supplemented or
amended prospectus contemplated by Section 3(f) or 3(g) and, if so directed by
the Company, such Investor shall deliver to the Company (at the expense of the
Company) or destroy (and deliver to the Company a certificate of destruction)
all copies in such Investor's possession of the prospectus covering such
Registrable Securities current at the time of receipt of such notice; and
(e) No Investor may participate in any underwritten registration
hereunder unless such Investor (i) agrees to sell such Investor's Registrable
Securities on the basis provided in any underwriting arrangements approved by
the Investors entitled hereunder to approve such arrangements, (ii) completes
and executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents reasonably required under the terms of such
underwriting arrangements and (iii) agrees to pay its pro rata share of all
underwriting discounts and commissions and other fees and expenses of investment
bankers and any manager or managers of such underwriting and legal expenses of
the underwriters applicable with respect to its Registrable Securities, in each
case to the extent not payable by the Company pursuant to the terms of this
Agreement.
12
<PAGE>
5. EXPENSES OF REGISTRATION. All reasonable expenses, other than
underwriting discounts and commissions and other fees and expenses of investment
bankers and other than brokerage commissions, incurred in connection with
registrations, filings or qualifications pursuant to Section 3, including,
without limitation, all registration, listing and qualifications fees, printers
and accounting fees and the fees and disbursements of counsel for the Company
and the Investors, shall be borne by the Company, provided, however, that the
Investors shall bear the fees and out-of-pocket expenses of the one legal
counsel selected by the Investors pursuant to Section 2(b) hereof.
6. INDEMNIFICATION. In the event any Registrable Securities are
included in a Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Investor who holds such Registrable Securities, the
directors, if any, of such Investor, the officers, if any, of such Investor,
each person, if any, who controls any Investor within the meaning of the
Securities Act or the Exchange Act, any underwriter (as defined in the
Securities Act) for the Investors, the directors, if any, of such underwriter
and the officers, if any, of such underwriter, and each person, if any, who
controls any such underwriter within the meaning of the Securities Act or the
Exchange Act (each, an "Indemnified Person"), against any losses, claims,
damages, liabilities or expenses (joint or several) incurred (collectively,
"Claims") to which any of them may become subject under the Securities Act, the
Exchange Act or otherwise, insofar as such Claims (or actions or proceedings,
whether commenced or threatened, in respect thereof) arise out of or are based
upon any of the following statements, omissions or violations in the
Registration Statement, or any post-effective amendment thereof, or any
prospectus included therein: (i) any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or any
post-effective amendment thereof or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) any untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus if used
prior to the effective date of such Registration Statement, or contained in the
final prospectus (as amended or supplemented, if the Company files any amendment
thereof or supplement thereto with the SEC) or the omission or alleged omission
to state therein any material fact necessary to make the statements made
therein, in light of the circumstances under which the statements therein were
made, not misleading or (iii) any violation or alleged violation by the Company
of the Securities Act, the Exchange Act, any state securities law or any rule or
regulation under the Securities Act, the Exchange Act or any state securities
law (the matters in the foregoing clauses (i) through (iii) being, collectively,
"Violations"). Subject to the restrictions set forth in Section 6(d) with
respect to the number of legal counsel, the Company shall reimburse the
Investors and each such underwriter or controlling person, promptly as such
expenses are incurred and are due
13
<PAGE>
and payable, for any legal fees or other reasonable expenses incurred by them in
connection with investigating or defending any such Claim. Notwithstanding
anything to the contrary contained herein, the indemnification agreement
contained in this Section 6(a): (I) shall not apply to a Claim arising out of
or based upon a Violation which occurs in reliance upon and in conformity with
information furnished in writing to the Company by any Indemnified Person or
underwriter for such Indemnified Person expressly for use in connection with the
preparation of the Registration Statement, the prospectus or any such amendment
thereof or supplement thereto, if such prospectus was timely made available by
the Company pursuant to Section 3(c) hereof; (II) with respect to any
preliminary prospectus shall not inure to the benefit of any such person from
whom the person asserting any such Claim purchased the Registrable Securities
that are the subject thereof (or to the benefit of any person controlling such
person) if the untrue statement or omission of material fact contained in the
preliminary prospectus was corrected in the prospectus, as then amended or
supplemented, if such prospectus was timely made available by the Company
pursuant to Section 3(c) hereof; and (III) shall not apply to amounts paid in
settlement of any Claim if such settlement is effected without the prior written
consent of the Company, which consent shall not be unreasonably withheld. Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of the Indemnified Person and shall survive the transfer of
the Registrable Securities by the Investors pursuant to Section 9.
(b) In connection with any Registration Statement in which an Investor
is participating, each such Investor agrees to indemnify and hold harmless, to
the same extent and in the same manner set forth in Section 6(a), the Company,
each of its directors, each of its officers who signs the Registration
Statement, each person, if any, who controls the Company within the meaning of
the Securities Act or the Exchange Act, any underwriter and any other
stockholder selling securities pursuant to the Registration Statement or any of
its directors or officers or any person who controls such stockholder or
underwriter within the meaning of the Securities Act or the Exchange Act
(collectively and together with an Indemnified Person, an "Indemnified Party"),
against any Claim to which any of them may become subject, under the Securities
Act, the Exchange Act or otherwise, insofar as such Claim arises out of or is
based upon any Violation, in each case to the extent (and only to the extent)
that such Violation occurs in reliance upon and in conformity with written
information furnished to the Company by such Investor expressly for use in
connection with such Registration Statement; and such Investor will reimburse
any legal or other expenses reasonably incurred by any Indemnified Party in
connection with investigating or defending any such Claim; provided, however,
that the indemnity agreement contained in this Section 6(b) shall not apply to
amounts paid in settlement of any Claim if such settlement is effected without
the prior written consent of such Investor, which consent shall not be
unreasonably withheld; provided, further, however, that the Investor shall be
liable under this Section 6(b) for only that amount of a Claim as does not
exceed the amount by
14
<PAGE>
which the net proceeds to such Investor from the sale of Registrable Securities
pursuant to such Registration Statement exceeds the purchase price paid by such
Investor for the securities converted into such Registrable Securities. Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of such Indemnified Party and shall survive the transfer of
the Registrable Securities by the Investors pursuant to Section 9.
Notwithstanding anything to the contrary contained herein, the indemnification
agreement contained in this Section 6(b) with respect to any preliminary
prospectus shall not inure to the benefit of any Indemnified Party if the untrue
statement or omission of material fact contained in the preliminary prospectus
was corrected on a timely basis in the prospectus, as then amended or
supplemented.
(c) The Company shall be entitled to receive indemnities from
underwriters, selling brokers, dealer managers and similar securities industry
professionals participating in any distribution, to the same extent as provided
above, with respect to information so furnished in writing by such persons
expressly for inclusion in the Registration Statement.
(d) Promptly after receipt by an Indemnified Person or Indemnified
Party under this Section 6 of notice of the commencement of any action
(including any governmental action), such Indemnified Person or Indemnified
Party shall, if a Claim in respect thereof is to be made against any
indemnifying party under this Section 6, deliver to the indemnifying party a
written notice of the commencement thereof and the indemnifying party shall have
the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
control of the defense thereof with counsel selected by the indemnifying party
but reasonably acceptable to the Indemnified Person or the Indemnified Party, as
the case may be; provided, however, that an Indemnified Person or Indemnified
Party shall have the right to retain its own counsel with the fees and expenses
to be paid by the indemnifying party, if, in the reasonable opinion of counsel
retained by the indemnifying party, the representation by such counsel of the
Indemnified Person or Indemnified Party and the indemnifying party would be
inappropriate due to actual or potential differing interests between such
Indemnified Person or Indemnified Party and any other party represented by such
counsel in such proceeding. In such event, the Company shall pay for only one
separate legal counsel for the Investors; such legal counsel shall be selected
by the Investors holding a majority in interest of the Registrable Securities
included in the Registration Statement to which the Claim relates. The failure
to deliver written notice to the indemnifying party within a reasonable time of
the commencement of any such action shall not relieve such indemnifying party of
any liability to the Indemnified Person or Indemnified Party under this Section
6, except to the extent that the indemnifying party is prejudiced in its ability
to defend such action. The indemnification required by this Section 6 shall be
made by periodic payments of the amount thereof during the course of the
15
<PAGE>
investigation or defense, as such expense, loss, damage or liability is incurred
and is due and payable.
7. CONTRIBUTION. To the extent any indemnification by an
indemnifying party is prohibited or limited by law, the indemnifying party
agrees to make the maximum contribution with respect to any amounts for which it
would otherwise be liable under Section 6 to the fullest extent permitted by
law; provided, however, that (a) no contribution shall be made under
circumstances where the maker would not have been liable for indemnification
under the fault standards set forth in Section 6, (b) no seller of Registrable
Securities guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any seller
of Registrable Securities who was not guilty of such fraudulent
misrepresentation and (c) contribution by any seller of Registrable Securities
shall be limited in amount to the amount by which the net amount of proceeds
received by such seller from the sale of such Registrable Securities exceeds the
purchase price paid by such seller for the securities converted into such
Registrable Securities.
8. REPORTS UNDER EXCHANGE ACT. With a view to making available to
the Investors the benefits of Rule 144 promulgated under the Securities Act or
any other similar rule or regulation of the SEC that may at any time permit the
Investors to sell securities of the Company to the public without registration
("Rule 144"), the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and
(c) furnish to each Investor so long as such Investor owns Registrable
Securities, promptly upon request, (i) a written statement by the Company that
it has complied with the reporting requirements of Rule 144 and the Exchange
Act, (ii) a copy of the most recent annual or quarterly report of the Company
and such other reports and documents so filed by the Company and (iii) such
other information as may be reasonably requested to permit the Investors to sell
such securities pursuant to Rule 144 without registration.
9. ASSIGNMENT OF THE REGISTRATION RIGHTS. With the prior written
consent of the Company, which consent will not be unreasonably withheld, the
rights to have the Company register Registrable Securities pursuant to this
Agreement shall be automatically assigned by the Investors to any transferee of
all or any portion of such securities (or all or any portion of the Note, the
Interest Notes, the Preferred Shares, the Dividend Shares or the Warrants) only
if: (a) the Investor agrees in writing with the
16
<PAGE>
transferee or assignee to assign such rights, and a copy of such agreement is
furnished to the Company within a reasonable time after such assignment, (b) the
Company is, within a reasonable time after such transfer or assignment,
furnished with written notice of (i) the name and address of such transferee or
assignee and (ii) the securities with respect to which such registration rights
are being transferred or assigned, (c) immediately following such transfer or
assignment the further disposition of such securities by the transferee or
assignee is restricted under the Securities Act and applicable state securities
laws, and (d) at or before the time the Company received the written notice
contemplated by clause (b) of this sentence the transferee or assignee agrees in
writing with the Company to be bound by all of the provisions contained herein.
In connection with any such transfer the Company shall, at its sole cost and
expense, promptly after such assignment take such actions as shall be reasonably
acceptable to the Initial Investor and such transferee to assure that the
Registration Statement and related prospectus are available for use by such
transferee for sales of the Registrable Securities in respect of which the
rights to registration have been so assigned. In connection with any such
assignment, each Investor shall have the right to assign to such transferee such
Investor's rights under the Exchange Agreement by notice of such assignment to
the Company. Following such notice of assignment of rights under the Exchange
Agreement, the Company shall be obligated to such transferee to perform all of
its covenants under of the Exchange Agreement as if such transferee were the
Buyer under the Exchange Agreement.
10. AMENDMENT OF REGISTRATION RIGHTS. Any provision of this
Agreement may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and Investors who
hold a majority in interest of the Registrable Securities. Any amendment or
waiver effected in accordance with this Section 10 shall be binding upon each
Investor and the Company.
11. MISCELLANEOUS.
(a) A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
(b) Notices required or permitted to be given hereunder shall be in
writing and shall be deemed to be sufficiently given when personally delivered
(by hand, by courier, by telephone line facsimile transmission or other means)
(i) if to the Company, at 1250 Wood Branch Park Drive, Houston, Texas 77079,
Attention: Chief Executive Officer, telephone line facsimile transmission
number (281) 529-4650, (ii) if to
17
<PAGE>
the Initial Investor, c/o Genesee International, Inc., 10500 N.E. 8th Street,
Suite 1920, Bellevue, Washington 98004-4332, telephone line facsimile
transmission number (425) 462-4645 and (iii) if to any other Investor, at such
address as such Investor shall have provided in writing to the Company, or at
such other address as each such party furnishes by notice given in accordance
with this Section 11(b), and shall be effective upon receipt.
(c) Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
(d) This Agreement shall be enforced, governed by and construed in
accordance with the laws of the State of New York applicable to agreements made
and to be performed entirely within such State. In the event that any provision
of this Agreement is invalid or unenforceable under any applicable statute or
rule of law, then such provision shall be deemed inoperative to the extent that
it may conflict therewith and shall be deemed modified to conform with such
statute or rule of law. Any provision hereof which may prove invalid or
unenforceable under any law shall not affect the validity or enforceability of
any other provision hereof.
(e) This Agreement constitutes the entire agreement among the parties
hereto with respect to the subject matter hereof. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein. This Agreement supersedes all prior agreements and understandings among
the parties hereto with respect to the subject matter hereof.
(f) Subject to the requirements of Section 9 hereof, this Agreement
shall inure to the benefit of and be binding upon the successors and assigns of
each of the parties hereto.
(g) All pronouns and any variations thereof refer to the masculine,
feminine or neuter, singular or plural, as the context may require.
(h) The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.
(i) The Company acknowledges that any failure by the Company to
perform its obligations under this Agreement, including, without limitation, the
Company's obligations under Section 3(n), or any delay in such performance could
result in damages to the Investors and the Company agrees that, in addition to
any other liability the Company may have by reason of any such failure or delay,
the Company shall be liable for all direct and consequential damages caused by
any such failure or delay.
18
<PAGE>
(j) This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original but all of which shall constitute one and
the same agreement. This Agreement, once executed by a party, may be delivered
to the other party hereto by telephone line facsimile transmission of a copy of
this Agreement bearing the signature of the party so delivering this Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
19
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed by their respective officers thereunto duly authorized as of day and
year first above written.
EQUALNET COMMUNICATIONS
CORP.
By:
--------------------------------------
Name:
Title:
ADVANTAGE FUND LIMITED
By:
--------------------------------------
W.R. Weber
President
20
<PAGE>
Draft of 9/1/98
EXHIBIT 1
TO
REGISTRATION
RIGHTS AGREEMENT
[Company Letterhead]
[Date]
American Stock Transfer & Trust Company,
as Transfer Agent, Registrar, Conversion
Agent and Executive Agent
6201 Fifteenth Avenue
Brooklyn, New York 11219
Ladies and Gentlemen:
This letter shall serve as our irrevocable authorization and direction
to you [(1) to transfer or re-register the certificates for the shares of Common
Stock, $.01 par value (the "Common Stock"), of Equalnet Communications Corp., a
Texas corporation (the "Company"), represented by certificate numbers _______
and _______ for an aggregate of _______ shares (the "Outstanding Shares") of
Common Stock presently registered in the name of [Name of Investors] upon
surrender of such certificate(s) to you, notwithstanding the legend appearing on
such certificates, and (2)]/1/ to issue (a) shares (the "Conversion Shares") of
Common Stock to or upon the order of the holder from time to time on conversion
of the Company's 6% Senior Secured Convertible Notes due 2001 (the "Notes") and
the shares (the "Preferred Shares") of Series D Convertible Preferred Stock,
$.01 par value, of the Company upon receipt by you of a Notice of Conversion of
6% Senior Secured Convertible Note due 2001 or a Notice of Conversion of Series
D Convertible Preferred Stock in the forms enclosed herewith, and (b) shares
(the "Warrant Shares") of Common Stock to or upon the order of the holder from
time to time on exercise of the Common Stock Purchase Warrants (the "Warrants")
exercisable for Common Stock issued by the Company upon receipt by you of a
Subscription Form from such holder in the form enclosed herewith. [The transfer
or re-registration of the certificates for the Outstanding Shares by you should
be made at such time as you are requested to do so by the record holder of the
Outstanding Shares. The certificate issued upon such transfer or re-
registration should be registered in such name as requested by the holder of
record of the certificate surrendered to you and should not bear any legend
which would restrict the transfer of the shares represented thereby. In
addition, you are hereby directed to remove any stop-transfer instruction
relating to the Outstanding Shares.]/2/ Certificates for the
- - ------------
/1/ Omit if no conversions of Notes or Preferred Stock or exercises of Warrants
have occurred before SEC registration is declared effective.
1-21
<PAGE>
Conversion Shares and Warrant Shares should not bear any restrictive legend and
should not be subject to any stop-transfer restriction.
Contemporaneously with the delivery of this letter, the Company is
delivering to you an opinion of __________________________ as to registration of
the resale of [the Outstanding Shares and]* the Conversion Shares and Warrant
Shares under the Securities Act of 1933, as amended.
1-22
<PAGE>
Should you have any questions concerning this matter, please contact me.
Very truly yours,
EQUALNET COMMUNICATIONS CORP.
By:
--------------------------------------
Name:
Title:
Enclosures
cc: [Names of Investors]
1-23
<PAGE>
EXHIBIT 2
TO
REGISTRATION
RIGHTS AGREEMENT
_______________ ___, 1998
[Names and Addresses of Investors]
EQUALNET COMMUNICATIONS CORP.
Shares of Common Stock
Ladies and Gentlemen:
We are counsel to Equalnet Communications Corp., a Texas corporation
(the "Company"), and we understand that the Company has sold to [Names of
Investors] (the "Holders") $_________ aggregate principal amount of 6% Senior
Secured Convertible Notes due 2001 (the "Notes") and an aggregate of ________
shares (the "Preferred Shares") of the Company's Series D Convertible Preferred
Stock, $.01 par value (the "Preferred Stock"), and issued to the Holders Common
Stock Purchase Warrants (the "Warrants"). The Notes and Preferred Shares were
sold, and the Warrants were issued, to the Holders pursuant to several Note
Purchase and Exchange Agreements, dated as of August ___, 1998, by and between
the Holders and the Company (the "Exchange Agreements"). Pursuant to the
several Registration Rights Agreements, dated as of August ___, 1998, by and
between the Company and each Holder (the "Registration Rights Agreements")
entered into in connection with the purchase by the Holders of the Notes and
Preferred Shares, the Company agreed with each Holder, among other things, to
register for resale (1) the shares (the "Conversion Shares") of Common Stock
issuable upon conversion of the Notes and the Preferred Shares, conversion of
the Notes issued in payment of interest on the Notes and conversion of the
shares of Preferred Stock issuable as dividends on the Preferred Shares and (2)
the shares (the "Warrant Shares") of Common Stock issuable upon exercise of the
Warrants under the Securities Act of 1933, as amended (the "Securities Act"),
upon the terms provided in the Registration Rights Agreements. The Conversion
Shares and the Warrant Shares are referred to herein collectively as the
"Shares." Pursuant to the Registration Rights Agreements, on _________ ___,
1998 the Company filed a Registration Statement on Form S-__ (File No. 333-
__________) (the "Registration Statement") with the Securities and Exchange
Commission (the "SEC") relating to the Shares, which names the Holders as
selling stockholders thereunder.
2-24
<PAGE>
[Other introductory and scope of examination language to be inserted
prior to execution of Registration Rights Agreement.]
Based on the foregoing, we are of the opinion that:
(1) All of the forms, reports and other documents filed by the Company
with the SEC under the Securities Exchange Act of 1934, as amended (the
"1934 Act"), since the Closing Date complied, when filed, in all material
respects, with all applicable requirements of the 1933 Act and the 1934
Act;
(2) The Registration Statement and the Prospectus contained therein
(other than the financial statements and financial schedules and other
financial and statistical information contained or incorporated by
reference therein, as to which we have not been requested to and do not
express any opinion) comply as to form in all material respects with the
applicable requirements of the 1933 Act and the rules and regulations
promulgated thereunder; and
(3) The Registration Statement has become effective under the 1933
Act, to the best of our knowledge after due inquiry, no stop order
proceedings with respect thereto have been instituted or threatened by the
SEC. The Shares have been registered under the 1933 Act and may be resold
by the respective Holders pursuant to the Registration Statement.
We have participated in the preparation of the Registration Statement
and the Prospectus, including review and discussions with officers and other
representatives of the Company, representatives of the independent public
accountants for the Company, and your representatives at which the contents of
the Registration Statement and the Prospectus contained therein and related
matters were discussed, and, although we are not passing upon and do not assume
any responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement and the Prospectus contained therein, on
the basis of the foregoing, nothing has come to our attention that leads us to
believe either that the Registration Statement at the time the Registration
Statement became effective contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, or that the Prospectus contained in
the Registration Statement, as of its date, contained an untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading (it being understood that we have not
been requested to and do not express any view with respect to the financial
statements and schedules and other financial and statistical data included or
incorporated by reference in the Registration Statement or the Prospectus
contained therein).
2-25
<PAGE>
Paragraph (3) of this opinion may be relied upon by American Stock
Transfer & Trust Company, as Transfer Agent and Registrar (the "Transfer
Agent"), as if addressed to the Transfer Agent.
Very truly yours,
cc: American Stock Transfer & Trust Company,
as Transfer Agent and Registrar
2-26
<PAGE>
EXHIBIT 3
TO
REGISTRATION
RIGHTS AGREEMENT
_______________ ___, 1998
[Names and Addresses of Investors]
EQUALNET COMMUNICATIONS CORP.
SHARES OF COMMON STOCK
Ladies and Gentlemen:
I am General Counsel of Equalnet Communications Corp., a Texas
corporation (the "Company"), and I understand that the Company has sold to
[Names of Investors] (the "Holders") $_________ aggregate principal amount of 6%
Senior Secured Convertible Notes due 2001 (the "Notes") and an aggregate of
________ shares (the "Preferred Shares") of the Company's Series D Convertible
Preferred Stock, $.01 par value (the "Preferred Stock"), and issued to the
Holders Common Stock Purchase Warrants (the "Warrants"). The Notes and
Preferred Shares were sold, and the Warrants were issued, to the Holders
pursuant to several Note Purchase and Exchange Agreements, dated as of August
___, 1998, by and between the Holders and the Company (the "Exchange
Agreements"). Pursuant to the several Registration Rights Agreements, dated as
of August ___, 1998, by and between the Company and each Holder (the
"Registration Rights Agreements") entered into in connection with the purchase
by the Holders of the Preferred Shares, the Company agreed with each Holder,
among other things, to register for resale (1) the shares (the "Conversion
Shares") of Common Stock issuable upon conversion of the Notes and the Preferred
Shares, conversion of the Notes issued in payment of interest on the Notes and
conversion of the shares of Preferred Stock issuable as dividends on the
Preferred Shares and (2) the shares (the "Warrant Shares") of Common Stock
issuable upon exercise of the Warrants under the Securities Act of 1933, as
amended (the "Securities Act"), upon the terms provided in the Registration
Rights Agreements. The Conversion Shares and the Warrant Shares are referred to
herein collectively as the "Shares." Pursuant to the Registration Rights
Agreements, on _________ ___, 1998 the Company filed a Registration Statement on
Form S-__ (File No. 333-__________) (the "Registration Statement") with the
Securities and Exchange Commission (the "SEC") relating to the Shares, which
names the Holders as selling stockholders thereunder.
3-27
<PAGE>
[Other introductory and scope of examination language to be inserted
prior to execution of Registration Rights Agreement.]
Based on the foregoing, I am of the opinion that the Company has filed
with the SEC all of the forms, reports and other documents under the Securities
Exchange Act of 1934, as amended, required to be filed by the Company since the
Closing Date.
I have participated in the preparation of the Registration Statement
and the Prospectus, including review and discussions with officers and other
representatives of the Company, representatives of the independent public
accountants for the Company, and your representatives at which the contents of
the Registration Statement and the Prospectus contained therein and related
matters were discussed, and, although I am not passing upon and do not assume
any responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement and the Prospectus contained therein, on
the basis of the foregoing, nothing has come to my attention that leads me to
believe either that the Registration Statement at the time the Registration
Statement became effective contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, or that the Prospectus contained in
the Registration Statement, as of its date, contained an untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading (it being understood that we have not
been requested to and do not express any view with respect to the financial
statements and schedules and other financial and statistical data included or
incorporated by reference in the Registration Statement or the Prospectus
contained therein).
Very truly yours,
3-28
<PAGE>
EXHIBIT 10.29
Draft of 9/1/98
ANNEX VII
TO
NOTE PURCHASE
AND EXCHANGE
AGREEMENT
NOTICE OF CONVERSION
OF
SERIES D CONVERTIBLE PREFERRED STOCK
OF
EQUALNET COMMUNICATIONS CORP.
TO: American Stock Transfer & Trust Company,
as Transfer Agent and Registrar
6201 Fifteenth Avenue
Third Floor
Brooklyn, New York 11219
Attention: Mr. Barry Rosenthal
Facsimile No.: (718) 259-1144
(1) Pursuant to the terms of the Series D Convertible Preferred Stock
(the "Preferred Stock") of Equalnet Communications Corp., a Texas corporation
(the "Company"), the undersigned hereby elects to convert ________________
shares of the Preferred Stock together with accrued and unpaid dividends thereon
in the amount of $_______________ and interest on dividends in arrears in the
amount of $________________ into shares of Common Stock, $.01 par value (the
"Common Stock"), of the Company, or such other securities into which the
Preferred Stock is currently convertible. Capitalized terms used in this Notice
and not otherwise defined herein have the respective meanings provided in the
Statement of Resolution of the Board of Directors Establishing and Designating
Series D Convertible Preferred Stock and Fixing the Rights and Preferences of
Such Series (the "Statement of Resolution").
(2) Please issue a certificate or certificates for ________________
shares of Common Stock or other securities into which such number of shares of
Preferred Stock is convertible in the name(s) specified immediately below or, if
additional space is necessary, on an attachment hereto:
__________________ ____________________
Name Name
___________________ ____________________
Address Address
VI-1
<PAGE>
______________________ ______________________
SS or Tax ID Number SS or Tax ID Number
(3) The Conversion Date is __________________________________. Check
and complete one of the following:
[ ] The undersigned elects to convert based on the Average Market Price of
the Common Stock. The Market Price of the Common Stock on each of the
five Trading Days (whether or not consecutive) during the 25
consecutive Trading Days preceding the Conversion Date having the
lowest Market Prices, and the arithmetic average thereof are as
follows:
Date Market Price
---- ------------
--------------------- --------------------
--------------------- --------------------
--------------------- --------------------
--------------------- --------------------
--------------------- --------------------
Arithmetic Average: $_______________________
OR
[ ] The undersigned elects to convert based on the Ceiling Price of the
Common Stock of $__________ applicable to conversions of Preferred
Stock.
VI-2
<PAGE>
(4) If the shares of Common Stock issuable upon conversion of the
Preferred Stock have not been registered for resale under the Securities Act of
1933, as amended (the "Act"), and this Notice is submitted prior to the date
which is two years after the Issuance Date, the undersigned represents and
warrants that (i) the shares of Common Stock not so registered are being
acquired for the account of the undersigned for investment, and not with a view
to, or for resale in connection with, the public distribution thereof other than
pursuant to registration under the Act, and that the undersigned has no present
intention of distributing or reselling the shares of Common Stock not so
registered other than pursuant to registration under the Act and (ii) the
undersigned is an "accredited investor" as defined in Regulation D under the
Act. The undersigned further agrees that (A) the shares of Common Stock not so
registered shall not be sold or transferred unless either (i) they first shall
have been registered under the Act and applicable state securities laws or (ii)
the Company first shall have been furnished with an opinion of legal counsel
reasonably satisfactory to the Company to the effect that such sale or transfer
is exempt from the registration requirements of the Act and (B) the Company may
place a legend on the certificate(s) for the shares of Common Stock not so
registered to that effect and place a stop-transfer restriction in its records
relating to the shares of Common Stock not so registered, all in accordance with
the Subscription Agreement.
Date _________________________ ____________________________________
Signature of Holder (Must be signed exactly
as name appears on the Preferred Stock
Certificate.)
VI-3
<PAGE>
American Stock Transfer & Trust Company, as Transfer Agent and
Registrar of the Common Stock, is hereby authorized and directed to issue the
above number of shares of Common Stock in the name of the above referenced
entity or person.
EQUALNET COMMUNICATIONS CORP.
By:
--------------------------------
Name:
Title:
VI-4
<PAGE>
EXHIBITS 10.30
AND 10.37
WEIL, GOTSHAL & MANGES LLP Dallas
700 Louisiana Menlo Park
Suite 1600 (Silicon Valley)
Houston,Texas 77002-2784 Miami
(713) 546-5000 New York
Fax: (713) 224-9511 Washington, D.C.
Brussels
Budapest
London
September 4, 1998 Prague
Writer's Direct Line Warsaw
To Each of the Buyers
Listed on the Attached Schedule A
Ladies and Gentlemen:
We have acted as counsel to Equalnet Communications Corp. (the
"Company") in connection with the issuance by the Company of $3,000,000
aggregate principal amount of 6% Senior Secured Convertible Notes due 2001 of
the Company (the "Notes"), an aggregate of 3,750 shares (the "Preferred
Shares") of Series D Convertible Preferred Stock, par value $.01 per share (the
"Series D Convertible Preferred Stock"), of the Company in exchange for the
Common Shares held by the Buyers (as hereinafter defined) and Common Stock
Purchase Warrants (the "Warrants") to purchase shares of common stock, par value
$.01 per share (the "Common Stock") of the Company pursuant to the Note Purchase
Agreements, each dated as of July 31, 1998 (the "Purchase Agreements"), and the
Note Purchase and Exchange Agreements, each dated as of July 31, 1998 (the
"Exchange Agreements", and collectively with the Purchase Agreements, the
"Agreements"), each of the Agreements by and between the Company and the buyer
named therein (collectively, the "Buyers"). Capitalized terms defined in the
Agreements and used but not otherwise defined herein are used herein as so
defined.
In so acting, we have examined originals or copies, certified or
otherwise identified to our satisfaction, of the Agreements, the Notes, the
Statement of Resolution, the Transfer Agent Instruction, the Warrants, and the
Registration Rights Agreements (collectively, the "Transaction Documents") and
such corporate records, agreements, documents, opinions and other instruments,
and such certificates or comparable documents of public officials and of
officers and representatives of the Company, and have made such inquiries of
such officers and representatives, as we have deemed relevant and necessary as a
basis for the opinions hereinafter set forth.
<PAGE>
Weil, Gotshal & Manges LLP
In such examination, we have assumed the genuineness of all signatures,
the legal capacity of natural persons, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, conformed or photostatic copies and the
authenticity of the originals of such latter documents. As to all questions of
fact material to this opinion that have not been independently established, we
have relied upon certificates or comparable documents of officers and
representatives of the Company and upon the representations and warranties of
the Company contained in the Agreements. As used herein "to our knowledge" and
"of which we are aware" mean the conscious awareness of facts or other
information by any lawyer in our firm actively involved in the transactions
contemplated by the Transaction Documents.
Based on the foregoing, and subject to the qualifications stated herein,
we are of the opinion that:
1. Each of the Company and EqualNet Corporation, TeleSource, Inc.,
EqualNet Wholesale Services, Inc., USC Telecom, Inc. and Netco Acquisition Corp.
(collectively, the "Subsidiaries") is a corporation duly incorporated, validly
existing and in good standing under the laws of the state of its incorporation
and has all requisite corporate power and authority to own, lease and operate
its properties and to carry on its business as now being conducted.
2. The authorized capital stock of the Company consists of 50,000,000
shares of common stock, par value $0.01 per share, and 5,000,000 shares of
preferred stock, par value $0.01 per share, of which 2,000 shares have been
designated as Series A Convertible Preferred Stock, 3,000 shares have been
designated as Series B Senior Convertible Preferred Stock, 300,000 shares have
been designated as Series C Convertible Preferred Stock, and 6,500 shares have
been designated as Series D Convertible Preferred Stock. As of August 10, 1998,
there were 21,393,070 shares of common stock, 2,000 shares of Series A
Convertible Preferred Stock, 3,000 shares of Series B Senior Convertible
Preferred Stock, and 195,073 shares of Series C Convertible Preferred Stock,
issued and outstanding. All of such outstanding shares of the Company's capital
stock are duly authorized, validly issued, fully paid and nonassessable and have
not been issued in violation of any preemptive rights pursuant to law or in the
Company's articles of incorporation. To our knowledge, except as disclosed in
the SEC Reports or in Schedule III hereto, there are no outstanding securities
of the Company convertible into or evidencing the right to purchase or subscribe
for any shares of capital stock of the
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Weil, Gotshal & Manges LLP
Company, and there are no outstanding or authorized options, warrants, calls
subscriptions, rights commitments or any other agreements of any character
obligating the Company to issue any shares of its capital stock or any
securities convertible into or evidencing and right to purchase or subscribe for
any shares of such stock.
3. The shares of Series D Convertible Preferred Stock to be issued
pursuant to the Agreements have been duly authorized and, when issued as
contemplated by the Agreements, will be validly issued, fully paid and
nonassessable and free of preemptive rights pursuant to law or in the Company's
articles of incorporation. One thousand five hundred (1,500) shares of Series D
Convertible Preferred Stock to the issued from time to time as dividends on the
Preferred Shares have been duly authorized and, when issued as contemplated by
the Statement of Resolution, will be validly issued, fully paid and
nonassessable and free of preemptive rights pursuant to law or in the Company's
articles of incorporation. 13,043,468 shares of Common Stock issuable upon
exercise of the Warrants or upon conversion of the Notes or the Series D
Convertible Preferred Stock have been duly authorized, and when issued as
contemplated by the Purchase Agreements or the Statement of Resolution or the
Warrants, as applicable, will be validly issued, fully paid and nonassessable
and free of preemptive rights pursuant to law or in the Company's articles of
incorporation.
4. The Company has all requisite corporate power and authority to
execute and deliver the Transaction Documents and to perform its obligations
thereunder in accordance with the terms thereof, subject to the terms and
conditions contained or otherwise referenced therein. The execution, delivery
and performance of the Transaction Documents by the Company and the consummation
by the Company of the transactions contemplated thereby have been duly
authorized by all necessary corporate action on the part of the Company, subject
to the terms and conditions contained or otherwise referenced in the Transaction
Documents. The Transaction Documents have been duly and validly executed and
delivered by the Company and (assuming the due authorization, execution and
delivery thereof by each of the other parties thereto) constitute the legal,
valid and binding obligation of the Company, enforceable against it in
accordance with their terms, subject to applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and similar laws affecting
creditors' rights and remedies generally, and subject, as to enforceability, to
general principles of equity, including principles of commercial reasonableness,
good faith and fair
3
<PAGE>
Weil, Gotshal & Manges LLP
dealing (regardless of whether enforcement is sought in a proceeding at law or
in equity) and except that rights to indemnification and contribution thereunder
may be limited by federal or state securities laws or public policy relating
thereto.
5. The execution and delivery of the Transaction Documents, the
consummation of the transactions contemplated thereby and compliance by the
Company with the provisions thereof will not materially conflict with,
constitute a default under or violate (i) any of the terms, conditions or
provisions of the articles of incorporation or by-laws of the Company except as
set forth on Schedule I, (ii) any of the terms, conditions or provisions of the
Applicable Contracts (except that we express no opinion as to any covenant,
restriction or provision of the Applicable Contracts related to financial
covenants, ratios or tests or any aspect of the financial condition or results
of operations of the Company), (iii) any New York, Texas or federal law or
regulation (other than federal and state securities or blue sky laws or laws
regulating the maximum rate of interest which may be charged, taken or received,
as to which we express no opinion except to the extent set forth in the next
clause), (iv) any New York law regulating the maximum rate of interest which may
be charged, taken or received, or (v) any judgment, writ, injunction, decree,
order or ruling of any court or government authority binding on the Company of
which we are aware. "Applicable Contracts" means those documents, agreements or
instruments set forth on Schedule II attached hereto, which have been identified
to us by the Company as all material documents, agreements or other instruments
to which the Company or the Subsidiaries are a party or by which they are bound.
6. No consent, approval, waiver, license or authorization or other
action by or filing with any New York, Texas or federal governmental authority
is required in connection with the execution and delivery by the Company of the
Transaction Documents or the consummation by the Company of the transactions
contemplated thereby, except for (i) the Form D to be filed with the Securities
and Exchange Commission and (ii) any other filings in connection with federal
and state securities or blue sky laws, as to which other filings we express no
opinion.
7. Except as disclosed in the SEC Reports or in Schedule 3(i) to the
Agreements, to our knowledge, there is no litigation, proceeding or governmental
investigation pending or overtly threatened against the Company that relates to
any of the transactions contemplated by the Transaction Documents or which, if
adversely determined,
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Weil, Gotshal & Manges LLP
would have a material adverse effect on the business, assets or financial
condition of the Company and its Subsidiaries taken as a whole.
8. Assuming that the representations of each of the Company and the
Buyers contained in the Agreements (including, without limitation, the
representation of the Company that no form of general solicitation or general
advertising was used by the Company or any other person acting on its behalf in
connection with the issuance of the Securities) are true, correct and complete
and assuming compliance by each of the Company and the Buyers with their
covenants set forth in the Agreements, it is not necessary in connection with
the issuance of the Notes and the Warrants to the Buyers pursuant to the
Purchase Agreements to register the Notes or the Warrants under the Securities
Act of 1933, as amended (the "1933 Act"). No opinion is expressed herein as to
registration requirements applicable to any re-sale or other re-transfer or
re-disposition of any of such securities.
9. Assuming that (i) such exchange is made by the Company with its
existing security-holders exclusively, (ii) no commission or other remuneration
is paid or given directly or indirectly for soliciting such exchange, and (iii)
the representations of each of the Company and the Buyers contained in the
Agreements (including, without limitation, the representation of the Company
that no form of general solicitation or general advertising was used by the
Company or any other person acting on its behalf in connection with the issuance
of the Securities) are true, correct and complete and assuming compliance by
each of the Company and the Buyers with their covenants set forth in the
Agreements, it is not necessary in connection with the exchange of the Preferred
Shares to be issued by the Company for the Common Shares held by the Buyers
pursuant to the Exchange Agreements to register the Preferred Shares under the
1933 Act. No opinion is expressed herein as to registration requirements
applicable to any re-sale or other re-transfer or re-disposition of any of such
securities.
With respect to our opinions expressed in paragraphs 3, 4 and 5, we note
that (i) in accordance with Rule 4460(i) of Nasdaq and as required by the
Agreements and the Notes, the Company may not issue shares of common stock
pursuant to the Transaction Documents in an amount equal to or in excess of
twenty percent of its shares of common stock outstanding on the Issuance Date
unless and until the transactions contemplated by the Transaction Documents are
approved by a majority of the votes cast by the holders of shares of common
stock of the Company; and (ii) in
5
<PAGE>
Weil, Gotshal & Manges LLP
accordance with the Agreements, the Company must obtain Stockholder Approval of
the issuance of the Notes, the Interest Notes, the Preferred Shares, the
Dividend Shares, the Warrants and the Common Shares on or before the date which
is 120 days after the Closing Date; if the Company fails to obtain such
Stockholder Approval within such period of time, the Company shall be required
to redeem the Notes and the Preferred Shares.
With respect to our opinions expressed in paragraphs 4 and 5, we note
that we have assumed with your concurrence that a substantial part of the
negotiations relating to the Transaction Documents and the transactions
contemplated thereby, and the signing of the Transaction Documents by a party
thereto, have occurred in the State of New York.
With respect to the opinions expressed herein, we note that we have not
reviewed the minutes of the meetings of the Board of Directors of the Company
held after April 14, 1998 except for those dated as of August 11, 1998, and
accordingly, the opinions expressed herein assume that no fact or event occurred
at such meetings, and no action or inaction was authorized or approved at such
meetings, directly or indirectly, such that any opinion expressed herein would
be or is inaccurate, incomplete or untrue.
Furthermore, with respect to the opinions expressed herein, we note that
we have acted as counsel to the Company and that the Board of Directors of the
Company has retained separate counsel and has relied upon the advice of such
separate counsel and such counsel's evaluation of the Transaction Documents and
the transactions contemplated thereby.
The opinions expressed herein are limited to the laws of the State of
New York, the laws of the State of Texas, the corporate laws of the State of
Delaware and the federal laws of the United States, and we express no opinion as
to the effect on the matters covered by this letter of the laws of any other
jurisdiction.
The opinions expressed herein are rendered solely for your benefit in
connection with the transactions described herein. Those opinions may not be
used or relied upon by any other person, nor may this letter or any copies
thereof be furnished to a third party, filed with a governmental agency, quoted,
cited or otherwise referred to without our prior written consent, except that
the opinions
6
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Weil, Gotshal & Manges LLP
expressed in paragraph 3 may be relied upon by American Stock Transfer & Trust
Company as Transfer Agent and Registrar for the Common Stock.
Very truly yours,
/s/ Weil, Gotshal & Manges LLP
7
<PAGE>
Weil, Gotshal & Manges LLP
SCHEDULE A
Willis Group, LLC
c/o Brian W. Pusch, Esq.
Penthouse Suite
29 West 57th Street
New York, NY
10019
Genesee Fund Limited-Portfolio B
c/o Brian W. Pusch, Esq.
Penthouse Suite
29 West 57th Street
New York, NY
10019
8
<PAGE>
SCHEDULE I
The Statements of Resolution for each of the Series A Convertible
Preferred Stock and the Series C Convertible Preferred Stock provide that, in
the event of a redemption by the Company of Common Stock in excess of a
threshold set forth therein, the Company must offer to purchase a certain
percentage of the shares held by each holder of Series A Convertible Preferred
Stock or Series C Convertible Preferred Stock. The transactions contemplated by
the Transaction Documents will trigger this mandatory purchase obligation. It
is our understanding that the Company will obtain a waiver of its mandatory
purchase obligation from each holder of the Series A Convertible Preferred Stock
or Series C Convertible Preferred Stock.
<PAGE>
SCHEDULE II
1. Credit Agreement between Equalnet Communications Corp. f/k/a EqualNet
Communications Corp. f/k/a EqualNet Holding Corp. (the "Company") and
Comerica Bank-Texas
2. Receivables Sale Agreement dated June 18, 1997 between EqualNet Corporation
("EC") and Receivables Funding Corporation
3. Irrevocable Standing Letter of Credit No. SC 1920 dated May 15, 1998 with
Southwest Bank of Texas, N.A. by the Company in favor of Caroline Partners,
Ltd.
4. Lease Agreement dated June 28, 1994, as amended, between EC and Caroline
Partners, Ltd.
5. Lease Agreement dated March 24, 1995 between EC and First Houston
Enterprises, Inc.
6. Carrier Agreement dated May 13, 1997, as amended, between EC and AT&T Corp.
7. Loan and Security Agreement dated as of March 6, 1998 between Netco
Acquisition Corp. and FINOVA Capital Corporation ("FCC")
8. Corporate Guaranty dated as of March 6, 1998 by the Company in favor FCC
9. Management and Services Agreement dated as of March 12, 1998 by and among
the Company, EC, S.A. Telecommunications, Inc. and certain subsidiaries of
S.A. Telecommunications, Inc.
10. Telecommunications Services Agreement (undated and unexecuted between the
Company and Worldcom Network Services, Inc.
11. Agreement dated May 21, 1998 between EC and ITI Marketing Services, Inc.
12. Finder's Fee Agreement dated June 17, 1998 between the Company and RC&A
Group, Inc.
13. Master Lease dated November 4, 1994 between EC and Norwest Equipment
Finance, Inc.
14. Stock Purchase Warrant dated February 11, 1997 from the Company to The
Furst Group, Inc.
15. Stock Purchase Warrant dated October 1, 1997 from the Company to Willis
Group, LLC
16. Stock Purchase Warrant dated March 5, 1998 from the Company to Willis
Group, LLC
17. Stock Purchase Warrant dated March 6, 1998 from the Company to J. C.
Bradford Co., L.L.C.
18. Stock Purchase Warrant dated March 5, 1998 from the Company to Mike
Willis
19. Stock Purchase Warrant dated March 26, 1998 from the Company to First
Sterling Ventures Corp.
1
<PAGE>
20. Stock Purchase Warrant dated March 26, 1998 from the Company to Frank
Hervdejs
21. Stock Purchase Warrant dated April 15, 1998 from the Company to Mezzanine
Telecom, Inc.
22. Stock Purchase Warrant dated April 15, 1998 from the Company to John
Dalton
23. Stock Purchase Warrant dated April 15, 1998 from the Company to Zane
Russell
24. Stock Purchase Warrant dated April 15, 1998 from the Company to Michael L.
Hlinak
25. Stock Purchase Warrant dated June 27, 1998 from the Company to Pacific
Global Networks, Inc.
26. Stock Purchase Warrant dated June 27, 1998 from the Company to Future
Telecom Networks, Inc.
27. Common Stock Purchase Warrant dated July 23, 1998 from the Company to RFC
Capital Corporation
28. Warrant Agreement dated April 24, 1998 between the Company and James R.
Crane
29. Warrant Agreement dated as of December 2, 1997 between the Company and
Netco Acquisition, LLC
30. Warrant Agreement dated as of August 19, 1998 between the Company and Lance
Hack
31. Registration Rights Agreement dated November 12, 1996 between the Company
and Creative Communications International, Inc.
32. Registration Rights Agreement dated as of April 24, 1998 between the
Company and James R. Crane
33. Carrier Switchless Agreement dated June 30, 1998 between Frontier
Communications of the West, Inc. and EqualNet Corporation
34. Service Provider Agreement dated July 8, 1998 between EqualNet Corporation
and KPT, Inc.
35. Merchandising License Agreement between the Company (as assignee of
Creative Communications International, Inc.) and Kiss Catalog Ltd.
36. Prepaid Calling Card Agreement dated October 25, 1996 between the Company
(as assignee of CCI - no consent to assignment provided) and World Direct,
Ltd.
37. Network Services Agreement dated October 22, 1997 between EC and Premiere
Communications, Inc.
38. Web Site Services and Long Distance Agreement dated August __, 1997 between
the Company and International Center for Entrepreneurial Development, Inc.
39. Management and Services Agreement dated as of March 12, 1998 by and among
EC, the Company and S.A. Telecommunications, Inc.
40. Lease Agreement No. 9524 dated May 4, 1995 between EC and Comerica Leasing
Corporation
2
<PAGE>
41. Secured Promissory Note dated August 5, 1998 made by USC Telecom, Inc.
payable to the order of Greyrock Business Credit
3
<PAGE>
SCHEDULE III
1. Stock Purchase Warrant dated October 1, 1997 from the Company to Willis
Group, LLC
2. Stock Purchase Warrant dated March 5, 1998 from the Company to Willis
Group, LLC
3. Stock Purchase Warrant dated March 6, 1998 from the Company to J. C.
Bradford Co., L.L.C.
4. Stock Purchase Warrant dated March 5, 1998 from the Company to Mike Willis
5. Stock Purchase Warrant dated March 26, 1998 from the Company to First
Sterling Ventures Corp.
6. Stock Purchase Warrant dated March 26, 1998 from the Company to Frank
Hervdejs
7. Stock Purchase Warrant dated April 15, 1998 from the Company to Mezzanine
Telecom, Inc.
8. Stock Purchase Warrant dated April 15, 1998 from the Company to John Dalton
9. Stock Purchase Warrant dated April 15, 1998 from the Company to Zane
Russell
10. Stock Purchase Warrant dated April 15, 1998 from the Company to Michael L.
Hlinak
11. Stock Purchase Warrant dated June 27, 1998 from the Company to Pacific
Global Networks, Inc.
12. Stock Purchase Warrant dated June 27, 1998 from the Company to Future
Telecom Networks, Inc.
13. Common Stock Purchase Warrant dated July 23, 1998 from the Company to RFC
Capital Corporation
14. Warrant Agreement dated April 24, 1998 between the Company and James R.
Crane
15. Warrant Agreement dated as of August 19, 1998 between the Company and L.
Hack
16. Options to purchase, in the aggregate, 700,000 shares of common stock of
the Company held by Hal Turner
17. Series A Convertible Preferred Stock convertible into, in the aggregate,
2,000,000 shares of common stock of the Company
18. Series B Convertible Preferred Stock convertible into, in the aggregate,
1,500,000 shares of common stock of the Company
19. Series C Convertible Preferred Stock convertible into, in the aggregate,
1,950,730 shares of common stock of the Company
20. Employee Stock Options to purchase, in the aggregate, 4,000,000 shares of
common stock of the Company
21. Non-Employee Director Stock Options to purchase, in the aggregate, 500,000
shares of common stock of the Company
<PAGE>
EXHIBITS 10.31
AND 10.38
Draft of 8/7/98
ANNEX IX
TO
NOTE PURCHASE
AND EXCHANGE
AGREEMENT
[Letterhead of Company Counsel]
August ___, 1998
To Each of the Buyers
Listed on the Attached Schedule A
RE: EQUALNET HOLDING CORP.
Ladies and Gentlemen:
We have acted as counsel to EqualNet Holding Corp., a Texas
corporation (the "Company"), in connection with the issuance by the Company of
5,000 shares (the "Preferred Shares") of Series C Convertible Preferred Stock,
par value $.01 per share (the "Series C Preferred Stock"), of the Company and
Common Stock Purchase Warrants (the "Warrants") to purchase shares of Common
Stock, par value $.01 per share (the "Common Stock") of the Company pursuant to
the Subscription Agreements, each dated as of August ___, 1998 (collectively,
the "Agreements"), by and between the Company and the buyer named therein
(collectively, the "Buyers"). Capitalized terms used herein and not otherwise
defined herein shall have the respective meanings assigned to such terms in the
Agreements and, if not defined in the Agreements, in the Statement of
Resolution.
[OTHER INTRODUCTORY STATEMENTS ACCEPTABLE TO THE BUYERS MAY BE
INCLUDED IN THIS FORM PRIOR TO EXECUTION OF SUBSCRIPTION AGREEMENTS.]
Based upon the foregoing, we are of the opinion that:
(1) Each of the Company and its Subsidiaries is a corporation duly
organized, validly existing and in good standing under the laws of the
state of its incorporation and has all requisite corporate power and
authority to own, lease and operate its properties and to carry on its
business as now being conducted; the Company has all requisite corporate
power and authority to execute, deliver and perform its obligations under
the Agreements, the Statement of Resolution, the Transfer Agent Agreement,
the Warrants, the Registration Rights Agreements and the other agreements
and instruments executed and delivered by the Company in connection
therewith (collectively referred to as the "Transaction Documents"), and to
consummate the transactions contemplated thereby; and the Company has no
subsidiaries or equity investments in any other person other than the
Subsidiaries;
VII-1
<PAGE>
(2) The Transaction Documents have been duly and validly authorized by
the Company; and the Transaction Documents have been duly executed and
delivered by the Company and, assuming the due authorization, execution and
delivery by the Buyers of the Transaction Documents executed or to be
executed by the Buyers, constitute the legal, valid and binding obligations
of the Company enforceable against the Company in accordance with their
respective terms, subject, as to enforcement of remedies, to applicable
bankruptcy, insolvency, moratorium, fraudulent conveyance, reorganization
or similar laws affecting creditors' rights generally and subject to
general principles of equity, whether enforcement is considered in a
proceeding at law or in equity;
(3) The execution and delivery of the Transaction Documents by the
Company and the consummation by the Company of the issuance of the
Preferred Shares and the Warrants and the other transactions contemplated
by the Transaction Documents do not and will not, with or without the
giving of notice or the lapse of time, or both (i) result in any violation
of any term of the Articles of Incorporation or by-laws of the Company or
the Subsidiaries, (ii) conflict with or result in a breach by the Company
or any Subsidiary of any of the terms or provisions of, or constitute a
default under, or result in the modification of, or result in the creation
or imposition of any lien, security interest, charge or encumbrance upon
any of the properties or assets of the Company or any Subsidiary pursuant
to, any indenture, mortgage, deed of trust or other agreement or instrument
to which the Company or any Subsidiary is a party or by which the Company
or any Subsidiary or any of their respective properties or assets are bound
or affected or (iii) violate or contravene any applicable law, rule or
regulation or any applicable decree, judgment or order of any court, United
States federal or state regulatory body, administrative agency or other
governmental body having jurisdiction over the Company or any Subsidiary or
any of their respective properties or assets or (iv) have any material
adverse effect on any permit, certification, registration, approval,
consent, license or franchise necessary for the Company or any Subsidiary
to own or lease and operate any of their respective properties and to
conduct any of their respective businesses or the ability of the Company or
any Subsidiary to make use thereof;
(4) The Preferred Shares have been duly authorized and, when issued
and paid for in accordance with the Agreements, will be validly issued,
fully paid and non-assessable; and the Dividend Shares have been duly
authorized and, when issued as dividends on the Preferred Stock, will be
validly issued, fully paid and nonassessable;
(5) The Common Shares have been duly authorized and, when issued upon
conversion of the Preferred Shares or the Dividend Shares or exercise of
the Warrants, will be validly issued, fully paid and non-assessable;
(6) The authorized capital stock of the Company consists of (a)
50,000,000 shares of Common Stock of which __________________ shares were
outstanding on August ___, 1998, all of which are fully paid and
nonassessable; and (b) 5,000,000 shares of Preferred Stock, $.01 par value,
of which __________________ shares have been designated Series A Preferred
Stock and __________________ of which are outstanding, __________________
shares have been
VII-2
<PAGE>
designated Series B Preferred Stock and of which __________________ are
outstanding, and 6,000 shares of which have been designated Series C
Convertible Preferred Stock, of which 5,000 shares are being issued on the
Closing Date pursuant to the Agreements; the Company has duly reserved from
its authorized and unissued shares of Common Stock _____________ shares of
Common Stock for issuance upon conversion of the Preferred Shares and the
Dividend Shares and exercise of the Warrants; to the best of our knowledge
after due inquiry, the SEC Reports disclose all outstanding options or
warrants for the purchase of, or other rights to purchase or subscribe for,
or securities convertible into or exchangeable for, Common Stock or other
capital stock of the Company, or any contracts or commitments to issue or
sell Common Stock or other capital stock of the Company or any such
options, warrants, rights or other securities; the Company has duly
reserved from its authorized and unissued shares of Common Stock the full
number of shares required for (a) all options, warrants, convertible
securities and other rights to acquire shares of Common Stock which are
outstanding, and (b) all shares of Common Stock and options and other
rights to acquire shares of Common Stock which may be issued or granted
under the stock option, stock purchase and similar plans which have been
adopted by the Company or the Subsidiaries; and, immediately following the
Closing, after giving effect to any antidilution or similar adjustment
arising by reason of issuance of the Preferred Shares, the Dividend Shares
or the Warrants, the total number of shares of Common Stock reserved and
required to be reserved from the authorized and unissued shares of Common
Stock for purposes of all such options, warrants, convertible securities,
other rights and stock option, stock purchase and similar plans will be
_______________________________; and there are no preemptive or similar
rights of any stockholder of the Company or any other person to acquire the
Preferred Shares, the Dividend Shares, the Warrants or the Common Shares.
(7) The Common Stock is listed for trading on the Nasdaq National
Market ("Nasdaq") and, (a) to the best of our knowledge, after due inquiry,
no suspension of trading in the Common Stock is in effect, (b) the Company
and the Common Stock meet the criteria for continued listing and trading on
Nasdaq, and (c) since January 1, 1996, the Company has not been notified by
Nasdaq of any failure or potential failure to meet the criteria for
continued listing and trading on Nasdaq; the Common Shares have been duly
listed for trading on Nasdaq; the outstanding shares of Common Stock, and
outstanding options, warrants and other securities to purchase Common Stock
have been duly authorized and validly issued and in the case of the Common
Stock are fully paid and non-assessable; none of such outstanding shares of
Common Stock, options, warrants and other securities has been issued in
violation of the preemptive rights of any securityholder of the Company;
the authorized shares of Common Stock, and outstanding options, warrants
and other securities to purchase Common Stock conform in all material
respects to the descriptions thereof contained in the SEC Reports; and to
the best of our knowledge, after due inquiry, no holder of any of the
Company's securities has any rights, "demand," "piggy-back" or otherwise,
to have such securities registered by reason of the intention to file,
filing or effectiveness of the Registration Statement;
VII-3
<PAGE>
(8) The Preferred Shares and the Warrants may be issued to the Buyers
pursuant to the Agreements without registration under the 1933 Act and the
Dividend Shares may be issued as dividends on the Preferred Stock without
registration under the 1933 Act;
(9) The Common Shares may be issued to the Buyers upon conversion of
the Preferred Shares or the Dividend Shares, in accordance with the
Statement of Resolution, or upon exercise of the Warrants, without
registration under the 1933 Act;
(10) No authorization, approval or consent of any, or filing with, any
court, governmental body, regulatory agency, self-regulatory organization,
stock exchange or market body or the stockholders of the Company is
required to be obtained or made by the Company for the issuance and sale of
the Preferred Shares and the issuance of the Warrants as contemplated by
the Agreements, the issuance of the Dividend Shares in accordance with the
Statement of Resolution or the issuance of the Common Shares on conversion
of the Preferred Shares or the Dividend Shares or the exercise of the
Warrants other than (a) such as may be required under any applicable
securities or "blue sky" laws, as to which we express no opinion, and (b)
the Form D to be filed by the Company with the SEC;
(11) Except as disclosed in the SEC Reports, there is no action, suit,
proceeding, inquiry or investigation before or by any court, public board
or body pending or, to the best of our knowledge after due inquiry,
threatened against or affecting the Company or any Subsidiary, wherein an
unfavorable decision, ruling or finding could have a material adverse
effect on the business, properties, operations, condition (financial or
other), results of operations or prospects of the Company and the
Subsidiaries, taken as a whole, or the transactions contemplated by the
Transaction Documents or which could materially adversely affect the
validity or enforceability of, or the authority or ability of the Company
to perform its obligations under, the Transaction Documents; and
(12) The Company has timely filed with the SEC all forms, reports and
other documents required to be filed with the SEC under the 1934 Act since
January 1, 1996. All of such forms, reports and other documents complied,
when filed, in all material respects, with all applicable requirements of
the 1934 Act.
[OTHER QUALIFICATIONS AND LIMITATIONS ACCEPTABLE TO THE BUYERS MAY BE
INCLUDED IN THIS FORM PRIOR TO EXECUTION OF THE SUBSCRIPTION AGREEMENTS.]
These opinions are limited to the matters expressly stated herein and
are rendered solely for your benefit and may not be quoted or relied upon for
any other purpose or by an other person, except that the opinions expressed in
paragraphs (4), (5) and (9), may be relied upon by ChaseMellon Shareholder
Services, L.L.C., as Transfer Agent and Registrar for the Common Stock.
Very truly yours,
cc: ChaseMellon Shareholder Services, L.L.C.,
as Transfer Agent and Registrar
VII-4
<PAGE>
SCHEDULE A
Advantage Fund II Ltd.
c/o CITCO
Kaya Flamboyan 9
CuraIao, Netherlands Antilles
A-5
<PAGE>
EXHIBIT 10.32
ANNEX X
Form of Opinion in Connection with Security Agreement
-----------------------------------------------------
1. The Company has all requisite corporate power and authority
to execute and deliver the Security Agreement and to perform its
obligations thereunder in accordance with the terms thereof, subject
to the terms and conditions contained or otherwise referenced therein.
The execution, delivery and performance of the Security Agreement by
the Company and the consummation by the Company of the transactions
contemplated thereby have been duly authorized by all necessary
corporate action on the part of the Company, subject to the terms and
conditions contained or otherwise referenced in the Security
Agreement. The Security Agreement has been duly and validly executed
and delivered by the Company and (assuming the due authorization,
execution and delivery thereof by each of the other parties thereto)
constitutes the legal, valid and binding obligation of the Company,
enforceable against it in accordance with their terms, subject to
applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar laws affecting creditors'
rights and remedies generally, and subject, as to enforceability, to
general principles of equity, including principles of commercial
reasonableness, good faith and fair dealing (regardless of whether
enforcement is sought in a proceeding at law or in equity) and except
that certain remedial provisions of the Security Agreement are or
may be unenforceable in whole or in part under the laws of the State
of Texas and the State of New York, but the inclusion of such
provisions does not affect the validity of the Security Agreement, and
the Security Agreement contains adequate provisions for the practical
realization of the rights and benefits afforded thereby. No opinion is
expressed in this paragraph as to the perfection or priority of any
liens granted pursuant to the Security Agreement.
2. The execution and delivery of the Security Agreement,
the consummation of the transactions contemplated thereby and
compliance by the Company with the provisions thereof will not
materially conflict with, constitute a default under or violate (i)
any of the terms, conditions or provisions of the articles of
incorporation or by-laws of the Company, (ii) any of the terms,
conditions or provisions of the Applicable Contracts except as set
forth on Schedule I (except that we express no opinion as to any
covenant, restriction or provision of the Applicable Contracts related
to financial covenants, ratios or tests or any aspect of the financial
condition or results of operations of the Company), (iii) any New
York, Texas or federal law or regulation (other than federal and state
securities or blue sky laws or laws regulating the maximum rate of
interest which may be charged, taken or received, as to which we
express no opinion except to the extent set forth in the next
<PAGE>
clause), (iv) any New York law regulating the maximum rate of interest
which may be charged, taken or received, or (v) any judgment, writ,
injunction, decree, order or ruling of any court or governmental
authority binding on the Company of which we are aware. "Applicable
Contracts" means those documents, agreements or instruments set forth
on Schedule II attached hereto, which have been identified to us by
the Company as all material documents, agreements or other instruments
to which the Company or the Subsidiaries are a party or by which they
are bound.
3. Assuming the filing of the financing statements on Form UCC-1
in the offices in the jurisdictions indicated on Schedule III hereto,
the execution and delivery of the Security Agreement creates a valid
and duly perfected lien on and a security interest in the "Collateral"
(as such term is defined in the Security Agreement) to the extent
perfection of a lien or security interest in the Collateral may be
perfected by the filing of a financing statement under the Uniform
Commercial Code in effect in the State of Texas (the "UCC"), as
security for the Obligations (as such term is defined in the Security
Agreement).
The opinion is subject to the following exceptions:
A. that with respect to any Debtor's (as such term is
defined in the Security Agreement) rights in or title to the
Collateral, we express no opinion, and have assumed that such Debtor
has title to the Collateral;
B. that with respect to any Collateral as to which the
perfection of a lien or security interest is governed by the laws of
any jurisdiction other than the State of Texas, we express no opinion;
and
C. that with respect to any Collateral which is or may
become fixtures (within the meaning of Section 9.313 of the UCC) we
express no opinion; and
D. that with respect to transactions excluded from
Article 9 of the UCC by Section 9.104 thereof, we express no opinion.
In addition, the opinion set forth above is subject to (i) the
limitations on perfection of security interests in proceeds resulting
from the operation of Section 9.306 of the UCC; (ii) the limitations
with respect to buyers in the ordinary course of business imposed by
Sections 9.307 and 9.308 of the UCC; (iii) the limitations with
respect to documents, instruments and securities imposed by Sections
8.302, 9.304
2
<PAGE>
and 9.309 of the UCC; (iv) the provisions of Section 9.203 of the UCC
relating to the time of attachment; and (v) Section 552 of Tide 11 of
the United States Code (the "Bankruptcy Code") with respect to any
Collateral acquired by the Debtors subsequent to the commencement of
a case against or by the Debtors under the Bankruptcy Code.
We further assume (a) that all filings will be timely made and
duly filed as necessary (i) in the event of a change in the name,
identity or corporate structure of the Debtors, (ii) in the event of a
change in location of the Collateral, or the location of the principal
office of the Debtors or the place where the Debtors keeps its books
and records, and (iii) to continue to maintain the effectiveness of the
original filings, and (b) that any money, instruments, documents or
securities which may constitute part of the Collateral are and will
remain in the Creditors' possession.
3
<PAGE>
EXHIBIT 10.33
NOTE PURCHASE AGREEMENT
DATED AS OF JULY 31, 1998
BY AND BETWEEN
EQUALNET COMMUNICATIONS CORP.
AND
GENESEE FUND LIMITED-PORTFOLIO B
____________________
6% SENIOR SECURED CONVERTIBLE NOTE DUE 2001
and
COMMON STOCK PURCHASE WARRANTS
1
<PAGE>
NOTE PURCHASE AGREEMENT
6% SENIOR SECURED CONVERTIBLE NOTE DUE 2001
AND
COMMON STOCK PURCHASE WARRANTS
EQUALNET COMMUNICATIONS CORP.
Page
----
1. AGREEMENT TO PURCHASE................................................. 1
(a) Purchase of Note............................................. 1
(b) Deliveries and Form of Payment............................... 2
(c) Method of Payment............................................ 2
2. BUYER REPRESENTATIONS, WARRANTIES, ETC................................ 2
(a) Purchase for Investment...................................... 2
(b) Accredited Investor.......................................... 2
(c) Reoffers and Resales......................................... 2
(d) Company Reliance............................................. 3
(e) Information Provided......................................... 3
(f) Absence of Approvals......................................... 3
(g) Note Purchase Agreement...................................... 3
3. COMPANY REPRESENTATIONS, WARRANTIES, ETC.............................. 3
(a) Organization and Authority................................... 3
(b) Capitalization............................................... 4
(c) Concerning the Common Shares and the Common Stock............ 4
(d) Note Purchase Agreement, Note and Other Transaction Documents 5
(e) Non-contravention............................................ 5
(f) Approvals.................................................... 5
(g) Information Provided......................................... 6
(h) Absence of Certain Changes................................... 6
(i) Absence of Certain Proceedings............................... 6
(j) Properties................................................... 7
(k) Labor Relations.............................................. 8
(l) SEC Filings.................................................. 8
(m) Absence of Brokers, Finders, Etc............................. 8
(n) No Solicitation.............................................. 8
(o) Certain Issuances of Securities.............................. 8
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS................................. 8
(a) Transfer Restrictions........................................ 8
(b) Restrictive Legend........................................... 9
(c) Registration Rights Agreement................................ 10
2
<PAGE>
(d) Form D.................................................... 10
(e) Authorization for Trading................................. 10
(f) Use of Proceeds........................................... 10
(g) Blue Sky Laws............................................. 10
(h) Certain Expenses.......................................... 10
(i) Certain Issuances of Securities........................... 11
(j) Stockholder Approval...................................... 11
(k) Best Efforts.............................................. 11
5. TRANSFER AGENT INSTRUCTION......................................... 12
6. CLOSING DATE....................................................... 12
7. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL AND ISSUE........... 12
8. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE................... 13
9. MISCELLANEOUS...................................................... 13
(a) Governing Law............................................. 13
(b) Counterparts.............................................. 13
(c) Headings, etc............................................. 14
(d) Severability.............................................. 14
(e) Amendments................................................ 14
(f) Waivers................................................... 14
(g) Notices................................................... 14
(h) Assignment................................................ 15
(i) Survival of Representations and Warranties................ 15
(j) Entire Agreement.......................................... 15
(k) Termination............................................... 15
(l) Further Assurances........................................ 16
(m) Public Statements, Press Releases, Etc.................... 16
(n) Construction.............................................. 16
SCHEDULES
Schedule 3(b)-1 Antidilution Adjustments
Schedule 3(b)-2 Certain Registration Rights
Schedule 3(c)-1 Certain Nasdaq Matters
ANNEXES
Annex I Form of 6% Senior Secured Convertible Note due 2001
3
<PAGE>
Annex II Form of Common Stock Purchase Warrant
Annex III Joint Escrow Instructions
Annex IV Form of Registration Rights Agreement
Annex V Form of Transfer Agent Instruction
Annex VI Form of Opinion of Counsel to Be Delivered on Closing Date
Annex VII Form of Opinion of the Company's General Counsel
4
<PAGE>
NOTE PURCHASE AGREEMENT
THIS NOTE PURCHASE AGREEMENT, dated as of July 31, 1998 (this
"Agreement"), by and between EQUALNET COMMUNICATIONS CORP., a Texas corporation
(the "Company"), with headquarters located at 1250 Wood Branch Park Drive,
Houston, Texas 77079, and GENESEE FUND LIMITED-PORTFOLIO B, a British Virgin
Islands corporation (the "Buyer").
W I T N E S S E T H:
WHEREAS, the Buyer wishes to purchase, upon the terms and subject to
the conditions of this Agreement, a senior secured convertible note of the
Company which will be convertible into shares of Common Stock, $.01 par value
(the "Common Stock"), of the Company and in connection therewith the Company is
to issue to the Buyer warrants to purchase shares of Common Stock as provided in
this Agreement;
WHEREAS, the Company and the Buyer are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by Rule 506 of Regulation D as promulgated by the Securities and Exchange
Commission (the "SEC") under the Securities Act of 1933, as amended (the "1933
Act"); and
WHEREAS, in connection with this Agreement and the transactions
contemplated hereby, the Company is executing and delivering several Note
Purchase and Exchange Agreements, dated as of the date hereof, with the several
buyers named therein (the "Exchange Agreements"), pursuant to which, among other
things, the Company has agreed, upon the terms and subject to the conditions of
the Exchange Agreements, to sell senior secured convertible notes to such buyers
(the "Other Notes"), to issue shares of Series D Convertible Preferred Stock,
$.01 par value (the "Series D Preferred Stock"), in exchange for outstanding
shares of Common Stock held by such buyers and to issue to such buyers warrants
to purchase shares of Common Stock (the "Other Warrants");
NOW THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. AGREEMENT TO PURCHASE; PURCHASE PRICE.
(A) PURCHASE OF NOTE; ISSUANCE OF WARRANTS. The Buyer hereby agrees to purchase
from the Company a 6% Senior Secured Convertible Note due 2001 in the principal
amount set forth on the signature page of this Agreement, having the terms and
conditions in the form thereof attached hereto as ANNEX I (the "Note") for the
aggregate purchase price set forth on the signature page of this Agreement (the
"Purchase Price"). In connection with the purchase of the Note by the Buyer, the
Company shall issue to the Buyer at the closing on the Closing Date (as defined
herein) Common Stock Purchase Warrants in the form attached hereto as ANNEX II
(the
5
<PAGE>
"Warrants") to purchase a number of shares of Common Stock equal to the quotient
obtained by dividing (i) the quotient obtained by dividing (x) the Purchase
Price by (y) the Purchase Price (as defined in the Warrants) per share of Common
Stock to be set forth in the Warrants by (ii) 4.6666 (subject to adjustment
after issuance of the Warrants as provided in the Warrants). The 6% Senior
Secured Convertible Notes due 2001 issuable pursuant to Section 1.1 of the Note
or such notes in payment of interest on the Note and such notes are referred to
herein as the "Interest Notes." The shares of Common Stock issuable upon
exercise of the Warrants are referred to herein as the "Warrant Shares." The
Warrant Shares and the shares of Common Stock issuable upon conversion of the
Note and the Interest Notes are referred to herein collectively as the "Common
Shares." The Common Shares, the Note and the Interest Notes are referred to
herein collectively as the "Securities."
(B) DELIVERIES AND FORM OF PAYMENT. The Buyer shall pay the Purchase Price by
delivering good funds in United States Dollars to the escrow agent (the "Escrow
Agent") identified in the Joint Escrow Instructions attached hereto as ANNEX III
(the "Joint Escrow Instructions"). Such delivery of funds shall be made against
delivery by the Company of the certificates for the Note and the Warrants
registered in the name of the Buyer. Promptly following payment by the Buyer to
the Escrow Agent of the Purchase Price, but in any event prior to the Closing
Date (as defined herein), the Company shall deliver certificates for the
Preferred Shares, registered in the name of the Buyer or its nominee, to the
Escrow Agent. The certificates for the Note shall be delivered by the Company to
the Escrow Agent on a delivery against payment basis at the closing. By signing
this Agreement, the Buyer and the Company each agrees to all of the terms and
conditions of, and becomes a party to, the Joint Escrow Instructions, all of the
provisions of which are incorporated herein by this reference as if set forth in
full.
(C) METHOD OF PAYMENT. Payment of the Purchase Price for the Preferred Shares
shall be made by wire transfer of funds to:
Citibank, N.A.
153 East 53rd Street
New York, New York 10043
ABA#021000089
For credit to A/C#37179446
For credit to the account of Brian W. Pusch Attorney Escrow Account
Reference: Genesee/Equalnet
Not later than 4:00 p.m., New York City time, on the date which is one Business
Day after the Company shall have accepted this Agreement and returned a signed
counterpart of this Agreement to the Buyer or its legal counsel, the Buyer shall
deposit with the Escrow Agent an amount equal to the Purchase Price. As used in
this Agreement, the term "Business Day" means any day other than a Saturday,
Sunday or other day on which commercial banks in The City of New York are
authorized or required by law to remain closed.
6
<PAGE>
2. BUYER REPRESENTATIONS, WARRANTIES, ETC.
The Buyer represents and warrants to, and covenants and agrees with,
the Company as follows:
(A) PURCHASE FOR INVESTMENT. The Buyer is purchasing the Note and acquiring the
Warrants for its own account for investment only and not with a view towards the
public sale or distribution thereof;
(B) ACCREDITED INVESTOR. The Buyer is an "accredited investor" as that term is
defined in Rule 501 of the General Rules and Regulations under the 1933 Act by
reason of Rule 501(a)(3);
(C) REOFFERS AND RESALES. All subsequent offers and sales of the Securities by
the Buyer shall be made pursuant to registration of the Securities being offered
and sold under the 1933 Act or pursuant to an exemption from registration;
(D) COMPANY RELIANCE. The Buyer understands that the Note is being offered and
sold, the Warrants are being issued, and the Common Shares are being offered, in
each case to it in reliance on specific exemptions from the registration
requirements of United States federal and state securities laws and that the
Company is relying upon the truth and accuracy of, and the Buyer's compliance
with, the representations, warranties, agreements, acknowledgments and
understandings of the Buyer set forth herein in order to determine the
availability of such exemptions and the eligibility of the Buyer to acquire the
Note and the Warrants and to receive an offer of the Common Shares;
(E) INFORMATION PROVIDED. The Buyer and its advisors, if any, have been
furnished with all materials relating to the business, finances and operations
of the Company and materials relating to the offer and sale of the Note and the
issuance of the Warrants and the offer of the Common Shares which have been
requested by the Buyer; the Buyer and its advisors, if any, have been afforded
the opportunity to ask questions of the Company and have received satisfactory
answers to any such inquiries; without limiting the generality of the foregoing,
the Buyer has had the opportunity to obtain and to review the Company's (1)
Annual Report on Form 10-K for the fiscal year ended June 30, 1997, as amended
by Amendment No. 1 thereto on Form 10-K/A filed with the SEC on September 30,
1997, Amendment No. 2 thereto on Form 10-K/A filed with the SEC on October 28,
1997, Amendment No. 3 thereto filed with the SEC on January 20, 1998, and
Amendment No. 4 thereto on Form 10-K/A filed with the SEC on January 30, 1998
(the "1997 10-K"), (2) Quarterly Reports on Form 10-Q for the quarters ended
September 30, 1997, December 31, 1997 and March 31, 1998, (3) definitive proxy
statement for the Company's 1997 Annual Meeting of Shareholders, (4) definitive
proxy statement for a Special Meeting of stockholders of the Company held on
June 30, 1998, and (5) Current Reports on Form 8-K dated July 10, 1997, July 23,
1997 and March 10, 1998, in each case as filed with the SEC (collectively, the
"SEC Reports"); and the Buyer understands that its investment in the Securities
involves a high degree of risk;
7
<PAGE>
(F) ABSENCE OF APPROVALS. The Buyer understands that no United States federal or
state agency or any other government or governmental agency has passed on or
made any recommendation or endorsement of the Securities; and
(G) NOTE PURCHASE AGREEMENT. This Agreement has been duly and validly
authorized, executed and delivered on behalf of the Buyer and is a valid and
binding agreement of the Buyer enforceable in accordance with its terms, subject
as to enforceability to general principles of equity and to bankruptcy,
insolvency, moratorium and other similar laws affecting the enforcement of
creditors' rights generally.
3. COMPANY REPRESENTATIONS, WARRANTIES, ETC.
The Company represents and warrants to, and covenants and agrees with,
the Buyer that as of August 31, 1998 except as otherwise specifically provided
herein:
(A) ORGANIZATION AND AUTHORITY. Each of the Company and its subsidiaries listed
in Exhibit 21 to the 1997 10-K (together with USC Telecom, Inc. and Netco
Acquisition Corp., the "Subsidiaries") is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation, and has all requisite corporate power and authority (i) to own,
lease and operate its properties and to carry on its business as now being
conducted, and (ii) to execute, deliver and perform its obligations under this
Agreement, the Note, the Warrants, the Registration Rights Agreement, the form
of which is attached hereto as ANNEX IV (the "Registration Rights Agreement"),
the Transfer Agent Instruction, the form of which is attached hereto as ANNEX V
(the "Transfer Agent Instruction"), and the other agreements to be executed and
delivered by the Company in connection herewith, and to consummate the
transactions contemplated hereby and thereby. Each of the Company and the
Subsidiaries is duly qualified to do business as a foreign corporation and is in
good standing in all jurisdictions wherein such qualification is necessary and
where failure so to qualify could have a material adverse effect on the
business, properties, operations, condition (financial or other), results of
operations or prospects of the Company and the Subsidiaries, taken as a whole.
The Company has no equity investment in any person other than the Subsidiaries.
(B) CAPITALIZATION. The authorized capital stock of the Company consists of (a)
50,000,000 shares of Common Stock of which 21,393,070 shares were outstanding on
August 10, 1998, all of which are fully paid and nonassessable; and (b)
5,000,000 shares of Preferred Stock, $.01 par value, of which 2,000 shares have
been designated Series A Convertible Preferred Stock and of which 2,000 shares
are outstanding, 3,000 shares have been designated Series B Senior Convertible
Preferred Stock and of which 3,000 shares are outstanding, of which 300,000
shares have been designated Series C Convertible Preferred Stock (the "Series C
Stock") and of which 195,073 shares are outstanding, and of which 6,500 shares
will, be designated as Series D Convertible Preferred Stock, of which 5,000
shares will be issued pursuant to the Exchange Agreements; and on the Closing
Date there will be (x) no material increase from August 10, 1998 in the number
of shares of Common Stock outstanding and (y) no issuances of preferred stock
except as issued pursuant to the Exchange Agreements. As of August 10, 1998, the
Company had outstanding options, warrants and similar rights entitling the
holders to purchase
8
<PAGE>
14,563,462 shares of Common Stock. Other than as set forth in the preceding
sentence, the Company does not have outstanding any material amount of
securities (or obligations to issue any such securities) convertible into,
exchangeable for or otherwise entitling the holders thereof to acquire shares of
Common Stock, except as disclosed in the SEC Reports. The Company has duly
reserved from its authorized and unissued shares of Common Stock the full number
of shares required for (a) all options, warrants, convertible securities and
other rights to acquire shares of Common Stock which are outstanding and (b) all
shares of Common Stock and options and other rights to acquire shares of Common
Stock which may be issued or granted under the stock option and similar plans
which have been adopted by the Company or any of the Subsidiaries. Each
outstanding class or series of securities for which any antidilution or similar
adjustment arising by reason of the issuance or conversion of the Note and the
Interest Notes or the issuance or exercise of the Warrants or the issuance or
conversion of the shares of Series D Preferred Stock or the issuance or exercise
of the Other Warrants to be issued pursuant to the Exchange Agreements will
occur is identified on SCHEDULE 3(B)-1 attached hereto, together with the amount
of such antidilution adjustment. The outstanding shares of Common Stock and
outstanding options, warrants and other securities convertible into,
exchangeable for or otherwise entitling the holder thereof to acquire shares of
Common Stock have been duly authorized and validly issued. None of such
outstanding shares of Common Stock, options, warrants and other securities has
been issued in violation of the preemptive rights of any securityholder of the
Company. The offers and sales of the outstanding shares of Common Stock and such
options, warrants and other securities were at all relevant times either
registered under the 1933 Act and applicable state securities laws or exempt
from such requirements. No holder of any of the Company's securities has any
rights, "demand," "piggy-back" or otherwise, to have such securities registered
by reason of the intention to file, filing or effectiveness of the Registration
Statement (as defined in the Registration Rights Agreement), except as set forth
on SCHEDULE 3(B)-2 attached hereto.
(C) CONCERNING THE COMMON SHARES AND THE COMMON STOCK. The Common Shares have
been duly authorized and, when issued upon conversion of the Note or the
Interest Notes or upon exercise of the Warrants, as the case may be, will be
duly and validly issued, fully paid and non-assessable and will not subject the
holder thereof to personal liability by reason of being such holder. There are
no preemptive or similar rights of any stockholder of the Company or any other
person to acquire the Note, the Interest Notes or any of the Common Shares. The
Company has duly reserved 13,043,468 shares of Common Stock for conversion of
the Note, the Interest Notes, the Other Notes, and the shares of Series D
Preferred Stock and exercise of the Warrants and the Other Warrants, and such
shares shall remain so reserved (subject to reduction from time to time for
shares of Common Stock issued upon conversion of the Note, the Interest Notes,
the Other Notes, and the shares of Series D Preferred Stock and exercise of the
Warrants and the Other Warrants), and the Company shall from time to time
reserve such additional shares of Common Stock as shall be required to be
reserved pursuant to the Note and the Interest Notes, as long as the Note and
the Interest Notes are convertible, and pursuant to the Warrants, as long as the
Warrants are exercisable. The Common Stock is listed for trading on the Nasdaq
National Market ("Nasdaq") and (1) the Company and the Common Stock meet the
criteria for continued listing and trading on Nasdaq; (2) except as set forth on
SCHEDULE 3(C)-1 attached hereto, the Company has not been notified since January
1, 1996 by Nasdaq of any failure or potential
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failure to meet the criteria for continued listing and trading on Nasdaq and (3)
no suspension of trading in the Common Stock is in effect. The Company knows of
no reason that the Common Shares will not be eligible for listing on Nasdaq.
(D) NOTE PURCHASE AGREEMENT, NOTE AND OTHER TRANSACTION DOCUMENTS. This
Agreement, the Note, the Registration Rights Agreement, the Warrants and the
Transfer Agent Instruction and the other agreements and instruments contemplated
hereby and thereby have been duly and validly authorized by the Company, this
Agreement has been duly executed and delivered by the Company and this Agreement
is, and the Note, the Registration Rights Agreement, the Warrants and the
Transfer Agent Instruction and such other agreements, when executed and
delivered by the Company, will be, valid and binding obligations of the Company
enforceable in accordance with their respective terms, subject as to
enforceability to general principles of equity and to bankruptcy, insolvency,
moratorium and other similar laws affecting the enforcement of creditors' rights
generally.
(E) NON-CONTRAVENTION. The execution and delivery by the Company of this
Agreement and the other documents contemplated by this Agreement and the
consummation by the Company of the issuance of the Note and the Warrants as
contemplated by this Agreement, and the other transactions contemplated by this
Agreement, the Note, the Registration Rights Agreement, the Warrants and the
Transfer Agent Instruction do not and will not, with or without the giving of
notice or the lapse of time, or both (i) result in any violation of any terms of
the Articles of Incorporation or By-laws of the Company or any Subsidiary, (ii)
conflict with or result in a breach by the Company or any Subsidiary of any of
the terms or provisions of, or constitute a default under, or result in the
modification, amendment, termination or cancellation of, result in the
acceleration of any obligation of the Company or any Subsidiary under, or result
in the creation or imposition of any lien, security interest, charge or
encumbrance upon any of the properties or assets of the Company or any
Subsidiary pursuant to, any indenture, mortgage, deed of trust or other
agreement or instrument to which the Company or any Subsidiary is a party or by
which the Company or any Subsidiary or any of their respective properties or
assets is bound or affected, (iii) violate or contravene any applicable law,
rule or regulation or any applicable decree, judgment or order of any court,
United States federal or state regulatory body, administrative agency or other
governmental body having jurisdiction over the Company or any Subsidiary or any
of their respective properties or assets, including, without limitation, any law
of the State of New York or the State of Texas relating to usury or the maximum
rate chargeable with respect to indebtedness, or (iv) have any material adverse
effect on any permit, certification, registration, approval, consent, license or
franchise necessary for the Company or any Subsidiary to own or lease and
operate any of their respective properties or to conduct any of their respective
businesses or the ability of the Company or any Subsidiary to make use thereof.
(F) APPROVALS. No authorization, approval or consent of, or filing with, any
court, governmental body, regulatory agency, self-regulatory organization, or
stock exchange or market or the stockholders of the Company is required to be
obtained or made by the Company for (1) the execution, delivery and performance
by the Company of this Agreement, the Registration Rights Agreement, the
Warrants, the Transfer Agent Instruction and the other agreements and
instruments contemplated hereby and thereby, (2) the execution and issuance of
the Note and the
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Interest Notes, (3) the issuance and sale of the Note, the issuance of the
Interest Notes and the issuance of the Warrants as contemplated by this
Agreement and (4) the issuance of Common Shares on conversion of the Note or the
Interest Notes or upon the exercise of the Warrants or the issuance of Interest
Notes in payment of interest on the Note or the Interest Notes, other than (w)
the listing of the Common Shares on Nasdaq, (x) registration of the resale of
the Common Shares under the 1933 Act as contemplated by the Registration Rights
Agreement, (y) as may be required under applicable state securities or "blue
sky" laws and (z) filing of one or more Forms D with respect to the Securities
as required under Regulation D.
(G) INFORMATION PROVIDED. The information provided by or on behalf of the
Company to the Buyer in connection with the transactions contemplated by this
Agreement, including, without limitation, the information referred to in Section
2(e) of this Agreement, does not contain any untrue statement of a material fact
or omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they are made, not
misleading, it being understood that, for purposes of this Section 3(g), any
statement contained in such information shall be deemed to be modified or
superseded for purposes of this Section 3(g) to the extent that a statement in
any document included in such information which was prepared or filed with the
SEC on a later date modifies or replaces such statement, whether or not such
later prepared or filed statement so states. The Company has not filed any
reports with the SEC under the Securities Exchange Act of 1934, as amended (the
"1934 Act"), since June 30, 1997 other than the SEC Reports.
(H) ABSENCE OF CERTAIN CHANGES. Since March 31, 1998, there has been no material
adverse change and no material adverse development in the business, properties,
operations, condition (financial or other), results of operations or prospects
of the Company and the Subsidiaries, taken as a whole, except as disclosed in
the SEC Reports or in SCHEDULE 3(H) attached hereto. Except as and to the extent
disclosed, reflected or reserved against in the financial statements of the
Company and the notes thereto included in the SEC Reports, neither the Company
nor any Subsidiary has any material (individually or in the aggregate)
liabilities, debts or obligations whether accrued, absolute, contingent or
otherwise, and whether due or to become due. Subsequent to March 31, 1998,
neither the Company nor any Subsidiary has incurred any liabilities, debts or
obligations of any nature whatsoever which are individually or in the aggregate
material to the Company and the Subsidiaries, taken as a whole, other than those
incurred in the ordinary course of their respective businesses or disclosed in
the SEC Reports.
(I) ABSENCE OF CERTAIN PROCEEDINGS. Except as disclosed in the SEC Reports or on
SCHEDULE 3(I) attached hereto, there is no action, suit, proceeding, inquiry or
investigation before or by any court, public board or body or governmental
agency (collectively, an "Action") pending or, to the knowledge of the Company
or any Subsidiary, threatened against the Company or any Subsidiary, in any such
case wherein an unfavorable decision, ruling or finding would have a material
adverse effect on the business, properties, condition (financial or other),
results of operations or prospects of the Company and the Subsidiaries, taken as
a whole, or the transactions contemplated by this Agreement or any of the
documents contemplated hereby or which would adversely affect the validity or
enforceability of, or the authority or ability of the Company to perform its
obligations under, this Agreement or any of such other documents;
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neither the Company or any Subsidiary nor any director or officer thereof is or
has been the subject of any Action involving a claim of violation of or
liability under federal or state securities laws or a claim of breach of
fiduciary duty; the Company does not have pending before the SEC any request for
confidential treatment of information and to the best of the Company's knowledge
no such request will be made by the Company prior to the time the Registration
Statement relating to the Common Shares which is contemplated by the
Registration Rights Agreement is first ordered effective by the SEC; and there
has not been, and to the best of the Company's knowledge there is not pending or
contemplated, any investigation by the SEC involving the Company or any current
or former director or officer of the Company.
(J) PROPERTIES. The Company and the Subsidiaries have good title to all property
real and personal (tangible and intangible) and other assets owned by them, free
and clear of all security interests, charges, mortgages, liens or other
encumbrances, except those in favor of RFC Capital Corporation or Greyrock
Business Credit, Finova Capital Corporation, Willis Group, LLC and Netco LLC and
such as are described in the SEC Reports or such as do not materially interfere
with the use of such property made, or proposed to be made, by the Company or
any Subsidiary. The leases, licenses or other contracts or instruments under
which the Company and the Subsidiaries lease, hold or are entitled to use any
property, real or personal, are valid, subsisting and enforceable with only such
exceptions as do not materially interfere with the use of such property made, or
proposed to be made, by the Company or any Subsidiary. Neither the Company nor
any Subsidiary has received notice of any material violation of any applicable
law, ordinance, regulation, order or requirement relating to its owned or leased
properties. The Company does not have any knowledge of, and the Company has not
given or received any notice of, any pending conflicts with or infringement of
the rights of others with respect to any Company Proprietary Rights (as defined
herein) or with respect to any license of Company Proprietary Rights. No action,
suit, arbitration, or legal, administrative or other proceeding or investigation
is pending, or, to the best knowledge of the Company, threatened, which involves
any Company Proprietary Rights. Neither the Company nor any Subsidiary is
subject to any judgment, order, writ, injunction or decree of any court or any
federal, state, local, foreign or other governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, or any
arbitrator, or has entered into or is a party to any contract which restricts or
impairs the use of any such Company Proprietary Rights in a manner which would
have a material adverse effect on the use by the Company or any Subsidiary of
any of the Company Proprietary Rights. To the best knowledge of the Company, no
Company Proprietary Rights and no services or products sold by the Company or
any Subsidiary, conflict with or infringe upon any proprietary rights available
to any third party. Neither the Company nor any Subsidiary has received written
notice of any pending conflict with or infringement upon such third-party
proprietary rights. Neither the Company nor any Subsidiary has entered into any
consent, indemnification, forbearance to sue or settlement agreement with
respect to Company Proprietary Rights other than in the ordinary course of
business. No claims have been asserted by any person with respect to the
validity of the Company's or any Subsidiary's ownership or right to use the
Company Proprietary Rights and, to the best knowledge of the Company, there is
no reasonable basis for any such claim to be successful. To the best knowledge
of the Company, the Company Proprietary Rights are valid and enforceable. No
registration relating to the Company Proprietary Rights has lapsed, expired or
been abandoned or canceled or is the subject of
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cancellation or other adversarial proceedings, and all applications therefor are
pending and are in good standing, except for such lapses, expirations,
abandonments, cancellations, adversarial proceedings or failures to be in good
standing which would not, singly or in the aggregate, have a material adverse
effect on the business, properties, operations, condition (financial or
otherwise), results of operations or prospects of the Company and the
Subsidiaries, taken as a whole. The Company and the Subsidiaries have complied,
in all material respects, with their respective contractual obligations relating
to the protection of the Company Proprietary Rights used pursuant to licenses.
To the best knowledge of the Company, no person is infringing on or violating
the Company Proprietary Rights. As used herein, the term "Company Proprietary
Rights" means all patents, patent applications, inventions, trademarks, trade
names, applications for registration of trademarks, service marks, service mark
applications, copyrights, know-how, manufacturing processes, formulae, trade
secrets, licenses and rights in any thereof and any other intangible property
and assets which are material to the businesses of the Company and the
Subsidiaries as now conducted, as proposed to be conducted or as described in
this Agreement.
(K) LABOR RELATIONS. No material labor problem exists or, to the knowledge of
the Company or any Subsidiary, is imminent with respect to any of the employees
of the Company or any Subsidiary.
(L) SEC FILINGS. The Company has timely filed all required forms, reports and
other documents required to be filed with the SEC under the 1934 Act since
January 1, 1997. All of such forms, reports and other documents complied, when
filed, in all material respects, with all applicable requirements of the 1933
Act and the 1934 Act.
(M) ABSENCE OF BROKERS, FINDERS, ETC. No broker, finder or similar person is
entitled to any commission, fee or other compensation in respect of the
transactions contemplated by this Agreement by reason of any action or conduct
of the Company or any Subsidiary or any person acting on behalf of any of them,
and the Company shall pay, and indemnify and hold harmless the Buyer from, any
claim made against the Buyer by any person for any such commission, fee or other
compensation.
(N) NO SOLICITATION. No form of general solicitation or general advertising was
used by the Company or, to the best of its knowledge, any other person acting on
behalf of the Company, in respect of or in connection with the offer and sale of
the Securities. Neither the Company nor, to its knowledge, any person acting on
behalf of the Company has, either directly or indirectly, sold or offered for
sale to any person any of the Notes or the Warrants or, within the six months
prior to the date hereof, any other similar security of the Company except for
the Series C Stock and as contemplated by this Agreement or the Exchange
Agreements; and neither the Company nor any person authorized to act on its
behalf will sell or offer for sale any debt securities, shares of Common Stock
or Warrants, or solicit any offers to buy any debt securities, shares of Common
Stock or Warrants, so as thereby to cause the issuance or sale of the Note or
the Interest Notes or the issuance of the Warrants to be in violation of Section
5 of the 1933 Act.
(O) CERTAIN ISSUANCES OF SECURITIES. The Company has not issued any shares of
Common Stock or shares of any series of preferred stock or other securities
convertible into, exchangeable
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for or otherwise entitling the holder to acquire shares of Common Stock which
are subject to Rule 4460(i) of Nasdaq (or any successor, replacement or similar
provision thereof or of any other market on which the Common Stock is listed for
trading) and which would be integrated with the sale of the Note to the Buyer or
the issuance of Interest Notes in payment of interest on the Note or the
Interest Notes or the issuance of Common Shares upon conversion thereof or upon
exercise of the Warrants for purposes of such Rule 4460(i) (or any successor,
replacement or similar provision thereof or of any other market on which the
Common Stock is listed for trading).
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
(a) TRANSFER RESTRICTIONS. The Company and the Buyer acknowledge and agree that
(1) the Note and the Warrants have not been and are not being registered under
the provisions of the 1933 Act and, except as provided in the Registration
Rights Agreement with respect to the resale of the Common Shares, the Common
Shares have not been and are not being registered for resale under the 1933 Act,
and the Securities may not be transferred unless (A) subsequently registered for
resale thereunder or (B) the Buyer shall have delivered to the Company an
opinion of counsel, reasonably satisfactory in form, scope and substance to the
Company, to the effect that the Securities to be sold or transferred may be sold
or transferred pursuant to an exemption from such registration; (2) any resale
of the Securities made in reliance on Rule 144 promulgated under the 1933 Act
may be made only in accordance with the terms of said Rule and further, if said
Rule is not applicable, any such resale of Securities under circumstances in
which the seller, or the person through whom the sale is made, may be deemed to
be an underwriter, as that term is used in the 1933 Act, may require compliance
with some other exemption under the 1933 Act or the rules and regulations of the
SEC thereunder; and (3) neither the Company nor any other person is under any
obligation to register the Securities (other than pursuant to the Registration
Rights Agreement) under the 1933 Act or to comply with the terms and conditions
of any exemption thereunder (other than pursuant to Section 4(d) hereof and
pursuant to the Registration Rights Agreement).
(b) RESTRICTIVE LEGEND. (1) The Buyer acknowledges and agrees that the Note
shall bear a restrictive legend in substantially the following form (and a stop-
transfer order may be placed against transfer of the Note):
This Note has not been registered under the Securities Act of 1933, as
amended (the "1933 Act"). The issuance to the holder of this Note of the
shares of Common Stock issuable upon conversion of this Note and in payment
of interest on this Note are not covered by a registration statement under
the 1933 Act. This Note has been acquired, and such shares must be
acquired, for investment only and may not be sold, transferred or assigned
in the absence of registration of the resale thereof under the 1933 Act or
an opinion of counsel reasonably satisfactory in form, scope and substance
to the Company that such registration is not required.
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(2) The Buyer further acknowledges and agrees that the Warrants shall bear
a restrictive legend in substantially the following form (and a stop-transfer
order may be placed against transfer of the Warrants):
The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended. The securities have been
acquired for investment and may not be resold, transferred or assigned in
the absence of an effective registration statement for the securities under
the Securities Act of 1933, as amended, or an opinion of counsel that
registration is not required under said Act.
(3) The Buyer further acknowledges and agrees that until such time as the
Common Shares have been registered for resale under the 1933 Act as contemplated
by the Registration Rights Agreement, the certificates for the Common Shares may
bear a restrictive legend in substantially the following form (and a stop-
transfer order may be placed against transfer of the certificates for the Common
Shares):
The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended. The securities have been
acquired for investment and may not be resold, transferred or assigned in
the absence of an effective registration statement for the securities under
the Securities Act of 1933, as amended, or an opinion of counsel that
registration is not required under said Act.
(4) Once the Registration Statement required to be filed by the Company
pursuant to Section 2 of the Registration Rights Agreement has been declared
effective, thereafter (1) upon request of the Buyer the Company will substitute
certificates without restrictive legend for certificates for any Common Shares
issued prior to the date such Registration Statement is declared effective by
the SEC which bear such restrictive legend and remove any stop-transfer
restriction relating thereto promptly, but in no event later than three trading
days after surrender of such certificates by the Buyer and (2) the Company shall
not place any restrictive legend on certificates for Common Shares issued on
conversion of or as dividends on the Preferred Shares or upon exercise of the
Warrants or impose any stop-transfer restriction thereon.
(c) REGISTRATION RIGHTS AGREEMENT. The parties hereto agree to enter into the
Registration Rights Agreement in the form attached hereto as ANNEX IV on or
before the Closing Date.
(d) FORM D. The Company agrees to file a Form D with respect to the Securities
as required under Regulation D and to provide a copy thereof to the Buyer
promptly after such filing. The Buyer agrees to cooperate with the Company in
connection with such filing and, upon request of the Company, to provide all
information relating to the Buyer reasonably required for such filing.
(e) AUTHORIZATION FOR TRADING; REPORTING STATUS. On or before the Closing Date,
the Company shall file a notification for listing of additional shares with the
Nasdaq relating to the Common Shares and shall provide evidence of such filing
to the Buyer. So long as the Buyer beneficially owns any of the Note, the
Interest Notes, the Warrants or the Common Shares, the
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Company shall file all reports required to be filed with the SEC pursuant to
Section 13 or 15(d) of the 1934 Act and the Company shall not terminate its
status as an issuer required to file reports under the 1934 Act even if the 1934
Act or the rules and regulations thereunder would permit such termination.
(f) USE OF PROCEEDS. Neither the Company nor any Subsidiary owns or has any
present intention of acquiring any "margin stock" as defined in Regulation G
(12 CFR Part 207) of the Board of Governors of the Federal Reserve System
("margin stock"). The proceeds of sale of the Note will be used for general
working capital purposes and in the operation of the Company's business. None of
such proceeds will be used, directly or indirectly (1) to make any loan to or
investment in any other person (other than financing the Company's subsidiaries
in the ordinary course of business) or (2) for the purpose, whether immediate,
incidental or ultimate, of purchasing or carrying any margin stock or for the
purpose of maintaining, reducing or retiring any indebtedness which was
originally incurred to purchase or carry any stock that is currently a margin
stock or for any other purpose which might constitute the transactions
contemplated by this Agreement a "purpose credit" within the meaning of such
Regulation G. Neither the Company nor any agent acting on its behalf has taken
or will take any action which might cause this Agreement or the transactions
contemplated hereby to violate Regulation G, Regulation T or any other
regulation of the Board of Governors of the Federal Reserve System or to violate
the 1934 Act, in each case as in effect now or as the same may hereafter be in
effect.
(g) BLUE SKY LAWS. On or before the Closing Date, the Company shall take such
action as shall be necessary to qualify, or to obtain an exemption for, the Note
for sale to the Buyer and the Warrants for issuance to the Buyer pursuant to
this Agreement and the Common Shares for issuance to the Buyer on conversion of
the Note under such of the securities or "blue sky" laws of jurisdictions as
shall be applicable to the sale of the Note and the issuance of the Warrants
pursuant to this Agreement and the issuance to the Buyer of Common Shares on
conversion of the Note and exercise of the Warrants. The Company shall furnish
copies of all filings, applications, orders and grants or confirmations of
exemptions relating to such securities or "blue sky" laws on or prior to the
Closing Date.
(h) CERTAIN EXPENSES. Whether or not the closing occurs, the Company shall pay
or reimburse the Buyer for all reasonable expenses (including, without
limitation, legal fees and expenses of counsel to the Buyer) incurred by the
Buyer in connection with this Agreement and the transactions contemplated
hereby. The Company shall pay on demand all reasonable expenses incurred by the
Buyer, including reasonable attorneys' fees and expenses, as a consequence of,
or in connection with (1) the negotiation, preparation or execution of any
amendment, modification or waiver of this Agreement, the Note, the Registration
Rights Agreement, the Warrants, the Transfer Agent Instruction and the other
agreements and instruments contemplated hereby and thereby requested by the
Company, (2) any default or breach of any of the Company's obligations set forth
in any of such agreements or instruments and (3) the enforcement or
restructuring of any right of, including the collection of any payments due, the
Buyer under any of such agreements or instruments, including any action or
proceeding relating to such enforcement or any order, injunction or other
process seeking to restrain the Company from paying any amount due the Buyer, in
which the Buyer prevails.
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(i) CERTAIN ISSUANCES OF SECURITIES. (1) Unless the Company obtains the
Stockholder Approval (as defined in the Note) or a waiver thereof from the
Nasdaq, the Company will not issue any shares of Common Stock or shares of
preferred stock or other securities convertible into, exchangeable for, or
otherwise entitling the holder to acquire, shares of Common Stock which would be
subject to the requirements of Rule 4460(i) of Nasdaq (or any successor,
replacement, or similar provision thereof or of any other market on which the
Common Stock is listed for trading) and which would be integrated with the sale
of the Note and issuance of the Warrants to the Buyer or the issuance of Common
Shares upon conversion of the Note or Interest Notes or exercise of the Warrants
for purposes of Rule 4460(i) of Nasdaq (or any successor, replacement or similar
provision thereof or of any other market on which the Common Stock is listed for
trading).
(2) Subject to the restrictions in Section 4(i)(1), during the period
from the date of execution and delivery of this Agreement to the date which is
one year after the Closing Date, the Company shall not offer, sell, contract to
sell or issue (or engage any person to assist the Company in taking any such
action) any Discounted Securities without giving the Buyer the first right to
acquire all or any portion, as determined by the Buyer in its discretion, of
such Discounted Securities on the same terms as the Discounted Securities are to
be offered to other investors. In each instance of proposed issuance of
Discounted Securities the Company shall give notice to the Buyer of the detailed
terms of such Discounted Securities proposed to be issued and, promptly after
requested by the Buyer, such other information as requested by the Buyer. The
Buyer may, by notice to the Company, exercise such right of first refusal at any
time until the later of (x) ten Business Days after such notice from the Company
to the Buyer and (y) three Business Days after the Company provides such
additional information as shall have been requested by the Buyer.
(j) STOCKHOLDER APPROVAL. The Company shall seek and use its best efforts to
obtain, on or before the date which is 120 days after the Closing Date, the
Stockholder Approval of the issuance of the Note, the Interest Notes, the
Warrants and the Common Shares. The Company shall call a meeting of stockholders
to be held within 120 days after the Closing Date, shall prepare and file with
the SEC no later than 45 days after the Closing Date, preliminary proxy
materials which set forth a proposal to seek such Stockholder Approval and shall
recommend approval thereof by its stockholders. The Company shall provide the
Buyer an opportunity to review and comment on such proxy materials by providing
copies of such proxy materials and any revised preliminary proxy materials to
the Buyer a reasonable period of time prior to their filing with the SEC. The
Company shall furnish to the Buyer and its counsel a copy of its definitive
proxy materials for such meeting of stockholders and any amendments or
supplements thereto promptly after the same are mailed to stockholders or filed
with the SEC, shall inform the Buyer of the progress of solicitation of proxies
for such meeting and shall inform the Buyer of any adjournment of such meeting
and shall report the result of the vote of any stockholders on such proposition
on the day such vote is taken. If for any reason the Company fails to obtain
such Stockholder Approval, the Company shall be required to redeem the Note and
any Interest Notes in accordance with Sections 5.1 and 5.2 thereof. As used
herein, "Stockholder Approval" shall have the meaning to be provided or provided
in the Note.
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(k) NASDAQ DETERMINATION. The Company shall promptly seek and use its best
efforts to obtain a written determination from Nasdaq that neither the Warrants
and the issuance of shares of Common Stock upon exercise of the Warrants nor the
Series D Preferred Stock and the issuance of shares of Common Stock upon
conversion of the Series D Preferred Stock need to be integrated with the Note
and the issuance of shares of Common Stock upon conversion of the Note for
purposes of Rule 4460(i) of the Nasdaq (or any successor, replacement or similar
provision thereof or of any other market on which the Common Stock is listed for
trading).
(l) OPINION. The Company shall deliver an opinion of Weil, Gotshal and Manges,
LLP, counsel for the Company, addressed to the Buyer, in substantially the form
set forth in ANNEX X attached hereto, on or before the date which is (7)
Business Days after the Closing Date.
(m) BEST EFFORTS. Each of the parties shall use its best efforts timely to
satisfy each of the conditions to the other party's obligations to sell and
purchase the Preferred Shares set forth in Section 7 or 8, as the case may be,
of this Agreement on or before the Closing Date.
5. TRANSFER AGENT INSTRUCTION. Prior to the Closing Date, the Company will
execute and deliver the Transfer Agent Instruction in the form attached hereto
as ANNEX V and thereby (1) irrevocably instruct American Stock Transfer & Trust
Company, as Transfer Agent and Registrar (the "Transfer Agent"), to issue
certificates for the Common Shares from time to time upon conversion of the Note
and the Interest Notes and exercise of the Warrants in such amounts as specified
from time to time to the Transfer Agent in the Notices of Conversion surrendered
in connection with such conversions and in the form attached to the Note and the
Form of Subscription in the form attached to the Warrants and (2) appoint the
Transfer Agent the conversion agent for the Note and the Interest Notes and the
exercise agent for the Warrants. The certificates for the Common Shares may bear
the restrictive legend specified in Section 4(b) of this Agreement prior to
registration of the resale of the Common Shares under the 1933 Act. The
certificates for the Common Shares shall be registered in the name of the Buyer
or its designee and in such denominations to be specified by the Buyer in
connection with each conversion of the Note or any Interest Note or exercise of
the Warrants. The Company warrants that no instruction other than (x) such
instructions referred to in this Section 5, (y) stop transfer instructions to
give effect to Section 4(a) prior to registration of the resale of the Common
Shares under the 1933 Act and (z) the instructions required by Section 3(n) of
the Registration Rights Agreement will be given by the Company to the Transfer
Agent and that the Common Shares shall otherwise be freely transferable on the
books and records of the Company as and to the extent provided in this
Agreement. Nothing in this Section 5 shall limit in any way the Buyer's
obligations and agreement to comply with the registration requirements of the
1933 Act upon resale of the Common Shares. If the Buyer provides the Company
with an opinion of counsel, reasonably satisfactory in form, scope and substance
to the Company and its legal counsel, that registration of a resale by the Buyer
of any of the Securities is not required under the 1933 Act, the Company shall
permit the transfer of such Securities and, in the case of the Common Shares, in
accordance with clause (1)(B) of Section 4(a) of this Agreement, promptly
instruct the Company's transfer agent to issue upon transfer one or more share
certificates in such name and
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in such denominations as specified by the Buyer within three trading days after
receipt of such opinion. Nothing in this Section 5 shall limit the obligations
of the Company under Section 3(n) of the Registration Rights Agreement.
6. CLOSING DATE.
Subject to the satisfaction or waiver of the conditions set forth in
Sections 7 and 8, the date and time of the issuance and sale of the Preferred
Shares (the "Closing Date") shall be 12:00 noon, New York City time, on or
before the date which is three Business Days after the date the Buyer has
deposited the Purchase Price with the Escrow Agent in accordance with Section
1(c), or such other mutually agreed to time. The closing shall occur on the
Closing Date at the Law Offices of Brian W Pusch, Penthouse Suite, 29 West
57th Street, New York, New York 10019.
7. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL AND ISSUE.
The Buyer understands that the Company's obligation to sell the Note and
issue the Warrants to the Buyer pursuant to this Agreement is conditioned
upon the satisfaction of the following conditions precedent on or before
the Closing Date (any or all of which may be waived by the Company in its
sole discretion):
(a) The receipt and acceptance by the Company of this Agreement as
evidenced by execution of this Agreement by the Company and delivery of an
executed counterpart of this Agreement to the Buyer or its legal counsel;
(b) Delivery by the Buyer to the Escrow Agent of good funds as payment in
full of an amount equal to the Purchase Price for the Note in accordance
with Section 1(b) hereof; and
(c) The accuracy on the Closing Date of the representations and warranties
of the Buyer contained in this Agreement as if made on the Closing Date
and the performance by the Buyer on or before the Closing Date of all
covenants and agreements of the Buyer required to be performed on or
before the Closing Date.
8. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The Company understands that the Buyer's obligation to purchase the Note
and acquire the Warrants on the Closing Date is conditioned upon the
satisfaction of the following conditions precedent on or before the Closing
Date (any or all of which may be waived by the Buyer in its sole discretion):
(a) Delivery by the Company to the Escrow Agent of the certificates for the
Note and the Warrants in accordance with this Agreement;
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<PAGE>
(b) The accuracy on the Closing Date of the representations and warranties
of the Company contained in this Agreement as if made on the Closing Date and
the performance by the Company on or before the Closing Date of all covenants
and agreements of the Company required to be performed on or before the Closing
Date and receipt by the Buyer of a certificate, dated the Closing Date, of the
Chief Executive Officer or the Chief Financial Officer of the Company confirming
such matters and such other matters as the Buyer may reasonably request;
(c) The receipt by the Buyer of a certificate, dated the Closing Date, of
the Secretary of the Company certifying (1) the Articles of Incorporation and
By-Laws of the Company as in effect on the Closing Date, (2) all resolutions of
the Board of Directors (and committees thereof) of the Company relating to this
Agreement and the transactions contemplated hereby and (3) such other matters as
reasonably requested by the Buyer;
(d) The Transfer Agent shall have acknowledged receipt of the Transfer
Agent Instruction in the form attached hereto as ANNEX V and shall not have
objected or declined to follow the instructions contained therein;
(e) Receipt by the Buyer on the Closing Date of an opinion of Weil, Gotshal
& Manges LLP, counsel for the Company, dated the Closing Date, in form, scope
and substance reasonably satisfactory to the Buyer, to the effect set forth in
ANNEX VI attached hereto; and
(f) Receipt by the Buyer on the Closing Date of an opinion of the Company's
General Counsel, dated the Closing Date, in form, scope and substance reasonably
satisfactory to the Buyer, to the effect set forth in ANNEX VII attached hereto.
9. MISCELLANEOUS.
(a) GOVERNING LAW. This Agreement shall be governed by and interpreted in
accordance with the laws of the State of New York.
(b) COUNTERPARTS. This Agreement may be executed in counterparts and by the
parties hereto on separate counterparts, all of which together shall constitute
one and the same instrument. A facsimile transmission of this Agreement bearing
a signature on behalf of a party hereto shall be legal and binding on such
party. Although this Agreement is dated as of the date first set forth above,
the actual date of execution and delivery of this Agreement by each party is the
date set forth below such party's signature on the signature page hereof. Any
reference in this Agreement or in any of the documents executed and delivered by
the parties hereto in connection herewith to (1) the date of execution and
delivery of this Agreement by the Buyer shall be deemed a reference to the date
set forth below the Buyer's signature on the signature page hereof, (2) the date
of execution and delivery of this Agreement by the Company shall be deemed a
reference to the date set forth below the Company's signature on the signature
page hereof and (3) the date of execution and delivery of this Agreement or the
date of execution and delivery of this Agreement by the Buyer and the Company
shall be deemed a reference to the later of the dates set forth below the
signatures of the parties on the signature page hereof. The Company and the
Buyer hereby represent, warrant, covenant and agree that this Agreement has been
signed
20
<PAGE>
and delivered in the State of New York and it is the intention of the Company
and the Buyer that this Agreement shall be construed accordingly for all
purposes.
(c) HEADINGS, ETC. The headings, captions and footers of this Agreement are for
convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement.
(d) SEVERABILITY. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement or the
validity or enforceability of this Agreement in any other jurisdiction.
(e) AMENDMENTS. No amendment, modification, waiver, discharge or termination of
any provision of this Agreement nor consent to any departure by the Buyer or the
Company therefrom shall in any event be effective unless the same shall be in
writing and signed by the party to be charged with enforcement, and then shall
be effective only in the specific instance and for the purpose for which given.
No course of dealing between the parties hereto shall operate as an amendment of
this Agreement.
(f) WAIVERS. Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
or any course of dealings between the parties, shall not operate as a waiver
thereof or an amendment hereof, nor shall any single or partial exercise of any
such right or power, or any abandonment or discontinuance of steps to enforce
such a right or power, preclude any other or further exercise thereof or
exercise of any other right or power.
(g) NOTICES. Any notices required or permitted to be given under the terms of
this Agreement shall be delivered personally (which shall include telephone line
facsimile transmission with answer back confirmation) or by courier and shall be
effective upon receipt, if delivered personally or by courier, in the case of
the Company addressed to the Company at its address shown in the introductory
paragraph of this Agreement, Attention: Chief Executive Officer (telephone line
facsimile transmission number (281) 529-4650 or, in the case of the Buyer, at
its address or telephone line facsimile transmission number shown on the
signature page of this Agreement, with a copy to Genesee International, Inc.,
10500 N.E. 8th Street, Suite 1920, Bellevue, Washington 98004-4332 (telephone
line facsimile transmission number (425) 462-4645) or such other address or
telephone line facsimile transmission number as a party shall have provided by
notice to the other party in accordance with this provision. The Buyer hereby
designates as its address for any notice required or permitted to be given to
the Buyer pursuant to the Note the address shown on the signature page of this
Agreement, with a copy to: Genesee Fund Limited - Portfolio B, c/o Genesee
International, Inc., 10500 N.E. 8th Street, Suite 1920, Bellevue, Washington
98004-4332 (facsimile number (425) 462-4645), until the Buyer shall designate
another address for such purpose.
(h) ASSIGNMENT. Prior to the Closing Date, with the prior written consent of the
Company, which consent will not be unreasonably withheld, the Buyer shall have
the right to assign its
21
<PAGE>
rights and obligations under this Agreement with respect to the purchase of all
or any portion of the Note and the issuance of the Warrants, provided any such
assignee, by written instrument duly executed by such assignee, assumes all
obligations of the Buyer hereunder with respect to the purchase of the portion
of the Preferred Shares or the acquisition of the Warrants so assigned and makes
the same representations and warranties with respect thereto as the Buyer makes
in this Agreement, whereupon the Buyer shall be relieved of any further
obligations, responsibilities and liabilities with respect to the purchase of
all or the portion of the Note and acquisition of the related Warrants the
obligation for the purchase or acquisition of which has been so assigned. In the
case of any such assignment, the Company shall agree in writing with such
assignee to make available to such assignee the benefits of the Registration
Rights Agreement with respect to the Common Shares issuable on conversion of the
Note and exercise of the Warrants with respect to which the purchase under this
Agreement has been so assigned. Any transfer of the Note or the Warrants by the
Buyer after the Closing Date shall be made in accordance with Section 4(a).
After the Closing Date, the Buyer shall have the right to assign its rights and
obligations under this Agreement in connection with any transfer of the Buyer's
rights under the Registration Rights Agreement by compliance with the provisions
of Section 9 of the Registration Rights Agreement.
(i) SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The respective representations,
warranties, covenants and agreements of the Buyer and the Company contained in
this Agreement or made by or on behalf of them, respectively, pursuant to this
Agreement shall survive the delivery of payment for the Preferred Shares and
shall remain in full force and effect regardless of any investigation made by or
on behalf of them or any person controlling or advising any of them.
(j) ENTIRE AGREEMENT. This Agreement and its Schedule and Annexes set forth the
entire agreement between the parties hereto with respect to the subject matter
hereof and supersede all prior agreements and understandings, whether written or
oral, with respect thereto.
(k) TERMINATION. (1) The Buyer shall have the right to terminate this Agreement
by giving notice to the Company at any time at or prior to the Closing Date if:
(A) the Company shall have failed, refused, or been unable at or prior to
the date of such termination of this Agreement to perform any of its obligations
hereunder;
(B) any other condition of the Buyer's obligations hereunder is not
fulfilled when required to be fulfilled; or
(C) the closing shall not have occurred on a Closing Date on or before
September 5, 1998, other than solely by reason of a breach of this Agreement by
the Buyer.
Any such termination shall be effective upon the giving of notice thereof by the
Buyer. Upon such termination, neither the Buyer nor the Company shall have any
further obligation hereunder or in connection herewith one to the other.
22
<PAGE>
(2) The Company shall have the right to terminate this Agreement by giving
notice to the Buyer at any time at or prior to the Closing Date if:
(A) the Buyer shall have failed, refused, or been unable at or prior to the
date of such termination of this Agreement to perform any of its obligations
hereunder;
(B) any other condition of the Company's obligations hereunder is not
fulfilled when required to be fulfilled; or
(C) the closing shall not have occurred on a Closing Date on or before
September 5, 1998, other than solely by reason of a breach of this Agreement by
the Company.
Any such termination shall be effective upon the giving of notice thereof by
the Company. Upon such termination, neither the Company nor the Buyer shall
have any further obligation hereunder or in connection herewith one to the
other.
(l) FURTHER ASSURANCES. Each party to this Agreement will perform any and all
acts and execute any and all documents as may be necessary and proper under the
circumstances in order to accomplish the intents and purposes of this Agreement
and to carry out its provisions.
(m) PUBLIC STATEMENTS, PRESS RELEASES, ETC. The Company and the Buyer shall have
the right to approve before issuance any press releases or any other public
statements with respect to the transactions contemplated hereby; provided,
however, that the Company shall be entitled, without the prior approval of the
Buyer, to make any press release or other public disclosure with respect to such
transactions as is required by applicable law or Nasdaq regulation (although the
Buyer shall be consulted by the Company in connection with any such press
release or other public disclosure prior to its release and shall be provided
with a copy thereof).
(n) CONSTRUCTION. The language used in this Agreement will be deemed to be the
language chosen by the parties to express their mutual intent, and no rules of
strict construction will be applied against any party.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
23
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by the Buyer and
the Company by their respective officers or other representatives thereunto duly
authorized on the respective dates set forth below.
PRINCIPAL AMOUNT OF NOTE: $1,500,000.00
PURCHASE PRICE: $1,400,000.00
GENESEE FUND LIMITED - PORTFOLIO B
By:
--------------------------------
W.R. Weber
President
Date:
------------------------------
Address: c/o CITCO
Kaya Flamboyan 9
Curacao, Netherlands Antilles
Facsimile No.: 011-599-9732-2008
EQUALNET COMMUNICATIONS CORP.
By:
--------------------------------
Name:
Title:
Date:
------------------------------
24
<PAGE>
SCHEDULE 3(b)-1
CERTAIN ANTIDILUTION ADJUSTMENTS
--------------------------------
[To come from the Company]
25
<PAGE>
SCHEDULE 3(b)-2
CERTAIN REGISTRATION RIGHTS
----------------------------
1. Holders of the Company's Series A Convertible Preferred Stock have
demand and piggyback registration rights.
2. Holders of Series C Preferred Stock have demand registration rights.
3. RFC Capital Corp. has demand and piggyback registration rights.
26
<PAGE>
SCHEDULE 3(c)-1
CERTAIN NASDAQ MATTERS
----------------------
[To come from the Company]
27
<PAGE>
SCHEDULE 3(i)
CERTAIN LEGAL PROCEEDINGS
-------------------------
[To come from the Company]
28
<PAGE>
EXHIBIT 10.36
ANNEX IV
TO
NOTE PURCHASE
AGREEMENT
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of July 31, 1998 (this
"Agreement"), is made by and between EQUALNET COMMUNICATIONS CORP., a Texas
corporation (the "Company"), and the person named on the signature page hereto
(the "Initial Investor").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, in connection with the Note Purchase Agreement, dated as of
July 31, 1998, by and between the Initial Investor and the Company (the "Note
Purchase Agreement"), the Company has agreed, upon the terms and subject to the
conditions of the Note Purchase Agreement, to issue and sell to the Initial
Investor a 6% Senior Secured Convertible Note due 2001 (the "Note") issued by
the Company, which Note is convertible into shares (the "Conversion Shares") of
Common Stock, $.01 par value (the "Common Stock"), of the Company and in
connection therewith to issue common stock purchase warrants (the "Warrants") to
purchase shares (the "Warrant Shares") of Common Stock; and
WHEREAS, to induce the Initial Investor to execute and deliver the
Note Purchase Agreement, the Company has agreed to provide certain registration
rights under the Securities Act of 1933, as amended, and the rules and
regulations thereunder, or any similar successor statute (collectively, the
"Securities Act"), and applicable state securities laws with respect to the
Conversion Shares, the Warrant Shares and the shares of Common Stock issuable
upon conversion of the Interest Notes;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Initial Investor hereby agree as follows:
1. DEFINITIONS.
(a) As used in this Agreement, the following terms shall have the
following meanings:
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
<PAGE>
"Investor" means the Initial Investor and any transferee or assignee
who agrees to become bound by the provisions of this Agreement in accordance
with Section 9 hereof.
"Nasdaq" means the Nasdaq National Market.
"register," "registered," and "registration" refer to a registration
effected by preparing and filing a Registration Statement or Statements in
compliance with the Securities Act and pursuant to Rule 415 under the Securities
Act or any successor rule providing for offering securities on a continuous
basis ("Rule 415"), and the declaration or ordering of effectiveness of such
Registration Statement by the United States Securities and Exchange Commission
(the "SEC").
"Registrable Securities" means the Conversion Shares, the Warrant
Shares and any shares of Common Stock issued upon conversion of the Interest
Notes.
"Registration Period" means the period from the Closing Date to the
earliest of (i) the date which is three years after the SEC Effective Date, (ii)
the date on which each Investor may sell all of its Registrable Securities
without registration under the Securities Act pursuant to Rule 144, without
restriction on the manner of sale or the volume of securities which may be sold
in any period and without the requirement for the giving of any notice to, or
the making of any filing with, the SEC and (iii) the date on which the Investors
no longer beneficially own any Registrable Securities.
"Registration Statement" means a registration statement of the Company
under the Securities Act, including any amendment thereto.
"Rule 144" means Rule 144 promulgated under the Securities Act or any
other similar rule or regulation of the SEC that may at any time permit a holder
of any securities to sell securities of the Company to the public without
registration under the Securities Act.
"SEC Effective Date" means the date the Registration Statement is
declared effective by the SEC.
"SEC Filing Date" means the date the Registration Statement is first
filed with the SEC pursuant to Section 2(a).
(b) As used in this Agreement, the term Investor includes (i) each
Investor (as defined above) and (ii) each person who is a permitted transferee
or assignee of the Registrable Securities pursuant to Section 9 of this
Agreement.
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<PAGE>
(c) Capitalized terms defined in the introductory paragraph or the
recitals to this Agreement shall have the respective meanings therein provided.
Capitalized terms used herein and not otherwise defined herein shall have the
respective meanings set forth in the Note Purchase Agreement.
2. REGISTRATION.
(A) MANDATORY REGISTRATION. The Company shall prepare, and on or
prior to the date which is 60 days after the Closing Date, file with the SEC a
Registration Statement on Form S-3 (or, if the Company does not meet the
requirements of Form S-3, then on Form S-1 or another appropriate form) which,
on the date of filing with the SEC, covers the resale by the Initial Investor of
a number of shares of Common Stock at least equal to
(1) if Rule 416 under the 1933 Act is applicable to the Note and the
Interest Notes, the sum of (x) the number of shares of Common Stock
issuable upon conversion of the Note, determined as if the Note, together
with accrued and unpaid interest thereon, were converted in full on the SEC
Filing Date (and determined without regard to the limitation on conversion
contained in the Note or the limitation on beneficial ownership contained
in Section 2.1 of the Note), plus (y) the number of Warrant Shares
(determined without regard to the limitation on beneficial ownership
contained in Section 1.1(b) of the Warrants) and the resale of such
additional number of shares of Common Stock as the Company shall in its
discretion determine to register to permit the issuance of Interest Notes
and the resale of the shares of Common Stock issuable upon conversion
thereof, and which Registration Statement shall state that, in accordance
with Rule 416 under the Securities Act, such Registration Statement also
covers such indeterminate number of additional shares of Common Stock as
may become issuable upon conversion of the Note and the Interest Notes or
exercise of the Warrants to prevent dilution resulting from stock splits,
stock dividends or similar transactions in accordance with the terms
thereof and the resale of such additional number of shares of Common Stock
as the Company shall in its discretion determine to register to permit the
issuance of Interest Notes and the resale of the shares of Common Stock
issuable upon conversion thereof; or
(2) if Rule 416 under the 1933 Act is not applicable to the Note, the
sum of (x) a number of shares of Common Stock equal to 175% of the number
of shares of Common Stock issuable upon conversion of the Note, determined
as if the Note, together with accrued and unpaid interest thereon, were
converted in full on the SEC Filing Date (and determined without regard to
the limitation on conversion contained in the Note or the limitation on
beneficial ownership contained in Section 2.1 of the Note) plus (y) the
number of Warrant Shares
-3-
<PAGE>
(determined without regard to the limitation on beneficial ownership
contained in Section 1.1(b) of the Warrants) and the resale of such
additional number of shares of Common Stock as the Company shall in its
discretion determine to register to permit the issuance of Interest Notes
and the resale of the shares of Common Stock issuable upon conversion
thereof.
If at any time the number of shares of Common Stock included in the Registration
Statement required to be filed as provided in the first sentence of this Section
2(a) shall be insufficient to cover the number of shares of Common Stock
issuable on conversion in full of the unconverted Note and Interest Notes or the
unexercised portion of the Warrants, then promptly, but in no event later than
20 days after such insufficiency shall occur, the Company shall file with the
SEC an additional Registration Statement on Form S-3 or, if the Company does not
meet the requirements of Form S-3, then on Form S-1 or another appropriate form
(in any such case which shall not constitute a post-effective amendment to the
Registration Statement filed pursuant to the first sentence of this Section
2(a)), covering such number of shares of Common Stock as shall be sufficient to
permit such conversion and exercise. For all purposes of this Agreement such
additional Registration Statement shall be deemed to be the Registration
Statement required to be filed by the Company pursuant to Section 2(a) of this
Agreement, and the Company and the Investors shall have the same rights and
obligations with respect to such additional Registration Statement as they shall
have with respect to the initial Registration Statement required to be filed by
the Company pursuant to this Section 2(a).
(B) CERTAIN OFFERINGS. If any offering pursuant to a Registration
Statement pursuant to Section 2(a) hereof involves an underwritten offering,
Investors who hold a majority in interest of the Registrable Securities subject
to such underwritten offering shall have the right to select one legal counsel
and an investment banker or bankers and manager or managers to administer the
offering, which investment banker or bankers or manager or managers shall be
reasonably satisfactory to the Company. The Investors who hold the Registrable
Securities to be included in such underwriting shall pay all underwriting
discounts and commissions and other fees and expenses of such investment banker
or bankers and manager or managers so selected in accordance with this Section
2(b) (other than fees and expenses relating to registration of Registrable
Securities under federal or state securities laws, which are payable by the
Company pursuant to Section 5 hereof) with respect to their Registrable
Securities and the fees and expenses of such legal counsel so selected by the
Investors.
(C) ADJUSTMENTS OF CONVERSION TERMS. The Note and the Interest Note
provide, among other things, that, if (1) the Registration Statement covering
the Registrable Securities which is required to be filed by the Company pursuant
to the first sentence of Section 2(a) (A) is not filed with the SEC within 60
days after the Closing Date, (B) is not effective within 105 days after the
Closing Date, if the Registration
-4-
<PAGE>
Statement is on Form S-3, or 120 days after the Closing Date, if the
Registration Statement is on Form S-1, or (C) shall cease to be available for
use by the holder of the Note or any Interest Note which is named therein as a
selling stockholder for any reason (including, without limitation, by reason of
an SEC stop order, a material misstatement or omission in such Registration
Statement or the information contained in such Registration Statement having
become outdated), or (2) a holder of the Note or any Interest Note becomes
unable to convert the Note or any Interest Note in accordance with Section 2.1
of the Note or any Interest Note (other than by reason of the 4.9% limitation
set forth therein), then the Conversion Percentage (as defined in the Note and
the Interest Notes) shall be adjusted as provided in the Note and the Interest
Notes.
(D) PIGGY-BACK REGISTRATIONS. If at any time the Company shall
determine to prepare and file with the SEC a Registration Statement relating to
an offering for its own account or the account of others under the Securities
Act of any of its equity securities, other than on Form S-4 or Form S-8 or their
then equivalents relating to equity securities to be issued solely in connection
with any acquisition of any entity or business or equity securities issuable in
connection with stock option or other employee benefit plans, the Company shall
send to each Investor who is entitled to registration rights under this Section
2(d) written notice of such determination and, if within ten (10) days after
receipt of such notice, such Investor shall so request in writing, the Company
shall include in such Registration Statement all or any part of the Registrable
Securities such Investor requests to be registered, except that if, in
connection with any underwritten public offering for the account of the Company,
the managing underwriter(s) thereof shall impose a limitation on the number of
shares of Common Stock which may be included in the Registration Statement
because, in such underwriter(s)' judgment, such limitation is necessary to
effect an orderly public distribution, then the Company shall be obligated to
include in such Registration Statement only such limited portion of the
Registrable Securities with respect to which such Investor has requested
inclusion hereunder. Any exclusion of Registrable Securities shall be made pro
rata among the Investors seeking to include Registrable Securities, in
proportion to the number of Registrable Securities sought to be included by such
Investors; provided, however, that the Company shall not exclude any Registrable
Securities unless the Company has first excluded all outstanding securities the
holders of which are not entitled by right to inclusion of securities in such
Registration Statement; and provided further, however, that, after giving effect
to the immediately preceding proviso, any exclusion of Registrable Securities
shall be made pro rata with holders of other securities having the right to
include such securities in the Registration Statement, based on the number of
securities for which registration is requested except to the extent such pro
rata exclusion of such other securities is prohibited under any written
agreement entered into by the Company with the holder of such other securities
prior to the date of this Agreement, in which case such other securities shall
be excluded, if at all, in accordance with the terms of such agreement. No
right to
-5-
<PAGE>
registration of Registrable Securities under this Section 2(d) shall be
construed to limit any registration required under Section 2(a) hereof. The
obligations of the Company under this Section 2(d) may be waived by Investors
holding a majority in interest of the Registrable Securities and shall expire
after the Company has afforded the opportunity for the Investors to exercise
registration rights under this Section 2(d) for two registrations; provided,
however, that any Investor who shall have had any Registrable Securities
excluded from any Registration Statement in accordance with this Section 2(d)
shall be entitled to include in an additional Registration Statement filed by
the Company the Registrable Securities so excluded. Notwithstanding any other
provision of this Agreement, if the Registration Statement required to be filed
pursuant to Section 2(a) of this Agreement shall have been ordered effective by
the SEC and the Company shall have maintained the effectiveness of such
Registration Statement as required by this Agreement and if the Company shall
otherwise have complied in all material respects with its obligations under this
Agreement, then the Company shall not be obligated to register any Registrable
Securities on such Registration Statement referred to in this Section 2(d).
(E) ELIGIBILITY FOR FORM S-3. The Company shall file all reports
required to be filed by the Company with the SEC in a timely manner so as to be
eligible for the use of Form S-3 for registration of the resale of the
Registrable Securities.
3. OBLIGATIONS OF THE COMPANY. In connection with the registration
of the Registrable Securities, the Company shall:
(a) prepare promptly, and file with the SEC not later than 60 days
after the Closing Date, a Registration Statement with respect to the number of
Registrable Securities provided in Section 2(a), and thereafter to use its best
efforts to cause each Registration Statement relating to Registrable Securities
to become effective as soon as possible after such filing, and keep the
Registration Statement effective pursuant to Rule 415 at all times during the
Registration Period; submit to the SEC, within three business days after the
Company learns that no review of the Registration Statement will be made by the
staff of the SEC or that the staff of the SEC has no further comments on the
Registration Statement, as the case may be, a request for acceleration of
effectiveness of the Registration Statement to a time and date not later than 48
hours after the submission of such request; notify the Investors of the
effectiveness of the Registration Statement on the date the Registration
Statement is declared effective; and the Company represents and warrants to, and
covenants and agrees with, the Investors that the Registration Statement
(including any amendments or supplements thereto and prospectuses contained
therein), at the time it is first filed with the SEC, at the time it is ordered
effective by the SEC and at all time during which it is required to be effective
hereunder (and each such amendment and supplement at the time it is filed with
the SEC and at all time during which it is available for use in connection with
the offer and sale of the Registrable Securities) shall not contain any untrue
statement of a material
-6-
<PAGE>
fact or omit to state a material fact required to be stated therein, or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading;
(b) prepare and file with the SEC such amendments (including post-
effective amendments) and supplements to the Registration Statement and the
prospectus used in connection with the Registration Statement as may be
necessary to keep the Registration Statement effective at all times during the
Registration Period, and, during the Registration Period, comply with the
provisions of the Securities Act with respect to the disposition of all
Registrable Securities of the Company covered by the Registration Statement
until such time as all of such Registrable Securities have been disposed of in
accordance with the intended methods of disposition by the seller or sellers
thereof as set forth in the Registration Statement;
(c) furnish to each Investor whose Registrable Securities are included
in the Registration Statement and its legal counsel, (1) promptly after the same
is prepared and publicly distributed, filed with the SEC or received by the
Company, one copy of the Registration Statement and any amendment thereto, each
preliminary prospectus and prospectus and each amendment or supplement thereto,
each letter written by or on behalf of the Company to the SEC or the staff of
the SEC and each item of correspondence from the SEC or the staff of the SEC
relating to such Registration Statement (other than any portion of any thereof
which contains information for which the Company has sought confidential
treatment) and (2) such number of copies of a prospectus, including a
preliminary prospectus, and all amendments and supplements thereto and such
other documents, as such Investor may reasonably request in order to facilitate
the disposition of the Registrable Securities owned by such Investor;
(d) use reasonable efforts to (i) register and qualify the Registrable
Securities covered by the Registration Statement under such securities or blue
sky laws of such jurisdictions as the Investors who hold a majority in interest
of the Registrable Securities being offered reasonably request, (ii) prepare and
file in those jurisdictions such amendments (including post-effective
amendments) and supplements to such registrations and qualifications as may be
necessary to maintain the effectiveness thereof at all times until the end of
the Registration Period, (iii) take such other actions as may be necessary to
maintain such registrations and qualifications in effect at all times during the
Registration Period and (iv) take all other actions reasonably necessary or
advisable to qualify the Registrable Securities for sale in such jurisdictions;
provided, however, that the Company shall not be required in connection
therewith or as a condition thereto (I) to qualify to do business in any
jurisdiction where it would not otherwise be required to qualify but for this
Section 3(d), (II) to subject itself to general taxation in any such
jurisdiction, (III) to file a general consent to service of process in any such
jurisdiction, (IV) to provide any undertakings that cause more than nominal
expense or burden to the Company or (V) to make any change in its Articles of
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<PAGE>
Incorporation or by-laws, which in each case the Board of Directors of the
Company determines to be contrary to the best interests of the Company and its
stockholders;
(e) in the event that the Registrable Securities are being offered in
an underwritten offering, enter into and perform its obligations under an
underwriting agreement, in usual and customary form, including, without
limitation, customary indemnification and contribution obligations, with the
underwriters of such offering;
(f) as promptly as practicable after becoming aware of such event or
circumstance, notify each Investor of any event or circumstance of which the
Company has knowledge, as a result of which the prospectus included in the
Registration Statement, as then in effect, includes an untrue statement of a
material fact or omits to state 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, and use its best efforts promptly to
prepare a supplement or amendment to the Registration Statement to correct such
untrue statement or omission, file such supplement or amendment with the SEC at
such time as shall permit the Investors to sell Registrable Securities pursuant
to the Registration Statement as promptly as practical, and deliver a number of
copies of such supplement or amendment to each Investor as such Investor may
reasonably request;
(g) as promptly as practicable after becoming aware of such event,
notify each Investor who holds Registrable Securities being sold (or, in the
event of an underwritten offering, the managing underwriters) of the issuance by
the SEC of any stop order or other suspension of effectiveness of the
Registration Statement at the earliest possible time;
(h) permit a single firm of counsel designated as selling
stockholders' counsel by the Investors who hold a majority in interest of the
Registrable Securities being sold to review and comment on the Registration
Statement and all amendments and supplements thereto a reasonable period of time
prior to their filing with the SEC;
(i) make generally available to its security holders as soon as
practical, but not later than ninety (90) days after the close of the period
covered thereby, an earnings statement (in form complying with the provisions of
Rule 158 under the Securities Act) covering a twelve-month period beginning not
later than the first day of the Company's fiscal quarter next following the
effective date of the Registration Statement;
(j) at the request of the Investors who hold a majority in interest of
the Registrable Securities being sold, furnish on the date that Registrable
Securities are delivered to an underwriter, if any, for sale in connection with
the Registration Statement (i) a letter, dated such date, from the Company's
independent certified public
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<PAGE>
accountants in form and substance as is customarily given by independent
certified public accountants to underwriters in an underwritten public offering,
addressed to the underwriters; and (ii) an opinion, dated such date, from
counsel representing the Company for purposes of such Registration Statement, in
form and substance as is customarily given in an underwritten public offering,
addressed to the underwriters and the Investors;
(k) make available for inspection by any Investor, any underwriter
participating in any disposition pursuant to the Registration Statement, and any
attorney, accountant or other agent retained by any such Investor or underwriter
(collectively, the "Inspectors"), all pertinent financial and other records,
pertinent corporate documents and properties of the Company (collectively, the
"Records"), as shall be reasonably necessary to enable each Investor to exercise
its due diligence responsibility, and cause the Company's officers, directors
and employees to supply all information which any Inspector may reasonably
request for purposes of such due diligence; provided, however, that each
Inspector shall hold in confidence and shall not make any disclosure (except to
an Investor) of any Record or other information which the Company determines in
good faith to be confidential, and of which determination the Inspectors are so
notified, unless (i) the disclosure of such Records is necessary to avoid or
correct a misstatement or omission in any Registration Statement, (ii) the
release of such Records is ordered pursuant to a subpoena or other order from a
court or government body of competent jurisdiction or (iii) the information in
such Records has been made generally available to the public other than by
disclosure in violation of this or any other agreement. The Company shall not
be required to disclose any confidential information in such Records to any
Inspector until and unless such Inspector shall have entered into
confidentiality agreements (in form and substance satisfactory to the Company)
with the Company with respect thereto, substantially in the form of this Section
3(k). Each Investor agrees that it shall, upon learning that disclosure of such
Records is sought in or by a court or governmental body of competent
jurisdiction or through other means, give prompt notice to the Company and allow
the Company, at the Company's own expense, to undertake appropriate action to
prevent disclosure of, or to obtain a protective order for, the Records deemed
confidential. The Company shall hold in confidence and shall not make any
disclosure of information concerning an Investor provided to the Company
pursuant to Section 4(e) hereof unless (i) disclosure of such information is
necessary to comply with federal or state securities laws, (ii) the disclosure
of such information is necessary to avoid or correct a misstatement or omission
in any Registration Statement, (iii) the release of such information is ordered
pursuant to a subpoena or other order from a court or governmental body of
competent jurisdiction or (iv) such information has been made generally
available to the public other than by disclosure in violation of this or any
other agreement. The Company agrees that it shall, upon learning that
disclosure of such information concerning an Investor is sought in or by a court
or governmental body of competent jurisdiction or through other means, give
prompt notice to such
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<PAGE>
Investor, at such Investor's own expense, to undertake appropriate action to
prevent disclosure of, or to obtain a protective order for, such information;
(l) use its commercially reasonable best efforts (i) to cause all the
Registrable Securities covered by the Registration Statement to be listed on the
Nasdaq or such other principal securities market on which securities of the same
class or series issued by the Company are then listed or traded or (ii) if
securities of the same class or series as the Registrable Securities are not
then listed on Nasdaq or any such other securities market, to cause all of the
Registrable Securities covered by the Registration Statement to be listed on the
Nasdaq SmallCap Market;
(m) provide a transfer agent and registrar, which may be a single
entity, for the Registrable Securities not later than the effective date of the
Registration Statement;
(n) cooperate with the Investors who hold Registrable Securities being
offered and the managing underwriter or underwriters, if any, to facilitate the
timely preparation and delivery of certificates (not bearing any restrictive
legends) representing Registrable Securities to be offered pursuant to the
Registration Statement and enable such certificates to be in such denominations
or amounts as the case may be, as the managing underwriter or underwriters, if
any, or the Investors may reasonably request and registered in such names as the
managing underwriter or underwriters, if any, or the Investors may request; and,
within three business days after a Registration Statement which includes
Registrable Securities is ordered effective by the SEC, the Company shall
deliver to the transfer agent for the Registrable Securities (with copies to the
Investors whose Registrable Securities are included in such Registration
Statement) an instruction substantially in the form attached hereto as EXHIBIT
1, shall cause legal counsel selected by the Company to deliver to the Investors
an opinion of such counsel in the form attached hereto as EXHIBIT 2 (with a copy
to the Company's transfer agent) and shall cause the Company's General Counsel
to deliver to the Investors an opinion of such counsel in the form attached
hereto as EXHIBIT 3;
(o) during the period the Company is required to maintain
effectiveness of the Registration Statement pursuant to Section 3(a), the
Company shall not bid for or purchase any Common Stock or any right to purchase
Common Stock or attempt to induce any person to purchase any such security or
right if such bid, purchase or attempt would in any way limit the right of the
Investors to sell Registrable Securities by reason of the limitations set forth
in Regulation M under the Exchange Act; and
(p) take all other reasonable actions necessary to expedite and
facilitate disposition by the Investors of the Registrable Securities pursuant
to the Registration Statement.
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4. OBLIGATIONS OF THE INVESTORS. In connection with the
registration of the Registrable Securities, the Investors shall have the
following obligations:
(a) It shall be a condition precedent to the obligations of the
Company to complete the registration pursuant to this Agreement with respect to
the Registrable Securities of a particular Investor that such Investor shall
furnish to the Company such information regarding itself, the Registrable
Securities held by it and the intended method of disposition of the Registrable
Securities held by it as shall be reasonably required to effect the registration
of such Registrable Securities and shall execute such documents in connection
with such registration as the Company may reasonably request. At least four
days prior to the first anticipated filing date of the Registration Statement,
the Company shall notify each Investor of the information the Company requires
from each such Investor (the "Requested Information") if any of such Investor's
Registrable Securities are eligible for inclusion in the Registration Statement.
If at least one business day prior to the filing date the Company has not
received the Requested Information from an Investor (a "Non-Responsive
Investor"), then the Company may file the Registration Statement without
including Registrable Securities of such Non-Responsive Investor but shall not
be relieved of its obligation to file a Registration Statement with the SEC
relating to the Registrable Securities of such Non-Responsive Investor promptly
after such Non-Responsive Investor provides the Requested Information;
(b) Each Investor by such Investor's acceptance of the Registrable
Securities agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of the Registration
Statement hereunder, unless such Investor has notified the Company in writing of
such Investor's election to exclude all of such Investor's Registrable
Securities from the Registration Statement;
(c) In the event Investors holding a majority in interest of the
Registrable Securities being registered determine to engage the services of an
underwriter, each Investor agrees to enter into and perform such Investor's
obligations under an underwriting agreement, in usual and customary form,
including, without limitation, customary indemnification and contribution
obligations, with the managing underwriter of such offering and take such other
actions as are reasonably required in order to expedite or facilitate the
disposition of the Registrable Securities, unless such Investor has notified the
Company in writing of such Investor's election to exclude all of such Investor's
Registrable Securities from the Registration Statement;
(d) Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 3(f) or
3(g), such Investor will immediately discontinue disposition of Registrable
Securities
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pursuant to the Registration Statement covering such Registrable Securities
until such Investor's receipt of the copies of the supplemented or amended
prospectus contemplated by Section 3(f) or 3(g) and, if so directed by the
Company, such Investor shall deliver to the Company (at the expense of the
Company) or destroy (and deliver to the Company a certificate of destruction)
all copies in such Investor's possession of the prospectus covering such
Registrable Securities current at the time of receipt of such notice; and
(e) No Investor may participate in any underwritten registration
hereunder unless such Investor (i) agrees to sell such Investor's Registrable
Securities on the basis provided in any underwriting arrangements approved by
the Investors entitled hereunder to approve such arrangements, (ii) completes
and executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents reasonably required under the terms of such
underwriting arrangements and (iii) agrees to pay its pro rata share of all
underwriting discounts and commissions and other fees and expenses of investment
bankers and any manager or managers of such underwriting and legal expenses of
the underwriters applicable with respect to its Registrable Securities, in each
case to the extent not payable by the Company pursuant to the terms of this
Agreement.
5. EXPENSES OF REGISTRATION. All reasonable expenses, other than
underwriting discounts and commissions and other fees and expenses of investment
bankers and other than brokerage commissions, incurred in connection with
registrations, filings or qualifications pursuant to Section 3, including,
without limitation, all registration, listing and qualifications fees, printers
and accounting fees and the fees and disbursements of counsel for the Company
and the Investors, shall be borne by the Company, provided, however, that the
Investors shall bear the fees and out-of-pocket expenses of the one legal
counsel selected by the Investors pursuant to Section 2(b) hereof.
6. INDEMNIFICATION. In the event any Registrable Securities are
included in a Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Investor who holds such Registrable Securities, the
directors, if any, of such Investor, the officers, if any, of such Investor,
each person, if any, who controls any Investor within the meaning of the
Securities Act or the Exchange Act, any underwriter (as defined in the
Securities Act) for the Investors, the directors, if any, of such underwriter
and the officers, if any, of such underwriter, and each person, if any, who
controls any such underwriter within the meaning of the Securities Act or the
Exchange Act (each, an "Indemnified Person"), against any losses, claims,
damages, liabilities or expenses (joint or several) incurred (collectively,
"Claims") to which any of them may become subject under the Securities Act, the
Exchange Act or otherwise,
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<PAGE>
insofar as such Claims (or actions or proceedings, whether commenced or
threatened, in respect thereof) arise out of or are based upon any of the
following statements, omissions or violations in the Registration Statement, or
any post-effective amendment thereof, or any prospectus included therein: (i)
any untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement or any post-effective amendment thereof or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, (ii)
any untrue statement or alleged untrue statement of a material fact contained in
any preliminary prospectus if used prior to the effective date of such
Registration Statement, or contained in the final prospectus (as amended or
supplemented, if the Company files any amendment thereof or supplement thereto
with the SEC) or the omission or alleged omission to state therein any material
fact necessary to make the statements made therein, in light of the
circumstances under which the statements therein were made, not misleading or
(iii) any violation or alleged violation by the Company of the Securities Act,
the Exchange Act, any state securities law or any rule or regulation under the
Securities Act, the Exchange Act or any state securities law (the matters in the
foregoing clauses (i) through (iii) being, collectively, "Violations"). Subject
to the restrictions set forth in Section 6(d) with respect to the number of
legal counsel, the Company shall reimburse the Investors and each such
underwriter or controlling person, promptly as such expenses are incurred and
are due and payable, for any legal fees or other reasonable expenses incurred by
them in connection with investigating or defending any such Claim.
Notwithstanding anything to the contrary contained herein, the indemnification
agreement contained in this Section 6(a): (I) shall not apply to a Claim
arising out of or based upon a Violation which occurs in reliance upon and in
conformity with information furnished in writing to the Company by any
Indemnified Person or underwriter for such Indemnified Person expressly for use
in connection with the preparation of the Registration Statement, the prospectus
or any such amendment thereof or supplement thereto, if such prospectus was
timely made available by the Company pursuant to Section 3(c) hereof; (II) with
respect to any preliminary prospectus shall not inure to the benefit of any such
person from whom the person asserting any such Claim purchased the Registrable
Securities that are the subject thereof (or to the benefit of any person
controlling such person) if the untrue statement or omission of material fact
contained in the preliminary prospectus was corrected in the prospectus, as then
amended or supplemented, if such prospectus was timely made available by the
Company pursuant to Section 3(c) hereof; and (III) shall not apply to amounts
paid in settlement of any Claim if such settlement is effected without the prior
written consent of the Company, which consent shall not be unreasonably
withheld. Such indemnity shall remain in full force and effect regardless of
any investigation made by or on behalf of the Indemnified Person and shall
survive the transfer of the Registrable Securities by the Investors pursuant to
Section 9.
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<PAGE>
(b) In connection with any Registration Statement in which an Investor
is participating, each such Investor agrees to indemnify and hold harmless, to
the same extent and in the same manner set forth in Section 6(a), the Company,
each of its directors, each of its officers who signs the Registration
Statement, each person, if any, who controls the Company within the meaning of
the Securities Act or the Exchange Act, any underwriter and any other
stockholder selling securities pursuant to the Registration Statement or any of
its directors or officers or any person who controls such stockholder or
underwriter within the meaning of the Securities Act or the Exchange Act
(collectively and together with an Indemnified Person, an "Indemnified Party"),
against any Claim to which any of them may become subject, under the Securities
Act, the Exchange Act or otherwise, insofar as such Claim arises out of or is
based upon any Violation, in each case to the extent (and only to the extent)
that such Violation occurs in reliance upon and in conformity with written
information furnished to the Company by such Investor expressly for use in
connection with such Registration Statement; and such Investor will reimburse
any legal or other expenses reasonably incurred by any Indemnified Party in
connection with investigating or defending any such Claim; provided, however,
that the indemnity agreement contained in this Section 6(b) shall not apply to
amounts paid in settlement of any Claim if such settlement is effected without
the prior written consent of such Investor, which consent shall not be
unreasonably withheld; provided, further, however, that the Investor shall be
liable under this Section 6(b) for only that amount of a Claim as does not
exceed the amount by which the net proceeds to such Investor from the sale of
Registrable Securities pursuant to such Registration Statement exceeds the
purchase price paid by such Investor for the securities converted into such
Registrable Securities. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of such Indemnified Party
and shall survive the transfer of the Registrable Securities by the Investors
pursuant to Section 9. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 6(b) with
respect to any preliminary prospectus shall not inure to the benefit of any
Indemnified Party if the untrue statement or omission of material fact contained
in the preliminary prospectus was corrected on a timely basis in the prospectus,
as then amended or supplemented.
(c) The Company shall be entitled to receive indemnities from
underwriters, selling brokers, dealer managers and similar securities industry
professionals participating in any distribution, to the same extent as provided
above, with respect to information so furnished in writing by such persons
expressly for inclusion in the Registration Statement.
(d) Promptly after receipt by an Indemnified Person or Indemnified
Party under this Section 6 of notice of the commencement of any action
(including any governmental action), such Indemnified Person or Indemnified
Party shall, if a Claim in respect thereof is to be made against any
indemnifying party under this Section 6, deliver to the indemnifying party a
written notice of the commencement thereof and the
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indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume control of the defense thereof with counsel
selected by the indemnifying party but reasonably acceptable to the Indemnified
Person or the Indemnified Party, as the case may be; provided, however, that an
Indemnified Person or Indemnified Party shall have the right to retain its own
counsel with the fees and expenses to be paid by the indemnifying party, if, in
the reasonable opinion of counsel retained by the indemnifying party, the
representation by such counsel of the Indemnified Person or Indemnified Party
and the indemnifying party would be inappropriate due to actual or potential
differing interests between such Indemnified Person or Indemnified Party and any
other party represented by such counsel in such proceeding. In such event, the
Company shall pay for only one separate legal counsel for the Investors; such
legal counsel shall be selected by the Investors holding a majority in interest
of the Registrable Securities included in the Registration Statement to which
the Claim relates. The failure to deliver written notice to the indemnifying
party within a reasonable time of the commencement of any such action shall not
relieve such indemnifying party of any liability to the Indemnified Person or
Indemnified Party under this Section 6, except to the extent that the
indemnifying party is prejudiced in its ability to defend such action. The
indemnification required by this Section 6 shall be made by periodic payments of
the amount thereof during the course of the investigation or defense, as such
expense, loss, damage or liability is incurred and is due and payable.
7. CONTRIBUTION. To the extent any indemnification by an
indemnifying party is prohibited or limited by law, the indemnifying party
agrees to make the maximum contribution with respect to any amounts for which it
would otherwise be liable under Section 6 to the fullest extent permitted by
law; provided, however, that (a) no contribution shall be made under
circumstances where the maker would not have been liable for indemnification
under the fault standards set forth in Section 6, (b) no seller of Registrable
Securities guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any seller
of Registrable Securities who was not guilty of such fraudulent
misrepresentation and (c) contribution by any seller of Registrable Securities
shall be limited in amount to the amount by which the net amount of proceeds
received by such seller from the sale of such Registrable Securities exceeds the
purchase price paid by such seller for the securities converted into such
Registrable Securities.
8. REPORTS UNDER EXCHANGE ACT. With a view to making available to
the Investors the benefits of Rule 144 promulgated under the Securities Act or
any other similar rule or regulation of the SEC that may at any time permit the
Investors to sell securities of the Company to the public without registration
("Rule 144"), the Company agrees to:
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(a) make and keep public information available, as those terms are
understood and defined in Rule 144;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and
(c) furnish to each Investor so long as such Investor owns Registrable
Securities, promptly upon request, (i) a written statement by the Company that
it has complied with the reporting requirements of Rule 144 and the Exchange
Act, (ii) a copy of the most recent annual or quarterly report of the Company
and such other reports and documents so filed by the Company and (iii) such
other information as may be reasonably requested to permit the Investors to sell
such securities pursuant to Rule 144 without registration.
9. ASSIGNMENT OF THE REGISTRATION RIGHTS. With the prior written
consent of the Company, which consent will not be unreasonably withheld, the
rights to have the Company register Registrable Securities pursuant to this
Agreement shall be automatically assigned by the Investors to any transferee of
all or any portion of such securities (or all or any portion of the Note, the
Interest Notes or the Warrants) only if: (a) the Investor agrees in writing
with the transferee or assignee to assign such rights, and a copy of such
agreement is furnished to the Company within a reasonable time after such
assignment, (b) the Company is, within a reasonable time after such transfer or
assignment, furnished with written notice of (i) the name and address of such
transferee or assignee and (ii) the securities with respect to which such
registration rights are being transferred or assigned, (c) immediately following
such transfer or assignment the further disposition of such securities by the
transferee or assignee is restricted under the Securities Act and applicable
state securities laws, and (d) at or before the time the Company received the
written notice contemplated by clause (b) of this sentence the transferee or
assignee agrees in writing with the Company to be bound by all of the provisions
contained herein. In connection with any such transfer the Company shall, at
its sole cost and expense, promptly after such assignment take such actions as
shall be reasonably acceptable to the Initial Investor and such transferee to
assure that the Registration Statement and related prospectus are available for
use by such transferee for sales of the Registrable Securities in respect of
which the rights to registration have been so assigned. In connection with any
such assignment, each Investor shall have the right to assign to such transferee
such Investor's rights under the Note Purchase Agreement by notice of such
assignment to the Company. Following such notice of assignment of rights under
the Note Purchase Agreement, the Company shall be obligated to such transferee
to perform all of its covenants under of the Note Purchase Agreement as if such
transferee were the Buyer under the Note Purchase Agreement.
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10. AMENDMENT OF REGISTRATION RIGHTS. Any provision of this
Agreement may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and Investors who
hold a majority in interest of the Registrable Securities. Any amendment or
waiver effected in accordance with this Section 10 shall be binding upon each
Investor and the Company.
11. MISCELLANEOUS.
(a) A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
(b) Notices required or permitted to be given hereunder shall be in
writing and shall be deemed to be sufficiently given when personally delivered
(by hand, by courier, by telephone line facsimile transmission or other means)
(i) if to the Company, at 1250 Wood Branch Park Drive, Houston, Texas 77079,
Attention: Chief Executive Officer, telephone line facsimile transmission
number (281) 529-4650, (ii) if to the Initial Investor, c/o Genesee
International, Inc., 10500 N.E. 8th Street, Suite 1920, Bellevue, Washington
98004-4332, telephone line facsimile transmission number (425) 462-4645 and
(iii) if to any other Investor, at such address as such Investor shall have
provided in writing to the Company, or at such other address as each such party
furnishes by notice given in accordance with this Section 11(b), and shall be
effective upon receipt.
(c) Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
(d) This Agreement shall be enforced, governed by and construed in
accordance with the laws of the State of New York applicable to agreements made
and to be performed entirely within such State. In the event that any provision
of this Agreement is invalid or unenforceable under any applicable statute or
rule of law, then such provision shall be deemed inoperative to the extent that
it may conflict therewith and shall be deemed modified to conform with such
statute or rule of law. Any provision hereof which may prove invalid or
unenforceable under any law shall not affect the validity or enforceability of
any other provision hereof.
(e) This Agreement constitutes the entire agreement among the parties
hereto with respect to the subject matter hereof. There are no restrictions,
promises,
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warranties or undertakings, other than those set forth or referred to herein.
This Agreement supersedes all prior agreements and understandings among the
parties hereto with respect to the subject matter hereof.
(f) Subject to the requirements of Section 9 hereof, this Agreement
shall inure to the benefit of and be binding upon the successors and assigns of
each of the parties hereto.
(g) All pronouns and any variations thereof refer to the masculine,
feminine or neuter, singular or plural, as the context may require.
(h) The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.
(i) The Company acknowledges that any failure by the Company to
perform its obligations under this Agreement, including, without limitation, the
Company's obligations under Section 3(n), or any delay in such performance could
result in damages to the Investors and the Company agrees that, in addition to
any other liability the Company may have by reason of any such failure or delay,
the Company shall be liable for all direct and consequential damages caused by
any such failure or delay.
(j) This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original but all of which shall constitute one and
the same agreement. This Agreement, once executed by a party, may be delivered
to the other party hereto by telephone line facsimile transmission of a copy of
this Agreement bearing the signature of the party so delivering this Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed by their respective officers thereunto duly authorized as of day and
year first above written.
EQUALNET COMMUNICATIONS
CORP.
By:
----------------------------------
Name:
Title:
GENESEE FUND LIMITED-
PORTFOLIO B
By:
----------------------------------
W.R. Weber
President
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EXHIBIT 1
TO
REGISTRATION
RIGHTS AGREEMENT
[Company Letterhead]
[Date]
American Stock Transfer & Trust Company,
as Transfer Agent and Registrar
6201 Fifteenth Avenue
Brooklyn, New York 11219
Ladies and Gentlemen:
This letter shall serve as our irrevocable authorization and direction
to you [(1) to transfer or re-register the certificates for the shares of Common
Stock, $.01 par value (the "Common Stock"), of Equalnet Communications Corp., a
Texas corporation (the "Company"), represented by certificate numbers _______
and _______ for an aggregate of _______ shares (the "Outstanding Shares") of
Common Stock presently registered in the name of [Name of Investors] upon
surrender of such certificate(s) to you, notwithstanding the legend appearing on
such certificates, and (2) ]/1/ to issue (a) shares (the "Conversion Shares") of
Common Stock to or upon the order of the holder from time to time on conversion
of the Company's 6% Senior Secured Convertible Notes due 2001 (the "Notes") upon
receipt by you of a Notice of Conversion of 6% Senior Secured Convertible Note
due 2001 in the form enclosed herewith, and (b) shares (the "Warrant Shares") of
Common Stock to or upon the order of the holder from time to time on exercise of
the Common Stock Purchase Warrants (the "Warrants") exercisable for Common Stock
issued by the Company upon receipt by you of a Subscription Form from such
holder in the form enclosed herewith. [The transfer or re-registration of the
certificates for the Outstanding Shares by you should be made at such time as
you are requested to do so by the record holder of the Outstanding Shares. The
certificate issued upon such transfer or re-registration should be registered in
such name as requested by the holder of record of the certificate surrendered to
you and should not bear any legend which would restrict the transfer of the
shares represented thereby. In addition, you are hereby directed to remove any
stop-transfer instruction relating to the Outstanding Shares.]/2/ Certificates
for the Conversion Shares and Warrant Shares should not bear any restrictive
legend and should not be subject to any stop-transfer restriction.
- - -----------------
/1/ Omit if no conversions of Notes or Preferred Stock or exercises of Warrants
have occurred before SEC registration is declared effective.
1-20
<PAGE>
Contemporaneously with the delivery of this letter, the Company is
delivering to you an opinion of __________________________ as to registration of
the resale of [the Outstanding Shares and]* the Conversion Shares and Warrant
Shares under the Securities Act of 1933, as amended.
1-21
<PAGE>
Should you have any questions concerning this matter, please contact
me.
Very truly yours,
EQUALNET COMMUNICATIONS CORP.
By:
-------------------------------------
Name:
Title:
Enclosures
cc: [Names of Investors]
1-22
<PAGE>
EXHIBIT 2
TO
REGISTRATION
RIGHTS AGREEMENT
________________________________________________ ___, 1998
[Names and Addresses of Investors]
EQUALNET COMMUNICATIONS CORP.
Shares of Common Stock
--------------------------------------
Ladies and Gentlemen:
We are counsel to Equalnet Communications Corp., a Texas corporation
(the "Company"), and we understand that the Company has sold to [Name of
Investor] (the "Holder") a 6% Senior Secured Convertible Notes due 2001 in the
principal amount of $________________ (the "Note") and issued to the Holder
Common Stock Purchase Warrants (the "Warrants"). The Note was sold, and the
Warrants were issued, to the Holder pursuant to the Note Purchase Agreement,
dated as of July ___, 1998, by and between the Holder and the Company (the "Note
Purchase Agreements"). Pursuant to the Registration Rights Agreement, dated as
of July ___, 1998, by and between the Company and the Holders (the "Registration
Rights Agreement") entered into in connection with the purchase by the Holder of
the Note, the Company agreed with the Holder, among other things, to register
for resale (1) the shares (the "Conversion Shares") of Common Stock issuable
upon conversion of the Note and conversion of the Notes issued in payment of
interest on the Note and (2) the shares (the "Warrant Shares") of Common Stock
issuable upon exercise of the Warrants under the Securities Act of 1933, as
amended (the "Securities Act"), upon the terms provided in the Registration
Rights Agreement. The Conversion Shares and the Warrant Shares are referred to
herein collectively as the "Shares." Pursuant to the Registration Rights
Agreement, on _________ ___, 1998 the Company filed a Registration Statement on
Form S-__ (File No. 333-__________) (the "Registration Statement") with the
Securities and Exchange Commission (the "SEC") relating to the Shares, which
names the Holders as selling stockholders thereunder.
[Other introductory and scope of examination language to be inserted
prior to execution of Registration Rights Agreement.]
Based on the foregoing, we are of the opinion that:
2-23
<PAGE>
(1) All of the forms, reports and other documents filed by the Company
with the SEC under the Securities Exchange Act of 1934, as amended (the
"1934 Act"), since the Closing Date complied, when filed, in all material
respects, with all applicable requirements of the 1933 Act and the 1934
Act;
(2) The Registration Statement and the Prospectus contained therein
(other than the financial statements and financial schedules and other
financial and statistical information contained or incorporated by
reference therein, as to which we have not been requested to and do not
express any opinion) comply as to form in all material respects with the
applicable requirements of the 1933 Act and the rules and regulations
promulgated thereunder; and
(3) The Registration Statement has become effective under the 1933
Act, to the best of our knowledge after due inquiry, no stop order
proceedings with respect thereto have been instituted or threatened by the
SEC. The Shares have been registered under the 1933 Act and may be resold
by the respective Holders pursuant to the Registration Statement.
We have participated in the preparation of the Registration Statement
and the Prospectus, including review and discussions with officers and other
representatives of the Company, representatives of the independent public
accountants for the Company, and your representatives at which the contents of
the Registration Statement and the Prospectus contained therein and related
matters were discussed, and, although we are not passing upon and do not assume
any responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement and the Prospectus contained therein, on
the basis of the foregoing, nothing has come to our attention that leads us to
believe either that the Registration Statement at the time the Registration
Statement became effective contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, or that the Prospectus contained in
the Registration Statement, as of its date, contained an untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading (it being understood that we have not
been requested to and do not express any view with respect to the financial
statements and schedules and other financial and statistical data included or
incorporated by reference in the Registration Statement or the Prospectus
contained therein).
Paragraph (3) of this opinion may be relied upon by American Stock
Transfer & Trust Company, as Transfer Agent and Registrar (the "Transfer
Agent"), as if addressed to the Transfer Agent.
2-24
<PAGE>
Very truly yours,
cc: American Stock Transfer & Trust Company,
as Transfer Agent and Registrar
2-25
<PAGE>
EXHIBIT 3
TO
REGISTRATION
RIGHTS AGREEMENT
________________________________________________ ___, 1998
[Names and Addresses of Investors]
EQUALNET COMMUNICATIONS CORP.
Shares of Common Stock
--------------------------------------
Ladies and Gentlemen:
I am General Counsel of Equalnet Communications Corp., a Texas
corporation (the "Company"), and I understand that the Company has sold to [Name
of Investor] (the "Holder") a 6% Senior Secured Convertible Notes due 2001 in
the principal amount of $________________ (the "Note") and issued to the Holder
Common Stock Purchase Warrants (the "Warrants"). The Note was sold, and the
Warrants were issued, to the Holder pursuant to the Note Purchase Agreement,
dated as of July ___, 1998, by and between the Holder and the Company (the
"Note Purchase Agreement"). Pursuant to the Registration Rights Agreement,
dated as of July ___, 1998, by and between the Company and the Holder (the
"Registration Rights Agreement") entered into in connection with the purchase by
the Holder of the Note, the Company agreed with the Holder, among other things,
to register for resale (1) the shares (the "Conversion Shares") of Common Stock
issuable upon conversion of the Note and conversion of the Notes issued in
payment of interest on the Note and (2) the shares (the "Warrant Shares") of
Common Stock issuable upon exercise of the Warrants under the Securities Act of
1933, as amended (the "Securities Act"), upon the terms provided in the
Registration Rights Agreement. The Conversion Shares and the Warrant Shares are
referred to herein collectively as the "Shares." Pursuant to the Registration
Rights Agreement, on _________ ___, 1998 the Company filed a Registration
Statement on Form S-__ (File No. 333-__________) (the "Registration Statement")
with the Securities and Exchange Commission (the "SEC") relating to the Shares,
which names the Holder as selling stockholders thereunder.
[Other introductory and scope of examination language to be inserted
prior to execution of Registration Rights Agreement.]
2-26
<PAGE>
Based on the foregoing, I am of the opinion that the Company has filed
with the SEC all of the forms, reports and other documents under the Securities
Exchange Act of 1934, as amended, required to be filed by the Company since the
Closing Date.
I have participated in the preparation of the Registration Statement
and the Prospectus, including review and discussions with officers and other
representatives of the Company, representatives of the independent public
accountants for the Company, and your representatives at which the contents of
the Registration Statement and the Prospectus contained therein and related
matters were discussed, and, although I am not passing upon and do not assume
any responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement and the Prospectus contained therein, on
the basis of the foregoing, nothing has come to my attention that leads me to
believe either that the Registration Statement at the time the Registration
Statement became effective contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, or that the Prospectus contained in
the Registration Statement, as of its date, contained an untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading (it being understood that we have not
been requested to and do not express any view with respect to the financial
statements and schedules and other financial and statistical data included or
incorporated by reference in the Registration Statement or the Prospectus
contained therein).
Very truly yours,
2-27
<PAGE>
EXHIBIT 10.39
ANNEX X
Form of Opinion in Connection with Security Agreement
-----------------------------------------------------
1. The Company has all requisite corporate power and authority to
execute and deliver the Security Agreement and to perform its obligations
thereunder in accordance with the terms thereof, subject to the terms and
conditions contained or otherwise referenced therein. The execution, delivery
and performance of the Security Agreement by the Company and the consummation by
the Company of the transactions contemplated thereby have been duly authorized
by all necessary corporate action on the part of the Company, subject to the
terms and conditions contained or otherwise referenced in the Security
Agreement. The Security Agreement has been duly and validly executed and
delivered by the Company and (assuming the due authorization, execution and
delivery thereof by each of the other parties thereto) constitutes the legal,
valid and binding obligation of the Company, enforceable against it in
accordance with their terms, subject to applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and similar laws affecting
creditors' rights and remedies generally, and subject, as to enforceability, to
general principles of equity, including principles of commercial reasonableness,
good faith and fair dealing (regardless of whether enforcement is sought in a
proceeding at law or in equity) and except that certain remedial provisions of
the Security Agreement are or may be unenforceable in whole or in part under the
laws of the State of Texas and the State of New York, but the inclusion of such
provisions does not affect the validity of the Security Agreement, and the
Security Agreement contains adequate provisions for the practical realization of
the rights and benefits afforded thereby. No opinion is expressed in this
paragraph as to the perfection or priority of any liens granted pursuant to the
Security Agreement.
2. The execution and delivery of the Security Agreement, the
consummation of the transactions contemplated thereby and compliance by the
Company with the provisions thereof will not materially conflict with,
constitute a default under or violate (i) any of the terms, conditions or
provisions of the articles of incorporation or by-laws of the Company, (ii) any
of the terms, conditions or provisions of the Applicable Contracts except as set
forth on Schedule I (except that we express no opinion as to any covenant,
restriction or provision of the Applicable Contracts related to financial
covenants, ratios or tests or any aspect of the financial condition or results
of operations of the Company), (iii) any New York, Texas or federal law or
regulation (other than federal and state securities or blue sky laws or laws
regulating the maximum rate of interest which may be charged, taken or received,
as to which we express no opinion except to the extent set forth in the next
<PAGE>
clause), (iv) any New York law regulating the maximum rate of interest which may
be charged, taken or received, or (v) any judgment, writ, injunction, decree,
order or ruling of any court or governmental authority binding on the Company of
which we are aware. "Applicable Contracts" means those documents, agreements or
instruments set forth on Schedule II attached hereto, which have been identified
to us by the Company as all material documents, agreements or other instruments
to which the Company or the Subsidiaries are a party or by which they are bound.
3. Assuming the filing of the financing statements on Form UCC-1 in
the offices in the jurisdictions indicated on Schedule III hereto, the execution
and delivery of the Security Agreement creates a valid and duly perfected lien
on and a security interest in the "Collateral" (as such term is defined in the
Security Agreement) to the extent perfection of a lien or security interest in
the Collateral may be perfected by the filing of a financing statement under the
Uniform Commercial Code in effect in the State of Texas (the "UCC"), as security
for the Obligations (as such term is defined in the Security Agreement).
The opinion is subject to the following exceptions:
A. that with respect to any Debtor's (as such term is defined in
the Security Agreement) rights in or title to the Collateral, we express no
opinion, and have assumed that such Debtor has title to the Collateral;
B. that with respect to any Collateral as to which the perfection
of a lien or security interest is governed by the laws of any jurisdiction other
than the State of Texas, we express no opinion; and
C. that with respect to any Collateral which is or may become
fixtures (within the meaning of Section 9.313 of the UCC) we express no opinion;
and
D. that with respect to transactions excluded from Article 9 of
the UCC by Section 9.104 thereof, we express no opinion.
In addition, the opinion set forth above is subject to (i) the
limitations on perfection of security interests in proceeds resulting from the
operation of Section 9.306 of the UCC; (ii) the limitations with respect to
buyers in the ordinary course of business imposed by Sections 9.307 and 9.308 of
the UCC; (iii) the limitations with respect to documents, instruments and
securities imposed by Sections 8.302, 9.304
2
<PAGE>
and 9.309 of the UCC; (iv) the provisions of Section 9.203 of the UCC relating
to the time of attachment; and (v) Section 552 of Title 11 of the United States
Code (the "Bankruptcy Code") with respect to any Collateral acquired by the
Debtors subsequent to the commencement of a case against or by the Debtors under
the Bankruptcy Code.
We further assume (a) that all filings will be timely made and duly
filed as necessary (i) in the event of a change in the name, identify or
corporate structure of the Debtors, (ii) in the event of a change in location of
the Collateral, or the location of the principal office of the Debtors or the
place where the Debtors keeps its books and records, and (iii) to continue to
maintain the effectiveness of the original filings, and (b) that any money,
instruments, documents or securities which may constitute part of the Collateral
are and will remain in the Creditors' possession.
3
<PAGE>
EXHIBIT 10.40
EQUALNET COMMUNICATIONS CORP.
1250 Wood Branch Park Drive
Houston, 7X 77079
September 4, 1998
Genesee Fund Limited - Portfolio B
10500 N.E. 8th Street, Suite 1920
Bellevue, Washington 98004-4332
Attention: Chris Purrier
Willis Group, LLC
5005 Woodway, Suite 350
Houston, TX 77056
Attention: Mark Willis
Re: Interest in Net Proceeds of the Sale of the Network
---------------------------------------------------
Gentlemen:
Reference is made to each of the Note Purchase Agreements and Note
Purchase and Exchange Agreements (collectively the "Agreements") between
Equalnet Communications Corp. (the "Company") and each of Genesee Fund Limited -
Portfolio B and Willis Group, LLC (collectively, the "Investors"). The advances
to be made to the Company pursuant to the Agreements are conditioned upon the
execution and delivery of this letter by the Company and its wholly owned
subsidiary, Netco Acquisition Corp. ("Netco"). As further consideration for the
advances to be made to the Company pursuant to the Agreements. the Company
hereby agrees that the investors shall be entitled to receive an aggregate of
five percent (5%) of the Net Proceeds (as defined below) of any sale of all or
any portion of the Network (as defined below) owned by Netco. Such amount shall
be allocated among the Investors pro ram In accordance with the outstanding
amount of the 6% Senior Secured Convertible Notes due 2001 of the Company held
by each Investor. Netco hereby agrees to pay such amount to the Company upon
consummation of any such sale.
As used above, "Network" means the long distance telecommunications
network owned by Netco, which consists of nine Siemens Stromberg DCO/CS digital
long distance switches and related tangible and intangible assets. As used
above,
<PAGE>
"Net Proceeds" means the proceeds of any sale of all or any portion of the
Network by Netco after deducting (i) all amounts necessary to repay all
indebtedness secured by the Network and (ii) the costs and expenses incurred in
connection with any such sale.
This agreement and the obligations created hereby shall terminate on
the first date on which there are no amounts outstanding under the Notes (as
defined in the Agreements).
EQUALNET COMMUNICATIONS CORP.
BY: /s/ MITCHELL BODIAN
-------------------------------------
Name: Mitchell Bodian
--------------------------------
Title: President
-------------------------------
NETCO ACQUISITION CORP.
By: /s/ MITCHELL BODIAN
-------------------------------------
Name: Mitchell Bodian
--------------------------------
Title: President
-------------------------------
AGREED:
GENESEE FUND LIMITED -
PORTFOLIO B
By:
---------------------------
Name:
--------------------
Title:
-------------------
WILLIS GROUP, LLC
By: /s/ Mark Willis
---------------------------
Name: Mark Willis
--------------------
Title: Pres.
-------------------
2
<PAGE>
"Net Proceeds" means the proceeds of any sale of all or any portion of the
Network by Netco after deducting (i) all amounts necessary to repay all
indebtedness secured by the Network and (ii) the costs and expenses
incurred in connection with any such sale.
This agreement and the obligations created hereby shall
terminate on the first date on which there are no amounts outstanding under the
Notes (as defined in the Agreements).
EQUALNET COMMUNICATIONS CORP.
By: __________________________
Name: __________________
Title: _________________
NETCO ACQUISITION CORP.
By: __________________________
Name: __________________
Title: _________________
AGREED:
GENESEE FUND LIMITED -
PORTFOLIO B
By: /s/ W.R. Weber
---------------------------
Name: W.R. Weber
-------------------
Title: President
------------------
WILLIS GROUP, LLC
By:
---------------------------
Name:
-------------------
Title:
------------------
2
<PAGE>
EXHIBIT 10.41
MASTER PURCHASE AGREEMENT
THIS MASTER PURCHASE AGREEMENT, dated as of July 31, 1998 (this
"Agreement"), by and between EQUALNET COMMUNICATIONS CORP., a Texas corporation
(the "Company"), and GENESEE FUND LIMITED - PORTFOLIO B, a British Virgin
Islands corporation, WILLIS GROUP, LLC, a Texas limited liability company and
ADVANTAGE FUND LIMITED, a British Virgin Islands corporation (the "Buyers").
WITNESSETH:
WHEREAS, in connection with this Agreement, the Company and each of
the Buyers are entering into Note Purchase Agreements (the "Note Purchase
Agreements"), Note Purchase and Exchange Agreements (the "Note Purchase and
Exchange Agreements"), 6% Senior Secured Convertible Notes due 2001 and
Registration Rights Agreements, each dated as of the date hereof (collectively,
the "Transaction Agreements");
WHEREAS, the Company and the Buyers are executing and delivering this
Agreement and the Transaction Agreements as part of a loan to the Company in the
aggregate original principal amount of $2,800,000;
WHEREAS, it is the intent of the Company and each of the Buyers that
this Agreement and each of the Transaction Agreements shall constitute one
single agreement;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and in the Transaction Agreements and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
1. Contemporaneous Execution. This Agreement and the Transaction Agreements
shall not become effective until (i) this Agreement and (ii) each
Transaction Agreement has been duly and validly executed by each of the
parties hereto and thereto, as the case may be.
2. Contemporaneous Closing. The closing of the transactions contemplated by
each of the Note Purchase Agreements and the Note Purchase and Exchange
Agreements shall be conditioned upon the satisfaction of all of the
conditions precedent to the closing of each of the other Note Purchase
Agreements and Note Purchase and Exchange Agreements.
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by the
Company and each of the Buyers by their respective officers or other
representatives thereunto duly authorized as of July 31, 1998.
COMPANY:
EQUALNET COMMUNICATIONS CORP.
By: /s/ Mitchell Bodian
----------------------------
Name: Mitchell Bodian
---------------------
Title: President
---------------------
BUYERS:
WILLIS GROUP, LLC
By: /s/ Mark Willis
----------------------------
Name: Mark Willis
---------------------
Title: President
---------------------
GENESEE FUND LIMITED -
PORTFOLIO B
By: /s/ W.R. Weber
----------------------------
Name: W.R. Weber
---------------------
Title: President
---------------------
ADVANTAGE FUND LIMITED
By: /s/ W.R. Weber
----------------------------
Name: W.R. Weber
---------------------
Title: President
---------------------
2
<PAGE>
EXHIBIT 10.42
SECURITY AGREEMENT
THIS SECURITY AGREEMENT ("Agreement") is made and entered into as of
July 31, 1998 by and among EQUALNET COMMUNICATIONS CORP., a Texas corporation
(individually, "Parent"), USE TELECOM, INC., a Delaware corporation, NETCO
ACQUISITION CORP., a Delaware corporation, and EQUALNET CORPORATION, a Delaware
corporation (collectively "Debtors"), each with its principal place of business
located at 1250 Wood Branch Park Drive, Houston, TX 77079, and each of WILLIS
GROUP, LLC (herein "Willis"), a Texas limited liability company, with its
principal place of business located at 5005 Woodway, Suite 350, Houston, TX
77056, GENESEE FUND LIMITED - PORTFOLIO B (herein "Genesee" and, together with
Willis, the "Creditors"), a British Virgin Islands corporation, with its
principal place of business located at 10500 N.E. 8th Street, Suite 1920,
Bellevue, Washington 98004-4332.
WHEREAS, pursuant to that Master Purchase Agreement (the "Master
Purchase Agreement") of even date herewith, by and among, among others, Parent
and the Creditors, the Creditors have agreed to make certain advances to Parent;
and
WHEREAS, the Creditors are willing to make such advances but only upon
the condition, among others, that each of the Debtors shall have executed and
delivered to the Creditors this Security Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained and for other good and valuable consideration, the
receipt of which is hereby acknowledged, the parties hereto agree as follows:
1. Debtors hereby sell, assign, transfer and grant a security
interest to secure the Obligations (as herein defined) of Parent in the
following described collateral, and all products and proceeds thereof (the
"Collateral") to the Creditors:
(a) Debtors' existing and hereafter acquired equipment, furniture,
contract rights and customer contracts;
(b) all general intangibles (as defined in the Texas Uniform
Commercial Code) relating to the Collateral;
(c) all insurance policies relating to the Collateral;
(d) all liens, guaranties and other rights and privileges relating
to any of the Collateral; and
<PAGE>
(e) all books, ledgers, books of account, records, writings, data
bases, information and other property relating to, used or useful in
connection with, evidencing, embodying, incorporating or referring to any
of the foregoing.
Debtors represent and warrant to Creditors that the Collateral is free
and clear of any claims, encumbrances, restrictions or security interests except
for the security interests held by RFC Capital Corporation, (fka Receivable
Funding Corporation), Greyrock Business Credit, Finova Capital Corporation,
Netco, LLC, Frontier Communications of the West, Inc. and Willis Group, LLC.
2. This security interest is granted to Creditors as security for the
following obligations (the "Obligations"):
(a) The full and prompt payment when due of all obligations and
liabilities of the Parent pursuant to the Transaction Agreements (as
defined in the Master Purchase Agreement) and the due performance and
compliance with the terms contained therein;
(b) any and all other indebtedness, obligations, and liabilities
of any kind of the Debtors to the Creditors, now or hereafter existing,
absolute or contingent, joint and/or several, secured or unsecured, due or
not due, arising by operation of law or otherwise; and
(c) in the event of any proceeding for the collection or
enforcement of any indebtedness, obligations or liabilities of the Parent
referred to in clause (a) or (b) after an Event of Default (as defined in
the Transaction Agreements) shall have occurred and be continuing, the
reasonable expenses of re-taking, holding, preparing for sale, selling or
otherwise disposing of or realizing on the Collateral, or of any exercise
by the Creditors of their rights hereunder, together with reasonable
attorneys' fees and court costs.
3. Each Debtor represents that the office where it keeps its records
concerning its customer accounts is at its address specified in the preamble to
this Agreement. Each Debtor will immediately advise the Creditors in writing of
any change in location of the place where its records concerning its accounts
are kept.
4. Upon the occurrence of an Event of Default (as defined in the
Transaction Agreements), or if Parent shall default under any of the Obligations
or any Debtor shall fail to observe or perform any of the provisions of this
Agreement, or upon institution of bankruptcy, insolvency, liquidation or
receivership proceedings or the filing of a petition for reorganization under
the Bankruptcy Code by any Debtor or against any Debtor, or upon an assignment
by any Debtor for the benefit of its creditors or the performance of Obligations
secured hereby impaired, all such Obligations shall become immediately due and
payable without demand or notice, and the Creditors shall have the rights and
remedies of a secured
2
<PAGE>
party under the Texas Uniform Commercial Code, in addition to any other rights
and remedies provided hereunder or at law or in equity, including, but not
limited to, the right to retain the Collateral in full satisfaction of the
Obligations secured hereby and the right to directly contact any of any Debtors'
billing entities, banking facilities or financial institutions requiring
redirection of funds to the Creditors. The requirements of reasonable notice of
disposition of Collateral by the Creditors shall be met if such notice is
mailed, postage prepaid, to the respective Debtor's address specified in the
preamble to this Agreement at least five (5) days before the time of the sale or
disposition.
5. Any and all proceeds of collection or sale of the Collateral other
than the sale of accounts receivable to RFC Capital Corporation, after payment
of all outstanding senior indebtedness secured by the Collateral and all
reasonable expenses incurred by the Creditors in so doing, including reasonable
attorneys' fees and other expenses, shall be applied to the satisfaction of the
Obligations and other of Parent's liabilities to Creditors on a pro rata basis
determined according to the outstanding amounts of the 6% Senior Secured
Convertible Notes Due 2001 held by each of the Creditors. Each Debtor shall
remain liable for any deficiency. Each purchaser at any such sale shall hold the
property sold absolutely free from any claim or right on the part of the
Debtors, and the Debtors hereby waive and release to the fullest extent
permitted by law any right or equity of redemption with respect to the
Collateral, whether before or after sale hereunder, and all rights, if any, of
marshaling the Collateral and any other security for the Obligations or
otherwise, and all rights, if any, of stay and/or appraisal which it now has or
may at any time in the future have under rule of law or statute now existing or
hereinafter enacted. At any such sale, unless prohibited by applicable law, the
Creditors may bid for and purchase all or any part of the Collateral so sold
free from any such right or equity of redemption.
6. Each Debtor agrees to execute such financing statements and
continuations thereof, and such other assignments or other instruments as are
requested by the Creditors to perfect and maintain Creditors' security interest
in the Collateral.
7. Each of the Debtors, as applicable, represents and warrants that
(a) it is the legal, record and beneficial owner of, and has good and marketable
title to, the Collateral described in Section 1 hereof, subject to no pledge,
lien, mortgage, hypothecation, security interest, charge, option or other
encumbrance whatsoever, except the liens and security interests credited by this
Agreement and as stated in Section 1; (b) it has full power, authority and legal
right to pledge all the Collateral pursuant to this Agreement; (c) this
Agreement has been duly executed and delivered by the Debtor and constitutes a
legal, valid and binding obligation of the Debtor enforceable in accordance with
its terms; (d) the execution, delivery and performance of this Agreement will
not violate any provision of any applicable law or regulation or of any order,
judgment, writ, award or decree of any court, arbitrator or governmental
authority, domestic or foreign, or of any securities issued by the Debtor, or of
any mortgage, indenture, lease, contract or other agreement, instrument or
undertaking to which the Debtor is a party or which purports to be binding upon
the Debtor or upon any of its assets and will not result in the creation or
imposition of any lien or encumbrance on any of
3
<PAGE>
the assets of the Debtor except as contemplated by this Agreement; (e) this
Agreement and the transactions contemplated hereby have been duly authorized by
all necessary corporate action on the part of the Debtor; (f) this Agreement
creates, as security for the Obligations, a valid and enforceable lien on and
security interest in all of the Collateral in favor of the Creditors for the
benefit of the Holders (as defined in the Transaction Agreements), subject to no
lien in favor of any other person except as noted in Section 1; and (g) no
consent, filing, approval, registration, recording, or other action is required
(x) for the grant of the security interest by the Debtor in the Collateral
pursuant to this Agreement or for the execution, delivery or performance of this
Agreement by the Debtor, or (y) to perfect the lien purported to be created by
this Agreement, in each case except as has been accomplished. Each Debtor
covenants and agrees that it will defend the Creditors' right, title and
security interest in and to the Collateral and the proceeds thereof against the
claims and demands of all persons whomsoever; and each Debtor covenants and
agrees that it will have like title to and right to pledge any other funds, or
property at any time hereafter pledged to the Creditors as Collateral hereunder
and will likewise defend the right thereto and security interest therein of the
Creditors and the Holders.
8. The laws of the State of Texas shall govern the construction of
this Agreement and the rights, remedies and duties of the parties hereto.
9. The transfer, assignment, conveyance, lease, loss or damage or
other disposition of the Collateral, or any part thereof, whether permitted or
unauthorized under the terms of this Agreement shall not release either Debtor
from any obligation created by this Agreement or the Obligations.
10. Each Debtor hereby irrevocably authorizes and appoints the
Creditors as such Debtor's attorney-in-fact to do any act which such Debtor is
obligated to do under this Agreement, or which is necessary to carry out the
intent of this Agreement. As attorney-in-fact, Creditor may, among other things,
execute, endorse or approve any and all documents, agreements, and/or
instruments pursuant to any applicable law. The parties understand and agree
that this authorization and appointment of the Creditors is solely to enable
Creditors to protect and preserve its rights under this Agreement and the
Transaction Agreements. Each right, power and remedy of the Creditors provided
for in this Agreement or the Transaction Agreements or now or hereafter existing
at law or in equity or by statute shall be cumulative and concurrent and shall
be in addition to every other such right, power or remedy. The exercise or
commencement of the exercise by the Creditors of any one or more of the rights,
powers or remedies provided for in this Agreement or the Transaction Agreements
or now or hereafter existing at law or in equity or by statute or otherwise
shall not preclude the simultaneous or later exercise by the Creditors or any
Holder of all such other rights, powers or remedies, and no failure or delay on
the party of the Creditors or any Holder to exercise any such right, power or
remedy shall operate as a waiver thereof.
11. If any legal action or other proceeding is brought for the
enforcement of this Agreement, or because of an alleged dispute, breach, default
or misrepresentation in connection with any of the provisions of this Agreement,
the prevailing party shall be entitled
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<PAGE>
to recover reasonable attorney's fees and other costs incurred in that action or
proceeding, in addition to any other relief to which it may be entitled.
12. This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original and, taken together, shall constitute one
and the same instrument.
13. The parties agree to do any and all things and to perform any
and all acts reasonably necessary order to carry out the intent of this
Agreement.
14. This Agreement shall be binding upon and shall inure to the
benefit of the parties and their successors and assigns. This Agreement,
together with the instruments referred to herein, contains the entire
understanding of the parties with respect to the subject matter hereof and may
be amended only by a written instrument executed by the parties or their
respective successors and assigns.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Security Agreement
as of the date set forth above.
EQUALNET COMMUNICATIONS CORP.
By: /s/ Mitchell Bodian
-------------------------------
Name: Mitchell Bodian
-------------------------
Title: President
-------------------------
USC TELECOM, INC.
By: /s/ Mitchell Bodian
-------------------------------
Name: Mitchell Bodian
-------------------------
Title: President
-------------------------
NETCO ACQUISITION CORP.
By: /s/ Mitchell Bodian
-------------------------------
Name: Mitchell Bodian
-------------------------
Title: President
-------------------------
EQUALNET CORPORATION
By: /s/ Mitchell Bodian
-------------------------------
Name: Mitchell Bodian
-------------------------
Title: President
-------------------------
WILLIS GROUP, LLC
By: /s/ Mark Diller
-------------------------------
Name: Mark Diller
-------------------------
Title: President
-------------------------
GENESEE FUND LIMITED - PORTFOLIO B
By: /s/ W. R. Weber
-------------------------------
Name: W. R. Weber
-------------------------
Title: President
-------------------------
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<PAGE>
EXHIBIT 10.43
EQUALNET COMMUNICATIONS CORP.
1250 Wood Branch Park Drive
Houston, Texas 77079-1212
July 21, 1998
SA Telecommunications, Inc.
1600 Promenade Center, 15th Floor
Richardson, Texas 75080
Attention: Albert B. Gordon, Jr.
Re: Assignment of Rights and Obligations Under Purchase Agreement
Ladies and Gentlemen:
Reference is made to (i) the Purchase Agreement, dated as of January 15,
1998, among SA Telecommunications, Inc. and certain of its subsidiaries
(collectively, the "Sellers"), EqualNet Corporation (the "Buyer") and EqualNet
Communications Corp. (fka EqualNet Holding Corp.) ("EqualNet"), as amended from
time to time (the "Purchase Agreement"); and (ii) the Management and Services
Agreement, dated as of March 12, 1998, by and among Buyer, EqualNet and the
Sellers, as amended from time to time (the "Management Agreement"). Capitalized
terms used but not defined herein shall have the meaning given to such terms in
the Purchase Agreement. Subject to and effective upon the consent of the
Sellers, to be evidenced by their signature below, the Buyer hereby assigns to
USC Telecom, Inc., a Delaware corporation ("USC Telecom"), and USC Telecom
hereby assumes, all of Buyer's rights, obligations and interests under the
Purchase Agreement, the other Transaction Documents (as defined in the Purchase
Agreement) and the Management Agreement. In consideration of the foregoing
assignment and assumption, Buyer hereby guaranties the due and punctual payment
and performance by USC Telecom of all of USC Telecom's obligations under the
Purchase Agreement, the other Transaction Documents and the Management
Agreement.
USC Telecom is a wholly owned subsidiary of EqualNet. EqualNet hereby
consents to the foregoing assignment and assumption and, consistent with Section
18(j) of the Purchase Agreement, guaranties the due and punctual payment and
performance by USC Telecom of all of USC Telecom's obligations under the
Purchase Agreement and the other Transaction Documents.
<PAGE>
USC Telecom agrees to be bound to all terms and conditions of, and shall be
deemed to make all representations made by, the Buyer under the Purchase
Agreement and the Management Agreement to the same extent as if USC Telecom were
originally named as the "Buyer" under said agreements; provided, however, that
USC Telecom shall be obligated to close under the Purchase Agreement (i.e., to
purchase and pay for the Assets) if Buyer would have been obligated to close
absent the assignment to USC Telecom provided for herein.
Buyer and USC Telecom shall be jointly and severally liable for all payment
obligations and adjustments under the Purchase Agreement, the other Transaction
Documents, and the Management Agreement. Sellers agree that USC Telecom shall
be entitled to all rights and benefits currently held by Buyer under the
Purchase Agreement, the other Transaction Documents and the Management
Agreement.
Except as expressly provided herein, all terms and conditions of the
Purchase Agreement, the other Transaction Documents and the Management Agreement
shall remain in full force and effect. Nothing herein shall be deemed a waiver
of any party's rights under the Purchase Agreement, the other Transaction
Documents and the Management Agreement with respect to any breaches that may
have occurred prior to the date of this letter.
Please acknowledge your consent to the foregoing assignment and assumption
by signing below and delivering an executed copy of this letter to the attention
of Dean Fisher.
EQUALNET CORPORATION
By: /s/ Dean H. Fisher
------------------
Dean H. Fisher
Vice President
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EQUALNET COMMUNICATIONS CORP.
By: /s/ Mitchell H. Bodian
----------------------
Mitchell H. Bodian, President
USC TELECOM, INC.
By: /s/ Mitchell H. Bodian
----------------------
Mitchell H. Bodian, President
ACKNOWLEDGED AND AGREED:
SA TELECOMMUNICATIONS, INC.
ADDTEL COMMUNICATIONS, INC.
LONG DISTANCE NETWORK, INC.
NORTH AMERICAN TELECOMMUNICATIONS
CORPORATION
U.S. COMMUNICATIONS, INC.
SOUTHWEST LONG DISTANCE NETWORK, INC.
UNIQUEST COMMUNICATIONS, INC.
Debtors and Debtors-in-possession
By: /s/ Albert B. Gordon, Jr.
-------------------------
Albert B. Gordon, Jr., CEO
3
<PAGE>
EXHIBIT 10.44
RECEIVABLES SALE AGREEMENT
Dated as of July 23, 1998
by and between
USC TELECOM, INC.,
as Seller, and
RFC CAPITAL CORPORATION
as Purchaser and Master Servicer
<PAGE>
RECEIVABLES SALE AGREEMENT (the "Agreement"), dated as of July 23, 1998, by
and between USC TELECOM, INC., a Delaware corporation, as Seller and
Subservicer, and RFC CAPITAL CORPORATION, a Delaware corporation, as Purchaser
and Master Servicer.
WITNESSETH:
WHEREAS, the Seller desires to sell certain of its telecommunication
receivables and the Purchaser is a corporation formed for the purpose of
purchasing certain telecommunication receivables from time to time;
WHEREAS, the Purchaser shall act in its capacity as the Master Servicer to
perform certain servicing, administrative and collection functions in respect of
the receivables purchased by the Purchaser under this Agreement (the "Purchased
Receivables");
WHEREAS, the Purchaser and the Master Servicer desire that the Subservicer
be appointed to perform certain servicing, administrative and collection
functions in respect of the Purchased Receivables; and
WHEREAS, the Seller has been requested and is willing to act as the
Subservicer.
NOW, THEREFORE, the parties agree as follows:
ARTICLE I - DEFINITIONS
Section 1.1. Certain Defined Terms. The terms used in this Agreement
shall have the respective meanings set forth on Exhibit A.
Section 1.2. Other Terms. All accounting terms not specifically defined
in this Agreement shall be construed in accordance with generally accepted
accounting principles. All terms used in Article 9 of the UCC, and not
specifically defined in this Agreement, are used in this Agreement as defined in
such Article 9.
ARTICLE II - PURCHASE AND SALE; ESTABLISHMENT OF ACCOUNTS
Section 2.1. Offer to Sell. Seller shall offer to sell, transfer, assign
and set over to Purchaser those Eligible Receivables set forth on a list of such
Eligible Receivables which shall be delivered by the Seller to the Purchaser no
later than three (3) Business Days prior to each Purchase Date.
Section 2.2. Purchase of Receivables. Upon receipt of the list of
Eligible Receivables pursuant to Section 2.1, the Master Servicer, in its sole
discretion, will confirm which of the Eligible Receivables offered by Seller
that the Purchaser will Purchase. The Purchase of such Receivables shall occur
upon payment of the Purchase Price. Upon Purchase of the Receivables, Seller
will have sold, transferred, assigned, set over and conveyed to Purchaser, all
of Seller's right, title and interest in and to the Purchased Receivables. The
Seller shall not take any action inconsistent with such ownership and shall not
claim any ownership in any Purchased Receivable. The Seller shall indicate in
its Records that ownership interest in any Purchased Receivable is held by the
Purchaser. In addition, the Seller shall respond to any inquiries with respect
to ownership of a Purchased Receivable by stating that it is no longer the owner
of such Purchased Receivable and that ownership of such Purchased Receivable is
held by the Purchaser. Documents relating to the Purchased Receivables shall be
held in trust by the Seller and the Subservicer, for the benefit of the
Purchaser as the owner of the Purchased Receivables, and possession of any
Required Information relating to the
<PAGE>
Purchased Receivables so retained is for the sole purpose of facilitating the
servicing of the Purchased Receivables. Such retention and possession is at the
will of the Purchaser and in a custodial capacity for the benefit of the
Purchaser only.
Section 2.3. Purchase Price and Payment. The Purchase Price for
Receivables purchased on any Purchase Date shall be an amount equal to the
aggregate Net Values of such Purchased Receivables. The Purchase Price to be
paid on such Purchase Date shall be reduced by (a) the Program Fees as of such
Purchase Date, (b) the amount, if any, by which the Seller Credit Reserve
Account (net of withdrawals required hereunder) is less than the Specified
Credit Reserve Balance as of such Purchase Date, (c) any Rejected Receivable
Amount, (c) any Defaulted Receivable Amount, and (c) other amounts due the
Purchaser in accordance with this Agreement.
Section 2.4. Establishment of Accounts; Conveyance of Interests Therein;
Investments. (a) A Lockbox Account(s) will be established or assigned, as the
case may be, for the benefit of the Purchaser into which all Collections from
Payors with respect to Receivables shall be deposited. The Lockbox Account(s)
will be maintained at the expense of the Seller. The Seller agrees to deposit
all Collections it receives with respect to Receivables in said Lockbox
Account(s) and will instruct all Payors to make all payments on Receivables to
said Lockbox Account(s). Such direction shall be provided to each Payor in a
timely manner mutually agreed upon by the Seller and Purchaser.
(b) The Purchaser has established and shall maintain the "Collection
Account" (the "Collection Account") and the "Seller Credit Reserve Account" (the
"Seller Credit Reserve Account").
(c) The Seller does hereby sell, transfer, assign, set over and convey to
the Purchaser all right, title and interest of the Seller in and to all amounts
deposited, from time to time, in the Lockbox Account(s), the Collection Account
and the Seller Credit Reserve Account. The Purchaser agrees to return in a
timely manner to Seller any payments or amounts received in the Collection
Account other than Collections with respect to Purchased Receivables subject to
(i) that the Purchaser has reasonably sufficient information to properly
identify the underlying Receivable to which such Collection(s) should be applied
and (ii) the satisfaction of any amounts due and owing the Purchaser in
accordance with Section 5.3 of this Agreement. Any Collections relating to
Receivables held by the Seller or the Subservicer pending deposit to the Lockbox
Account(s) as provided in this Agreement, shall be held in trust for the benefit
of the Purchaser until such amounts are deposited into the Lockbox Accounts(s)
or such other accounts established by the Seller and placed under the sole
direction and control of the Purchaser. All Collections in respect of Purchased
Receivables received by the Seller and not deposited directly by the Payor in
the Lockbox Account(s) shall be remitted to the Lockbox Account(s) or other such
account(s) established by the Seller and which shall be assigned to and under
the sole discretion of the Purchaser on the day of receipt or the following
Business Day if the day of receipt is not a Business Day, and if such
Collections are not remitted on a timely basis, in addition to its other
remedies hereunder, the Purchaser shall be entitled to receive a late charge
(which shall be in addition to the Program Fee) equal to 12% per annum or the
maximum rate legally permitted if less than such rate, calculated as of the
first Business Day of such delinquency.
Section 2.5. Grant of Security Interest. It is the intention of the
parties to this Agreement that each payment of the Purchase Price by the
Purchaser to the Seller for Purchased Receivables to be made under this
Agreement shall constitute part of the purchase and sale of such Purchased
Receivables and not a loan. In the event, however, that a court of competent
jurisdiction were to hold that the transaction evidenced by this Agreement
constitutes a loan and not a purchase and sale, it is the intention of the
parties that this Agreement shall constitute a Security agreement under the UCC
and any other applicable law, and that the Seller shall be
2
<PAGE>
deemed to have granted to the Purchaser a first priority perfected security
interest in all of the Seller's right, title and interest in, to and under the
Purchased Receivables; all payments of principal of or interest on such
Purchased Receivables; all amounts on deposit from time to time in the Lockbox
Account(s), the Collection Account and the Seller Credit Reserve Account; all
other rights relating to and payments made under this Agreement, and all
proceeds of any of the foregoing.
Section 2.6. Further Action Evidencing Purchases. The Seller agrees
that, from time to time, at its expense, it will promptly execute and deliver
all further instruments and documents, and take all further action, that may be
necessary or appropriate, or that the Purchaser may reasonably request, in order
to perfect, protect or more fully evidence the transfer of ownership of the
Purchased Receivables or to enable the Purchaser to exercise or enforce any of
its rights hereunder.
ARTICLE III - CONDITIONS OF PURCHASES
Section 3.1. Conditions Precedent to All Purchases. Each Purchase from
the Seller by the Purchaser shall be subject to the conditions precedent that:
(a) No Event of Seller Default has occurred and the Seller is in compliance
with each of its covenants and representations set forth in Sections 4.1 and 4.2
of this Agreement;
(b) The Seller shall have delivered to the Purchaser a complete copy of
each of the then current Carrier Agreements, Clearinghouse Agreements and
Billing and Collection Agreements and any amendment or modification of such
agreements;
(c) The Seller shall have delivered to the Purchaser a copy of each
written notice delivered by or received by either the Carrier, Billing and
Collection Agent, Clearinghouse Agent or the Seller with respect to any Carrier
Agreements, Clearinghouse Agreements and/or the Billing and Collection
Agreements;
(d) The Termination Date shall not have occurred; and
(e) Except as pertaining to Purchases occurring before September 30, 1998,
Seller shall deliver to Purchaser an opinion of counsel on or before September
30, 1998 (or such other time as Purchaser may agree in writing) as to its
compliance with any and all necessary regulatory matters necessary for the
Seller to validly generate telecommunications receivables and to conduct its
business as then conducted.
ARTICLE IV - REPRESENTATIONS, WARRANTIES
AND COVENANTS OF THE SELLER
Section 4.1. Representations, Warranties and Covenants as to the Seller.
The Seller represents and warrants to the Purchaser and Master Servicer, as of
the date of this Agreement and on each subsequent Purchase Date, as follows:
(a) The Seller is a corporation duly organized, validly existing and in
good standing under the laws of its state of incorporation and is duly qualified
to do business and is in good standing in each jurisdiction in which it is doing
business and has the power and authority to own and convey all of its properties
and assets and to execute and deliver this Agreement and the Related Documents
and to perform the transactions contemplated thereby; and each is the legal,
valid and binding obligation of the Seller enforceable against the Seller in
accordance with its terms;
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<PAGE>
(b) The execution, delivery and performance by the Seller of this
Agreement and the Related Documents and the transactions contemplated thereby
(i) have been duly authorized by all necessary corporate or other action on the
part of the Seller, (ii) do not contravene or cause the Seller to be in default
under (A) any contractual restriction contained in any loan or other agreement
or instrument binding on or affecting the Seller or its property; or (B) any
law, rule, regulation, order, writ, judgment, award, injunction, or decree
applicable to, binding on or affecting the Seller or its property and (iii) does
not result in or require the creation of any adverse claim upon or with respect
to any of the property of the Seller (other than in favor of the Purchaser as
contemplated hereunder);
(c) There is no court order, judgment, writ, pending or threatened action,
suit or proceeding, of a material nature against or affecting the Seller, its
officers or directors, or the property of the Seller, in any court or tribunal,
or before any arbitrator of any kind or before or by any Governmental Authority
(i) asserting the invalidity of this Agreement or any of the Related Documents,
(ii) seeking to prevent the sale and assignment of any Receivable or the
consummation of any of the transactions contemplated thereby, (iii) seeking any
determination or ruling that might materially and adversely affect the Seller,
this Agreement, the Related Documents, the Receivables, the Contracts or any
LOA, or (iv) asserting a claim for payment of money in excess of $50,000;
(d) The primary business of the Seller is the provision of
telecommunication services and/or equipment. All license numbers issued to the
Seller by any Governmental Authority are set forth on Schedule 1 and the Seller
has complied in all material respects with all applicable laws, rules,
regulations, orders and related Contracts and all restrictions contained in any
agreement or instrument binding on or affecting the Seller, and has and
maintains all permits, licenses, certifications, authorizations, registrations,
approvals and consents of Governmental Authorities or any other party materially
necessary for the business of the Seller and each of its Subsidiaries;
(e) The Seller (i) has filed on a timely basis all tax returns (federal,
state, and local) required to be filed and has paid or made adequate provisions
for the payment of all taxes, assessments, and other governmental charges due
from the Seller, which, if not paid in such manner could have a material adverse
affect on the results or operations or the financial condition of the Seller or
its ability to comply with the terms and conditions of this Agreement; (ii)
shall furnish to the Purchaser copies of its financial statements for the six
month period ending December 31, 1998, prepared internally by the Seller, which
fairly present the financial condition of the Seller, all in accordance with
generally accepted accounting principles consistently applied; (iii) since the
date of its organization and formation, there has been no material adverse
change in any such condition, business or operations other than that disclosed
to the Purchaser by the Seller prior to the date of this Agreement; and (iv)
shall deliver to the Purchaser within 45 days after the end of each subsequent
three month period the financial statements, including balance sheet and income
statement prepared in accordance with generally accepted accounting principles,
of the Seller as of the end of such three month period, certified by an officer
of the Seller;
(f) All information furnished by or on behalf of the Seller to the Master
Servicer or the Purchaser in connection with this Agreement is true and complete
in all material respects and does not omit to state a material fact and the
sales of Purchased Receivables under this Agreement are made by the Seller for
reasonably equivalent value and without intent to hinder, delay or defraud
present or future creditors of the Seller;
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<PAGE>
(g) The Lockbox Account(s) is/are the only lockbox account(s) to which
Payors have been or will be instructed to direct Receivable proceeds and each
Payor of an Eligible Receivable has been directed upon its receipt of the notice
attached hereto as Exhibit B, which such notice is to provided to each Payor in
a timely manner, to remit all payments with respect to such Receivable for
deposit in the Lockbox Account(S);
(h) The principal place of business and chief executive office of the
Seller are located at the address of the Seller set forth under its signature
below and there are not now, and during the past four months there have not
been, any other locations where the Seller is located (as that term is used in
the UCC) or keeps Records except as set forth in the designated space beneath
its signature line in this Agreement;
(i) The legal name of the Seller is as set forth at the beginning of this
Agreement and the Seller has not changed its legal name in the last six years,
and during such period, the Seller did not use, nor does the Seller now use any
tradenames, fictitious names, assumed names or "doing business as" names other
than those appearing on the signature page of this Agreement;
(j) The Seller has not done anything to impede or interfere with the
collection by the Purchaser of the Purchased Receivables and shall not waive or
otherwise permit or agree to any deviation from the terms or conditions of any
Purchased Receivable or any related Carrier Agreement, Clearinghouse Agreement,
Billing and Collection Agreement, Contract or LOA without first providing the
Purchaser with thirty days written notice thereof except where such amendment or
waiver would not have a material adverse effect upon either the validity or
ability of the Subservicer to collect amounts due and owing with respect to
Purchased Receivables; and
(k) For federal income tax reporting and accounting purposes, the Seller
will treat the sale of each Purchased Receivable pursuant to this Agreement as a
sale of, or absolute assignment of its full right, title and ownership interest
in such Purchased Receivable to the Purchaser to the extent such treatment does
not conflict with either GAAP or the Internal Revenue Code of 1986, as amended
from time to time (the "Code"), to the extent that such treatment does not
conflict with either GAAP or the Code.
Section 4.2. Representations and Warranties of the Seller as to Purchased
Receivables. With respect to each Purchased Receivable sold pursuant to this
Agreement the Seller represents and warrants, as of the date hereof and on each
subsequent Purchase Date, as follows:
(a) Such Receivable (i) consists of all the Required Information, (ii) is
the liability of an Eligible Payor and (iii) was created by the provision or
sale of telecommunication services or equipment by the Seller in the ordinary
course of its business, (iv) has a Purchase Date no later than 90 days from its
Billing Date, is not a Purchased Receivable which, as of any Determination Date,
payment by the Payor of such Receivable has been received and is not duplicative
of any other Receivable; and (v) is owned by the Seller free and clear of any
adverse claim, and the Seller has the right to sell, assign and transfer the
same and interests therein as contemplated under this Agreement and no consent
other than those secured and delivered to the Purchaser on or prior to the
Closing Date from any Governmental Authority, the Payor, a Carrier, the Billing
and Collection Agent, the Clearinghouse Agent or any other Person shall be
required to effect the sale of any Purchased Receivables;
(b) The Eligible Receivable Amount set forth in the applicable Required
Information of such Receivable is payable in United States Dollars and is not in
excess of $25,000 with respect to any one individual Payor of any Payor Class
other than an Eligible Receivable payable under a Billing and Collection
Agreement as set forth on the attached Schedule 3, and is net of any adjustments
or other modifications
5
<PAGE>
contemplated by any Carrier Agreement, Clearinghouse Agreement, Billing and
Collection Agreement or otherwise and neither the Receivable nor the related
Carrier Agreement, Clearinghouse Agreement, Billing and Collection Agreement or
Contract has or will be compromised, adjusted, extended, satisfied,
subordinated, rescinded, set-off or modified by the Seller, the Payor, the
Carrier, the Clearinghouse Agent or the Billing and Collection Agent other than
routine credits and adjustments made in the ordinary course of providing
customer service to customer accounts, and is not nor will be subject to
compromise, adjustment, termination or modification, whether arising out of
transactions concerning the Contract, any Carrier Agreement, Clearinghouse
Agreement, Billing and Collection Agreement or otherwise; and
(c) There are no procedures or investigations pending or threatened before
any Governmental Authority (i) asserting the invalidity of such Receivable,
Carrier Agreement, Clearinghouse Agreement, Billing and Collection Agreement,
LOA or such Contract, (ii) asserting the bankruptcy or insolvency of the related
Payor, (iii) seeking the payment of such Receivable or payment and performance
of the related Carrier Agreement, Clearinghouse Agreement, Billing and
Collection Agreement, or such other Contract, (iv) seeking any determination or
ruling that might materially and adversely affect the validity or enforceability
of such Receivable or the related Carrier Agreement, Clearinghouse Agreement,
Billing and Collection Agreement, or such other Contract or LOA.
Section 4.3. Negative Covenants of the Seller. The Seller shall not,
without the written consent of the Purchaser and the Master Servicer, which such
consent will not be unreasonably withheld:
(a) Sell, assign or otherwise dispose of, or create or suffer to exist any
adverse claim or lien upon any Receivable, related Contract, the Lockbox
Account(s), the Collection Account, or any other account in which any
Collections of any Receivable are deposited, or assign any right to receive
income in respect of any Receivable;
(b) Submit or permit to be submitted to Payors any invoice for
telecommunication services or equipment rendered by or on behalf of Seller which
contains a "pay to" address other than the Lockbox Account(s);
(c) Make any change to (i) the location of its chief executive office or
the location of the office where Records are kept or (ii) its corporate name or
use any tradenames, fictitious names, assumed names or "doing business as"
names; or
(d) Enter into or execute any Clearinghouse Agreement or Billing and
Collection Agreement (other than those listed on Exhibit 3 hereof) or any
amendment or modification thereof, unless such amendment or modification would
not have a material adverse effect upon either the validity or ability of the
Subservicer to collect amounts due and owing with respect to Purchased
Receivables.
Section 4.4. Repurchase Obligation. Upon discovery by any party to this
Agreement of a breach of any representation or warranty in this Article IV which
materially and adversely affects the value of a Purchased Receivable or the
interests of the Purchaser therein (herein a "Rejected Receivable"), the party
discovering such breach shall give prompt written notice to the other parties to
this Agreement. Thereafter, on the next Purchase Date, the Net Value of the
Rejected Receivables shall be deducted from the amount otherwise payable to the
Seller pursuant to Section 23, In the event that the full Net Value of such
Rejected Receivables is not deposited in the Collection Account pursuant to the
foregoing sentence, the Purchaser shall deduct any such deficiency from the
Excess Collection Amount and/or make demand upon the Seller to pay any such
deficiency to the Purchaser for deposit to the Collection Account.
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ARTICLE V - ACCOUNTS ADMINISTRATION
Section 5.1. Collection Account. The Purchaser and the Master Servicer
acknowledge that certain amounts deposited in the Collection Account may relate
to Receivables other than Purchased Receivables and that such amounts continue
to be owned by the Seller. All such amounts shall be administered in accordance
with Section 5.3.
Section 5.2. Determinations of the Master Servicer. On each
Determination Date, the Master Servicer will determine:
(a) the Net Value of all Purchased Receivables which have become Rejected
Receivables since the prior Purchase Date (the "Rejected Receivable Amount");
(b) the amount of Collections up to the Purchase Price of all Purchased
Receivables received since the prior Determination Date (the "Paid Receivables
Amount");
(c) the Net Value of all Purchased Receivables which have become Defaulted
Receivables since the prior Purchase Date (the "Defaulted Receivable Amount");
(d) the aggregate amount deposited in the Collection Account in excess of
the Purchase Price of each Purchased Receivable since the prior Determination
Date (the "Excess Collection Amount"); and
(e) the Net Value of all Purchased Receivables less the Rejected Receivable
Amount and the Defaulted Receivable Amount as of the current Determination Date.
The Master Servicer's determinations of the foregoing amounts shall be presumed
correct unless later determined to be in error, in which case the party alleging
such error must provide the other party with written notification thereof, and
any mutually agreed upon and verified variance in such determination shall be
corrected in a timely manner. The Master Servicer shall notify the Purchaser of
such determinations.
Section 5.3. Distributions from Accounts. (a) No later than 11:00 a.m.
on each Determination Date, following the determinations set forth in Section
5.2, the Master Servicer will withdraw from the accounts the following amounts:
(i) the Paid Receivables Amount and the Rejected Receivable Amount
plus any outstanding Rejected Receivable Amount applicable to any prior period
from the Collection Account and deposit such amount in the Purchase Account;
(ii) the Defaulted Receivable Amount from the Seller Credit Reserve
Account and deposit such amount in the Purchase Account; and
(iii) the Excess Collection Amount and deposit such amount in the
Seller Credit Reserve Account to the extent that the Seller Credit Reserve
Account is less than the Specified Credit Reserve Balance.
(b) Until the Termination Date, on each Purchase Date the Master Servicer
shall pay to the Purchaser by withdrawal from the Collection Account all amounts
due and owing the Purchaser in accordance with Sections 2.3, 4.4, 5.4, 8.1 and
9.4 and pay the balance, if any, to the Seller by check or wire transfer;
provided, however, with respect to Receivables processed or cleared pursuant to
any Carrier Agreement,
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Clearinghouse Agreement or Billing and Collection Agreement, if applicable, any
Excess Collection Amount shall be retained by the Purchaser until such time that
the billing cycle (or batch) to which such Excess Collection Amount applies is
deemed closed by the Purchaser which, absent the occurrence of an Event of
Default, will occur no later than the Purchase Date following such
determination.
Section 5.4. Allocation of Moneys following Termination Date. Following
the Termination Date and the Purchaser's receipt of the Termination Fee, if
applicable, from the Seller, the Master Servicer shall withdraw an amount equal
to the Program Fee, to the extent owed, Rejected Receivable Amount and any
deficiency in the Specified Credit Reserve Account balance from the Collection
Account on each Purchase Date and deposit it in the Purchase Account. To the
extent that such funds do not equal the Program Fee and Rejected Receivable
Amount, the Seller shall deposit any such deficiency in the Purchase Account
within five Business Days following demand therefor. After withdrawing such
amounts, if any, owed to Purchaser, Purchaser shall forward to Seller in a
timely manner the balance of any funds held by Purchaser which the right, title
and interest therein belongs to Seller. Distribution of monies collected
subsequent to the Termination Date will continue in a manner consistent with
that described in Section 5.3.
ARTICLE VI - APPOINTMENT OF THE SUBSERVICER
Section 6.1. Appointment of the Subservicer. The Master Servicer and the
Purchaser hereby appoint the Seller and the Seller hereby accepts such
appointment to act as Subservicer under this Agreement. The Subservicer shall
service the Purchased Receivables and enforce the Purchaser's respective rights
and interests in and under each Purchased Receivable and each related Contract
or LOA; and shall take, or cause to be taken, all such actions as may be
necessary or advisable to service, administer and collect each Purchased
Receivable all in accordance with (i) customary and prudent servicing procedures
for telecommunication receivables of a similar type, and (ii) all applicable
laws, rules and regulations; and shall serve in such capacity until the
termination of its responsibilities pursuant to Section 6.4 or 7.1. The
Subservicer may, with the prior consent of the Purchaser, which consent shall
not be unreasonably withheld and which shall be considered delivered upon
execution of this Agreement with respect to USBI, ESBI, Claremont, Centillion,
ACUS, Millikan & Michael and Pinnacle Financial, subcontract with a subservicer
for billing, collection, servicing or administration of the Receivables. Any
termination or resignation of the Subservicer under this Agreement shall not
affect any claims that the Purchaser may have against the Subservicer for events
or actions taken or not taken by the Subservicer arising prior to any such
termination or resignation.
Section 6.2. Duties and Obligations of the Subservicer. (a) The
Subservicer shall at any time permit the Purchaser or any of its representatives
to visit the offices of the Subservicer and examine and make copies of all
Servicing Records;
(b) The Subservicer shall notify the Purchaser of any action, suit,
proceeding, dispute, offset, deduction, defense or counterclaim, other than
routine matters which are processed and resolved by the Subservicer in less than
thirty days, that is or may be asserted by any Person with respect to any
Purchased Receivable.
(c) The Purchaser shall not have any obligation or liability with respect
to any Purchased Receivables or related Contracts, nor shall it be obligated to
perform any of the obligations of the Subservicer hereunder.
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Section 6.3. Subservicing Expense. The Subservicer shall be required to
pay for all expenses incurred by the Subservicer in connection with its
activities hereunder (including any payments to accountants, counsel or any
other Person) and shall not be entitled to any payment or reimbursement
therefor.
Section 6.4. Subservicer Not to Resign. The Subservicer shall not resign
from the duties and responsibilities hereunder except upon determination that
(a) the performance of its duties hereunder has become impermissible under
applicable law and (b) there is no reasonable action which the Subservicer could
take to make the performance of its duties hereunder permissible under
applicable law evidenced as to clause (a) above by an opinion of counsel to such
effect delivered to the Purchaser.
Section 6.5. Authorization of the Master Servicer. The Seller hereby
authorizes the Master Servicer (including any successors thereto) to take any
and all reasonable steps in its name and on its behalf necessary or desirable in
the determination of the Master Servicer to collect all amounts due under any
and all Purchased Receivables, process all Collections, commence proceedings
with respect to enforcing payment of such Purchased Receivables and the related
Contracts, and adjusting, settling or compromising the account or payment
thereof. The Seller shall furnish the Master Servicer (and any successors
thereto) with any powers of attorney and other documents necessary or
appropriate to enable the Master Servicer to carry out its servicing and
administrative duties under this Agreement, and shall cooperate with the Master
Servicer to the fullest extent in order to ensure the collectibility of the
Purchased Receivables.
ARTICLE VII - EVENTS OF SELLER DEFAULT
Section 7.1. Events of Seller Default. If any of the following events
(each, an "Event of Seller Default") shall occur and be continuing:
(a) The Seller (either as Seller or Subservicer) shall materially fail to
perform or observe any term, covenant or agreement contained in this Agreement
which remains uncured for 5 Business Days following notice from the Purchaser
with respect thereto, provided, however, the failure of the Purchaser to provide
such notice shall not in any way be considered a waiver of any right or remedy
available to the Purchaser under this Agreement;
(b) An Insolvency Event shall have occurred; however, if such Insolvency
Event is initiated by third parties against the Seller, Seller shall not be in
default unless Seller fails or refuses to have such third party action dismissed
within sixty days of service of process on Seller seeking such relief,
(c) There is a material breach of any of the representations and warranties
of the Seller as stated in Sections 4.1 or 4.2 that has remained uncured for a
period of 30 days;
(d) Any Governmental Authority shall file notice of a lien with regard to
any of the assets of the Seller or with regard to the Seller which remains
undischarged for a period of 30 days;
(e) As of the first day of any month, the aggregate Net Value of Purchased
Receivables which became Defaulted Receivables or Rejected Receivables during
the prior three-month period shall exceed 5.0% of the average aggregate Net
Values of all Purchased Receivables then owned by the Purchaser at the end of
each of such three months;
(f) This Agreement shall for any reason cease to evidence the transfer to
the Purchaser (or its assignees or transferees) of the legal and equitable title
to, and ownership of, the Purchased Receivables;
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(g) The termination of any Clearinghouse Agreement, if applicable, and/or
any Carrier Agreement or Billing and Collection Agreement for any reason
whatsoever absent the consummation of a substitute Clearinghouse Agreement,
Carrier Agreement and/or Billing and Collections Agreement, as the case may be,
within ten Business Days of the termination thereof;
(h) The amount deposited hereunder (net of withdrawals required hereunder)
in the Seller Credit Reserve Account has remained at less than the Specified
Credit Reserve Balance for fourteen consecutive days; or
(i) A Termination Event shall have occurred;
then and in any such event, the Master Servicer may, by notice to the Seller and
the Purchaser declare that an Event of Seller Default shall have occurred and,
the Termination Date shall forthwith occur, without demand, protest or further
notice of any kind, and the Purchaser shall make no further Purchases from the
Seller. The Purchaser and the Master Servicer shall have, in addition to all
other rights and remedies under this Agreement, all other rights and remedies
provided under the UCC and other applicable law, which rights shall be
cumulative.
ARTICLE VIII - INDEMNIFICATION AND SECURITY INTEREST
Section 8.1. Indemnities by the Seller. (a) Without limiting any other
rights that the Purchaser, the Master Servicer, or any director, officer,
employee or agent of either such party (each an "Indemnified Party") may have
under this Agreement or under applicable law, the Seller hereby agrees to
indemnify each Indemnified Party front and against any and all claims, losses,
liabilities, obligations, damages, penalties, actions, judgments, suits, and
related costs and expenses of any nature whatsoever, including reasonable
attorneys' fees and disbursements (all of the foregoing being collectively
referred to as "Indemnified Amounts") which may be imposed on, incurred by or
asserted against an Indemnified Party in any way arising out of or relating to
this Agreement or the ownership of the Purchased Receivables or in respect of
any Receivable or any Contract, excluding, however, Indemnified Amounts to the
extent resulting from gross negligence or willful misconduct on the part of such
Indemnified Party.
(b) Any Indemnified Amounts subject to the indemnification provisions of
this Section shall be paid to the Indemnified Party within five Business Days
following demand therefor, which such demand shall set forth satisfactory
evidence of a right of indemnification and the corresponding amount at issue,
together with interest at the lesser of 12% per annum or the highest rate
permitted by law from the date of demand for such Indemnified Amount.
Section 8.2 Security Interest. The Seller hereby grants to the Purchaser
a first priority perfected security interest in the Seller's Customer Base,
including but not limited to, all past, present and future customer contracts,
lists, agreements, LOA's (other than as set forth on Schedule 5 attached hereto
as to such LOA's only) or arrangements relating thereto, all of the Seller's
right, title and interest in, to and under all of the Seller's Receivables not
sold to the Purchaser hereunder, including all rights to payments under any
related Contracts, contract rights, instruments, documents, chattel paper,
general intangibles, LOA's or other agreements with all Payors and all the
Collections, Records and proceeds thereof, any other obligations or rights of
Seller to receive any payments in money or kind; all cash or non-cash proceeds
of the foregoing; all of the right, title and interest of the Seller in and with
respect to the goods, services or other property which gave rise to or which
secure any of the foregoing as security for the timely payment and performance
of any
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and all obligations the Seller or the Subservicer may owe the Purchaser under
Sections 2.4, 4.4, 5.2, 7.1 (a) and (b), and 8.1, but excluding recourse for
unpaid Purchased Receivables. This Section 8.2 shall constitute a security
agreement under the UCC and any other applicable law and the Purchaser shall
have the rights and remedies of a secured party thereunder. Such security
interest shall be further evidenced by Seller's execution of appropriate UCC-1
financing statements prepared by and acceptable to the Purchaser, and such other
further assurances that may be reasonably requested by the Purchaser from time
to time.
ARTICLE IX - MISCELLANEOUS
Section 9.1. Notices, Etc. All notices, shall be in writing and mailed
or telecommunicated, or delivered as to each party hereto, at its address set
forth under its name on the signature pages hereof or at such other address as
shall be designated by such party in a written notice to the other parties
hereto. All such notices and communications shall not be effective until
received by the party to whom such notice or communication is addressed.
Section 9.2. Remedies. No failure or delay on the part of the Purchaser
or the Master Servicer to exercise any right hereunder shall operate as a waiver
or partial waiver thereof The remedies herein provided are cumulative and not
exclusive of any remedies provided by law.
Section 9.3. Binding Effect, Assignability. This Agreement shall be
binding upon and inure to the benefit of the Seller, the Subservicer, the
Purchaser, the Master Servicer and their respective successors and permitted
assigns. Neither the Seller nor the Subservicer may assign any of their rights
and obligations hereunder or any interest herein without the prior written
consent of the Purchaser and the Master Servicer. The Purchaser may, at any
time, without the consent of the Seller or the Subservicer, assign any of its
rights and obligations hereunder or interest herein to any Person. Without
limiting the generality of the foregoing, the Seller acknowledges that the
Purchaser has assigned its rights hereunder for the benefit of third parties.
The Seller does hereby further agree to execute and deliver to the Purchaser all
documents and amendments presented to the Seller by the Purchaser in order to
effectuate the assignment by the Purchaser in furtherance of this Section 9.3
consistent with the terms and provisions of this Agreement. This Agreement
shall create and constitute the continuing obligations of the parties hereto in
accordance with its terms, and shall remain in full force and effect until its
termination; provided, that the rights and remedies with respect to any breach
of any representation and warranty made by the Seller or the Master Servicer
pursuant to Article IV and the indemnification and payment provisions of Article
VIII shall be continuing and shall survive any termination of this Agreement.
Section 9.4. Costs, Expenses and Taxes. (a) In addition to the rights of
indemnification under Article VIII, the Seller agrees to pay upon demand, all
reasonable costs and expenses in connection with the administration (including
periodic auditing, modification and amendment) of this Agreement, and the other
documents to be delivered hereunder, including, without limitation: (i) the
reasonable fees and out-of-pocket expenses of counsel for the Purchaser or the
Master Servicer with respect to (A) advising the Purchaser as to its rights and
remedies under this Agreement or (B) the enforcement (whether through
negotiations, legal proceedings or otherwise) of this Agreement or the other
documents to be delivered hereunder; (ii) any and all accrued Program Fee and
amounts related thereto not yet paid to the Purchaser; and (iii) any and all
stamp, sales, excise and other taxes and fees payable or determined to be
payable in connection with the execution, delivery, filing or recording of this
Agreement or the other agreements and documents to be delivered hereunder, and
agrees to indemnify and save each Indemnified Party from and against any and all
liabilities with respect to or resulting from any delay in paying or omission to
pay such taxes and fees.
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(b) If the Seller or the Subservicer fails to pay any Lockbox Account(s)
fees or other charges or debits related to such accounts, to pay or perform any
agreement or obligation contained under this Agreement, the Purchaser may, or
may direct the Master Servicer to pay or perform, or cause payment or
performance of, such agreement or obligation, and the expenses of the Purchaser
or the Master Servicer incurred in connection therewith shall be payable by the
party which has failed to so perform.
Section 9.5. Amendments; Waivers; Consents. No modification, amendment
or waiver of, or with respect to, any provision of this Agreement or the Related
Documents shall be effective unless it shall be in writing and signed by each of
the parties hereto. This Agreement, the Related Documents and the documents
referred to therein embody the entire agreement among the Seller, the
Subservicer, the Purchaser and the Master Servicer, and supersede all prior
agreements and understandings relating to the subject hereof, whether written or
oral.
Section 9.6. GOVERNING LAW, CONSENT TO JURISDICTION; WAIVER OF JURY
TRIAL. (a) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE INTERNAL LAWS (AS OPPOSED TO CONFLICT OF LAWS PROVISIONS) OF THE STATE OF
OHIO, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE INTERESTS OF
THE PURCHASER IN THE PURCHASED RECEIVABLES OR REMEDIES HEREUNDER OR THEREUNDER,
IN RESPECT THEREOF, ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE
STATE OF OHIO.
(b) THE SELLER AND THE SUBSERVICER HEREBY SUBMIT TO THE EXCLUSIVE
JURISDICTION OF THE COURTS OF THE STATE OF OHIO AND THE UNITED STATES DISTRICT
COURT LOCATED IN THE SOUTHERN DISTRICT OF OHIO, AND EACH WAIVES PERSONAL SERVICE
OF ANY AND ALL PROCESS UPON IT AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE
MADE BY REGISTERED MAIL DIRECTED TO THE ADDRESS SET FORTH ON THE SIGNATURE PAGE
HEREOF AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED FIVE DAYS AFTER THE
SAME SHALL HAVE BEEN DEPOSITED IN THE U.S. MAILS, POSTAGE PREPAID. THE SELLER
AND THE SUBSERVICER EACH HEREBY WAIVES ANY OBJECTION BASED ON FORUM NON
CONVENIENS, AND ANY OBJECTION TO VENUE OF ANY ACTION INSTITUTED HEREUNDER AND
CONSENT'S TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED
APPROPRIATE BY THE COURT. NOTHING IN THIS SECTION SHALL AFFECT THE RIGHT OF THE
PURCHASER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT
THE RIGHT OF THE PURCHASER TO BRING ANY ACTION OR PROCEEDING AGAINST THE SELLER
OR ITS PROPERTY, OR THE SUBSERVICER OR ITS PROPERTY IN THE COURTS OF ANY OTHER
JURISDICTION. THE SELLER AND THE SUBSERVICER EACH HEREBY AGREE THAT THE
EXCLUSIVE AND APPROPRIATE FORUMS FOR ANY DISPUTE HEREUNDER ARE THE COURTS OF THE
STATE OF OHIO AND THE UNITED STATES DISTRICT COURT LOCATED IN THE SOUTHERN
DISTRICT OF OHIO AND AGREE NOT TO INSTITUTE ANY ACTION IN ANY OTHER FORUM.
(c) THE SELLER, AND THE SUBSERVICER EACH HEREBY WAIVES ANY RIGHT TO HAVE A
JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT,
OR OTHERWISE ARISING OUT OF, CONNECTED WITH, RELATED TO, OR IN CONNECTION WITH
THIS AGREEMENT. INSTEAD, ANY DISPUTE RESOLVED IN COURT WILL BE RESOLVED IN A
BENCH TRIAL WITHOUT A JURY.
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Section 9.7. Execution in Counterparts; Severability. This Agreement may
be executed in any number of counterparts, each of which when so executed shall
be deemed to be an original and all of which when taken together shall
constitute one and the same agreement. In case any provision in or obligation
under this Agreement shall be invalid, illegal or unenforceable in any
jurisdiction, the validity, legality and enforceability of the remaining
provisions or obligations, or of such provision or obligation in any other
jurisdiction, shall not in any way be affected or impaired thereby.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their respective officers thereunto duly authorized, as of the date first
above written.
USC TELECOM, INC., as Seller and as Subservicer
By:
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Name: Lance A. Hack
Title: Treasurer
Address at which the chief executive office is
located:
Address: 1250 Wood Branch Park Drive
Houston, TX 77079
Attention: Dean Fisher, Secretary/General Counsel
Phone number: 281/529-4646
Telecopier number: 281/529-4650
Additional locations at which the Seller does
business and maintains Records:
-----------------------------------------
-----------------------------------------
Additional names under which Seller does business:
-----------------------------------------
-----------------------------------------
RFC CAPITAL CORPORATION
By:
-----------------------------------------
Name: Mark D. Quinlan
Title: Vice President
Address: 130 East Chestnut Street
Suite 400
Columbus, OH 43215
Attention: Mark D. Quinlan
Phone number: (614) 229-7979
Telecopier number: (614) 229-7980
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SCHEDULE 1
SELLER'S LICENSE NUMBERS
Name of Seller License Numbers
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SCHEDULE 2
LIST OF NAMES UNDER WHICH SELLER IS DOING BUSINESS
AND ADDRESSES AT WHICH SELLER IS DOING BUSINESS
Names Under Which Seller Addresses At Which Seller Is
Is Doing Business and Payee Names Doing Business
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SCHEDULE 3
BILLING AND COLLECTION AGREEMENTS
Billing and Collection Agreement Date
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EXHIBIT A
DEFINITIONS
"ADVERSE CLAIM" means any claim of ownership, any lien, security interest
or other charge or encumbrance, or any other type of preferential arrangement
having the effect of a lien or security interest.
"AFFILIATE" means, as to any Person, any other Person that, directly or
indirectly, is in control of, is controlled by, or is under common control with,
such Person within the meaning of control under Section 15 of the Securities Act
of 1933.
"BASE RATE" means, as of any Purchase Date, a variable percentage rate
equal to the then applicable Provident Bank prime lending rate plus (i) 4.0% per
annum in the event EqualNet Communications Corporation's EBITDA for the prior
quarter is less than $0.00, (ii) 3.00% per annum in the event EqualNet
Communications Corporation's EBITDA for the prior quarter is greater than $0.00
but less than $1,000,000 or (iii) 2.0% per annum in the event EqualNet
Communications Corporation's EBITDA for the prior quarter is greater than
$1,000,000.
"BILLED AMOUNT" means, with respect to any Receivable the amount billed or
to be billed to the related Payor with respect thereto prior to the application
of any Gross Liquidation Rate.
"BILLING AND COLLECTION AGENT" means the party performing billing and
collection services for and on behalf of the Seller pursuant to the terms of a
Billing and Collection Agreement.
"BILLING AND COLLECTION AGREEMENT" means any written agreement whereby a
party is obligated to provide end-user billing and collection services with
respect. to the Seller's accounts.
"BILLING DATE" means the date on which the invoice with respect to a
Receivable was submitted to the related Payor which shall be not more than 45
days from the date on which telecommunication services were provided to the end
user of such services.
"BUSINESS DAY" means any day of the year other than a Saturday, Sunday or
any day on which banks are required, or authorized, by law to close in the State
of Ohio.
"CARRIER" means a provider of telecommunication services which such
services are resold by the Seller.
"CARRIER AGREEMENT" means any written agreement, contract or arrangement
whereby a Carrier is obligated to provide certain services to the Seller.
"CLEARINGHOUSE AGENT" means the party performing services for and on behalf
of the Seller pursuant to the terms and provisions of a Clearinghouse Agreement.
"CLEARINGHOUSE AGREEMENT" means any written agreement, contract or
arrangement whereby a party is obligated to perform certain services for the
Seller, including, without limitation, processing certain information provided
by the Seller to the Clearinghouse Agent and remitting such processed
information to one or more Billing and Collection Agents for billing and
collection of Seller's accounts.
"CLOSING DATE" means July 23, 1998.
"COLLECTION ACCOUNT" means the account established pursuant to Section
2.4(b).
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"COLLECTIONS" means, with respect to any Receivable, all cash collections
and other cash proceeds of such Receivable.
"CONTRACT" means an agreement (or agreements) pursuant to, or under which,
a Payor shall be obligated to pay for telecommunication services rendered by the
Seller from time to time.
"CUSTOMER BASE" means all of the Seller's past, present and future customer
contracts, agreements, LOA's or other arrangements, any customer list relating
thereto and any information regarding prospective customers and contracts,
agreements, LOA's or other arrangements and all of the goodwill and other
intangible assets associated with any of the foregoing.
"DEFAULTED RECEIVABLE" means a Receivable as to which, on any Determination
Date (a) any part of the Net Value thereof remains unpaid for more than 90 days
from the Billing Date for such Receivable; or (b) the Payor thereof has taken
any action, or suffered any event to occur, of the type described in Section
7.1(f) or (g); or (c) the Master Servicer otherwise deems any part of the Net
Value thereof to be uncollectible for reasons other than a breach of a
representation or warranty under Article IV hereof.
"DEFAULTED RECEIVABLE AMOUNT" has the meaning specified in Section 5.2(c).
"DETERMINATION DATE" means the Business Day preceding the Purchase Date of
each week.
"ELIGIBLE PAYOR" means a Payor which is (a) (i) a corporation, limited
liability company, partnership or any other statutory organization organized
under the laws of any jurisdiction in the United States and having its principal
office in the United States; (ii) an individual or sole proprietorship which is
a resident of any jurisdiction in the United States; (iii) a Clearinghouse
Agent; or (iv) a Billing and Collection Agent; (b) not an Affiliate of any of
the parties hereto; (c) has executed and delivered to the Seller either (i) a
Contract, (ii) an LOA, (iii) a Clearinghouse Agreement or (iv) a Billing and
Collection Agreement; and (d) not subject to bankruptcy or insolvency
proceedings at the time of sale of the Receivables to be purchased.
"ELIGIBLE RECEIVABLE" means, at any time, a Receivable as to which the
representations and warranties of Section 4.2 are true and correct in all
respects at the time of Purchase.
"ELIGIBLE RECEIVABLE AMOUNT" means, with respect to any Eligible
Receivable, an amount equal to its Billed Amount after giving effect to the
Gross Liquidation Rate associated with the Payor Class with respect to such
Eligible Receivable.
"EVENT OF SELLER DEFAULT" has the meaning specified in Section 7.1.
"EXCESS COLLECTION AMOUNT" has the meaning specified in Section 5.2(d).
"GOVERNMENTAL AUTHORITY" means the United States of America, Federal, any
state, local or other political subdivision thereof and any entity exercising
executive, legislative, judicial, regulatory or administrative functions thereof
or pertaining thereto.
"GROSS LIQUIDATION RATE" means a factor, conclusively determined by the
Master Servicer from time to time, with respect to a designated Payor Class
based on (i) the Seller's historical experience with respect to Collections for
such Payor Class, (ii) the terms and provisions of any Billing and Collection
Agreement and (iii)
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the terms and provisions of any Clearinghouse Agreement, determined on the basis
of actual Collections which are expected to be received on a Receivable within
90 days of its Billing Date.
"INSOLVENCY EVENT" means the occurrence of an event whereby the Seller
makes a general assignment for the benefit of creditors; or where any proceeding
is instituted by or against the Seller seeking to adjudicate it a bankrupt or
insolvent, or which seeks the liquidation, winding up, reorganization,
arrangement, adjustment, protection, relief, or composition of the Seller or any
of its Debts under any law relating to bankruptcy, insolvency or reorganization
or relief of debtors, or seeking the entry of an order for relief or the
appointment of a receiver, custodian or other similar official for it or for any
substantial part of its property.
"LOA" means a letter of agency, or other authorization, obtained by the
Seller from each Payor designating the Seller as its long distance
telecommunications provider and otherwise of a type or in a form acceptable
under applicable laws.
"LOCKBOX ACCOUNT" means the account established pursuant to Section 2.4(a).
"MASTER SERVICER" means RFC Capital Corporation, a Delaware corporation, or
any Person designated as the successor Master Servicer, and its successors and
assigns, from time to time.
"NET VALUE" of any Receivable at any time means an amount (not less than
zero) equal to (a)(i) the Eligible Receivable Amount multiplied by (ii) .90;
minus (b) all Collections received with respect thereto; provided, that if the
Master Servicer makes a determination that all payments by the Payor with
respect to such Receivable have been made, the Net Value shall be zero.
"PAID RECEIVABLES AMOUNT" has the meaning specified in Section 5.2(b).
"PAYOR" means, the Person obligated to make payments in respect of any
Receivables.
"PAYOR CLASS" means, with respect to any Payor, one of the following: (a)
Clearinghouse Agent; (b) Billing and Collection Agent; (c) statutory
organization; or (d) individuals and sole proprietorships.
"PERSON" means an individual, partnership, , limited liability company,
corporation (including a business trust), joint stock company, trust, voluntary
association, joint venture, a government or any agency or political subdivision
thereof, or any other entity of whatever nature.
"PROGRAM FEE" means as of each Purchase Date, an amount equal to (i) 7/360,
of the annualized Base Rate multiplied by (ii) the then current Net Value of all
Purchased Receivables including (A) Rejected Receivables and (B) those
Receivables to be purchased on such Purchase Date.
"PURCHASE" means a purchase by the Purchaser of Eligible Receivables from
the Seller pursuant to Section 2.2.
"PURCHASE ACCOUNT" means the account of the Purchaser titled "Purchase
Account."
"PURCHASE COMMITMENT" means an amount not to exceed $4,000,000; provided,
however, that with respect to the initial Purchase Date, such amount shall not
exceed $3,500,000 and other than with respect to the initial Purchase Date, the
aggregate Net Value of Purchased Receivables on the first Purchase Date of any
month may not be greater than $350,000, or such other amount as the Purchaser
and Seller may otherwise agree in writing,
A-3
<PAGE>
over the highest aggregate Net Value of Purchased Receivables at any time during
the immediately preceding month. Subject to the prior written approval by the
Purchaser and payment by the Seller of all applicable fees as agreed by and
between the Seller and Purchaser, the Seller may request, in writing, that the
Purchase Commitment be increased to $10,000,000, provided, however, that no
single incremental increase in such Purchase Commitment shall be less than
$2,000,000.
"PURCHASE DATE" means the date on which the Purchaser initially Purchases
Receivables from the Seller and thereafter, such other date of each week or
month, as the case may be, that the Seller and Purchaser mutually agree.
"PURCHASE PRICE" has the meaning specified in Section 2.3.
"PURCHASED RECEIVABLE" means any Receivable which has been purchased by the
Purchaser hereunder including a Rejected Receivable prior to its repurchase.
"PURCHASER" means RFC Capital Corporation, a Delaware corporation, together
with its successors and assigns.
"RECEIVABLE" means (a) an account receivable arising from the provision or
sale of telecommunication services (and any services or sales ancillary thereto)
by the Seller including the right to payment of any interest or finance charges
and other obligations of such Payor with respect thereto; (b) all security
interests or liens and property subject thereto from time to time purporting to
secure payment by the Payor; (c) all rights, remedies, guarantees, indemnities
and warranties and proceeds thereof, proceeds of insurance policies, UCC
financing statements and other agreements or arrangements of whatever character
from time to time supporting or securing payment of such Receivable including,
but not limited to, any Billing and Collection Agreement and any Clearinghouse
Agreement, and (d) all Collections, Records and proceeds with respect to any of
the foregoing. In the instance of a Receivable with respect to which the Payor
is a Billing and Collection Agent pursuant to a Billing and Collection
Agreement, the amount owed to the Seller by the Billing and Collection Agent is
the "Receivable" which is eligible for Purchase by the Purchaser and not the
amount owing to, or collected by, the Billing and Collection Agent from the end
user of telecommunication services provided by the Seller.
"RECORDS" means all Contracts, LOA's and other documents, books, records
and other information (including, without limitation, computer programs, tapes,
disks, punch cards, data processing software and related property and rights)
prepared and maintained by the Seller, the Subservicer or Additional Subservicer
with respect to Receivables (including Purchased Receivables) and the related
Payors.
"REJECTED RECEIVABLE AMOUNT" has the meaning specified in Section 5.2(a).
"REJECTED RECEIVABLE" has the meaning specified in Section 4.4.
"RELATED DOCUMENTS" means all documents required to be delivered thereunder
and under this Agreement.
"REQUIRED INFORMATION" means, with respect to a Receivable, (a) the Payor,
(b) the Eligible Receivable Amount, (c) the Billing Date, (d) the Payor
telephone number and (e) the Payor account number, if applicable.
"SELLER" means USC Telecom, Inc., a Delaware corporation, together with its
successors and assigns.
A-4
<PAGE>
"SELLER CREDIT RESERVE ACCOUNT" means the account established pursuant to
Section 2.4(b).
"SERVICING RECORDS" means all documents, books, records and other
information (including, without limitation, computer programs, tapes, disks,
punch cards, data processing software and related property and rights) prepared
and maintained by the Subservicer, Additional Subservicer or the Master Servicer
with respect to the Purchased Receivables and the related Payors.
"SPECIFIED CREDIT RESERVE BALANCE" means, as of any Purchase Date, an
amount equal to 5.00% of the Net Value of Purchased Receivables including (a)
Rejected Receivables (net of recoveries) and (b) those Receivables to be
purchased on such Purchase Date.
"SUBSERVICER" means, individually and collectively, the Seller and EqualNet
Corporation, a Delaware corporation, or any Person designated as Subservicer
hereunder.
"TERMINATION DATE" means the earlier of (a) July 23, 2000; (b) a
Termination Event; (c) the occurrence of an Event of Seller Default as set forth
in Section 7.1 of this Agreement; or (d) ninety days following the Seller's
delivery of a written notice to the Purchaser setting forth Seller's desire to
terminate this Agreement and the payment of the Termination Fee with respect
thereto.
"TERMINATION EVENT" means the occurrence of an event under any loan
agreement, indenture or governing document following which the funding of the
Purchaser to be utilized in purchasing Receivables hereunder may be terminated.
"TERMINATION FEE" means an amount to be paid by the Seller to the Purchaser
equal to 4.0% of the Purchase Commitment in the event of an occurrence of an
Event of Seller Default resulting in the termination of this Agreement; or in
the event the Seller desires to terminate this Agreement, whereby such
termination shall be effective only in the event that (a) the Seller has
provided the Purchaser prior written notice thereof; and (b) the Seller has paid
to Purchaser and Purchaser has received from Seller an amount equal to (i) 3.0%
of the Purchase Commitment if such notice of termination is provided to the
Purchaser during the one year period commencing on the Closing Date and ending
on the one year anniversary of the Closing Date, or (ii) 2.0% in the event such
notice of termination is provided to the Purchaser during the period commencing
the day after the one year anniversary of the Closing Date through the
Termination Date.
"UCC" means the Uniform Commercial Code as from time to time in effect in
the state of the location of the Seller's chief executive office.
A-5
<PAGE>
EXHIBIT B
FORM OF NOTICE TO PAYORS - [LEC PAYORS]
[SELLER LETTERHEAD]
[NAME AND ADDRESS OF PAYOR]
Dear _____________________________:
SELLER NAME (the "Seller") has entered into an agreement with RFC Capital
Corporation ("RFC") under which certain telecommunication receivables, including
the right to payment of any interest, finance charges or late fees with respect
thereto, originated by the Seller ("Receivables") have been and will be sold,
from time to time, to RFC or affiliates of RFC. RFC or such affiliates may, in
turn, from time to time, pledge and or assign such Receivables to such other
third parties as RFC deems necessary. It is contemplated that the Receivables
will continue to be serviced by the Seller.
RFC has established a lockbox (the "Lockbox") for collection of the
Receivables. Accordingly, you are hereby instructed to remit all payments on
Receivables to:
Provident Bank-Lockbox Account (SELLER NAME) #_______________________.
PROVIDENT BANK
10 WEST BROAD STREET
COLUMBUS, OHIO 43215
Payment of such Receivables in this manner will operate to discharge your
obligation with respect thereto (to the extent of such payment), whether or not
ownership has been transferred to RFC. Any prior notice of an assignment of any
interest in the Seller's Receivables previously delivered to you is hereby
superseded by this notice and all prior notices of such assignment are hereby
revoked. This notice shall be considered irrevocable absent written notice
otherwise received by you from RFC. Thank you for your cooperation.
Very truly yours,
SELLER NAME
----------------------------------
By:
Its:
AGREED TO AND ACKNOWLEDGED BY
ON THIS DAY OF , 19 :
[LEC]
By:
------------------------------
Name:
Title:
B-1
<PAGE>
EXHIBIT B
[SELLER LETTERHEAD]
FORM OF NOTICE TO PAYORS - [INDIVIDUAL PAYORS]
[NAME AND ADDRESS OF PAYOR]
Dear :
Because of our continued growth and in an effort to better serve our valued
customers, we have entered into a funding arrangement with RFC Capital
Corporation ("RFC"). One result of this relationship is that your payments will
be received and posted in a more timely manner. Payments should [for resellers
with existing lockboxes] continue to be forwarded to the same address which is
as follows or [for resellers establishing new lockboxes] be forwarded to the
following new address:
[bank name]-Lockbox Account (SELLER NAME) # .
[BANK NAME]
[BANK ADDRESS]
[BANK ABA #]
Your payments will continue to be serviced by Seller Name, and all
inquiries regarding your service, billing invoices and payments should continue
to be directed to Seller Name's Customer Service Department at [phone number].
This change is effective immediately and may not be further amended or modified
without the written consent of RFC.
Thank you for your cooperation and we look forward to continuing to satisfy
your telecommunication needs.
Sincerely,
SELLER NAME
---------------------------------
By:
Its:
B-2
<PAGE>
EXHIBIT C
FORM OF CORPORATE CERTIFICATE
FOR THE SELLER
I hereby certify that I am a duly elected [OFFICER] of SELLER NAME (in its
capacity as Seller, the "Seller") with all requisite knowledge of the matters
set forth below, and further certify as follows:
1. There has been no change of the Seller's legal name, identity or
corporate structure within the six month period preceding the execution
date hereof.
2. No proceedings looking toward merger, liquidation, dissolution or
bankruptcy of the Seller re pending or contemplated.
3. There is no litigation pending, or to my knowledge, threatened,
which, if determined adversely to the Seller, would adversely affect the
execution, delivery or enforceability of the Receivables Sale Agreement
(the "Sale Agreement"), dated as of [date of Sale Agreement] by and among
the Seller and RFC Capital Corporation ("RFC") as Purchaser (the
"Purchaser") and as Master Servicer (the "Master Servicer"), or the sale or
servicing of the Receivables as provided therein.
4. With respect to the Sale Agreement, the Seller has complied with
all the agreements by which it is bound and has satisfied all the
conditions on its part to be performed or satisfied prior to the Closing
Date.
5. No Event of Seller Default or other event of default in the
performance of any of the Seller's covenants or agreements under the Sale
Agreement has occurred and is continuing, nor has an event occurred which
with the passage of time or notice or both would become such an Event of
Seller Default.
6. The Seller is not a party to, or governed by, any contract,
indenture, mortgage, loan agreement, note, lease, deed of trust or other
instrument which restricts the Seller's ability to sell or service
telecommunication receivables or consummate any of the transactions
contemplated by the Sale Agreement.
7. For tax and reporting purposes, the Seller will treat the transfer
to the Purchaser of the Seller's interests in the Receivables as a sale.
8. The transfer to the Purchaser of the Seller's interests in the
Receivables will be made (a) in good faith and without intent to hinder,
delay, or defraud present or future creditors, and (b) in exchange for
reasonably equivalent value and fair consideration.
9. On the date hereof, the Seller (a) was paying its Debts, if any,
as they matured; (b) neither intended to incur, nor believed that it would
incur, Debts beyond its ability to pay as they mature; and (c) after giving
effect to the transfer to the Purchaser of the Seller's interests in the
Receivables, will have an
C-1
<PAGE>
adequate amount of capital to conduct its business and anticipates no
difficulty in continuing to do so for the foreseeable future.
10. The Seller has and maintains all material permits, licenses
(including any applicable and necessary license, permit or certification
from the Federal Communication Commission), authorizations, registrations,
approvals and consents of Governmental Authorities necessary for (a) the
activities and business of the Seller and each of its Subsidiaries as
currently conducted, (b) the ownership, use, operation and-maintenance by
each of them of its respective properties, facilities and assets, and (c)
the performance by the Seller of the Agreement.
11. Without limiting the generality of the foregoing paragraph:. (a)
each Contract of the Seller and each Subsidiary is in full force and effect
and has not been amended or otherwise modified, rescinded or revoked or
assigned, and (b) no condition exists or event has occurred which, in
itself or with the giving of notice or lapse of time or both, would result
in the suspension, revocation, impairment, forfeiture, and non-renewal
thereof.
12. Other than those UCC financing statements to be filed by the
Purchaser, no UCC financing statements, federal or state tax liens or
judgments with respect to the Purchased Receivables and all other
Receivables generated by the Seller have been filed nor shall be filed from
and after the date and time of the UCC search results provided by the
Seller in accordance with the conditions precedent set forth in the Sale
Agreement.
13. As of the date hereof, the undersigned hold the respective office
set forth opposite their name, and the signature set forth opposite their
name is their genuine signature:
NAME OFFICE SIGNATURE
----------------------------
----------------------------
----------------------------
----------------------------
14. The Seller is a corporation duly organized and validly existing
under the laws of the State of [state incorporated] validly acting by and
through its Board of Directors. Other than the Articles of Incorporation
filed on [date articles filed] and annexed to the Certificate of the
Secretary of State of the State of State Seller is incorporated, a true,
correct and complete copy of which is attached hereto as Exhibit A and
which are in effect on the date hereof, there has been no amendment or
other document filed with said Secretary of State with respect to the
Seller and no such amendment or other document has been authorized.
15. The Seller is in good standing (including the payment of all
franchise taxes and the filing of required reports) under the laws of the
State of State Seller is incorporated and is duly qualified to do business
in the State(s) of [states qualified]. A certificate of good standing
issued by the Secretary of State of [states qualified] is attached hereto
as Exhibit B.
C-2
<PAGE>
16. Attached hereto as Exhibit C is a true, correct and complete copy
of the Bylaws of the Seller, which Bylaws have not been amended, modified
or rescinded since their adoption on [date bylaws adopted]; no such
amendment, modification or rescission is contemplated and said Bylaws
continue in force on the date hereof.
17. Attached hereto as Exhibit D is a true, correct and complete copy
of resolutions (the "Resolutions") duly authorized and adopted by the Board
of Directors of the Seller pertaining to the RFC Receivables Program; said
Resolutions were duly adopted by the unanimous written consent of the Board
of Directors without a meeting in accordance with the Articles of
Incorporation and Bylaws of the Seller and have not been amended, modified,
annulled or revoked and are in full force and effect; and the instruments
referred to in said Resolutions to which the Seller is a party were
executed pursuant thereto and in compliance therewith by the duly
authorized officer of the Seller.
All capitalized terms used herein that are not otherwise defined shall have
the respective meanings ascribed thereto in the Sale Agreement.
IN WITNESS WHEREOF, I have hereunto signed my name and affixed the seal of
the Seller this _________ day of
___________________________________________________ , 199______.
By
--------------------------------
Name:
Title:
C-3
<PAGE>
EXHIBIT D
TO CORPORATE CERTIFICATE
CERTIFIED COPY OF RESOLUTION
WHEREAS, at a meeting of the Board of Directors of SELLER NAME, a
corporation organized and existing under the laws of the State of State Seller
is incorporated, duly and regularly called and held at the office of the
corporation on the __________ day of ((MeetingMonthandYear)), at which meeting a
quorum of said Board was present, the following resolution was duly adopted by
the unanimous vote of all Directors present, and the same has not been rescinded
or modified:
RESOLVED, that the ((OfficerTitlesonGenCert)) of this corporation be and
they are hereby authorized on behalf of and in the name of this corporation to
enter into and perform that certain "Receivables Sale Agreement" or
modifications, amendments, or supplements thereof or thereto with RFC Capital
Corporation (the "Purchaser"), a corporation organized and existing under the
laws of the State of Delaware, relating to the sale, assignment, transfer,
conveyance and/or the creation of a security interest in Seller Name's
Receivables, Seller Credit Reserve Account and Collection Account as defined in
said "Receivables Sale Agreement", and to execute and deliver said "Receivables
Sale Agreement" and any other documents to be executed and delivered in relation
to, or pursuant to said "Receivables Sale Agreement"; and said officers are
hereby further authorized at any time to sell, assign, transfer, convey and/or
create a security interest in such Receivables and related Seller Credit Reserve
Account and Collection Account on such terms and conditions and in such form as
may be acceptable to the Purchaser; and said officers are authorized to execute
and deliver all such instruments and documents and to do all such things as may
be required to complete any such transactions; and all acts and things of the
nature herein referred to, heretofore and hereafter done by the said officers or
any of them, are hereby approved, ratified, and confirmed.
RESOLVED FURTHER, that the authority conferred upon said officers by this
resolution shall remain in full force until written notice of revocation thereof
shall have been received by the Purchaser and a copy of this resolution
certified by President Name, President, and Secretary Name, Secretary, with the
seal of this corporation affixed, is delivered to the Purchaser.
We, President Name and Secretary Name, hereby certify that we are the
President and Secretary, respectively, of Seller Name; and that the foregoing
resolution was duly and regularly passed, as above stated, by the said Board of
Directors at a meeting of said Board of Directors, duly and regularly called and
held at the office of said corporation at the time and place hereinbefore
stated.
IN WITNESS WHEREOF, we have hereunto signed our names as President Name,
President, and Secretary Name, Secretary, and affixed the seal of said
corporation as of ((SaleSubservAgmtDate)).
SELLER NAME
- - --------------------------------- ---------------------------------
President Name Secretary Name
PRESIDENT SECRETARY
C-4
<PAGE>
EXHIBIT D
TO CORPORATE CERTIFICATE
CERTIFIED COPY OF RESOLUTION
WHEREAS, the Board of Directors of SELLER NAME, a corporation organized and
existing under the laws of the State of State Seller is incorporated, duly and
regularly adopted by unanimous written consent without a meeting the following
resolution and the same has not been rescinded or modified:
RESOLVED, that the ((OfficerTitlesonGenCert)) of this corporation be and
they are hereby authorized on behalf of and in the name of this corporation to
enter into and perform that certain "Receivables Sale Agreement" or
modifications, amendments, or supplements thereof or thereto with RFC Capital
Corporation (the "Purchaser"), a corporation organized and existing under the
laws of the State of Delaware, relating to the sale, assignment, transfer,
conveyance and/or the creation of a security interest in Seller Name's
Receivables, Seller Credit Reserve Account and Collection Account as defined in
said "Receivables Sale Agreement", and to execute and deliver said "Receivables
Sale Agreement" and any other documents to be executed and delivered in relation
to, or pursuant to said "Receivables Sale Agreement"; and said officers are
hereby further authorized at any time to sell, assign, transfer, convey and/or
create a security interest in such Receivables and related Seller Credit Reserve
Account and Collection Account on such terms and conditions and in such form as
may be acceptable to the Purchaser; and said officers are authorized to execute
and deliver all such instruments and documents and to do all such things as may
be required to complete any such transactions; and all acts and things of the
nature herein referred to, heretofore and hereafter done by the said officers or
any of them, are hereby approved, ratified, and confirmed.
RESOLVED FURTHER, that the authority conferred upon said officers by this
resolution shall remain in full force until written notice of revocation thereof
shall have been received by the Purchaser and a copy of this resolution
certified by President Name, President, and Secretary Name, Secretary, with the
seal of this corporation affixed, is delivered to the Purchaser.
We, President Name and Secretary Name, hereby certify that we are the
President and Secretary, respectively, of Seller Name; and that the foregoing
resolution was duly and regularly adopted by the unanimous written consent of
said Board of Directors.
IN WITNESS WHEREOF, we have hereunto signed our names as President Name,
President, and Secretary Name, Secretary, and affixed the seal of said
corporation as of ((SaleSubservAgmtDate)).
SELLER NAME
-----------------------------------
President Name Secretary Name
PRESIDENT SECRETARY
C-5
<PAGE>
EXHIBIT D
FORM OF OPINION OF COUNSEL FOR THE SELLER
CLOSING DATE
RFC Capital Corporation
130 E. Chestnut Street
Columbus, Ohio 43215
RE: RFC CAPITAL CORPORATION - RECEIVABLES SALE AGREEMENT
Gentlemen and Ladies:
We have acted as legal counsel to ________________________________________
(the "Seller") in connection with the transactions contemplated by that certain
Receivables Sale Agreement (the "Sale Agreement"), dated as of _____________,
199___, by and among the Seller, a(n) ______________ corporation, and RFC
Capital Corporation, a Delaware corporation, as Purchaser ("Purchaser") and as
Master Servicer ("Master Servicer"). All references herein to the Seller shall
refer to the Seller in its capacity as both Seller and Subservicer under the
Sale Agreement. This opinion is being delivered at the Seller's request.
Capitalized terms used and not otherwise defined herein shall have the
meanings ascribed thereto in the Sale Agreement.
In this connection, we have examined the following:
i) An executed copy of the Sale Agreement and all exhibits and
attachments thereto;
ii) Copies of the UCC-1 financing statements executed by the Seller as
assignor/debtor and naming the Purchaser as assignee/secured party
relating to the Purchased Receivables and all other Receivables
generated by the Seller (the "Financing Statements"), copies of which
are attached hereto as Annex 1;
iii) The results of the searches (the "Searches") conducted by the
Secretary of State of _____ ___/1/ [AND THE COUNTY RECORDER, _____
COUNTY, __________ , AS OF __________________,]/2/ certified by such
filing offices on Form UCC- 11, as to financing statements on
Form UCC-I on file with
- - --------------------
/1/ All references to "State of ____________________" in this form of opinion
mean the state of the present location of the Seller.
/2/ UCC searches certified on form UCC-II by the appropriate government
officials should be dated within ten (10) days of the closing of the
transaction.
D-1
<PAGE>
such offices and naming the Seller as a "debtor" as of such date, copies
of which are attached hereto as Annex 2A;
iv) [ADD IF APPLICABLE] [EXECUTED COPIES OF APPROPRIATE RELEASES OF ALL
OUTSTANDING FINANCING STATEMENTS RELATING TO SECURITY INTERESTS IN
ACCOUNTS OF THE SELLER IN FAVOR OF THIRD PARTIES WHICH ARE REFLECTED ON
THE SEARCHES AND WHICH SHALL BE RELEASED AT CLOSING] (the "Releases")
copies of which are attached hereto as Annex 213; and
v) Such other documents, records and papers as we have deemed necessary and
relevant as a basis for this opinion.
As to various questions of fact material to our opinions set forth below we
have relied upon certificates of officers of the Seller, copies of which are
attached hereto as Annex 3. Nothing has come to our attention in the course of
our representation of the Seller which leads us to believe that the
representations set forth in any of the foregoing certificates are inaccurate or
incomplete in any material respect.
In connection with the opinions set forth below we have assumed, with your
agreement, that each party to the Sale Agreement other than the Seller has
executed and delivered such Sale Agreement and has the corporate power and
authority to enter into and perform its obligations thereunder, and that the
execution, delivery and performance of the Sale Agreement by each party thereto
other than the Seller will not breach, contravene, conflict with, or constitute
a violation of any provision of the articles of incorporation or bylaws or other
organizational documents of such party, any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to which such party is bound or
to which any of its property or assets is subject, or constitute a violation of
any law, statute, rule, regulation, order, writ, judgment, award, injunction or
decree of any Governmental Authority as to any such party.
In connection with the opinions set forth below which deal with the
perfection and priority of security interests, we have assumed that no financing
statements relating to Seller, the Receivables or the Purchased Receivables have
been misindexed or misfiled in the appropriate filing offices covered by the
Searches.
We have also assumed that all documents submitted to us as originals are
complete and authentic, that all copies of documents submitted to us conform in
all respects to the originals thereof, including all amendments or modifications
thereto; and that all signatures of parties, other than those of the Seller and
its authorized officers, to the respective documents are genuine. We have also
assumed that all documents or copies thereof examined by us have been or will be
duly, validly and properly authorized, executed, acknowledged and delivered by
all parties thereto other than the Seller.
As you have agreed, for purposes solely of ascertaining the existence of
security interests perfected by the filing of UCC financing statements, we have
limited our investigation to an examination of the Searches, which indicate that
there are no filed financing statements naming the Seller as debtor and relating
to the Seller's Receivables [,OTHER THAN THOSE WHICH WILL BE TERMINATED BY THE
FILING OF THE RELEASES].
For purposes of the opinion expressed in the first sentence of Paragraph 4
below, we have assumed, with your consent, that the description of "Purchased
Receivables" set forth in the Sale Agreement accurately and completely describes
all of the Seller's Purchased Receivables being transferred to the Purchaser
pursuant to the Sale Agreement and the description of "Receivable" set forth in
the Sale Agreement accurately and completely describes all of the Seller's
Receivables generated by the Seller historically and from time to time.
D-2
<PAGE>
For purposes of the opinions expressed in Paragraphs 5 and 6 below, with
your agreement we have assumed that all transfers of Purchased Receivables will
have occurred in accordance with the terms and conditions set forth in the Sale
Agreement.
In addition to the foregoing, in rendering the opinions set forth herein we
have acted only as attorneys licensed to practice in the State of and do
not hold ourselves out as being knowledgeable as to the laws of any other
jurisdiction. We therefore express no opinions as to the effect of any laws
other than federal laws of the United States of America and the laws of the
State of . In this regard, we note that [- if the Seller is located in a
state other than Ohio -] the Sale Agreement is governed by the laws of the State
of Ohio. We have assumed, for purposes of issuing this letter, that insofar as
the laws of any such other jurisdiction are applicable to the matters set forth
below, such laws (including applicable conflict of laws provisions) are
identical to and will be interpreted in-all respects in the same manner as the
laws of the State of .
On the basis of the foregoing and subject to the limitations,
qualifications and exceptions set forth above, we are of the opinion as of the
date hereof that:
1. The Seller is a corporation duly organized and validly existing under
the laws of the State of __________________, is in good standing under the laws
of the State of [STATE OF ORGANIZATION] and is duly qualified to do business,
and is in good standing in each jurisdiction in which it maintains an office and
has the corporate power and authority to own, lease and operate its properties
and to conduct its business as now conducted. The Seller has made all filings
with, and has obtained all necessary or appropriate licenses and approvals from
federal and State of _____ Governmental Authorities, which such licenses and
approvals are in full force and effect as of the date hereof, that are necessary
to permit the Seller to own, lease and operate its properties, to lawfully
generate telecommunication receivables and to lawfully conduct its business as
presently conducted, and to consummate the transactions contemplated by the Sale
Agreement.
2. The Seller has the corporate power and authority to execute, deliver
and perform the Sale Agreement. The execution, delivery and performance of the
Sale Agreement has been duly authorized by all necessary corporate action of the
Seller and such Sale Agreement constitutes a legal, valid and binding obligation
of Seller enforceable against the Seller in accordance with its terms.
3. The execution and delivery of, and the performance of the Purchaser's
obligations under, the Sale Agreement does not and will not (a) violate any
provision of the Seller's articles of incorporation or bylaws, (b) violate any
statute, law, ordinance, rule or regulation of the United States of America or
the State of ___________________ binding on the Seller, (c) violate any orders,
judgments, writs or decrees known to us to which the Seller is subject in any
respect, or (d) violate or create a breach or default under any loan agreement,
indenture, note, evidence of indebtedness, mortgage, financing agreement, bond,
debenture or similar agreement or instrument relating to obligations of the
Seller for borrowed money or for the deferred purchase price of property or
services payable more than one year from the date of incurrence thereof or on
demand or relating to obligations of the Seller under capital leases which is
presently in effect and known to us and to which the Seller is a party of its
property is subject.
4. The Purchased Receivables and Receivables constitute "accounts" and
"general intangibles" within the meaning of the UCC. The Seller is "located" in
the State of __________________________________ for purposes of Section 9-
103(3)(b) of the UCC such that the laws (including the conflict of law rules) of
the State of ___________________________________ govern the perfection of
security interests in accounts and general intangibles of the Seller and the
sale of
D-3
<PAGE>
accounts by the Seller. The grant of a first priority security interest in the
Receivables, other than Purchased Receivables, is perfected by the filing of
appropriate UCC financing statements in the appropriate UCC filing offices
identified in paragraph 5(i) below. The transfers of the Purchased Receivables
are "true sales" of the Purchased Receivables to the Purchaser. In the event,
however, that a court of competent jurisdiction were to hold that such
transaction constitutes a loan and not a purchase and sale, then the Sale
Agreement creates a first priority perfected valid security interest in the
Receivables and Purchased Receivables in favor of the Purchaser.
5. If transfers of the Purchased Receivables from the Seller to the
Purchaser pursuant to the Sale Agreement constitute a "true sale" of the
Purchased Receivables to the Purchaser, the execution and delivery of the Sale
Agreement and
(i) upon the proper filing of the Financing Statements in the UCC filing
offices of the Secretary of State of ________, [and in the UCC filing
offices of the County Recorder of __________ County,] and
(ii) the delivery to the Payors of such Purchased Receivables of the
notices in the form of the notices on Exhibit B to the Sale Agreement
(assuming no such prior notice has been delivered to any such Payor by
any person claiming an interest in the Purchased Receivables, and we
hereby advise you that we have no knowledge that the Seller has
previously made any such assignment thereof or granted any such lien
or encumbrance thereupon);
are effective under the laws of the [STATE OR LOCATION OF SELLER] to vest title
thereto in the Purchaser, and all necessary steps have been taken under the laws
of the State of [LOCATION OF SELLER] to protect the Purchaser's ownership
interest in the Purchased Receivables now existing, and hereafter created,
against creditors of, or subsequent Purchasers from, the Seller, provided that
(x) if the transfers of the Purchased Receivables are deemed to be subject
to Article 9 of the UCC, or previously filed financing statements,
priority may be subject to financing statements effective as a result
of Section 9-401(2) of the UCC, or
(y) if the Purchased Receivables are deemed to be interests or claims "in
or under any policy of insurance" under (S)9-104(g) of the UCC,
priority may be subject to [IN ENGLISH RULE STATES: PRIOR NOTICES TO
PAYORS OF SUCH POLICIES] [IN AMERICAN RULE STATES: PRIOR SALES OF SUCH
PURCHASED RECEIVABLES]. /3/
- - -----------------------
/3/ As to assignments of accounts and intangibles, if the UCC is not
applicable because of Section 9-104, most jurisdictions follow either the
so-called "American rule" (which in general provides that the transfer of
an interest therein is made effective by a written assignment, with
priority being granted to the assignment which is first in time) or the
so-called "English rule" (which in general provides that the transfer of
an interest therein is only effective if notice is given to the payor).
Counsel should choose one approach or the other in completing paragraph
5(y) or, if the law in the jurisdiction is unsettled, counsel may include
both as exceptions (i.e., by indicating in paragraph 5(y) "prior notices
to payors of such policies or prior sales of such Purchased
Receivables").
D-4
<PAGE>
The filing of the Financing Statements in the filing offices identified in
paragraph 5(i) above are the only filings required to be made in the State of
to evidence, provide notice to third parties with respect to, or otherwise
perfect the Purchaser's ownership interest in the Purchased Receivables and the
Purchaser's security interest in all Receivables other than Purchased
Receivables under any applicable law of the State of ____. No other filings,
either in the filing offices identified in paragraph 5(i) or in any other filing
offices in the State of ____, are required or are advisable to be made to
evidence, provide notice to third parties with respect to, or otherwise perfect
such interests, or to establish the priority of the Purchaser's interest with
respect to such Purchased Receivables.
6. If the transfers of the Purchased Receivables from the Seller to the
Purchaser pursuant to the Sale Agreement does not constitute a "true sale" of
the Purchased Receivables to the Purchaser, the Sale Agreement creates a valid
security interest in favor of the Purchaser in the Purchased Receivables from
time to time transferred to the Purchaser pursuant to the Sale Agreement, which
security interest will constitute
(i) upon the proper filing of the Financing Statements in the UCC filing
offices of the Secretary of State of _________, [and in the UCC filing
offices of the County Recorder of ________________, County,] and
(ii) upon the delivery to the Payors of such Purchased Receivables of the
notices in the form of the notices on Exhibit B to the Sale Agreement
(assuming that no such prior notice has been delivered to any such
Payor by any person claiming an interest in the Purchased Receivables
and we hereby advise you that we have no knowledge that the Seller has
previously delivered any prior notice);
a security interest (perfected under the UCC and under other appropriate law to
the extent applicable) in the Seller's right, title and interest in and to the
Purchased Receivables and the proceeds thereof now existing, and hereafter
created, prior and senior to all other liens, provided that:
(x) if the granting of a security interest in the Purchased Receivables is
deemed to be subject to Article 9 of the UCC or previously filed
financing statements, priority may be subject to financing statements
effective as a result of Section 9-401(2) of the UCC, or
(y) if the Purchased Receivables are deemed to be interests or claims "in
or under any policy of insurance" under (S)9-104(g) of the UCC,
priority may be subject to [IN ENGLISH RULE STATES: PRIOR NOTICES TO
PAYORS OF SUCH POLICIES] [IN AMERICAN RULE STATES: PRIOR SALES OF SUCH
PURCHASED RECEIVABLES].
The filing of the Financing Statements in the filing offices identified in
paragraph 6(i) above are the only filings required to be made in the State of
to evidence, provide notice to third parties with respect to, or otherwise
perfect the Purchaser's security interest in the Purchased Receivables under any
applicable law of the State of ___________________________. No other filings,
either in the filing offices identified in paragraph 6(i) or in any other filing
offices in the State of __________, are required or are advisable to be made to
evidence, provide notice to third parties with respect to, or otherwise perfect
such interests, or to establish the priority of the Purchaser's interest with
respect to such Purchased Receivables.
7. A State of court and a federal court sitting in the State of
would give effect to the choice of law provisions of the Sale Agreement, except
that such court may apply State of law to (a) certain remedial and procedural
rights, (b) matters of public policy, (c) matters pertaining to the perfection
D-5
<PAGE>
and priority of security interests, and (d) matters as to which Ohio law cannot
be proven to such court to be sufficiently authoritative or certain for such
court to rely on it.
8. No consent of, or other action by, and no notice to or filing with, or
licensing by any federal or State of Governmental Authority or any other
party (except for those consents required under Section _________________ of the
Sale Agreement which have been provided by the Seller to the Purchaser) is
required for the due execution, delivery and performance by the Seller of the
Sale Agreement or any other agreement, document or instrument to be delivered
thereunder or for the perfection of or the exercise by the Seller, the Purchaser
or the Master Servicer of any of their rights or remedies thereunder. The
transactions contemplated by the Sale Agreement will not cause the Purchaser to
be subjected to any obligation to pay any transfer tax to any Governmental
Authority in the State of , including without limitation any transfer,
sales, use, added value, documentary stamp or other similar transfer tax other
than [DESCRIBE ANY SUCH TAXES WHICH ARE APPLICABLE].
9. To the best of our knowledge, there are no actions or proceedings
against or affecting the Seller or any of its assets, pending or threatened,
before any Governmental Authority (including, without limitation, any federal or
state court of competent jurisdiction) (i) which seek to affect the
enforceability of the Sale Agreement or the transactions contemplated thereby,
or (ii) which, if determined adversely, would materially and adversely affect
the ability of the Seller to perform its obligations under the Sale Agreement.
Our opinions set forth herein are subject to the following qualifications
and exceptions:
(a) The effect of certain laws governing bankruptcy, reorganization,
fraudulent conveyance, moratorium and insolvency and relating to or affecting
the enforcement of creditors' rights generally, including, but not limited to,
the right to take or retain personal property encumbered by the Sale Agreement
and the Financing Statements;
(b) The application of general principles of equity (regardless of whether
considered in a proceeding in equity or at law);
(c) Standards of commercial reasonableness and good faith;
(d) In the case of proceeds, perfection of security interests is limited to
the extent set forth in Section 9-306 of the UCC;
(e) Continuation of perfection in any proceeds which are subject to a
security interest or in any after acquired property may, if such proceeds or
after acquired property consist of property of a type in which a perfected
security interest cannot be obtained by filing a financing statement, require
additional compliance with applicable provisions of the UCC and we express no
opinion as to the perfection, priority an effectiveness of any security
interest in any proceeds of the Purchased Receivables initially subject to the
security interest or after acquired property to the extent that perfection,
priority or effectiveness depends upon additional compliance with the UCC. Any
change (from one state to another state) in the location of the Seller's place
of business or chief executive offices to a location outside of the State of
, or any change in the name, identity or corporate structure of the
Seller that would make a filed financing statement seriously misleading, may
result in the lapse of perfection of the security interest to the extent that
perfection is dependent on filing unless new and appropriate financing
statements are filed in a timely manner; and
D-6
<PAGE>
(f) In the case of collateral (as such term is defined in Article 9 of the
UCC) in which a debtor (as such term is defined in Article 9 of the UCC) has
no present rights, a security interest will be created therein only when the
debtor acquires rights to such collateral.
Our opinions expressed herein are limited to those matters expressly set
forth herein, and no opinion may be implied or inferred beyond the matters
expressly stated herein. Further, the opinions expressed herein are being
rendered solely in connection with the consummation of the transactions
contemplated by the Sale Agreement to which Seller is a party, and may not be
relied upon for any other purpose.
Our opinions are rendered only as of the date hereof and we assume no
obligation to update or supplement this opinion to reflect any facts or
circumstances that may hereafter occur or to reflect the applicability of any
laws that may affect the transactions contemplated by the Sale Agreement after
the date hereof.
In addition to the foregoing, this letter may not be distributed to,
furnished to or relied upon by any person without the express written consent of
this firm, provided, however, that any assignee of the Purchaser pursuant to the
Sale Agreement may likewise rely upon this opinion as if named as an addressee
herein.
Very truly yours,
D-7
<PAGE>
ANNEX 1
TO OPINION OF
COUNSEL FOR
THE SELLER
D-1-1
<PAGE>
ANNEX 2A
TO OPINION OF
COUNSEL FOR
THE SELLER
D-2A-1
<PAGE>
ANNEX 2B
TO OPINION OF
COUNSEL FOR
THE SELLER
D-2B-1
<PAGE>
ANNEX 3
TO OPINION OF
COUNSEL FOR
THE SELLER
D-3-1
<PAGE>
EXHIBIT 10.45
[LOGO OF FRONTIER APPEARS HERE]
CARRIER SERVICES SWITCHLESS AGREEMENT
BETWEEN
FRONTIER COMMUNICATIONS OF THE WEST, INC.
AND
EQUAL NET
CONFIDENTIAL
THIS DOCUMENT SHALL BE
CONSIDERED NULL AND VOID IF
FRONTIER DOES NOT RECEIVE
AN EXECUTED ORIGINAL WITHIN
20 DAYS FROM THE DATE
OF THIS AGREEMENT
<PAGE>
TABLE OF CONTENTS
Section
- - -------
1. Services
2. Term Of The Agreement
3. Billing And Payment
4. Billing Disputes
5. Termination Rights
6. Taxes And Assessments
7. Warranties And Limitation Of Liability
8. Indemnification
9. Representation
10. Force Majeure
11. Waivers
12. Assignment
13. Confidentiality
14. Integration
15. Construction
16. Governing Law
17. Notices
18. Counterparts
19. Compliance With Laws
20. Third Parties
21. Survival Of Provisions
22. Unenforceable Provisions
EXHIBITS
- - --------
Exhibit A General And Service Definitions
Exhibit B Ancillary Fee Schedule
Exhibit C Call Detail Records; Order Processing Procedures; Letter Of Agency
Requirements
Exhibit D Frontier Access Direct - Dedicated Carrier Termination Schedule
Exhibit D(a) Frontier Access Direct - Carrier Domestic Termination Service
Exhibit D(b) Carrier Termination International Service
Exhibit D(c) Frontier Access Direct - Carrier 800 Transport Service
Exhibit E Frontier Access Direct - National Origination Service Switched
Outbound Service
Exhibit F Frontier Access Direct - National Origination Service Switched &
Dedicated Inbound 800 Service
Exhibit G Frontier Access Direct - National Origination Service Dedicated
Outbound Service
Exhibit H National Origination Service Switched International Service
Exhibit H(a) National Origination Service Dedicated International Service
Exhibit I InterLink Calling Card Services Schedule
Exhibit I(a) InterLink Calling Card Service
Exhibit I(b) InterLink Originating International Service
Exhibit I(c) InterLink Terminating International Service
Exhibit J 800 PIN Service
Exhibit K Private Line Services Schedule
Exhibit L Network Interconnection Schedule
2
<PAGE>
CARRIER SERVICE AGREEMENT
(Switchless)
This Carrier Service Agreement ("AGREEMENT") is entered into between the
provider of service, Frontier Communications of the West, Inc. f/k/a West Coast
Telecommunications, Inc. on behalf of itself and its affiliates ("FRONTIER"), a
California corporation located at 90 Castilian Drive, Goleta, CA 93117 and Equal
Net ("EQUAL NET" or "PURCHASER"), a Delaware corporation with its principal
place of business located at 1250 Wood Branch Park Drive, Houston, TX 77079
(hereinafter, Frontier and Equal Net may be referred to in the aggregate as
"PARTIES", and each singularly as a "PARTY".)
PURPOSE
The Parties are telecommunications carriers subject to the Communications Act of
1934, as amended, as well as the Telecommunications Act of 1996. Equal Net
desires to purchase network transport and other telecommunication services from
Frontier for Equal Net's resale to its business and residential customers. The
Parties agree as follows:
1. SERVICES:
(a) Frontier shall, in accordance with this Agreement, provide to Equal
Net those services Equal Net subscribes to hereunder as defined and
identified herein and on exhibits, schedules and other attachments
appended hereto and made a part of this Agreement from time-to-time by
the Parties (collectively, the "SCHEDULES"). All such services being
provided under the Schedules are collectively referred to as the
"SERVICES".
(b) Equal Net shall provide Frontier with a forecast covering a good faith
estimate based on historical information (if available) of the monthly
traffic volume and geographic distribution for an ordered Service.
The estimate will be for the 3 calendar month period following the
desired activation date in a format supplied or approved by Frontier.
Frontier may request updated forecasts on a reasonable basis.
Forecasts do not constitute a binding commitment on the part of Equal
Net. Provision of Services is contingent on availability of Frontier
facilities.
(c) Orders for Services will be transmitted and processed in accordance
with the procedures set out in Exhibit C attached hereto and made a
part hereof as the same may be modified from time to time by Frontier
upon written notice to Equal Net.
2. TERM OF THE AGREEMENT:
(a) INITIAL TERM: This Agreement is effective and the Parties'
obligations commence upon the date of execution by Frontier
("EFFECTIVE DATE") and continues in effect for a period of two (2)
years ("INITIAL TERM") from either the day Service is first utilized
by Equal Net (as determined by Frontier's records), or the 90th day
after the Effective Date, whichever date occurs first, such date known
as the "START OF SERVICE DATE".
(b) AUTOMATIC RENEWAL: This Agreement renews automatically for a 1 year
period at the expiration of the Initial Term, unless canceled in
accordance with the termination provisions of this Agreement
("SUBSEQUENT TERM"). Each Subsequent Term renews automatically for a
1 year period upon its expiration, unless canceled in accordance with
the termination provisions of this Agreement.
(c) CANCELLATION: Either Party may terminate this Agreement upon
expiration of a term upon written notice given at least 90 days prior
to expiration of the then current term.
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<PAGE>
3. BILLING AND PAYMENT: Equal Net shall pay Frontier for the Services at the
rates and charges set out in the applicable Schedules. If Equal Net is
required to pay an initial cash deposit or provide other assurance of
payment, then Frontier is not obligated to begin accepting orders or
providing Service until the deposit or other assurance of payment is
received.
(a) Equal Net shall provide security in the form of a UCC-1 granting
Frontier security interest in Equal Net's existing and hereafter
acquired accounts, contract rights, chattel paper, account receivables
(including funds deposited into lock box and similar accounts) and
general intangibles, and all products and proceeds thereof, including
without limitation, call detail records, customer contracts, records
and lists and all causes of action for recovery or collection of the
foregoing (collectively, the "COLLATERAL") to the extent such
Collateral relates in any manner to Services being provided to Equal
Net or Equal Net's customers by Frontier. Equal Net shall execute any
documents reasonably required by Frontier to perfect the above
security interest.
(b) Frontier shall invoice Equal Net via facsimile on or about the fifth
Business Day after the close of each Billing Cycle for the Services
and for any other sums due Frontier ("INVOICE"). Each Invoice details:
(i) the amount due Frontier, or the credit due Equal Net, after a
reconciliation between the actual charges for the Services for the
prior Billing Cycle and any required pre-payment for the prior Billing
Cycle, and (ii) any other sums due Frontier. Except if Frontier has
agreed to a lock-box arrangement, in addition to the amounts under (i)
and (ii) above, the Invoice will provide for a pre-payment equal to 0%
of the actual charges for the Services for the prior Billing Cycle
(exclusive of any non-recurring charges). If Equal Net has submitted
a letter of credit that has an expiration date greater than 45 days
after the Invoice date, or a cash deposit, the pre-payment for a given
month will be reduced by the amount of such security (but to not less
than zero).
(c) Each Invoice shall be paid by Equal Net in immediately available US
funds so that the payment is received by Frontier no later than THIRTY
(30) calendar days from the date of the Invoice (the "DUE DATE").
Frontier agrees that (i) the Invoice date will be the same day the
Invoice is faxed to Equal Net, and (ii) the Invoice will be faxed on a
Business Day. Any Invoice not paid by the Due Date shall bear late
payment fees at the rate of 1-1/2% per month (or such lower amount as
maybe required by law) until paid.
(d) The Equal Net facsimile number and contact for purposes of this
Section 3. are 281-529-4695, Attention: Steve Reemts. Equal Net may
change the facsimile number and contact upon written notice to
Frontier.
(e) If Equal Net is delinquent in payment of an Invoice and Frontier does
not have security from Equal Net equal to Equal Net's prior month's
usage charges, Equal Net shall provide such additional security as
Frontier may reasonably request in writing.
(f) FRAUDULENT USAGE: Subject to the fraudulent usage provisions of the
Frontier InterLink Calling Card Services Schedule if applicable,
Frontier is not responsible for any fraudulent use of Service. Equal
Net is solely responsible for all Services' usage, fraudulent or
otherwise. Claims of fraudulent usage shall not constitute a valid
basis for dispute of an Invoice. Frontier will monitor End-User call
activity for suspected fraudulent use using the same procedures
Frontier uses for its own customers (except Frontier will contact
Equal Net in lieu of the End-User when investigating suspected
fraudulent use).
(g) Equal Net agrees to pay to Frontier any and all local exchange carrier
("LEC") assessed charges (other than access or other LEC charges
otherwise included under this Agreement) and governmentally imposed
charges levied upon Frontier as a result of Services provided to Equal
Net, such as but not limited to:
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<PAGE>
(i) primary Interexchange carrier ("PIC") change and slamming related
charges under Exhibit C, Section III;
(ii) assessments by the National Exchange Carrier's Association, Inc.
(NECA) including but not limited to, the Universal Service
Fund/Lifeline Assistance (USF/LA), the Telecommunications Relay
Service (TRS) Fund, and other assessments as may be assessed by
NECA in the future relative to the Services; (Equal Net
understands that NECA charges are assessed on a per ANI basis for
Presubscribed End-User ANIs, whether such ANIs are active or
not);
(iii) assessments by regulatory agencies, including but not limited
to, the Federal Communications Commission (FCC) and state Public
Utility/Service Commissions;
(iv) charges or costs incurred by Frontier for FCC/PUC mandated
initiatives under the Telecommunications Act of 1996, or
otherwise, such as the "access reform" and "payphone dial-around
compensation" initiatives.
(v) when Frontier is acting as the RespOrg, National Administrative
Services Center assessments (including any monthly recurring
charges) for "800"/"888" service installation;
(vi) applicable charges set out in the Schedule of Ancillary Fees
attached hereto as Exhibit B and made a part hereof as the same
may be modified from time to time by Frontier upon written notice
to Equal Net.
(h) "TEXT REDACTED"
(i) Frontier may revise the rates and monthly recurring and other charges
in this Agreement and the Schedules at any time upon written notice to
Equal Net. Domestic rates will be effective within thirty days and
international/offshore rates will be effective within seven days of
the date of Frontier's written notice. Such notice to Frontier of
cancellation of a severable Service will be effective as of the date
specified by Equal Net, provided such date is not back dated. If the
effective rate for a Service is increased pursuant to this paragraph,
then Equal Net may cancel the Service subject to the rate increase
upon written notice to Frontier given within 30 days after Equal Net's
receipt of the rate increase notice. Cancellation of a Service under
this paragraph includes a pro-rata reduction in the Minimum Charge to
adjust for the Service being canceled. If a rate increase affects a
portion of a Service that is not severable from the entire Service
Equal Net shall not be able to cancel the affected portion, e.g.
domestic outbound switched service is not cancelable as a result of a
rate increase in directory assistance calls (DA cannot be separately
blocked); further, if the rate increase affects traffic to a
particular LATA or country, Equal Net may only cancel Service to the
particular LATA/country to the extent severable by Frontier.
5
<PAGE>
(j) Equal Net agrees that any make up to minimum charges, shortfall
charges and surcharges for which it is liable under this Agreement are
based on agreed upon minimum commitments on its part and corresponding
rate concessions on Frontier's part, and are not penalties or
consequential or other damages under Section 7.(b).
4. BILLING DISPUTES: The Parties agree that time is of the essence for
payment of all Invoices. Equal Net shall provide written notice and
supporting documentation for any good-faith dispute it may have with an
Invoice ("DISPUTE") within 60 Business Days after Equal Net's receipt. If
Equal Net does not report a Dispute within the 60 Business Day period,
Equal Net shall have waived its dispute rights for that Invoice. Equal Net
shall pay disputed amounts, subject to resolution of the Dispute. Frontier
will use reasonable efforts to resolve timely Disputes within 30 Business
Days after its receipt of the Dispute notice. If a Dispute is not resolved
within the 30 Business Day period to Equal Net's satisfaction, then at
Equal Net's request the Dispute will be referred to an executive officer of
Frontier. If the Dispute is not resolved within 15 Business Days after the
referral, then either Party may commence an action in accordance with
Section 16., provided that the prevailing Party in such action shall be
entitled to payment of its reasonable attorney fees and costs by the other
Party.
5. TERMINATION RIGHTS:
(a) REGULATORY CHANGES: If the FCC, a state PUC or a court of competent
jurisdiction issues a rule, regulation, law or order which has the
effect of canceling, changing, or superseding any material term or
provision of this Agreement (collectively, "REGULATORY REQUIREMENT"),
then this Agreement shall be deemed modified in such a way as the
Parties mutually agree is consistent with the form, intent and purpose
of this Agreement and is necessary to comply with such Regulatory
Requirement. Should the Parties not be able to agree on modifications
necessary to comply with a Regulatory Requirement within 30 days after
the Regulatory Requirement is effective, then upon written notice
either Party may, to the extent practicable, terminate that portion of
this Agreement impacted by the Regulatory Requirement.
(b) Either Party may terminate this Agreement upon the other Party's
insolvency, dissolution or cessation of business operations. Frontier
may, upon written notice, immediately terminate this Agreement for
Equal Net's failure to pay any delinquent Invoice, or to maintain any
other assurance of payment that may be required hereunder.
(c) In the event of a breach of any material term or condition of this
Agreement by a Party (other than a failure to pay which is covered
under (b) above), the other Party may terminate this Agreement upon 30
days written notice, unless the breaching Party cures the breach
during the 30 day period. A breach that cannot be reasonably cured
within a 30 day period may be addressed by a written waiver of this
paragraph signed by the Parties.
(d) Upon any material breach by Equal Net not cured after expiration of
all applicable notice and cure periods, Frontier may at its sole
option do any or all of the following:
(i) cease accepting or processing orders for Service and suspend
Service;
(ii) cease all electronically and manually generated information and
reports (including any CDR not paid for by Equal Net);
(iii) draw on any letter of credit, security deposit or other
assurance of payment and enforce any security interest provided
by Equal Net;
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<PAGE>
(iv) terminate this Agreement and Service without liability to
Frontier;
(v) collect from Equal Net as liquidated damages an amount equal to
the Minimum Charge times the number of months remaining on the
unexpired term of this Agreement; and
(vi) pursue such other legal or equitable remedy or relief as may be
appropriate.
6. TAXES AND ASSESSMENTS:
Equal Net is responsible for the collection and remittance of all
governmental assessments, surcharges and fees pertaining to its resale
of the Services (other than taxes on Frontier's net income)
(collectively, "TAXES"). Equal Net shall provide Frontier with, and
maintain, valid and properly executed certificate(s) of exemption for
the Taxes, as applicable.
7. WARRANTIES AND LIMITATION OF LIABILITY:
(a) Service shall be provided by Frontier in accordance with the
applicable technical standards established for call transport by the
telecommunications industry. Frontier shall provide Service in a
quality and diligent manner consistent with service Frontier provides
to its other customers via a digital fiber optic network with SS7
signaling (where available). FRONTIER MAKES NO OTHER WARRANTY, EXPRESS
OR IMPLIED, WITH RESPECT TO TRANSMISSION, EQUIPMENT OR SERVICE
PROVIDED HEREUNDER, AND EXPRESSLY DISCLAIMS ANY WARRANTY OF
MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OR FUNCTION.
(b) In no event shall either Party be liable to the other Party for
incidental and consequential damages, loss of goodwill, anticipated
profit, or other claims for indirect damages in any manner related to
this Agreement or the Services.
8. INDEMNIFICATION:
Each Party shall defend and indemnify the other Party and its directors,
officers, employees, representatives and agents from any and all claims,
taxes, penalties, interest, expenses, damages, lawsuits or other
liabilities (including without limitation, reasonable attorney fees and
court costs) relating to or arising out of (i) acts or omissions in the
operation of its business, and (ii) its breach of this Agreement; provided,
however, Frontier shall not be liable and shall not be obligated to
indemnify Equal Net, and Equal Net shall defend and indemnify Frontier
hereunder, for any claims by any third party, including End-Users, with
respect to services provided by Equal Net which may incorporate any of
Frontier's services.
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<PAGE>
9. REPRESENTATION:
The Parties acknowledge and agree that the relationship between them is
solely that of independent contractors. Neither Party, nor their respective
employees, agents or representatives, has any right, power or authority to
act or create any obligation, express or implied, on behalf of the other
Party.
10. FORCE MAJEURE:
Other than with respect to failure to make payments due hereunder, neither
Party shall be liable under this Agreement for delays, failures to perform,
damages, losses or destruction, or malfunction of any equipment, or any
consequence thereof, caused or occasioned by, or due to fire, earthquake,
flood, water, the elements, labor disputes or shortages, utility
curtailments, power failures, explosions, civil disturbances, governmental
actions, shortages of equipment or supplies, unavailability of
transportation, acts or omissions of third parties, or any other cause
beyond its reasonable control.
11. WAIVERS:
Failure of either Party to enforce or insist upon compliance with the
provisions of this Agreement shall not be construed as a general waiver or
relinquishment of any provision or right under this Agreement.
12. ASSIGNMENT:
Neither Party may assign or transfer its rights or obligations under this
Agreement without the other Party's written consent, which consent may not
be unreasonably withheld, except that Frontier may assign this Agreement to
its parent, successor in interest, or an affiliate or subsidiary without
Equal Net's consent. Any assignment or transfer without the required
consent is void.
13. CONFIDENTIALITY:
(a) Each Party agrees that all information furnished to it by the other
Party, or to which it has access under this Agreement, shall be deemed
the confidential and proprietary information or trade secrets
(collectively referred to as "PROPRIETARY INFORMATION") of the
Disclosing Party and shall remain the sole and exclusive property of
the Disclosing Party (the Party furnishing the Proprietary Information
referred to as the "DISCLOSING PARTY" and the other Party referred to
as the "RECEIVING PARTY"). Each Party shall treat the Proprietary
Information and the contents of this Agreement in a confidential
manner and, except to the extent necessary in connection with the
performance of its obligations under this Agreement, neither Party may
directly or indirectly disclose the same to anyone other than its
employees on a need to know basis and who agree to be bound by the
terms of this Section, without the written consent of the Disclosing
Party.
8
<PAGE>
(b) The confidentiality of obligations of this Section do not apply to any
portion of the Proprietary Information which is (i) or becomes public
knowledge through no fault of the Receiving Party; (ii) in the lawful
possession of Receiving Party prior to disclosure to it by the
Disclosing Party (as confirmed by the Receiving Party's records);
(iii) disclosed to the Receiving Party without restriction on
disclosure by a person who has the lawful right to disclose the
information; or (iv) disclosed pursuant to the lawful requirements or
formal request of a governmental agency. If the Receiving Party is
requested or legally compelled by a governmental agency to disclose
any of the Proprietary Information of the Disclosing Party, the
Receiving Party agrees that it will provide the Disclosing Party with
prompt written notice of such requests so that the Disclosing Party
has the opportunity to pursue its legal and equitable remedies
regarding potential disclosure.
(c) Each Party acknowledges that its breach or threatened breach of this
Section may cause the Disclosing Party irreparable harm which would
not be adequately compensated by monetary damages. Accordingly, in
the event of any such breach or threatened breach, the Receiving Party
agrees that equitable relief, including temporary or permanent
injunctions, is an available remedy in addition to any legal remedies
to which the Disclosing Party may be entitled.
(d) Neither Party may use the name, logo, trade name, service marks, trade
marks, or printed materials of the other Party, in any promotional or
advertising material, statement, document, press release or broadcast
without the prior written consent of the other Party, which consent
may be granted or withheld at the other Party's sole discretion.
14. INTEGRATION:
This Agreement and all Exhibits, Schedules and other attachments
incorporated herein, represent the entire agreement between the Parties
with respect to the subject matter hereof and supersede and merge all prior
agreements, promises, understandings, statements, representations,
warranties, indemnities and inducements to the making of this Agreement
relied upon by either Party, whether written or oral.
15. CONSTRUCTION:
The language used in this Agreement is deemed the language chosen by the
Parties to express their mutual intent. No rule of strict construction
shall be applied against either Party.
16. GOVERNING LAW:
This Agreement is subject the laws of New York, excluding its choice
of law principles. The Parties agree that any action to enforce or
interpret the terms of this Agreement shall be instituted and maintained
only in the Federal Court for the Western District of New York, or if
jurisdiction is not available in the Federal Court, then a state court
located in Rochester, New York. Equal Net hereby consents to the
jurisdiction and venue of such courts and waives any right to object to
such jurisdiction and venue.
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17. NOTICES:
All notices, including but not limited to, demands, requests and other
communications required or permitted hereunder (not including Invoices)
shall be in writing and shall be deemed to be delivered when actually
received, whether upon personal delivery or if sent by facsimile, mail or
overnight delivery. All notices shall be addressed as follows, or to such
other address as each of the Parties hereto may notify the other:
Frontier Communications of the West, Inc. Equal Net
ATTN: Peggy L. Palak, Mgr. Contract Svcs. ATTN: Steve Reemts, Vice
Brian V. Fitzpatrick, VP Carrier Svcs. President Network
90 Castilian Drive Operations
Goleta, CA 93117 1250 Wood Branch Park Drive
Facsimile #800-689-2395 Houston, TX 77079
Facsimile #281-529-4695
18. COUNTERPARTS:
This Agreement may be executed in several counterparts, each of which
shall constitute an original, but all of which shall constitute one and the
same instrument.
19. COMPLIANCE WITH LAWS:
During the term of this Agreement, the Parties shall comply with all
local, state and federal laws and regulations applicable to this Agreement
and to their respective businesses. Further, each Party shall obtain, file
and maintain any tariffs, permits, certifications, authorizations, licenses
or similar documentation as may be required by the FCC, a state Public
Utility or Service Commission, or any other governmental body or agency
having jurisdiction over its business. Upon request, a Party will supply
copies of such permits, certifications, authorizations, licenses and
similar documentation.
20. THIRD PARTIES:
The provisions of this Agreement and the rights and obligations
created hereunder are intended for the sole benefit of Frontier and Equal
Net, and do not create any right, claim or benefit on the part of any
person not a Party to this Agreement, including End-Users.
21. SURVIVAL OF PROVISIONS:
Any obligations of the Parties relating to monies owed, as well as
those provisions relating to confidentiality, assurances of payment,
limitations on liability and indemnification, survive termination of this
Agreement.
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22. UNENFORCEABILITY OF PROVISIONS:
The illegality or unenforceability of any provision of this Agreement
does not affect the legality or enforceability of any other provision or
portion. If any provision or portion of this Agreement is deemed illegal
or unenforceable for any reason, there shall be deemed to be made such
minimum change in such provision or portion as is necessary to make it
valid and enforceable as so modified. This Agreement is voidable by
Frontier if modified by Equal Net without the written or initialed consent
of a Frontier Vice President.
By its signature below, each Party acknowledges and agrees that sufficient
allowance has been made for review of this Agreement by respective counsel and
that each Party has been advised as to its legal rights, duties and obligations
under this Agreement.
FRONTIER COMMUNICATIONS OF THE WEST, INC. EQUAL NET
By: /s/ Brian V. Fitzpatrick 6/30/98 By: /s/ Steve Reemts
---------------------------------------- ---------------------------
Brian V. Fitzpatrick, Vice President Steve Reemts, Vice President
Frontier Carrier Services Group Network Operations
Date: 6/30/98 Date: 6/22/98
------------------------------------- --------------------------
11
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Exhibit A
Page 1 of 2
GENERAL DEFINITIONS
(Not otherwise defined in the body of the Agreement or the Schedules)
1. FRONTIER 800 NUMBERS are 800/888 telephone numbers ordered onto the
Frontier network by Equal Net and for which Frontier has either (i) been
appointed the RespOrg, or (ii) reserved and issued the 800 telephone number
to Equal Net. Frontier shall be deemed to be the RespOrg for all 800/888
telephone numbers reserved and issued by it under (ii) above.
2. ANI is a telephone number.
3. BILLING CYCLE is the Frontier billing cycle to which Equal Net's account
hereunder is assigned by Frontier (a full billing cycle equals
approximately 30 days of Services usage).
4. BUSINESS DAY is Monday through Friday, 8:30 a.m. to 5:30 p.m. Detroit, MI
local time, excluding nationally recognized holidays. Unless otherwise
stated, "DAYS" refers to calendar days.
5. PRESUBSCRIBED means that an End-User has been assigned to Frontier's
network via Frontier's CIC.
6. CARRIER 800 NUMBERS are 800/888 telephone numbers ordered onto the Frontier
network by Equal Net for which a party other than Frontier or Equal Net has
been appointed the RespOrg.
7. CODE is a calling card authorization number used to access the Calling Card
Services.
8. CDR means call detail records and CDR TAPE is a magnetic tape containing
CDR.
9. EQUAL NET 800 NUMBERS are 800/888 telephone numbers ordered onto the
Frontier network by Equal Net for which Equal Net has been appointed the
RespOrg.
10. END-USERS are customers of Equal Net for which Equal Net has submitted an
order that has been accepted by Frontier during the term of this Agreement.
To the extent that Equal Net subscribes to the Services for its own use,
Equal Net is deemed to be an End-User.
11. 800 NUMBERS collectively refers to the Frontier 800 Numbers, Carrier 800
Numbers, Equal Net 800 Numbers and PIN 800 Numbers.
12. GUIDELINES refer to the telecommunications industry's general rules with
respect to 800/888 number portability, including but not limited to, (i)
the Federal Communications Commission's ("FCC") 800/888 (and other toll-
free) number portability policies and rules, (ii) the SMS 800 requirements
set forth in the Bell Operating Companies' Tariff FCC No. 1, and (iii) the
800 DataBase Ad-Hoc Committee's Guidelines for 800 DataBase, as all of the
foregoing may be replaced or modified from time to time.
13. PIN 800 NUMBERS are Frontier 800 Numbers assigned to Equal Net for use with
the 800 PIN Service.
14. RESPORG is a responsible organization as defined in the Guidelines. A
RespOrg is the entity that is responsible for managing and administering
the account records in the 800 Service Management System DataBase.
12
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Exhibit A
Page 2 of 2
SERVICE DEFINITIONS/DESCRIPTIONS
1. CALLING CARD SERVICES consist of calling card traffic generated via Codes.
2. 800 PIN SERVICE consists of inbound Switched Services combined with a PIN
800 Number accessed via four digit personal identification numbers ("PIN
NUMBERS") used by End-Users ("0000", "4663", "9675" and "9999" are not
available as PIN Numbers). The use of the PIN Numbers with a PIN 800
Number permits multiple End-Users to utilize the same 800/888 telephone
number on an individual basis. 800 Directory Assistance is not available
with the 800 PIN Service.
3. NOS DEDICATED SERVICES consist of: (i) End-User switched outbound long
distance traffic delivered to a Frontier Point of Presence ("POP") via
dedicated facilities and terminated over the Frontier network, and (ii)
switched inbound 800/888 traffic generated via 800 Numbers which traffic
originates on the Frontier network and is terminated by Frontier onto Equal
Net's or an End-User's dedicated facilities.
4. DIRECTORY ASSISTANCE TRANSPORT consists of Frontier terminating calls made
by End-Users to directory providers for assistance in locating a non-800
Number. "800 DIRECTORY ASSISTANCE" consists of calls made to directory
providers for assistance in locating a Frontier 800 Number.
5. INBOUND SERVICES collectively refers to inbound traffic generated via any
of the other Services.
6. INTERNATIONAL SERVICES consist of international traffic generated via any
of the other Services.
7. SWITCHED SERVICES consist of switched inbound and outbound long distance
traffic generated by End-Users that originates and terminates on the
Frontier network.
8. DEDICATED CARRIER TERMINATION consists of switched outbound long distance
traffic delivered by Equal Net to a Frontier Point of Presence ("POP") via
dedicated facilities and terminated over the Frontier network.
9. NATIONAL ORIGINATION SERVICES ("NOS"): collectively includes the Switched
Services, the NOS Dedicated Services and related Inbound Services and
International Services.
10. DOMESTIC means the 48 contiguous United States.
11. OFF-SHORE means Alaska, Hawaii, Puerto Rico and the US Virgin Islands.
12. OPERATOR SERVICES: see Operator Services Schedule. Operator Services
specifically exclude calling card operator assistance calls made via
Codes, which are deemed to be part of the Calling Card Services.
13
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EXHIBIT B
TEXT REDACTED
14
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EXHIBIT C
Page 1 of 3
CALL DETAIL RECORDS
ORDER PROCESSING PROCEDURES
LETTER OF AGENCY REQUIREMENTS
I. Call Detail Records; End-User DataBase Access.
1. If Equal Net requires call detail records for usage of the Services
("CDR") it has the option of (i) receiving CDR on a monthly basis via
magnetic tape, and/or (ii) having access on a daily basis via
electronic data exchange.
2. If Equal Net elects option 1. (i), then on or about the fifth Business
Day following the end of a Billing Cycle, Frontier will deposit with
an overnight delivery service for delivery to Equal Net a CDR Tape in
the format established by Frontier. CDR Tapes rate the Services at
Frontier rates in effect at the time the Services were provided and
must be re-rated by Equal Net at its tariffed rates.
3. If Equal Net elects option 1. (ii), then Frontier will make CDR
available for Equal Net's access Monday through Saturday, excluding
nationally recognized holidays, for the prior period's traffic. Equal
Net's access to CDR will be via electronic data exchange ("ELECTRONIC
EXCHANGE") to either (i) Equal Net's designated mainframe computer via
the IBM Information Network ("IIN") via Network Data Mover ("NDM"), or
(ii) dedicated personal computer via Procomm+ software. Equal Net is
liable for all transmission charges together with the cost of Frontier
compatible hardware and software necessary at its location for use of
Electronic Exchange. Frontier will archive CDR for 8 Business Days.
4. At Equal Net's written request, Frontier will provide Equal Net access
to Equal Net's End-User records resident on Frontier's systems in
Michigan via remote access ("RDA") so that Equal Net may perform
limited record inquiries and updates on a "real-time" basis. RDA is
available with Electronic Exchange only. Equal Net agrees to comply
with such policies, procedures and security measures as Frontier may
reasonably establish from time to time for Equal Net's use of RDA.
Frontier reserves the right to immediately discontinue RDA by Equal
Net if Frontier determines in its reasonable business judgment that
Equal Net is using RDA or data obtained therefrom in a manner
detrimental to Frontier or in violation of the confidentiality
provisions of this Agreement.
II. Order Processing Procedures.
1. Orders for Service are transmitted in a format designated by Frontier
via Electronic Exchange. At the time Equal Net submits an order for
Service, Equal Net shall furnish Frontier with the name, billing and
service addresses and ANI of each Presubscribed End-User (the "END-
USER INFORMATION"). The End-User Information is required for LEC
account set-up, normal call processing and handling NXX level customer
service. The End-User Information is deemed to be Equal Net's
Proprietary Information in accordance with Section 13. of the
Agreement.
2. If the traffic volume of Services ordered by Equal Net is such that
Frontier reasonably determines that a delay in processing orders is
required, Frontier may delay order processing for such period of time
as Frontier deems reasonable under the circumstances. If any such
delays result in Equal Net being unable to meet a minimum usage
requirement under the Agreement, Frontier agrees to proportionally
reduce the minimum requirement during the period orders are so
delayed.
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EXHIBIT C
Page 2 of 3
3. Codes and End-User ANIs:
A. Codes for existing End-User ANIs will be activated within 5
Business Days of receipt by Frontier of complete and accurate
End-User Information. Codes requested with End-User ANI orders
will be activated when the ANI is activated.
B. Equal Net understands and agrees that activation of End-User ANIs
is contingent on the End-User Information associated with such
ANIs complying with LEC established criteria. Assuming receipt
of properly formatted End-User Information that complies with the
LEC established criteria, ANIs will generally be activated within
10 Business Days of receipt by Frontier of the End-User
Information. If the End-User Information does not comply with
LEC criteria, Frontier will return the same to Equal Net for
Equal Net's correction and resubmission.
4. 800 Numbers:
Subject to (i) the Guidelines, (ii) delays attributable to third
parties, and (iii) otherwise applicable provisions of the Agreement,
800 Numbers will be activated and confirmed by Frontier within 2
Business Days of receipt by Frontier of a proper order in accordance
with the order processing requirements set forth below.
A. Orders must be submitted via Frontier established procedures and
formats and must include: (i) a letter of authorization if
Frontier is being appointed the RespOrg, and (ii) the End-User
Information for each 800 Number, including the ANI translation
for each 800 Number.
B. Equal Net may request that Frontier reserve a specific Frontier
800 Number on behalf of Equal Net at the charge set out in
Exhibit B. Frontier will either confirm reservation or indicate
unavailability within 2 Business Days of its receipt of the
request.
C. If Frontier has reserved a Frontier 800 Number for Equal Net and
Equal Net does not order activation of the reserved number in
accordance with item (a) above within 10 Business Days from the
date Frontier confirms the reservation, the reserved number will
be assigned to the Frontier pool of 800 numbers and be available
to Frontier for its own business purposes.
5. If the End-User Information or any other necessary order information
submitted by Equal Net is incomplete or inaccurate, Frontier will
return the same to Equal Net for correction and resubmission.
6. Service Cancellation: Frontier will, at Equal Net's request and at
Equal Net's sole risk and liability, block or cancel all or a portion
(to the extent permitted by its systems) of an End-User's Service(s).
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EXHIBIT C
Page 3 of 3
III. Letter of Agency Requirements.
Equal Net is responsible for obtaining and maintaining valid letters of
agency from prospective End-Users in accordance with the following:
1. Frontier acknowledges that at times Equal Net may obtain prospective
End-Users through telemarketing and tape recorded third party
verifications in accordance with FCC Guideline Subpart K section
64.1100 (c) as the same may be amended, interpreted or clarified
("VERBAL LOA"). Equal Net understands that some LECs will not accept
Verbal LOAs as valid authorization for a change of long distance
carriers and agrees that for prospective End-Users located in such
LECs' jurisdictions it will use Written LOAs. When Equal Net uses
written letters of agency ("WRITTEN LOAS") for prospective End-Users
it shall use a format that complies with FCC Guideline Subpart K
section 64.1150 as the same may be amended, interpreted or clarified.
Equal Net shall retain all Verbal LOA tapes and transcripts and
Written LOAs used and promptly make the originals available upon the
request of Frontier, a LEC or any regulatory agency.
2. Equal Net agrees that a Verbal LOA may be used to presubscribe a
prospective End-User to Frontier, but that the Verbal LOA will not be
accepted by Frontier as documentation with respect to any PIC or
"slamming" claims. Except as it may otherwise agree in writing,
Frontier is not obligated to "work" PIC disputes with respect to
"slamming" or similar claims from End-Users or prospective End-Users.
Frontier will refer LEC inquiries, and pass through any LEC charges
imposed on Frontier for such claims, directly to Equal Net, including
without limitation, PIC charges or any other charges and penalties
imposed by a LEC or regulatory agency (collectively, "PIC CHARGES"),
with respect to such claims. PIC Charges will be billed to Equal Net
periodically on an Invoice. Verbal LOAs and Written LOAs are
collectively referred to as "LOAS". EQUAL NET SHALL DEFEND AND
INDEMNIFY FRONTIER AGAINST ANY AND ALL CLAIMS, INCLUDING WITHOUT
LIMITATION, ANY END-USER, LEC OR REGULATORY AGENCY CLAIMS (INCLUDING
"SLAMMING CLAIMS"), ARISING FROM OR RELATED TO EQUAL NET'S USE OR
FAILURE TO USE OR PROVIDE VALID LOAS.
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EXHIBIT D
Page 1 of 2
FRONTIER ACCESS DIRECT
DEDICATED CARRIER TERMINATION SCHEDULE
Unless otherwise stated, domestic calls are measured in 6 second increments
after a 6 second minimum and international calls in 6 second increments after a
30 second minimum.
Dedicated Termination Service:
1. For domestic and international traffic (including Directory Assistance
Transport) originating from Equal Net's switch, Equal Net shall pay the
applicable rates set out in the attached pricing schedules.
2. Each DS-1 circuit interconnecting Equal Net to one of the Frontier POPs set
out in the attached Network Interconnections Schedule has a monthly minimum
usage requirement of 100,000 minutes. Frontier may add or delete a POP at
any time upon written notice. If a DS-1 circuit experiences a minimum
shortfall over two consecutive Billing Cycles, Frontier may provide Equal
Net with written notice of such fact and of Frontier's intent to disconnect
the under-minimum circuit if the minimum is not attained by the Billing
Cycle commencing after the date the notice is received. Equal Net shall
reimburse Frontier for any termination fees or charges paid by Frontier to
the circuit provider for early disconnection of such circuit.
3. Equal Net shall be responsible, at its sole expense, for all ordering of,
and charges for, dedicated facilities and equipment required to maintain
access, interconnection and interface with Frontier's equipment and
network.
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EXHIBIT D
Page 2 of 2
GATEWAY CARRIER SERVICE
LATA GATEWAY TABLE
<TABLE>
<CAPTION>
NORTHEAST SOUTHEAST MIDWEST SOUTHWEST WEST
- - ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
120 420 234 532 486 638
122 422 254 534 488 648
124 424 256 620 490 650
126 428 320 624 492 652
128 430 322 626 526 654
130 432 324 628 528 666
132 434 325 630 530 668
133 436 326 632 536 670
134 438 330 634 538 672
136 440 332 635 540 674
138 442 334 636 542 676
140 444 336 640 544 720
220 446 338 644 546 721
222 448 340 646 548 722
224 450 342 922 550 724
226 452 344 923 552 726
228 454 346 924 554 728
230 456 348 932 556 730
232 458 350 937 558 732
236 460 352 938 560 734
238 464 354 958 562 736
240 468 356 976 564 738
242 470 358 977 566 740
244 472 360 978 568 832
246 474 362 570 834
248 476 364 656 960
250 477 366 658 963
252 478 368 660 973
426 480 370 664 981
920 482 374 961
921 484 376 980
927 939 462
928 949 466
929 951 520
930 952 521
974 953 522
955 524
956
- - ------------------------------------------------------------------------------------------
</TABLE>
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EXHIBIT D
(a)(b)(c)
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EXHIBIT D
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EXHIBIT D
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EXHIBIT D
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EXHIBIT D
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EXHIBIT D
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EXHIBIT D
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EXHIBIT D
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EXHIBIT D
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EXHIBIT D
(a)(b)(c)
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EXHIBIT E
Page 1 of 3
FRONTIER ACCESS DIRECT
SWITCHED OUTBOUND SERVICES SCHEDULE
(NATIONAL ORIGINATION SERVICE)
Unless otherwise stated, (i) domestic switched and dedicated calls (inbound and
outbound) are measured in 6 second increments with a 6 second minimum, and (ii)
international switched and dedicated calls are measured in 6 second increments
after a 30 second minimum.
1. Upon Equal Net's request, Frontier will provide Purchase with an available
700 number (1-700-555-XXXX) and a recorded message that identifies Equal
Net to Presubscribed End-Users as their carrier. Frontier will make the
700 number available for Equal Net's use within 15 Business Days after
receipt of the request. Equal Net shall pay the applicable 700 Number
charges set out in Exhibit B of the Agreement.
2. If Equal Net has subscribed to Sub-CIC Services, the rates and terms set
out in the attached Sub-CIC Translation Schedule shall apply.
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EXHIBIT E
Page 2 of 3
TEXT REDACTED
35
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EXHIBIT E
Page 3 of 3
TEXT REDACTED
36
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EXHIBIT F
Page 1 of 5
FRONTIER ACCESS DIRECT
INBOUND 800 SERVICES SCHEDULE
(NATIONAL ORIGINATION SERVICE)
1. 800 Number Requirements.
A. In order to protect the integrity of its network Frontier may, without
liability, temporarily block any 800 Number having usage surges.
Frontier agrees to use reasonable efforts to promptly notify Equal Net
after blockage has occurred.
B. If usage of an 800 Number impacts Frontier in such a manner that the
unbillable (non-completed) calls for such 800 Number in any month are
greater than 7% of the billable (completed) calls for such 800 Number
in that month, Frontier may charge Equal Net a non-discountable $0.05
charge for each unbillable call in that month.
C. At Equal Net's written request and to the extent available to
Frontier, 800 Directory Assistance is available for Frontier 800
Numbers only at the charge set out in Exhibit B. Due to the fact that
800 Directory Assistance is provided through an arrangement with a
third party, the provision of 800 Directory Assistance by Frontier is
subject to the policies and procedures promulgated from time to time
by such third party. Equal Net understands that any Frontier 800
Number listed with 800 Directory Assistance is not published in any
written directory, but is only available on a call-in basis.
D. The transfer of 800 Numbers to another carrier is subject to the
Guidelines and the Frontier policies and procedures for 800/888
number/traffic transfers in effect at the time of the requested
transfer.
E. If an 800 Number is blocked at Equal Net's request, then for the
period the 800 Number is being blocked Frontier will, at Equal Net's
written request and expense, re-translate the 800 Number to Equal
Net's customer service telephone number.
37
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EXHIBIT F
Page 2 of 5
TEXT REDACTED
38
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EXHIBIT F
Page 3 of 5
TEXT REDACTED
39
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EXHIBIT F
Page 4 of 5
TEXT REDACTED
40
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EXHIBIT F
Page 5 of 5
TEXT REDACTED
41
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EXHIBIT G
Page 1 of 3
FRONTIER ACCESS DIRECT
DEDICATED OUTBOUND SERVICES SCHEDULE
(NATIONAL ORIGINATION SERVICE)
Unless otherwise stated, (i) domestic switched and dedicated calls (inbound and
outbound) are measured in 6 second increments with a 6 second minimum, and (ii)
international switched and dedicated calls are measured in 6 second increments
after a 30 second minimum.
1. DS-1 SERVICES (collectively, inbound and outbound NOS Dedicated Services)
are available at the Frontier POPs set out on the attached Network
Interconnection Schedule. Frontier may add or delete a POP at any time upon
written notice. At Equal Net's written request, its DS-1 circuits will
interconnect a Frontier POP to an End-User's premise. Equal Net is
responsible for coordinating LEC installation of local loops necessary for
the DS-1 Services as well as installation and monthly recurring charges
associated with dedicated circuits necessary for the DS-1 Services.
2. At Equal Net's written request, Frontier may provide the premise equipment
described in Exhibit B (the "EQUIPMENT") to End-Users that need the same to
access the DS-1 Services. Frontier will install and maintain the
Equipment. End-Users must sign an Equipment Agreement with Frontier in the
format supplied or approved by Frontier. Equal Net shall bear the risk of
loss of the Equipment if the Equipment is not returned to Frontier in good
working condition, normal wear and tear excepted.
3. At Equal Net's written request, Frontier may provide special 800
applications for the dedicated Inbound Services as described in Exhibit B
(collectively, the "APPLICATIONS"). All Applications require Equal Net to
have Frontier compatible equipment and some require RDA.
4. Equal Net shall be charged and pay the for the DS-1 Services (domestic and
international) in accordance with the rates set out in the attached pricing
schedules as well as applicable charges set out in Exhibit B.
5. "TEXT REDACTED"
42
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EXHIBIT G
Page 2 of 3
TEXT REDACTED
43
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EXHIBIT G
Page 3 of 3
TEXT REDACTED
44
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EXHIBIT H
Page 1 of 5
INTERNATIONAL SERVICES SCHEDULE
(NATIONAL ORIGINATION SERVICE)
The rates and discount credits described in this Schedule and any attachments
hereto are in lieu of any standard volume discounts and any promotional rates or
discounts that may from time to time be offered by Frontier for the Services.
Unless otherwise stated, international calls are measured in 6 second increments
after a 30 second minimum.
1. For non-calling card switched and dedicated International Services, Equal
Net shall pay the international rates set out in the attached pricing
schedules.
2. For international Directory Assistance Services, if available, Equal Net
shall pay the applicable standard Frontier resale rates in effect when
calls are made.
45
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EXHIBIT H
Page 2 of 8
TEXT REDACTED
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FRONTIER INTERLINK
CALLING CARD SERVICES SCHEDULE
I. CALLING CARD SERVICE FEATURES
Frontier InterLink consists of a customized program for the Calling Card
Services including a Equal Net unique 800 gateway number and specially
recorded voice and operator scripting as further described below.
1. This Service consists of 800 Number access, full-featured calling card
service, providing both automated and manual processing of calls.
2. Platform provides capability for customized messages and dialing
instructions.
3. 10 digit and 14 digit Code lengths are available allowing for
adaptation of line-based numbers; i.e., End-User's 10-digit telephone
number plus a 4-digit PIN. Codes are assigned and maintained by Equal
Net. The system will edit for duplicate number requests.
4. International Calling Capability:
A. Unless restrictions are placed by Equal Net, calls may be
terminated to all international countries serviced by Frontier.
B. International origination capability is provided from many
countries. System access is provided from shared toll free
access numbers. Currently, Frontier supports international
origination service from 60 countries (see attached country
service list).
C. Call termination restrictions may be defined by Equal Net on a
global 800 Number basis or on a Code specific basis.
International call blocking is provided on a country code basis.
Allowing domestic 809 termination while blocking international
809 calls is available.
5. Basic Features:
CALL RE-ORIGINATION: Originate multiple calls and use multiple features
without re-dialing 800 number or Code by pressing the "#" key for 2 to 3
seconds. A bong tone will be provided followed by a voice prompt allowing
the caller to either make a call or choose another feature option.
PERSONAL SPEED DIALING: After the 800 access number and the Code have been
entered, the caller may select the Speed Dial option to quickly reach up to
nine pre-programmed telephone numbers. Both personal and group speed dial
numbers may be established and are changeable by the End-User.
ACCOUNTING CODES: Account codes are available allowing End-Users to track
call activity per user. The account code is entered after the Code.
Account codes may be either "validated" allowing call completion only on
select digits, or they may be "non-validated" in which any combination of
digits will be accepted. Account codes may be from 2 to 4 digits in
length. Account code parameters are definable on a per Code basis.
Assignment and management of account codes is handled via the order entry
systems.
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6. Ancillary Services:
AUDIOTEXT - INFORMATION SERVICES: Provides easy access to latest news,
weather, sports, financial news, and fun features, such as soap opera
updates, horoscopes, TV listings and the "joke-of-the-day".
CONFERENCE CALLING SERVICES: An operator contacts each participant to join
the call. Option for two-way (talk and listen) or listen only. "Roll-
call" is an optional feature of operator-assisted conferencing. Cardholder
is billed for all usage associated with the conference call.
DIRECTORY ASSISTANCE: Operator scripting will be under Equal Net's brand
name. Once the desired number is located and communicated to the caller,
the operator will offer to complete the call.
VOICE MAIL SERVICES: Voice-prompted interactive system providing capability
to leave and make messages for other mailbox End-Users from a personalized
voice mailbox. An optional "direct-in" 800 number may be provided giving
callers capability to leave a voice mail message in the End-User's voice
mail box.
VOICE MESSAGE DELIVERY: Enables an End-User to record a message and have it
delivered to any domestic telephone. Allows End-User to personalize the
message. Call delivery attempts are made in 15 minute increments with a
maximum of 8 delivery attempts. Delivery of message may be delayed up to
96 hours. Messages may be up to 3 minutes in length. Activation of the
Message Delivery feature must be initiated by the End-User.
Additional features may be added and features may be modified or canceled
upon written notice to Equal Net.
III. CALLING CARD SUPPORT
1. Required communications hardware and software at Equal Net's locations
are the responsibility of Equal Net. Equal Net is also responsible
for making sure its equipment and facilities are compatible with
Frontier's. As the Frontier systems for calling card activation,
maintenance and call detail are not integrated with the order entry
systems for 1+ and 800 services, it may be necessary for Equal Net to
utilize two different data entry systems to transmit calling card
orders to Frontier.
2. Branding\Scripting: Branding may be provided in the name of Equal Net.
Standard system scripts are provided. If Equal Net desires, scripts
may be customized at the rates set out in the pricing schedules.
3. Order Entry: Orders are submitted at Equal Net's expense to Frontier
in a batch mode via use of Frontier's Bulletin Board System which is
accessed via an 800 Number. Batch file updates are processed by
Frontier twice each Business Day. Record layout formats are attached.
4. Card Production: Equal Net is responsible for card production and
distribution.
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5. End-User Customer Service: Callers reaching a Frontier operator for
customer service related questions (i.e., credit requests, rate
quotes, etc.) will at Frontier's option either be given an 800/888
number to reach the Equal Net's appropriate regional customer service
department or will be directly transferred to Equal Net. Applicable
operator and usage charges will be charged to the Equal Net for this
call activity. Equal Net shall provide Frontier with a list of Equal
Net's regional customer service 800 numbers, and timely update the
same as necessary, for this call activity.
6. Change Code Service: Equal Net may, during the hours and via the
procedures established by Frontier, verbally request activation or
cancellation of a Code. Upon receipt of such a request and provided
Equal Net has all the necessary information, Frontier will use
reasonable efforts to add or cancel a Code. Equal Net shall be solely
responsible for End-User claims resulting from this verbal request, as
well as confirmation of the Code activation/cancellation within five
(5) Business Days after the verbal request via a batch file.
7. Fraud Monitoring:
A. Standard fraud monitoring parameters are currently set as follows
(and may be modified by Frontier): usage exceeds 4 hours on a
single domestic call (2 hours international on a single call) in
a 24 hour period, or when a Code has more than 50 completed call
attempts in a 24 hour period, whichever occurs first. Further,
flag thresholds may be set at Equal Net's request on a Code-by-
Code basis to assist in the detection and shut-down of fraud
activity. For example: set a flag on the number of calls or
minutes in a 24 hour period; specify originating or terminating
numbers for monitoring; set parameters on the length of a single
call, or total minutes of usage of the Code.
B. When the monitoring parameters are exceeded, Frontier will
promptly notify Equal Net of such fact. If Equal Net cannot be
notified, Frontier may restrict the use of a Code if Frontier
determines there is a sufficient risk of fraudulent use.
C. If the monitoring parameters are exceeded for a Code and
Frontier fails to provide Equal Net with prompt notice thereof,
and Equal Net has otherwise complied with Frontier's recommended
Code security procedures, Equal Net is eligible for a credit for
usage charges on such Code determined by Frontier to have been
fraudulent.
D. Except as otherwise covered under C above, Equal Net is liable
for all charges with respect to fraudulent use of a Code.
8. Operator Assistance: Frontier will provide live operator assistance
as a default if an End-User fails to correctly respond to system
prompts twice in succession. Operator assistance can also be accessed
by End-Users at any time by dialing zero.
IV. RATES & CHARGES
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INTERLINK CALLING CARD
Call Rating Methodology
...TO...
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
...CALLS PLACED FROM... DOMESTIC 48 OFFSHORE (AK, HI, CANADA INTERNATIONAL LOCATIONS
USVI/PR)
---------------------------------------------------------------------------------------------
DOMESTIC 48 NOS Domestic Rate Offshore Canada International Terminating
Terminating Rate Terminating Rate Rate
- - ------------------------------------------------------------------------------------------------------------------------------
OFFSHORE (AK, HI, USVI/PR) Offshore Offshore Offshore Offshore Originating Rate
Originating Rate Originating Rate Originating Rate PLUS International
PLUS Offshore PLUS Canada Terminating Rate
Terminating Rate Terminating Rate
- - ------------------------------------------------------------------------------------------------------------------------------
CANADA Canada Canada Canada Canada Originating Rate
Originating Rate Originating Rate Originating Rate PLUS International
PLUS Offshore PLUS Canada Terminating Rate
Terminating Rate Terminating Rate
- - ------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL LOCATIONS Freephone Freephone Freephone Freephone International
International International International Originating Rate PLUS
Originating Rate Originating Rate Originating Rate International Terminating
PLUS Offshore PLUS Canada Rate
Terminating Rate Terminating Rate
- - ------------------------------------------------------------------------------------------------------------------------------
See rate sheets for actual charges
</TABLE>
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TOLL FREE P.I.N. SERVICE SCHEDULE
Upon Equal Net's request and payment of the set-up fee set out in Exhibit B for
the 800 PIN Service, the 800 PIN Service will be available under the following
terms and conditions. Provided Equal Net in not in default, the set-up fee will
be credited to the Invoice for the Billing Cycle in which Equal Net first has
$2,500 in 800 PIN Service usage.
1. "TEXT REDACTED"
2. When the 800 PIN Service is ordered by Equal Net, Frontier will
initially provide Equal Net with 2 PIN 800 Numbers. At such time as
all PIN 800 Numbers assigned to Equal Net have at least 1,000 PIN
Numbers assigned to each and either (i) each active PIN Number is
averaging at least $4.00 in charges each month, or (ii) all active PIN
Numbers aggregate at least $4,000 in charges each month, then upon the
written request of Equal Net, Frontier will provide an additional PIN
800 Number to Equal Net.
3. Calls to a PIN 800 Number for which a PIN Number is not entered or for
which an invalid PIN Number is entered are delivered by Frontier to
Equal Net's customer service center for handling. Equal Net shall pay
for such calls at the applicable rates set forth in the attached
pricing schedule. Frontier may modify or cancel this procedure at any
time upon written notice to Equal Net.
4. Equal Net shall pay the rates set out in the attached pricing
schedules. Calls are measured in 6 second increments after an 18
second minimum.
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PRIVATE LINE SERVICES SCHEDULE
1. PRIVATE LINE SERVICES:
(a) Frontier shall, in accordance with this Schedule, provide point-to-
point DS-1, DS-3, OC-3 and OC-12 circuit capacity as ordered by Equal
Net (the "PRIVATE LINE SERVICES").
(b) Equal Net understands that the Private Line Services will be provided
on a new SONET-ring network that is currently being constructed by
Frontier. Frontier has provided Equal Net with the estimated
completion dates for the network. Once ordered, Frontier will use
reasonable efforts to have the Private Line Services available to
Equal Net in accordance with such dates. Equal Net understands and
agrees that such dates are estimates only, that Frontier is not
warranting that the Private Line Services will be available by such
dates and that the provision of service is contingent on the
availability of Frontier facilities.
(c) Except if the Agreement is terminated by a Party for the other Party's
uncured breach, then, notwithstanding the term of the Agreement, the
Agreement will continue in effect with respect to the Private Line
Services as long as a circuit installed under this Schedule remains in
operation.
(d) Unless one Party provides the other with at least 90 days prior
written notice of its intent not to renew a circuit after the
circuit's minimum commitment period expires, then, unless the Parties
agree otherwise in writing, a circuit shall automatically renew for an
additional one year period at Frontier's then current rates and
charges in effect for a one year term commitment for that circuit
type. The foregoing notice and renewal process shall also apply for
each additional renewal period.
2. BILLING AND PAYMENT; MINIMUM COMMITMENTS:
(a) Equal Net shall pay Frontier for the Private Line Services at the
rates and charges set out below. Equal Net is also liable for
applicable taxes and governmental assessments with respect to its use
of the Private Line Services. Billing for a circuit shall commence
upon the earlier to occur of (i) 30 days following the date Frontier
notifies Equal Net, in writing or via electronic transmission, that
the ordered circuit capacity is available, and (ii) the date the
ordered circuit capacity is accepted by Equal Net.
(b) Monthly recurring charges are invoiced to Equal Net in advance and
installation and special charges upon order completion. Invoicing and
payment terms are set out in the Agreement.
(c) The pricing in this Schedule is limited to the Private Line Services
provided between "on-net" Frontier city pair nodes both resident on
Frontier's SONET-ring network. If Frontier's cost in providing the
Private Line Services is increased due to circumstances beyond its
reasonable control, or Frontier elects to pass through any
governmental or regulatory assessments related to its provision of the
Private Line Services, then Frontier may revise the rates and charges
in this Schedule upon thirty (30) days written notice to Equal Net.
Equal Net may cancel any circuits subject to a rate/charge increase
upon written notice to Frontier given no later than 30 days after
Equal Net's receipt of the increase notice.
(d) Equal Net shall be liable for the applicable minimum circuit terms and
minimum circuit commitment charges set out below.
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EXHIBIT 10.46
WARRANT AGREEMENT
-----------------
This WARRANT AGREEMENT dated as of October 1, 1997, between EQUALNET
HOLDING CORP., a Texas corporation (the "Company"), and THE WILLIS GROUP, LLC, a
Texas limited liability company ("Willis" and, together with any transferee of
Warrants or Warrant Shares, the "Warrant Holders(s)").
WHEREAS, Willis, the Company, EqualNet Corporation, Telesource, Inc., and
EqualNet Wholesale Services, Inc., have entered into a certain Note and Warrant
Purchase Agreement (the "Note Purchase Agreement") dated October 1, 1997; and
WHEREAS, the Company proposes to issue to Willis as partial consideration
for Willis's entering into the Note Purchase Agreement, common stock purchase
warrants (the "Warrants") to purchase up to 200,000 shares (the "Warrant
Shares") of the Company's common stock, par value $0.01 per share (the "Common
Stock"), each Warrant entitling the holder thereof to purchase one share of
Common Stock.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein and in the Agreement set forth and for other good and valuable
consideration, the parties hereto agree as follows:
1. ISSUANCE OF WARRANTS; FORM OF WARRANT. The Company will issue and
deliver the Warrants to Willis on the Closing Date referred to in the Note
Purchase Agreement. The aggregate number of Warrants to be issued and delivered
shall be 200,000 (subject to further limitation as provided herein). The
Warrants shall be exercisable on or after October 1, 1997. The text of each
Warrant shall be substantially as set forth in the Warrant Certificate attached
as Exhibit A hereto. The Warrants shall be executed on behalf of the Company by
the manual or facsimile signature of the present or any future Chairman of the
Board, President, or Vice President of the Company, attested by the manual or
facsimile signature of the present or future Secretary or an Assistant Secretary
of the Company. A Warrant bearing the manual or facsimile signature of
individuals who were at any time the proper officers of the Company shall bind
the Company notwithstanding that such individuals or any of them shall have
ceased to hold such offices prior to the delivery of such Warrant or did not
hold such offices on the date of this Warrant Agreement.
Warrants shall be dated as of the date of execution thereof by the Company
either upon initial issuance or upon division, exchange, substitution or
transfer.
Subject to Article V of the Note Purchase Agreement, the demand and the
piggy-back registration rights set forth in Section 16 hereof may be exercised
at any time during the term of the Warrants.
2. REPRESENTATIONS AND WARRANTIES.
(a) The Company hereby represents and warrants as follows:
<PAGE>
(i) POWER AND AUTHORITY. The Company has all requisite corporate power
and authority, and has taken all corporate action necessary, to execute,
deliver and perform this Warrant Agreement, to grant, issue, and deliver
the Warrants and to authorize and reserve for issuance and, upon payment
from time to time of the Exercise Price, to issue and deliver the shares of
Common Stock or other securities issuable upon exercise of the Warrants.
This Warrant Agreement has been duly executed and delivered by the Company.
(ii) RESERVATION, ISSUANCE AND DELIVERY OF COMMON STOCK. There have
been reserved for issuance, and the Company shall at all times keep
reserved, out of the authorized and unissued shares of Common Stock, a
number of shares sufficient to provide for the exercise of the rights of
purchase represented by the Warrants, and such shares, when issued upon
receipt of payment therefor or upon a net exercise in accordance with the
terms of the Warrants and of this Warrant Agreement, will be legally and
validly issued, fully paid and non-assessable and will be free of any
preemptive rights of shareholders or any restrictions.
(b) The Warrant Holder hereby represents and warrants as follows:
(i) ACCREDITED INVESTOR. The Warrant Holder 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. The Warrant Holder has made its own evaluation of
its investment in the Warrants, based upon such information as is available
to it and without reliance upon the Company or any other person or entity,
and the Warrant Holder agrees that neither the Company nor any other person
or entity has any obligation to furnish any additional information to the
Warrant Holder except as expressly set forth herein.
3. CONDITIONS TO PURCHASE. Willis's obligations hereunder shall be subject
to satisfaction of the following conditions on the Closing Date referred to in
the Note Purchase Agreement:
(a) All corporate proceedings and other legal matters incident to the
authorization, form and validity of this Warrant Agreement and the Warrants
and all other legal matters relating to this Warrant Agreement, the
Warrants and the transactions contemplated hereby shall be satisfactory in
all respects to Vinson & Elkins L.L.P., counsel for Willis, in their
reasonable judgment, and the Company shall have furnished to such counsel
all documents and information that they may reasonably request to enable
them to pass judgment upon such matters.
(b) There shall have been duly tendered to Willis or upon the order of
Willis a certificate or certificates representing the Warrants.
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(c) Each of the "Conditions Precedent" set forth in Article VII
of the Note Purchase Agreement shall have been satisfied.
4. REGISTRATION. The Warrants shall be numbered and shall be registered on
the books of the Company (the "Warrant Register") as they are issued. The
Warrants shall be registered initially in such names and such denominations as
Willis has specified to the Company.
5. EXCHANGE OF WARRANT CERTIFICATES. Subject to any restriction upon
transfer set forth in this Warrant Agreement, each Warrant certificate may be
exchanged at the option of the Warrant Holder thereof for another certificate or
certificates of different denominations entitling the Warrant Holder thereof to
purchase upon surrender to the Company or its duly authorized agent a like
aggregate number of Warrant Shares as the certificate or certificates
surrendered then entitle such Warrant Holder to purchase. Any Warrant Holder
desiring to exchange a Warrant certificate or certificates shall make such
request in writing delivered to the Company, and shall surrender, properly
endorsed, the certificate or certificates to be so exchanged. Thereupon, the
Company shall execute and deliver to the person entitled thereto a new Warrant
certificate or certificates, as the case may be, as so requested. Any Warrant
issued upon exchange, transfer or partial exercise of the Warrants shall be the
valid obligation of the Company, evidencing the same generic rights and entitled
to the same generic benefits under this Warrant Agreement as the Warrants
surrendered for such exchange, transfer or exercise.
6. TRANSFER OF WARRANTS. Subject to the provisions of Section 14 hereof,
the Warrants shall be transferrable only on the Warrant Register upon delivery
to the Company of the Warrant certificate or certificates duly endorsed by the
Warrant Holder or by his duly authorized attorney-in-fact or legal
representative, or accompanied by proper evidence of succession, assignment or
authority to transfer. In all cases of transfer by an attorney-in-fact, the
original power of attorney, duly approved, or an official copy thereof, duly
certified, shall be deposited with the Company. In case of transfer by
executors, administrators, guardians or other legal representatives, duly
authenticated evidence of their authority shall be produced, and may be required
to be deposited with the Company in its discretion. Upon any registration of
transfer, the Company shall deliver a new Warrant or Warrants to the person
entitled thereto.
7. TERM OF WARRANTS; EXERCISE OF WARRANTS.
(a) Each Warrant entitles the Warrant Holder thereof to purchase one share
of Common Stock during the time period and subject to the conditions set forth
in the respective Warrant Certificates at an exercise price of $1.00 per share,
subject to adjustment in accordance with Section 12 hereof (the "Exercise
Price"). Each Warrant terminates on the fifth anniversary of the date on which
such Warrant becomes exercisable in accordance with its terms (the "Expiration
Date").
(b) The Exercise Price and the number of shares issuable upon exercise of
Warrants are subject to adjustment upon the occurrence of certain events,
pursuant to the provisions of Section 12
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of this Warrant Agreement. Subject to the provisions of this Warrant Agreement,
each Warrant Holder shall have the right, which may be exercised as expressed in
such Warrants, to purchase from the Company (and the Company shall issue and
sell to such Warrant Holder) the number of fully paid and nonassessable shares
of Common Stock specified in such Warrants, upon surrender to the Company, or
its duly authorized agent of such Warrants, with the purchase form on the
reverse thereof duly filled in and signed, and upon payment to the Company of
the Exercise Price, as adjusted in accordance with the provisions of Section 12
of this Warrant Agreement or upon a net exercise pursuant to this subsection of
this Warrant Agreement, for the number of shares in respect of which such
Warrants are then exercised. The Warrant Holder may (i) pay the Exercise Price
in cash, by certified or official bank check payable to the order of the
Company, or by the surrender to the Company of securities of the Company having
a Market Price equal to the Exercise Price or by the surrender to the Company of
indebtedness owed by the Company pursuant to the Note Purchase Agreement (in
which case the Company will accept such specified unpaid principal amount in
full payment, as if such payment had been made in cash) or (ii) make an exercise
of Warrants for "Net Warrant Shares." The number of Net Warrant Shares will be
determined as described by the following formula: Net Warrant Shares =
[WS x (MP-EP)]/MP. "WS" is the number of Warrant Shares issuable upon exercise
of the Warrants or portion of Warrants in question. "MP" is the Market Price of
the Common Stock on the last trading day preceding the date of the request to
exercise the Warrants. "Market Price" shall mean the then current market price
per share of Common Stock, as determined in paragraph 12.1(e). "EP" shall mean
the Exercise Price.
Subject to paragraph 7(c) hereof, upon such surrender of Warrants, and payment
of the Exercise Price, with cash or securities, or upon a net exercise as
aforesaid, the Company at its expense shall issue and cause to be delivered with
all reasonable dispatch to or upon the written order of the Warrant Holder and
in such name or names as the Warrant Holder may designate, a certificate or
certificates for the number of full shares of Common Stock so purchased upon the
exercise of such Warrants, together with cash, as provided in Section 12 of this
Warrant Agreement, in respect of any fraction of a share of such stock otherwise
issuable upon such surrender. Such certificate or certificates shall be deemed
to have been issued, and any person so designated to be named therein shall be
deemed to have become a holder of record of such shares, as of the date of the
surrender of such Warrants and payment of the Exercise Price or receipt of
shares by net exercise as aforesaid. The rights of purchase represented by the
Warrants shall be exercisable, at the election of the Warrant Holders thereof,
either in full or from time to time in part and, in the event that any Warrant
is exercised in respect of less than all of the shares purchasable on such
exercise at any time prior to the Expiration Date, a new certificate evidencing
the remaining Warrant or Warrants will be issued.
(c) So long as the Company satisfies the continued listing requirements of
the Nasdaq National Market, the exercise rights set forth above and the right to
convert the Note as set forth in the Note Purchase Agreement shall be limited so
that, upon conversion of the Note or exercise of the Warrants or both, the
Purchaser's aggregate ownership of the Company will be less than 20% of the
shares of Common Stock outstanding on the date of issuance of the Note and the
Warrants; provided that such limitation shall cease and this Section 7(c) shall
become null and void upon the
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approval of the issuance of the Note and the Warrants by the shareholders of the
Company or the National Association of Securities Dealers, Inc. or upon such
other event as shall allow the conversion or exercise or both, as appropriate,
without violating the applicable requirements of the Nasdaq National Market.
8. COMPLIANCE WITH GOVERNMENT REGULATIONS. The Company covenants that if
any share of Common Stock required to be reserved for purposes of exercise or
conversion of Warrants require, under any federal or state law or applicable
governing rule or regulation of any national securities exchange, registration
with or approval of any governmental authority, or listing on any such national
securities exchange, before such shares may be issued upon exercise, the Company
will use its commercially reasonable efforts to cause such shares to be duly
registered, approved or listed on the relevant national securities exchange, as
the case may be.
9. PAYMENT OF TAXES. The Company will pay all documentary stamp taxes, if
any, attributable to the initial issuance of Warrant Shares upon the exercise of
Warrants and any securities issued pursuant to Section 12 hereof; provided
however, that the Company shall not be required to pay any tax or taxes which
may be payable in respect of any transfer involved in the issue or delivery of
any Warrants or certificates for Warrant Shares and any securities issued
pursuant to Section 12 hereof in a name other than that of the Warrant Holder of
such Warrants.
10. MUTILATED OR MISSING WARRANTS. In case any of the Warrants shall be
mutilated, lost, stolen or destroyed, the Company shall issue and deliver in
exchange and substitution for and upon cancellation of the mutilated Warrant, or
in lieu of and in substitution for the Warrant lost, stolen, or destroyed, a new
Warrant of like tenor and representing an equivalent right or interest.
11. RESERVATION OF WARRANT SHARES; PURCHASE AND CANCELLATION OF WARRANTS.
The Company shall at all times reserve, out of the authorized and unissued
shares of Common Stock, a number of shares sufficient to provide for the
exercise of the rights of purchase represented by the Warrants, and the transfer
agent for the Common Stock ("Transfer Agent") and every subsequent transfer
agent for any shares of the Company's capital stock issuable upon the exercise
of any of the rights of purchase aforesaid are hereby irrevocably authorized and
directed at all times until the Expiration Date to reserve such number of
authorized and unissued shares as shall be requisite for such purpose. The
Company will keep a copy of this Warrant Agreement on file with the Transfer
Agent and with every subsequent transfer agent for any shares of the Company's
capital stock issuable upon the exercise of the rights of purchase represented
by the Warrants. The Company will supply the Transfer Agent and any such
subsequent transfer agent with duly executed stock certificates for such purpose
and will itself provide or otherwise make available any cash which may be
issuable as provided by Section 13 of this Warrant Agreement. The Company will
furnish to the Transfer Agent and any such subsequent transfer agent a copy of
all notices of adjustments, and certificates related thereto, transmitted to
each Warrant Holder pursuant to Section 12.3 hereof. All warrants surrendered in
the exercise of the rights thereby evidenced shall be canceled, and such
canceled Warrants shall constitute sufficient evidence of the number of shares
of stock which have been issued upon the exercise of such Warrants (subject to
adjustment as herein provided). No
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shares of stock shall be subject to reservation in respect of the Warrants
subsequent to the Expiration Date except to the extent necessary to comply with
the terms of this Warrant Agreement.
12. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES. The number
and kind of securities purchasable upon the exercise of each Warrant and the
Exercise Price shall be subject to adjustment from time to time upon the
occurrence of certain events, as hereafter defined.
12.1. Mechanical Adjustments. The number of Warrant Shares purchasable
upon the exercise of each Warrant and the Warrant Price shall be subject to
adjustment as follows:
(a) In case the Company shall (i) pay a dividend to holders of
Common Stock in shares of Common Stock or make a distribution to
holders of Common Stock in shares of Common Stock, (ii) subdivide its
outstanding shares of Common Stock into a larger number of shares of
Common Stock, (iii) combine its outstanding shares of Common Stock
into a smaller number of shares of Common Stock or (iv) issue by
reclassification of its shares of Common Stock other securities of the
Company (including any such reclassification in connection with a
consolidation or merger in which the Company is the surviving
corporation), the number of Warrant Shares purchasable upon exercise
of each Warrant immediately prior thereto shall be adjusted so that
the Warrant Holder shall be entitled to receive the kind and number of
Warrant Shares or other securities of the Company which he would have
owned or have been entitled to receive after the happening of any of
the events described above, had such Warrant been exercised
immediately prior to the happening of such event or any record date
with respect thereto regardless of whether the Warrants are
exercisable at the time of the happening of such event or at the time
of any record date with respect thereto. An adjustment made pursuant
to this paragraph (a) shall become effective immediately after the
effective date of such event retroactive to the record date, if any,
for such event.
(b) In case the Company shall issue rights, options, or Warrants
to holders of its outstanding Common Stock, without any charge to such
holders entitling them to subscribe for or purchase shares of Common
Stock at a price per share which is lower at the record date
mentioned below than the Exercise Price, then (i) the Exercise in
effect immediately prior to such issuance shall immediately be reduced
to the price that is equivalent to such consideration received by the
Company upon such issuance and (ii) the number of Warrant Shares
thereafter purchasable upon the exercise of each Warrant shall be
increased in direct proportion to the increase in the number of shares
of Common Stock outstanding on a fully diluted basis immediately prior
to such issuance; provided that if such shares of Common Stock,
options or other convertible securities (other than Excluded Stock (as
defined in the Note Purchase Agreement)) are issued for consideration
per share less than the Exercise Price at the date of such issue or
sale, the number of shares of Common Stock that immediately prior to
such issuance the Warrant Holder shall have been entitled to
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purchase pursuant to this Warrant shall be increased to the greater of
(i) that number of shares of Common Stock that immediately prior to
such issuance the Warrant Holder shall have been entitled to purchase
pursuant to this Warrant multiplied by a fraction, the numerator of
which is the Exercise Price and the denominator of which is such
consideration per share, and (ii) the number of shares of Common Stock
otherwise calculated under this Section 12.1. Such adjustment shall be
made whenever such rights, options, or Warrants are issued, and shall
become effective immediately after the record date for the
determination of stockholders entitled to receive such rights,
options, or Warrants; provided that this Section 12.1(b) shall
expire and be of no force and effect on or after April 1, 1998.
(c) In case the Company shall distribute to holders of its shares
of Common Stock evidences of its indebtedness or assets (including
cash dividends or other cash distributions) or rights, options, or
warrants, or convertible or exchangeable securities containing the
right to subscribe for or purchase shares of Common Stock (excluding
those referred to in paragraph (b) above), then in each case the
number of Warrant Shares thereafter purchasable upon the exercise of
each Warrant shall be determined by multiplying the number of Warrant
Shares theretofore purchasable upon the exercise of each Warrant by a
fraction, of which the numerator shall be the then current market
price per share of Common Stock (as determined in accordance with
paragraph (e) below) on the date of such distribution, and of which
the denominator shall be the then current market price per share of
Common Stock, less the then fair value (as determined in good faith by
the Board of Directors of the Company) of the portion of the assets or
evidences of indebtedness so distributed or of such subscription
rights, options, or warrants, or of such convertible or exchangeable
securities applicable to one share of Common Stock. Such adjustment
shall be made whenever any such distribution is made, and shall become
effective on the date of distribution retroactive to the record date
for the determination of stockholders entitled to receive such
distribution.
In the event of distribution by the Company to holders of its
shares of Common Stock of stock of a subsidiary or securities
convertible into or exercisable for such stock, then in lieu of an
adjustment in the number of Warrant Shares purchasable upon the
exercise of each Warrant, the Warrant Holder, upon the exercise
thereof at any time after such distribution, shall be entitled to
receive from the Company, such subsidiary, or both, as the Company
shall determine, the stock or other securities to which such Warrant
Holder would have been entitled if such Warrant Holder had exercised
such Warrant immediately prior thereto regardless of whether the
Warrants are exercisable at such time, all subject to further
adjustment as provided in this subsection 12.1; provided, however,
that no adjustment in respect of dividends or interest on such stock
or other securities shall be made during the term of a Warrant or upon
the exercise of a Warrant; provided forth that this Section 12.1(c)
shall expire and be of no force and effect on or after April 1, 1998.
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(d) In case the Company shall sell and issue shares of Common
Stock (other than pursuant to rights, options, warrants, or
convertible securities initially issued before the date of this
Agreement) or rights, options, warrants, or convertible securities
containing the right to subscribe for or purchase shares of Common
Stock (excluding shares, rights, options, warrants or convertible
securities issued in any of the transactions described in paragraphs
(a), (b) or (c) above) at a price per share of Common Stock
(determined, in the case of such rights, options, Warrants or
convertible securities, by dividing (w) the total of the amount
received or receivable by the Company (determined as provided below)
in consideration of the sale and issuance of such rights, options,
warrants, or convertible securities, by (x) the total number of shares
of Common Stock covered by such rights, options, warrants, or
convertible securities) lower than the Exercise Price in effect
immediately prior to such sale and issuance, then (i) the Exercise in
effect immediately prior to such issuance shall immediately be reduced
to the price that is equivalent to such consideration received by the
Company upon such issuance and (ii) the number of Warrant Shares
thereafter purchasable upon the exercise of the Warrants shall be
increased in direct proportion to the increase in the number of shares
of Common Stock outstanding on a fully diluted basis immediately prior
to such issuance; provided that if such shares of Common Stock,
options or other convertible securities (other than Excluded Stock)
are issued for consideration per share less than the Exercise Price at
the date of such issue or sale, the number of shares of Common Stock
that immediately prior to such issuance the Warrant Holder shall have
been entitled to purchase pursuant to this Warrant shall be increased
to the greater of (i) that number of shares of Common Stock that
immediately prior to such issuance the Warrant Holder shall have been
entitled to purchase pursuant to this Warrant multiplied by a
fraction, the numerator of which is the Exercise Price and the
denominator of which is such consideration per share, and (ii) the
number of shares of Common Stock otherwise calculated under this
Section 12.1 Such adjustment shall be made successively whenever such
as issuance is made; provided that this Section 12.1(d) shall expire
and be of no force and effect on or after April 1, 1998. For the
purposes of such adjustments, the consideration received or receivable
by the Company for rights, options, warrants, or convertible
securities shall be deemed to be the consideration received by the
Company for such rights, options, warrants, or convertible securities,
plus the consideration or premiums stated in such rights, options,
warrants, or convertible securities to be paid for the shares of
Common Stock covered thereby. In case the Company shall sell and issue
shares of Common Stock, or rights, options, warrants, or convertible
securities containing the right to subscribe for or purchase shares of
Common Stock, for a consideration consisting, in whole or in part, of
property other than cash or its equivalent, then in determining the
"price per share of Common Stock" and the "consideration received or
receivable by the Company" for purposes of the first sentence of this
paragraph (d), the Board of Directors shall determine, in its
discretion, the fair value of said property.
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(e) For the purpose of any computation under paragraphs (b), (c),
and (d) of this Section, the current market price per share of Common
Stock at any date shall be the average of the daily closing prices of
the Company's Common Stock, for five consecutive trading days ending
one trading day before the date of such computation. The closing price
for each day shall be the last such reported, sales price regular way
or, in case no such reported sale takes place on such day, the average
of the closing bid and asked prices regular way for such day, in each
case on the principal national securities exchange on which the shares
of Common Stock are listed or admitted to trading or, if not listed or
admitted to trading, the average of the closing bid and asked prices
of the Common Stock in the over-the-counter market as reported by
NASDAQ or any comparable system. In the absence of one or more such
quotations, the Board of Directors of the Company shall determine the
current market price, in good faith, on the basis of such quotations,
as it considers appropriate. Notwithstanding the foregoing, for the
purpose of any calculation under paragraph (d) above (A) with respect
to any issuance of options under the Company's employee or director
compensation stock option plans as in effect or as adopted by the
Board of Directors of the Company on the date hereof, the term
"current market price", in such instances, shall mean the fair market
price on the date of the issuance of any such option determined in
accordance with the Company's employee compensation stock option plans
as in effect or adopted by the Board of Directors of the Company on
the date hereof; and (B) with respect to any issuances of Common Stock
(or rights, options, warrants, or convertible securities containing
the right to subscribe for or purchase shares of Common Stock) in
connection with bona fide corporate transactions (other than issuances
in such transactions for cash or similar consideration), the term
"fair market price" shall mean the fair market price per share as
determined in arm's-length negotiations by the Company and such other
parties (other than affiliates or subsidiaries of the Company) to such
transactions as reflected in the definitive documentation with respect
thereto, unless such determination is not reasonably related to the
closing market price on the date of such determination.
(f) In any case in which this Section 12.1 shall require that any
adjustment in the number of Warrant Shares be made effective as of
immediately after a record date for a specified event, the Company may
elect to defer until the occurrence of the event the issuing to the
holder of any Warrant exercised after that record date the shares of
Common Stock and other securities of the Company, if any, issuable
upon the exercise of any Warrant over and above the shares of Common
Stock and other securities of the Company, if any, issuable upon the
exercise of any Warrant prior to such adjustment; provided, however,
that the Company shall deliver to such Warrant Holder a due bill or
other appropriate instrument evidencing the holder's right to receive
such additional shares or securities upon the occurrence of the event
requiring such adjustment.
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(g) No adjustment in the number of Warrant Shares purchasable
hereunder shall be required unless such adjustment would require an
increase or decrease of at least one percent (1%) in the number of
Warrant Shares purchasable upon the exercise of each Warrant; provided,
however, that any adjustments which by reason of this paragraph (g) are
not required to be made shall be carried forward and taken into account
in any subsequent adjustment. All calculations shall be made to the
nearest one-thousandth of a share.
(h) Whenever the number of Warrant Shares purchasable upon the
exercise of each Warrant is adjusted, as herein provided, the Warrant
Price payable upon the exercise of each Warrant shall be adjusted by
multiplying such Warrant Price immediately prior to such adjustment by
a fraction, of which the numerator shall be the number of Warrant
Shares purchasable upon the exercise of such Warrant immediately prior
to such adjustment, and of which the denominator shall be the number of
Warrant Shares purchasable immediately.
(i) No adjustment in the number of Warrant Shares purchasable
upon the exercise of each Warrant need be made under paragraphs (b),
(c) and (d) if the Company issues or distributes to each Warrant Holder
the rights, options, warrants, or convertible or exchangeable
securities, or evidences of indebtedness or assets referred to in those
paragraphs which each Warrant Holder would have been entitled to
receive had the Warrants been exercised prior to the happening of such
event or the record date with respect thereto regardless of whether the
Warrants are exercisable at the time of the happening of such event or
at the time of any record date with respect thereto. No adjustment need
be made for a change in the par value of the Warrant Shares.
(j) For the purpose of this Section 12.1, the terms "shares of
Common Stock" shall mean (i) the class of stock designated as the
Common Stock of the Company at the date of this Agreement, or (ii) any
other class of stock resulting from successive changes or
reclassifications of such shares consisting solely of changes in par
value, or from par value to no par value, or from no par value to par
value. In the event that at any time, as a result of an adjustment made
pursuant to paragraph (a) above, the Warrant Holders shall become
entitled to purchase any securities of the Company other than shares of
Common Stock, thereafter the number of such other securities so
purchasable upon exercise of each Warrant and the Exercise Price of
such securities shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Warrant Shares contained in paragraphs
(a) through (i), inclusive, above, and the provisions of Section 7 and
Section 12.2 through 12.5, inclusive, with respect to the Warrant
Shares, shall apply on like terms to any such other securities.
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<PAGE>
(k) Upon the expiration of any rights, options, warrants, or
conversion or exchange privileges, if any thereof shall not have been
exercised the Warrant Price and the number of shares of Common Stock
purchasable upon the exercise of each warrant shall, upon such expiration,
be readjusted and shall thereafter be such as it would have been had it
been originally adjusted (or had the original adjustment not been required,
as the case may be) as if (A) the only shares of Common Stock so issued
were the shares of Common Stock, if any, actually issued or sold upon the
exercise of such rights, options, warrants, or conversion or exchange
rights and (B) such shares of Common Stock, if any, were issued or sold for
the consideration actually received by the Company upon such exercise plus
the aggregate consideration, if any, actually received by the Company for
the issuance, sale or grant of all such rights, options, warrants, or
conversion or exchange rights whether or not exercised; provided, however,
that no such readjustment shall have the effect of increasing the Warrant
Price or decreasing the number of Warrant Shares by an amount in excess of
the amount of the adjustment initially made with respect to the issuance,
sale or grant of such rights, options, warrants, or conversion or exchange
rights.
(1) In addition to the adjustments set forth above, the Exercise Price
shall be immediately reduced and the number of Warrant Shares shall be
immediately increased, in each case, on a pari passu basis with the
conversion, exercise, or strike price of any other derivative securities of
the Company whether now outstanding or hereafter issued.
12.2. VOLUNTARY ADJUSTMENT BY THE COMPANY. The Company may, at its option,
at any time during the term of the Warrants, reduce the then current Exercise
Price to any amount determined appropriate by the Board of Directors of the
Company.
12.3. NOTICE OF ADJUSTMENT. When the number of Warrant Shares purchasable
upon the exercise of each Warrant or the Exercise Price of such Warrant Shares
is adjusted, as herein provided, the Company shall promptly mail by first class,
postage prepaid, to each Warrant Holder notice of such adjustment or adjustments
and a certificate of a firm of independent public accountants selected by the
Board of Directors of the Company (who may be the regular accountants employed
by the Company) setting forth the number of Warrant Shares purchasable upon the
exercise of each Warrant and the Exercise Price of such Warrant Shares after
such adjustment and setting forth a brief statement of the facts requiring such
adjustment and setting forth the computation by which such adjustment was made.
Such certificate, absent manifest error, shall be conclusive evidence of the
correctness of such adjustment.
12.4. PRESERVATION OF PURCHASE RIGHTS UPON MERGER CONSOLIDATION, ETC. In
case of any consolidation of the Company with or merger of the Company into
another person or in case of any sale, transfer, or lease to another person of
all of or substantially all
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<PAGE>
the assets of the Company, the Company or such successor or purchaser, as
the case may be, shall execute with each Warrant Holder an agreement that
each Warrant Holder shall have the right thereafter upon payment of the
Exercise Price in effect immediately prior to such action to purchase upon
exercise of each Warrant the kind and amount of shares and other securities
and property which the Warrant Holder would have owned or have been
entitled to receive after the happening of such consolidation, merger,
sale, transfer, or lease had such Warrant been exercised immediately prior
to such action regardless of whether the Warrants are exercisable at the
time of such action. Such agreement shall provide for adjustments, which
shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Section 12. The provisions of this Section 12.4 shall
similarly apply to successive consolidations, mergers, sales, transfers, or
leases.
12.5. STATEMENT ON WARRANTS. Even though Warrants heretofore or
hereafter issued may continue to express the same price and number and kind
of shares as are stated in the Warrants initially issuable pursuant to this
Warrant Agreement, the parties understand and agree that such Warrants will
represent rights consistent with any adjustments in the Exercise Price or
the number or kind of shares purchasable upon the exercise of the Warrants.
13. FRACTIONAL INTERESTS. The Company shall not be required to issue
fractional Warrant Shares on the exercise of Warrants. If more than one Warrant
shall be presented for exercise in full at the same time by the same Warrant
Holder, the number of full Warrant Shares which shall be issuable upon the
exercise thereof shall be computed on the basis of the aggregate number of
Warrant Shares purchasable on exercise of the Warrants so presented. If any
fraction of a Warrant Share would, except for the provisions of this Section 13,
be issuable on the exercise of any Warrant (or specified portion, thereof), the
Company shall pay an amount in cash equal to the closing price for one share of
the Common Stock on the trading day immediately preceding the date the Warrant
is presented for exercise, multiplied by such fraction.
14. REGISTRATION UNDER THE SECURITIES ACT OF 1933. Willis represents and
warrants to the Company that it will not dispose of the Warrant or Warrant
Shares except pursuant to (i) an effective registration statement, or (ii) an
applicable exemption from registration under the Securities Act of 1933 (the
"Act"). In connection with any sale by Willis pursuant to clause (ii) of the
preceding sentence, it shall furnish to the Company an opinion of counsel
reasonably satisfactory to the Company to the effect that such exemption from
registration is available in connection with such sale.
15. CERTIFICATE TO BEAR LEGENDS. The Warrants shall be subject to a stop-
transfer order and the certificate or certificates therefor shall bear the
following legend by which each Warrant Holder shall be bound:
"THE WARRANTS REPRESENTED HEREBY AND THE SECURITIES ISSUABLE UPON EXERCISE
HEREOF HAVE NOT BEEN REGISTERED
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UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE
SECURITIES LAWS OF ANY OTHER STATE. THE WARRANTS REPRESENTED HEREBY AND THE
SECURITIES ISSUABLE UPON EXERCISE HEREOF 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."
The Warrant Shares or other securities issued upon exercise of the Warrants
shall, unless issued pursuant to an effective registration statement, be subject
to a stop-transfer order and the certificate or certificates evidencing any such
Warrant Shares or securities shall bear the following legend by which the
Warrant Holder thereof shall be bound:
"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."
16. REGISTRATION RIGHTS. The Warrant Shares shall be subject to the
registration rights set forth in Section 4.1.11 of the Note and Warrant
Purchase Agreement.
17. NO RIGHTS AS STOCKHOLDERS; NOTICE TO WARRANT HOLDERS. Nothing contained
in this Warrant Agreement or in any of the Warrants shall be construed as
conferring upon the Warrant Holders or their transferees the right to vote or to
receive dividends or to consent or to receive notice as stockholders in respect
of any meeting of stockholders for the election of directors of the Company or
any other matter, or any rights whatsoever as stockholders of the Company. If,
however, at any time prior to the expiration of the Warrants and prior to their
exercise, any of the following events shall occur:
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(a) the Company shall declare any dividend payable in any securities
upon its shares of Common Stock or make any distribution (other than a cash
dividend) to the holders of its shares of Common Stock; or
(b) the Company shall offer to the holders of its shares of Common
Stock any additional shares of Common Stock or securities convertible into
or exchangeable for shares of Common Stock or any right to subscribe to or
purchase any thereof; or
(c) a dissolution, liquidation, or winding up of the Company (other
than in connection with a consolidation, merger, sale, transfer, or lease
or all or substantially all of its property, assets, and business as an
entirety) shall be proposed,
then in any one or more of said events the Company shall give notice in writing
of such event to the Warrant Holders as provided in Section 20 hereof, with such
notice to be completed at least 15 days prior to the date fixed as a record date
or the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution, or subscription rights, or
for the determination of stockholders entitled to vote on such proposed
dissolution, liquidation or winding up. Such notice shall specify such record
date or the date of closing the transfer books, as the case may be. Failure to
provide or receive such notice or any defect therein or in the mailing thereof
shall not affect the validity of any action taken in connection with such
dividend, distribution, or subscription rights, or such proposed dissolution,
liquidation, or winding up.
18. EXPENSES. The Company shall pay all legal and other reasonable out-of-
pocket expenses of the Warrant Holders and of their counsel (up to a maximum of
$25,000). The Company agrees to reimburse Willis upon demand for its reasonable
out-of-pocket costs and expenses incurred in connection with the preparation,
review, negotiation, execution, and delivery of this Warrant Agreement and all
other related documents.
19. RIGHT TO INFORMATION. The Company, in accordance with Section 16(c)
above, will provide to all Warrant Holders and to all holders of Warrant Shares,
on a timely basis, copies of all documents and reports delivered to its
shareholders.
20. NOTICES. Any notice pursuant to this Warrant Agreement to be given or
made by the holder of any Warrant or Warrant Shares to or on the Company shall
be sufficiently given or made if sent by first-class mail, postage prepaid,
addressed as follows:
EqualNet Holding Corp.
1250 Wood Branch Park Drive
Houston, Texas 77079
Attention: General Counsel
Notices or demands authorized by this Warrant Agreement to be given or made to
or on the Warrant Holder of any Warrant or Warrant Shares shall be sufficiently
given or made (except as otherwise
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provided in this Warrant Agreement) if sent by registered mail, return receipt
requested, postage prepaid, addressed to such Warrant Holder at the address of
such Warrant Holder as shown on the Warrant Register or the Common Stock
Register, as the case may be.
21. GOVERNING LAW. THIS WARRANT AGREEMENT, THE WARRANTS AND ALL RELATED
DOCUMENTS SHALL BE DEEMED TO BE CONTRACTS MADE UNDER AND SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING
EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. ANY DISPUTE HEREUNDER OR UNDER THE
WARRANTS OR RELATED DOCUMENTS SHALL BE DETERMINED EXCLUSIVELY IN ACCORDANCE WITH
SECTION 8.7 OF THE NOTE PURCHASE AGREEMENT.
22. SUPPLEMENTS AND AMENDMENTS. The Company and the Warrant Holders may
from time to time supplement or amend this Warrant Agreement in order to cure
any ambiguity or to correct or supplement any provision contained herein which
may be defective or inconsistent with any other provision herein, or to make any
other provisions in regard to matters or questions arising hereunder which the
Company and the Warrant Holder may deem necessary or desirable and which shall
not be inconsistent with the provisions of the Warrants and which shall not
adversely affect the interests of the Warrant Holders. Any amendment to this
Warrant Agreement may be effected with the consent of Warrant Holders of at
least a majority of the total then outstanding Warrants (for this purpose
Warrant Shares shall be deemed to be Warrants in the proportion that Warrant
Shares are then issuable upon the exercise of Warrants); provided that any
amendment which shall have the effect of materially adversely affecting the
interests of any Warrant Holder shall not be effective with respect to such
Warrant Holder if such Warrant Holder shall not have consented thereto.
23. SURVIVAL OF COVENANTS. All covenants and agreements made herein shall
survive the execution and delivery of this Warrant Agreement and the Warrants
and shall remain in force and effect until the Expiration Date of all Warrants.
24. SUCCESSORS. All representations and warranties of the Company and all
covenants and agreements of this Warrant Agreement by or for the benefit of the
Company or the Warrant Holders shall bind and inure to the benefit of their
respective successors and assigns hereunder.
25. BENEFITS OF THIS WARRANT AGREEMENT. Nothing in this Warrant Agreement
shall be construed to give to any person or corporation other than the Company
and the Warrant Holders, any legal or equitable right, remedy, or claim under
this Warrant Agreement, but this Warrant Agreement shall be for the sole and
exclusive benefit of the Company and the holders of the Warrants and Warrant
Shares.
26. CAPTIONS. The captions of the sections and subsections of this Warrant
Agreement have been inserted for convenience and shall have no substantive
effect.
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27. COUNTERPARTS. This Warrant Agreement may be executed in any number of
counterparts, each of which so executed shall be deemed to be an original, but
such counterparts together shall constitute but one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this Warrant Agreement
to be duly executed on the day, month and year first above written.
EQUALNET HOLDING CORP.
By: /s/ Zane Russell
-------------------
Name: Zane Russell
-----------------
Title: President
----------------
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THE WILLIS GROUP LLC
By: /s/ Mark Willis
-------------------
Name: Mark Willis
-----------------
Title: Pres.
----------------
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EXHIBIT A
to
Warrant Agreement
FORM OF
WARRANT CERTIFICATE
THE WARRANTS REPRESENTED HEREBY AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY OTHER STATE. THE WARRANTS
REPRESENTED HEREBY AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF 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.
THE TRANSFER OR EXCHANGE OF THE WARRANTS AND COMMON STOCK UNDERLYING SUCH
WARRANTS REPRESENTED BY THIS CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE
WARRANT AGREEMENT REFERRED TO HEREIN.
No._______ 200,000 Warrants
VOID AFTER 5:00 P.M. NEW YORK, TIME
ON OCTOBER 1, 2002
EQUALNET HOLDING CORP.
WARRANT CERTIFICATE
THIS CERTIFIES THAT for value received THE WILLIS GROUP, the registered
holder hereof or registered assigns (the "Warrant Holder"), is the owner of the
number of the Warrants set forth above, each of which entitles the owner thereof
to purchase at any time from 9:00 A.M., New York time, on October 1, 1997, until
5:00 P.M., New York time on October 1, 2002, one fully paid and nonassessable
share of the common stock (subject to adjustment), par value $0.01 per share
(the "Common Stock"), of EQUALNET HOLDING CORP., a Texas corporation (the
"Company"), at the exercise price of $1.00 per share, subject to adjustment and
limitation as described in the Warrant Agreement referred to below (the
"Exercise Price"). The Warrant Holder may pay the Exercise Price in cash, or by
certified or official bank check or by reduction of the outstanding principal
amount under the Facility, or make a net exercise for Net Warrant Shares as
described in the Warrant Agreement.
Exhibit A-1
<PAGE>
This Warrant Certificate is subject to, and entitled to the benefits of,
all of the terms, provisions and conditions of an agreement dated October 1,
1997 (the "Warrant Agreement"), between the Company and The Willis Group which
Warrant Agreement is hereby incorporated herein by reference and made a part
hereof and to which Warrant Agreement reference is hereby made for a full
description of the rights, limitations of rights, obligations, duties and
immunities hereunder of the Company and the Warrant Holders of the Warrant
Certificates. Copies of the Warrant Agreement are on file at the principal
office of the Company.
The Warrant Holder hereof may be treated by the Company and all other
persons dealing with this Warrant Certificate as the absolute owner hereof for
any purpose and as the person entitled to exercise the rights represented
hereby, or to the transfer hereof on the books of the Company, any notice to the
contrary notwithstanding, and until such transfer on such books, the Company may
treat the Warrant Holder hereof as the owner for all purposes.
The Warrant Certificate, with or without other Warrant Certificates, upon
surrender at the principal office of the Company, may be exchanged for another
Warrant Certificate or Warrant Certificates of like tenor and date evidencing
Warrants entitling the Warrant Holder to purchase a like aggregate number of
shares of Common Stock as the Warrants evidenced by the Warrant Certificate or
Warrant Certificates surrendered entitled to such Warrant Holder to purchase. If
this Warrant Certificate shall be exercised in part, the Warrant Holder shall be
entitled to receive upon surrender hereof, another Warrant Certificate or
Warrant Certificates for the number of whole Warrants not exercised.
No fractional shares of Common Stock will be issued upon the exercise of
any Warrant or Warrants evidenced hereby, but in lieu thereof a cash payment
will be made, as provided in the Warrant Agreement.
Neither the Warrants nor the Warrant Certificate entitles any Warrant
Holder hereof to any of the rights of a stockholder of the Company.
THIS WARRANT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND SHALL BE
CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK,
WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
Exhibit A-2
<PAGE>
IN WITNESS WHEREOF, the Company has caused the signature of its President
and Secretary to be printed hereon.
EQUALNET HOLDING CORP.
By:
---------------------
Name:
-------------------
Title:
------------------
Attest:
- - -----------------------------------
[Name: ]
[Secretary]
Exhibit A-3
<PAGE>
EXHIBIT 10.47
WARRANT AGREEMENT
-----------------
(NETCO ACQUISITION)
-------------------
This WARRANT AGREEMENT dated as of December 2, 1997, between EQUALNET
HOLDING CORP., a Texas corporation (the "Company") and NETCO ACQUISITION, LLC, a
Delaware limited liability company ("Netco" and, together with any transferee of
Warrants or Warrant Shares, the "Warrant Holders(s)").
WHEREAS, Willis Group, LLC, the Company, MCM Partners and Advantage Fund,
Ltd. have entered into a certain letter of intent (the "Letter of Intent") dated
September 26, 1997; and
WHEREAS, the Company proposes to issue to Netco as partial consideration
for TWG and MCM (being the sole members of Netco) agreeing to enter into the
Letter of Intent, common stock purchase warrants (the "Warrants") to purchase up
to 150,000 shares (the "Warrant Shares") of the Company's common stock, par
value $0.01 per share (the "Common Stock"), each Warrant entitling the holder
thereof to purchase one share of Common Stock.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein and in the Agreement set forth and for other good and valuable
consideration, the parties hereto agree as follows:
1. ISSUANCE OF WARRANTS; FORM OF WARRANT. As of the date hereof the
Company will issue and deliver the Warrants to Netco. The aggregate number of
Warrants to be issued and delivered shall be 150,000 (subject to further
limitation as provided herein). The Warrants shall be exercisable on or after
the date hereof. The text of each Warrant shall be substantially as set forth in
the Warrant Certificate attached as Exhibit A hereto. The Warrants shall be
executed on behalf of the Company by the manual or facsimile signature of the
present or any future Chairman of the Board, President, or Vice President of the
Company, attested by the manual or facsimile signature of the present or future
Secretary or an Assistant Secretary of the Company. A Warrant bearing the manual
or facsimile signature of individuals who were at any time the proper officers
of the Company shall bind the Company notwithstanding that such individuals or
any of them shall have ceased to hold such offices prior to the delivery of such
Warrant or did not hold such offices on the date of this Warrant Agreement.
Warrants shall be dated as of the date of execution thereof by the Company
either upon initial issuance or upon division, exchange, substitution or
transfer.
The demand and the piggy-back registration rights set forth in Section 16
hereof may be exercised at any time during the term of the Warrants.
2. REPRESENTATIONS AND WARRANTIES.
(a) The Company hereby represents and warrants as follows:
<PAGE>
(i) POWER AND AUTHORITY. The Company has all requisite corporate power
and authority, and has taken all corporate action necessary, to execute,
deliver and perform this Warrant Agreement, to grant, issue, and deliver
the Warrants and to authorize and reserve for issuance and, upon payment
from time to time of the Exercise Price, to issue and deliver the shares of
Common Stock or other securities issuable upon exercise of the Warrants.
This Warrant Agreement has been duly executed and delivered by the Company.
(ii) RESERVATION, ISSUANCE AND DELIVERY OF COMMON STOCK. There have
been reserved for issuance, and the Company shall at all times keep
reserved, out of the authorized and unissued shares of Common Stock a
number of shares sufficient to provide for the exercise of the rights of
purchase represented by the Warrants, and such shares, when issued upon
receipt of payment therefor or upon a net exercise in accordance with the
terms of the Warrants and of this Warrant Agreement, will be legally and
validly issued, fully paid and non-assessable and will be free of any
preemptive rights of shareholders or any restrictions.
(b) The Warrant Holder hereby represents and warrants as follows:
(i) ACCREDITED INVESTOR. The Warrant Holder 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. The Warrant Holder has made its own evaluation of
its investment in the Warrants, based upon such information as is available
to it and without reliance upon the Company or any other person or entity,
and the Warrant Holder agrees that neither the Company nor any other person
or entity has any obligation to furnish any additional information to the
Warrant Holder except as expressly set forth herein.
3. CONDITIONS TO PURCHASE. Netco's obligations hereunder shall be subject
to satisfaction of the following conditions on or before the date hereof:
(a) All corporate proceedings and other legal matters incident to the
authorization, form and validity of this Warrant Agreement and the Warrants
and all other legal matters relating to this Warrant Agreement, the
Warrants and the transactions contemplated hereby shall be satisfactory in
all respects to Vinson & Elkins L.L.P., counsel for Netco, in their
reasonable judgment, and the Company shall have furnished to such counsel
all documents and information that they may reasonably request to enable
them to pass judgment upon such matters.
(b) There shall have been duly tendered to Netco a certificate or
certificates representing the Warrants.
4. REGISTRATION. The Warrants shall be numbered and shall be registered on
the books of the Company (the "Warrant Register") as they are issued. The
Warrants shall be registered initially in such names and such denominations as
Netco has specified to the Company.
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<PAGE>
5. EXCHANGE OF WARRANT CERTIFICATES. Subject to any restriction upon
transfer set forth in this Warrant Agreement, each Warrant certificate may be
exchanged at the option of the warrant Holder thereof for another certificate or
certificates of different denominations entitling the Warrant Holder thereof to
purchase upon surrender to the Company or its duly authorized agent a like
aggregate number of Warrant Shares as the certificate or certificates
surrendered then entitle such Warrant Holder to purchase. Any Warrant Holder
desiring to exchange a Warrant certificate or certificates shall make such
request in writing delivered to the Company, and shall surrender, properly
endorsed, the certificate or certificates to be so exchanged. Thereupon, the
Company shall execute and deliver to the person entitled thereto a new Warrant
certificate or certificates, as the case may be, as so requested. Any Warrant
issued upon exchange, transfer or partial exercise of the Warrants shall be the
valid obligation of the Company, evidencing the same generic rights and entitled
to the same generic benefits under this Warrant Agreement as the Warrants
surrendered for such exchange, transfer or exercise.
6. TRANSFER OF WARRANTS. Subject to the provisions of Section 14 hereof,
the Warrants shall be transferable only on the Warrant Register upon delivery to
the Company of the Warrant certificate or certificates duly endorsed by the
Warrant Holder or by his duly authorized attorney-in-fact or legal
representative, or accompanied by proper evidence of succession, assignment or
authority to transfer. In all cases of transfer by an attorney-in-fact, the
original power of attorney, duly approved, or an official copy thereof, duly
certified, shall be deposited with the Company. In case of transfer by
executors, administrators, guardians or other legal representatives, duly
authenticated evidence of their authority shall be produced, and may be required
to be deposited with the Company in its discretion. Upon any registration of
transfer, the Company shall deliver a new Warrant or Warrants to the person
entitled thereto.
7. TERM OF WARRANTS; EXERCISE OF WARRANTS.
(a) Each Warrant entitles the Warrant Holder thereof to purchase one share
of Common Stock during the time period and subject to the conditions set forth
in the respective Warrant Certificates at an exercise price of $1.00 per share,
subject to adjustment in accordance with Section 12 hereof (the "Exercise
Price"). Each Warrant terminates on the earlier to occur of (i) the fifth
anniversary of the date on which such Warrant becomes exercisable in accordance
with its terms and (ii) the closing of the transactions contemplated by that
certain Agreement of Merger and Plan of Reorganization dated as of December 2,
1997 among the Company, EQ Acquisition Sub, Inc., Netco and Netco Acquisition
Corp. (the "Reorganization Agreement") (the "Expiration Date"). Notwithstanding
anything to the contrary, in no event shall any Warrant be exercisable prior to
the date set forth in Sections 7(a)(iii) and (iv) of tile Reorganization
Agreement (as such date may be changed pursuant to an amendment of such
agreement, the "Outside Closing Date").
(b) The Exercise Price and the number of shares Isabel upon exercise of
Warrants are subject to adjustment upon the occurrence of certain events,
pursuant to the provisions of Section 12 of this Warrant Agreement. Subject to
the provisions of this Warrant Agreement, each Warrant Holder shall have the
right, which may be exercised as expressed in such Warrants, to purchase from
the Company (and the Company shall issue and sell to such Warrant Holder) the
number of fully paid and nonassessable shares of Common Stock specified in such
Warrants, upon surrender to the Company, or its duly authorized agent, of such
Warrants, with the purchase form on the reverse
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<PAGE>
thereof duly filled in and signed, and upon payment to the Company of the
Exercise Price, as adjusted in accordance with the provisions of Section 12 of
this Warrant Agreement or upon a net exercise pursuant to this subsection of
this Warrant Agreement, for the number of shares in respect of which such
Warrants are then exercised. The Warrant Holder may (i) pay the Exercise Price
in cash, by certified or official bank check payable to the order of the
Company, or (ii) make an exercise of Warrants for "Net Warrant Shares." The
number of Net Warrant Shares will be determined as described by the following
formula: Net Warrant Shares = [WS x (MP-EP)]/MP. "WS" is the number of Warrant
Shares issuable upon exercise of the Warrants or portion of Warrants in
question. "MP" is the Market Price of the Common Stock on the last trading day
preceding the date of the request to exercise the Warrants. "Market Price" shall
mean the then current market price per share of Common Stock, as determined in
paragraph 12.1(e). "EP" shall mean the Exercise Price.
Upon such surrender of Warrants, and payment of the Exercise Price, with
cash or securities, or upon a net exercise as aforesaid, the Company at its
expense shall issue and cause to be delivered with all reasonable dispatch to or
upon the written order of the Warrant Holder and in such name or names as the
Warrant Holder may designate, a certificate or certificates for the number of
full shares of Common Stock so purchased upon the exercise of such Warrants,
together with cash, as provided in Section 12 of this Warrant Agreement, in
respect of any fraction of a share of such stock otherwise issuable upon such
surrender. Such certificate or certificates shall be deemed to have been issued,
and any person so designated to be named therein shall be deemed to have become
a holder of record of such shares, as of the date of the surrender of such
Warrants and payment of the Exercise Price or receipt of shares by net exercise
as aforesaid. The rights of purchase represented by the Warrants shall be
exercisable, at the election of the Warrant Holders thereof, either in full or
from time to time in part and, in the event that any Warrant is exercised in
respect of less than all of the shares purchasable on such exercise at any time
prior to the Expiration Date, a new certificate evidencing the remaining Warrant
or Warrants will be issued.
8. COMPLIANCE WITH GOVERNMENT REGULATIONS. The Company covenants that if
any share of Common Stock required to be reserved for purposes of exercise or
conversion of Warrants require, under any federal or state law or applicable
governing rule or regulation of any national securities exchange, registration
with or approval of any governmental authority, or listing on any such national
securities exchange, before such shares may be issued upon exercise, the Company
will use its commercially reasonable efforts to cause such shares to be duly
registered, approved or listed on the relevant national securities exchange, as
the case may be.
9. PAYMENT OF TAXES. The Company will pay all documentary stamp taxes, if
any, attributable to the initial issuance of Warrant Shares upon the exercise of
Warrants and any securities issued pursuant to Section 12 hereof; provided
however, that the Company shall not be required to pay any tax or taxes which
may be payable in respect of any transfer involved in the issue or delivery of
any Warrants or certificates for Warrant Shares and any securities issued
pursuant to Section 12 hereof in a name other than that of the Warrant Holder of
such Warrants.
10. MUTILATED OR MISSING WARRANTS. In case any of the Warrants shall be
mutilated, lost, stolen or destroyed, the Company shall issue and deliver in
exchange and substitution for and
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<PAGE>
upon cancellation of the mutilated Warrant, or in lieu of and in substitution
for the Warrant lost, stolen, or destroyed, a new Warrant of like tenor and
representing an equivalent right or interest.
11. RESERVATION OF WARRANT SHARES; PURCHASE AND CANCELLATION OF WARRANTS.
The Company shall at all times reserve, out of the authorized and unissued
shares of Common Stock, a number of shares sufficient to provide for the
exercise of the rights of purchase represented by the Warrants, and the transfer
agent for the Common Stock ("Transfer Agent") and every subsequent transfer
agent for any shares of the Company's capital stock issuable upon the exercise
of any of the rights of purchase aforesaid are hereby irrevocably authorized and
directed at all times until the Expiration Date to reserve such number of
authorized and unissued shares as shall be requisite for such purpose. The
Company will keep a copy of this Warrant Agreement on file with the Transfer
Agent and with every subsequent transfer agent for any shares of the Company's
capital stock issuable upon the exercise of the rights of purchase represented
by the Warrants. The Company will supply the Transfer Agent and any such
subsequent transfer agent with duly executed stock certificates for such purpose
and will itself provide or otherwise make available any cash which may be
issuable as provided by Section 13 of this Warrant Agreement. The Company will
finish to the Transfer Agent and any such subsequent transfer agent a copy of
all notices of adjustments, and certificates related thereto, transmitted to
each Warrant Holder pursuant to Section 12.3 hereof All warrants surrendered in
the exercise of the rights thereby evidenced shall be canceled, and such
canceled Warrants shall constitute sufficient evidence of the number of shares
of stock which have been issued upon the exercise of such Warrants (subject to
adjustment as herein provided). No shares of stock shall be subject to
reservation in respect of the Warrants subsequent to the Expiration Date except
to the extent necessary to comply with the terms of this Warrant Agreement.
12. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES. The number
and kind of securities purchasable upon the exercise of each Warrant and the
Exercise Price shall be subject to adjustment from time to time upon the
occurrence of certain events, as hereafter defined.
12.1. MECHANICAL ADJUSTMENTS. The number of Warrant Shares purchasable
upon the exercise of each Warrant and the Warrant Price shall be subject to
adjustment as follows:
(a) In case the Company shall (i) pay a dividend to holders of
Common Stock in shares of Common Stock or make a distribution to
holders of Common Stock in shares of Common Stock, (ii) subdivide its
outstanding shares of Common Stock into a larger number of shares of
Common Stock, (iii) combine its outstanding shares of Common Stock into
a smaller number of shares of Common Stock or (iv) issue by
reclassification of its shares of Common Stock other securities of the
Company (including any such reclassification in connection with a
consolidation or merger in which the Company is the surviving
corporation), the number of Warrant Shares purchasable upon exercise of
each Warrant immediately prior thereto shall be adjusted so that the
Warrant Holder shall be entitled to receive the kind and number of
Warrant Shares or other securities of the Company which he would have
owned or have been entitled to receive after the happening of any of
the events described above, had such Warrant been exercised immediately
prior to the happening of such event or any record date with respect
thereto regardless of whether the Warrants are exercisable at the time
of the happening of such event or at the time of any record
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<PAGE>
date with respect thereto. An adjustment made pursuant to this
paragraph (a) shall become effective immediately after the effective
date of such event retroactive to the record date, if any, for such
event.
(b) In case the Company shall issue rights, options, or Warrants
to holders of its outstanding Common Stock, without any charge to such
holders, entitling them to subscribe for or purchase shares of Common
Stock at a price per share which is lower at the record date mentioned
below than the Exercise Price, then (i) the Exercise in effect
immediately prior to such issuance shall immediately be reduced to the
price that is equivalent to such consideration received by the Company
upon such issuance and (ii) the number of Warrant Shares thereafter
purchasable upon the exercise of each Warrant shall be increased in
direct proportion to the increase in the number of shares of Common
Stock outstanding on a fully diluted basis immediately prior to such
issuance; provided that if such shares of Common Stock, options or
other convertible securities (other than Excluded Stock (as defined in
the Note Purchase Agreement)) are issued for consideration per share
less than the Exercise Price at the date of such issue or sale, the
number of shares of Common Stock that immediately prior to such
issuance the Warrant Holder shall have been entitled to purchase
pursuant to this Warrant shall be increased to the greater of (i) that
number of shares of Common Stock that immediately prior to such
issuance the Warrant Holder shall have been entitled to purchase
pursuant to this Warrant multiplied by a fraction, the numerator of
which is the Exercise Price and the denominator of which is such
consideration per share, and (ii) the number of shares of Common Stock
otherwise calculated under this Section 12.1. Such adjustment shall be
made whenever such rights, options, or Warrants are issued, and shall
become effective immediately after the record date for the
determination of stockholders entitled to receive such rights, options,
or Warrants; provided that this Section 12. 1 (b) shall expire and be
of no force and effect on or after April 1, 1998.
(c) In case the Company shall distribute to holders of its shares
of Common Stock evidences of its indebtedness or assets (including cash
dividends or other cash distributions) or rights, options, or Warrants,
or convertible or exchangeable securities containing the right to
subscribe for or purchase shares of Common Stock (excluding those
referred to in paragraph (b) above), then in each case the number of
Warrant Shares thereafter purchasable upon the exercise of each Warrant
shall be determined by multiplying the number of Warrant Shares
theretofore purchasable upon the exercise of each Warrant by a
fraction, of which the numerator shall be the then current market price
per share of Common Stock (as determined in accordance with paragraph
(e) below) on the date of such distribution, and of which the
denominator shall be the then current market price per share of Common
Stock, less the then fair value (as determined in good faith by the
Board of Directors of the Company) of the portion of the assets or
evidences of indebtedness so distributed or of such subscription
rights, options, or Warrants, or of such convertible or exchangeable
securities applicable to one share of Common Stock. Such adjustment
shall be made whenever any such distribution is made, and shall
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<PAGE>
become effective on the date of distribution retroactive to the record
date for the determination of stockholders entitled to receive such
distribution.
In the event of distribution by the Company to holders of its
shares of Common Stock of stock of a subsidiary or securities
convertible into or exercisable for such stock, then in lieu of an
adjustment in the number of Warrant Shares purchasable upon the
exercise of each Warrant, the Warrant Holder, upon the exercise thereof
at any time after such distribution, shall be entitled to receive from
the Company, such subsidiary, or both, as the Company shall determine,
the stock or other securities to which such Warrant Holder would have
been entitled if such Warrant Holder had exercised such Warrant
immediately prior thereto regardless of whether the Warrants are
exercisable at such time, all subject to further adjustment as provided
in this subsection 12.1; provided, however, that no adjustment in
respect of dividends or interest on such stock or other securities
shall be made during the term of a Warrant or upon the exercise of a
Warrant; provided further that this Section 12.1 (c) shall expire and
be of no force and effect on or after April 1, 1998.
(d) In case the Company shall sell and issue shares of Common
Stock (other than pursuant to rights, options, warrants, or convertible
securities initially issued before the date of this Agreement) or
rights, options, Warrants, or convertible securities containing the
right to subscribe for or purchase shares of Common Stock (excluding
shares, rights, options, Warrants, or convertible securities issued in
any of the transactions described in paragraphs (a), (b) or (c) above)
at a price per share of Common Stock (determined, in the case of such
rights, options, warrants or convertible securities, by dividing (w)
the total of the amount received or receivable by the Company
(determined as provided below) in consideration of the sale and
issuance of such rights, options, Warrants, or convertible securities,
by (x) the total number of shares of Common Stock covered by such
rights, options, Warrants, or convertible securities) lower than the
Exercise Price in effect immediately prior to such sale and issuance,
then (i) the Exercise in effect immediately prior to such issuance
shall immediately be reduced to the price that is equivalent to such
consideration received by the Company upon such issuance and (ii) le
number of Warrant Shares thereafter purchasable upon the exercise of
the Warrants shall be increased in direct proportion to the increase in
the number of shares of Common Stock outstanding on a fully diluted
basis immediately prior to such issuance; provided that if such shares
of Common Stock, options or other convertible securities (other than
Excluded Stock) are issued for consideration per share less than the
Exercise Price at the date of such issue or sale, the number of shares
of Common Stock that immediately prior to such issuance the Warrant
Holder shall have been entitled to purchase pursuant to this Warrant
shall be increased to the greater of (i) that number of shares of
Common Stock that immediately prior to such issuance the Warrant Holder
shall have been entitled to purchase pursuant to this Warrant
multiplied by a fraction, the numerator of which is the Exercise Price
and the denominator of which is such consideration per share, and (ii)
the number of shares of Common Stock otherwise calculated under this
Section 12.1. Such adjustment shall be made successively whenever such
as issuance is made; provided that this
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<PAGE>
Section 12.1 (d) shall expire and be of no force and effect on or
after April 1, 1998. For the purposes of such adjustments, the
consideration received or receivable by the Company for rights,
options, Warrants, or convertible securities shall be deemed to be the
consideration received by the Company for such rights, options,
warrants, or convertible securities, plus the consideration or premiums
stated in such rights, options, warrants, or convertible securities to
be paid for the shares of Common Stock covered thereby. In case the
Company shall sell and issue shares of Common Stock, or rights,
options, warrants, or convertible securities containing the right to
subscribe for or purchase shares of Common Stock, for a consideration
consisting, in whole or in part, of property other than cash or its
equivalent, then in determining the "price per share of Common Stock"
and the "consideration received or receivable by the Company" for
purposes of the first sentence of this paragraph (d), the Board of
Directors shall determine, in its discretion, the fair value of said
property.
(e) For the purpose of any computation under paragraphs (b), (c),
and (d) of this Section, the current market price per share of Common
Stock at any date shall be the average of the daily closing prices of
the Companies Common Stock, for five consecutive trading days ending
one trading day before the date of such computation. The closing price
for each day shall be the last such reported sales price regular way
or, in case no such reported sale takes place on such day, the average
of the closing bid and asked prices regular way for such day, in each
case on the principal national securities exchange on which the shares
of Common Stock are listed or admitted to trading or, if not listed or
admitted to trading, the average of the closing bid and asked prices of
the Common Stock in the over-the-counter market as reported by NASDAQ
or any comparable system. In the absence of one or more such
quotations, the Board of Directors of the Company shall determine the
current market price, in good faith, on the basis of such quotations as
it considers appropriate. Notwithstanding the foregoing, for the
purpose of any calculation under paragraph (d) above (A) with respect
to any issuance of options under the Company's employee or director
compensation stock option plans as in effect or as adopted by the Board
of Directors of the Company on the date hereof the term "current market
price", in such instances, shall mean the fair market price on the date
of the issuance of any such option determined in accordance with the
Company's employee compensation stock option plans as in effect or
adopted by the Board of Directors of the Company on the date hereof;
and (B) with respect to any issuances of Common Stock (or rights,
options, warrants, or convertible securities containing the right to
subscribe for or purchase shares of Common Stock) in connection with
bona fide corporate transactions (other than issuances in such
transactions for cash or similar consideration), the term "fair market
price" shall mean the fair market price per share as determined in
arm's-length negotiations by the Company and such other parties (other
than affiliates or subsidiaries of the Company) to such transactions as
reflected in the definitive documentation with respect thereto, unless
such determination is not reasonably related to the closing market
price on the date of such determination.
(f) In any case in which this Section 12.1 shall require that any
adjustment in the number of Warrant Shares be made effective as of
immediately
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<PAGE>
after a record date for a specified event, the Company may elect to
defer until the occurrence of the event the issuing to the holder of
any Warrant exercised after that record date the shares of Common Stock
and other securities of the Company, if any, issuable upon the exercise
of any Warrant over and above the shares of Common Stock and other
securities of the Company, if any, issuable upon the exercise of any
Warrant prior to such adjustment; provided, however, that the Company
shall deliver to such Warrant Holder a due bill or other appropriate
instrument evidencing the holdees right to receive such additional
shares or securities upon the occurrence of the event requiring such
adjustment.
(g) No adjustment in the number of Warrant Shares purchasable
hereunder shall be required unless such adjustment would require an
increase or decrease of at least one percent (1%) in the number of
Warrant Shares purchasable upon the exercise of each Warrant; provided
however that any, adjustments which by reason of this paragraph (g) are
not required to be made shall be carried forward and taken into account
in any subsequent adjustment. All calculations shall be made to the
nearest one-thousandth of a share.
(h) Whenever the number of Warrant Shares purchasable upon the
exercise of each Warrant is adjusted, as herein provided, the Warrant
Price payable upon the exercise of each Warrant shall be adjusted by
multiplying such Warrant Price immediately prior to such adjustment by
a fraction, of which the numerator shall be the number of Warrant
Shares purchasable upon the exercise of such Warrant immediately prior
to such adjustment, and of which the denominator shall be the number of
Warrant Shares purchasable immediately.
(i) No adjustment in the number of Warrant Shares purchasable
upon the exercise of each Warrant need be made under paragraphs (b),
(c) and (d) if the Company issues or distributes to each Warrant Holder
the rights, options, Warrants, or convertible or exchangeable
securities, or evidences of indebtedness or assets referred to in those
paragraphs which each Warrant Holder would have been entitled to
receive had the Warrants been exercised prior to the happening of such
event or the record date with respect thereto regardless of whether the
Warrants are exercisable at the time of the happening of such event or
at the time of any record date with respect thereto. No adjustment need
be made for a change in the par value of the Warrant Shares.
(j) For the purpose of this Section 12. 1, the terms "shares of
Common Stock" shall mean (i) the class of stock designated as the
Common Stock of the Company at the date of this Agreement, or (ii) any
other class of stock resulting from successive changes or
reclassifications of such shares consisting solely of changes in par
value, or from par value to no par value, or from no par value to par
value. In the event that at any time, as a result of an adjustment made
pursuant to paragraph (a) above, the Warrant Holders shall become
entitled to purchase any securities of the Company other than shares of
Common Stock, thereafter the number of such other securities so
purchasable upon exercise of each Warrant and the Exercise Price of
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<PAGE>
such securities shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Warrant Shares contained in paragraphs
(a) through (i), inclusive, above, and the provisions of Section 7 and
Section 12.2 through 12.5, inclusive, with respect to the Warrant
Shares, shall apply on like terms to any such other securities.
(k) Upon the expiration of any rights, options, Warrants, or
conversion or exchange privileges, if any thereof shall not have been
exercised, the Warrant Price and the number of shares of Common Stock
purchasable upon the exercise of each Warrant shall, upon such
expiration, be readjusted and shall thereafter be such as it would have
been had it been originally adjusted (or had the original adjustment
not been required, as the case may be) as if (A) the only shares of
Common Stock so issued were the shares of Common Stock, if any,
actually issued or sold upon the exercise of such rights, options,
Warrants, or conversion or exchange rights and (B) such shares of
Common Stock, if any, were issued or sold for the consideration
actually received by the Company upon such exercise plus the aggregate
consideration, if any, actually received by the Company for the
issuance, sale or grant of all such rights, options, warrants, or
conversion or exchange rights whether or not exercised; provided,
however, that no such readjustment shall have the effect of increasing
the Warrant Price or decreasing the number of Warrant Shares by an
amount in excess of the amount of the adjustment initially made with
respect to the issuance, sale or grant of such rights, options,
warrants, or conversion or exchange rights.
(1) In addition to the adjustments set forth above, the Exercise
Price shall be immediately reduced and the number of Warrant Shares
shall be immediately increased, in each case, on a pari passu basis
with the conversion, exercise, or strike price of any other derivative
securities of the Company whether now outstanding or hereafter issued.
12.2. VOLUNTARY ADJUSTMENT BY THE COMPANY. The Company may, at its
option, at any time during the term of the Warrants, reduce the then
current Exercise Price to any amount determined appropriate by the Board of
Directors of the Company.
12.3. NOTICE OF ADJUSTMENT. When the number of Warrant Shares
purchasable upon the exercise of each Warrant or the Exercise Price of such
Warrant Shares is adjusted, as herein provided, the Company shall promptly
mail by first class, postage prepaid, to each Warrant Holder notice of such
adjustment or adjustments and a certificate of a firm of independent public
accountants selected by the Board of Directors of the Company (who may be
the regular accountants employed by the Company) setting forth the number
of Warrant Shares purchasable upon the exercise of each Warrant and the
Exercise Price of such Warrant Shares after such adjustment and setting
forth a brief statement of the facts requiring such adjustment and setting
forth the computation by which such adjustment was made. Such certificate,
absent manifest error, shall be conclusive evidence of the correctness of
such adjustment.
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12.4. PRESERVATION OF PURCHASE RIGHTS UPON MERGER, CONSOLIDATION, ETC.
In case of any consolidation of the Company with or merger of the Company
into another person or in case of any sale, transfer, or lease to another
person of all of or substantially all the assets of the Company, the
Company or such successor or purchaser, as the case may be, shall execute
with each Warrant Holder an agreement that each Warrant Holder shall have
the right thereafter upon payment of the Exercise Price in effect
immediately prior to such action to purchase upon exercise of each Warrant
the kind and amount of shares and other securities and property which the
Warrant Holder would have owned or have been entitled to receive after the
happening of such consolidation, merger, sale, transfer, or lease had such
Warrant been exercised immediately prior to such action regardless of
whether the Warrants are exercisable at the time of such action. Such
agreement shall provide for adjustments, which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
Section 12. The provisions of this Section 12.4 shall similarly apply to
successive consolidations, mergers, sales, transfers, or leases.
12.5. STATEMENT ON WARRANTS. Even though Warrants heretofore or
hereafter issued may continue to express the same price and number and kind
of shares as are stated in the Warrants initially issuable pursuant to this
Warrant Agreement, the parties understand and agree that such Warrants will
represent rights consistent with any adjustments in the Exercise Price or
the number or kind of shares purchasable upon the exercise of the Warrants.
13. FRACTIONAL INTERESTS. The Company shall not be required to issue
fractional Warrant Shares on the exercise of Warrants. If more than one Warrant
shall be presented for exercise in full at the same time by the same Warrant
Holder, the number of full Warrant Shares which shall be issuable upon the
exercise thereof shall be computed on the basis of the aggregate number of
Warrant Shares purchasable on exercise of the Warrants so presented. If any
fraction of a Warrant Share would, except for the provisions of this Section 13,
be issuable on the exercise of any Warrant (or specified portion, thereof), the
Company shall pay an amount in cash equal to the closing price for one share of
the Common Stock on the trading day immediately preceding the date the Warrant
is presented for exercise, multiplied by such fraction.
14. REGISTRATION UNDER THE SECURITIES ACT OF 1933. Willis represents and
warrants to the Company that it will not dispose of the Warrant or Warrant
Shares except pursuant to (i) an effective registration statement or (ii) an
applicable exemption from registration under the Securities Act of 1933 (the
"Act"). In connection with any sale by Willis pursuant to clause (ii) of the
preceding sentence, it shall furnish to the Company an opinion of counsel
reasonably satisfactory to the Company to the effect that such exemption from
registration is available in connection with such sale.
15. CERTIFICATE TO BEAR LEGENDS. The Warrants shall be subject to a stop-
transfer order and the certificate or certificates therefor shall bear the
following legend by which each Warrant Holder shall be bound:
"THE WARRANTS REPRESENTED HEREBY AND THE SECURITIES ISSUABLE UPON EXERCISE
HEREOF HAVE NOT BEEN REGISTERED
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UNDER THE SECURITIES ACT OF 19331, AS AMENDED (THE "SECURITIES ACT"), OR
THE SECURITIES LAWS OF ANY OTHER STATE. THE WARRANTS REPRESENTED HEREBY AND
THE SECURITIES ISSUABLE UPON EXERCISE HEREOF 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."
The Warrant Shares or other securities issued upon exercise of the Warrants
shall, unless issued pursuant to an effective registration statement, be subject
to a stop-transfer order and the certificate or certificates evidencing any such
Warrant Shares or securities shall bear the following legend by which the
Warrant Holder thereof shall be bound:
"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."
16. REGISTRATION RIGHTS. The Warrant Shares shall be subject to the same
registration rights contemplated by the form of Registration Rights Agreement
attached as Exhibit A to the Reorganization Agreement (modified as necessary to
apply only to the Warrant Shares), and promptly following request by Netco the
Company shall execute and deliver such modified Registration Rights Agreement to
Netco.
17. NO RIGHTS AS STOCKHOLDERS; NOTICE TO WARRANT HOLDERS. Nothing contained
in this Warrant Agreement or in any of the Warrants shall be construed as
conferring upon the Warrant Holders or their transferees the right to vote or to
receive dividends or to consent or to receive notice as stockholders in respect
of any meeting of stockholders for the election of directors of the Company or
any other matter, or any rights whatsoever as stockholders of the Company. If,
however, at any time prior to the expiration of the Warrants and prior to their
exercise, any of the following events shall occur:
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(a) the Company shall declare any dividend payable in any securities
upon its shares Of Common Stock or make any distribution (other than a cash
dividend) to the holders of its shares of Common Stock; or
(b) the Company shall offer to the holders of its shares of Common
Stock any additional shares of Common Stock or securities convertible into
or exchangeable for shares of Common Stock or any right to subscribe to or
purchase any thereof; or
(c) a dissolution, liquidation, or winding up of the Company (other
than in connection with a consolidation, merger, sale, transfer, or lease
or all or substantially all of its property, assets, and business as an
entirety) shall be proposed,
then in any one or more of said events the Company shall give notice in writing
of such event to the Warrant Holders as provided in Section 20 hereof with such
notice to be completed at least 15 days prior to the date fixed as a record date
or the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution, or subscription rights, or
for the determination of stockholders entitled to vote on such proposed
dissolution, liquidation or winding up. Such notice shall specify such record
date or the date of closing the transfer books, as the case may be. Failure to
provide or receive such notice or any defect therein or in the mailing thereof
shall not affect the validity of any action taken in connection with such
dividend, distribution, or subscription rights, or such proposed dissolution,
liquidation or winding up.
18. EXPENSES. The Company shall pay all legal and other reasonable out-of-
pocket expenses of the Warrant Holders and of their counsel (up to a maximum of
$25,000). The Company agrees to reimburse Willis upon demand for its reasonable
out-of-pocket costs and expenses incurred in connection with the preparation,
review, negotiation, execution, and delivery of this Warrant Agreement and all
other related documents.
19. RIGHT TO INFORMATION. The Company, in accordance with Section 16(c)
above, will provide to all Warrant Holders and to all holders of Warrant Shares,
on a timely basis, copies of all documents and reports delivered to its
shareholders.
20. NOTICES. Any notice pursuant to this Warrant Agreement to be given or
made by the holder of any Warrant or Warrant Shares to or on the Company shall
be sufficiently given or made if sent by first-class mail, postage prepaid,
addressed as follows:
EqualNet Holding Corp.
1250 Wood Branch Park Drive
Houston, Texas 77079
Attention: General Counsel
Notices or demands authorized by this Warrant Agreement to be given or made to
or on the Warrant Holder of any Warrant or Warrant Shares shall be sufficiently
given or made (except as otherwise provided in this Warrant Agreement) if sent
by registered mail, return receipt requested, postage prepaid, addressed to such
Warrant Holder at the address of such Warrant Holder as shown on the Warrant
Register or the Common Stock Register, as the case may be.
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<PAGE>
21. GOVERNING LAW. THIS WARRANT AGREEMENT, THE WARRANTS AND ALL RELATED
DOCUMENTS SHALL BE DEEMED TO BE CONTRACTS MADE UNDER AND SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS, WITHOUT GIVING
EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
22. SUPPLEMENTS AND AMENDMENTS. The Company and the Warrant Holders may
from time to time supplement or amend this Warrant Agreement in order to cure
any ambiguity or to correct or supplement any provision contained herein which
may be defective or inconsistent with any other provision herein, or to make any
other provisions in regard to matters or questions arising hereunder which the
Company and the Warrant Holder may deem necessary or desirable and which shall
not be inconsistent with the provisions of the Warrants and which shall not
adversely affect the interests of the Warrant Holders. Any amendment to this
Warrant Agreement may be effected with the consent of Warrant Holders of at
least a majority of the total then outstanding Warrants (for this purpose
Warrant Shares shall be deemed to be Warrants in the proportion that Warrant
Shares are then issuable upon the exercise of Warrants); provided that any
amendment which shall have the effect of materially adversely affecting the
interests of any Warrant Holder shall not be effective With respect to such
Warrant Holder if such Warrant Holder shall not have consented thereto.
23. SURVIVAL OF COVENANTS. All covenants and agreements made herein shall
survive the execution and delivery of this Warrant Agreement and the Warrants
and shall remain in force and effect until the Expiration Date of all Warrants.
24. SUCCESSORS. All representations and warranties of the Company and all
covenants and agreements of this Warrant Agreement by or for the benefit of the
Company or the Warrant Holders shall bind and inure to the benefit of their
respective successors and assigns hereunder.
25. BENEFITS OF THIS WARRANT AGREEMENT. Nothing in this Warrant Agreement
shall be construed to give to any person or corporation other than the Company
and the Warrant Holders, any legal or equitable right, remedy, or claim under
this Warrant Agreement, but this Warrant Agreement shall be for the sole and
exclusive benefit of the Company and the holders of the Warrants and Warrant
Shares.
26. CAPTIONS. The captions of the sections and subsections of this Warrant
Agreement have been inserted for convenience and shall have no substantive
effect.
27. COUNTERPARTS. This Warrant Agreement may be executed in any number of
counterparts, each of which so executed shall be deemed to be an original, but
such counterparts together shall constitute but one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this Warrant Agreement
to be duly executed on the day, month and year first above written.
EQUALNET HOLDING CORP.
By: /s/ ZANE RUSSELL
-------------------------------------
Name: Zane Russell
-----------------------------------
Title: CEO
----------------------------------
NETCO ACQUISITION, LLC
By: /s/ JAMES T. HARRIS
-------------------------------------
Name: James T. Harris
-----------------------------------
Title: Secretary
----------------------------------
[signature page to Warrant Agreement]
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<PAGE>
EXHIBIT A
TO
WARRANT AGREEMENT
FORM OF
WARRANT CERTIFICATE
THE WARRANTS REPRESENTED HEREBY AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY OTHER STATE. THE WARRANTS
REPRESENTED HEREBY AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF 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.
THE TRANSFER OR EXCHANGE OF THE WARRANTS AND COMMON STOCK UNDERLYING SUCH
WARRANTS REPRESENTED BY THIS CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE
WARRANT AGREEMENT REFERRED TO HEREIN.
No. 150,000 Warrants
------------
VOID AFTER 5:00 P.M. NEW YORK, TIME
ON DECEMBER 1, 2002
EQUALNET HOLDING CORP.
WARRANT CERTIFICATE
THIS CERTIFIES THAT for value received NETCO ACQUISITION, LLC, the
registered holder hereof or registered assigns (the "Warrant Holder"), is the
owner of the number of the Warrants set forth above, each of which entitles the
owner thereof to purchase at any time from 9:00 A.M., New York time, on the day
next following the Outside Closing Date (as such term is described in the
Warrant Agreement referred to below), until 5:00 P.M., New York time on
December 1, 2002 one fully paid and nonassessable share of the common stock
(subject to adjustment), par value $0.01 per share (the "Common Stock"), of
EQUALNET HOLDING CORP., a Texas corporation (the "Company"), at the exercise
price of $ 1.00 per share, subject to adjustment and limitation as described in
the Warrant Agreement referred to below (tile "Exercise Price"). The Warrant
Holder may pay the Exercise Price in cash, or by certified or official bank
check or make a net exercise for Net Warrant Shares as described in the Warrant
Agreement.
This Warrant Certificate is subject to, and entitled to the benefits of,
all of the terms, provisions and conditions of an agreement dated December 2,
1997 (the "Warrant Agreement"),
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<PAGE>
between the Company and Netco Acquisition, LLC, which Warrant Agreement is
hereby incorporated herein by reference and made a part hereof and to which
Warrant Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Company and the Warrant Holders of the Warrant Certificates. Copies of the
Warrant Agreement are on file at the principal office of the Company.
The Warrant Holder hereof may be treated by the Company and all other
persons dealing with this Warrant Certificate as the absolute owner hereof for
any purpose and as the person entitled to exercise the rights represented
hereby, or to the transfer hereof on the books of the Company, any notice to the
contrary notwithstanding, and until such transfer on such books, the Company may
treat the Warrant Holder hereof as the owner for all purposes.
The Warrant Certificate, with or without other Warrant Certificates, upon
surrender at the principal office of the Company, may be exchanged for another
Warrant Certificate or Warrant Certificates of like tenor and date evidencing
Warrants entitling the Warrant Holder to purchase a like aggregate number of
shares of Common Stock as the Warrants evidenced by the Warrant Certificate or
Warrant Certificates surrendered entitled to such Warrant Holder to purchase. If
this Warrant Certificate shall be exercised in part, the Warrant Holder shall be
entitled to receive upon surrender hereof, another Warrant Certificate or
Warrant Certificates for the number of whole Warrants not exercised.
No fractional shares of Common Stock will be issued upon the exercise of
any Warrant or Warrants evidenced hereby, but in lieu thereof a cash payment
will be made, as provided in the Warrant Agreement.
Neither the Warrants nor the Warrant Certificate entitles any Warrant
Holder hereof to any of the rights of a stockholder of the Company.
THIS WARRANT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND SHALL BE
CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS,
WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
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<PAGE>
IN WITNESS WHEREOF, the Company has caused the signature of its President
and Secretary to be printed hereon.
EQUALNET HOLDING CORP.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
ATTEST:
- - ------------------------------
[Name: ]
[Secretary]
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<PAGE>
EXHIBIT 10.48
WARRANT AGREEMENT
(SWITCHES)
This WARRANT AGREEMENT, dated as of March 5, 1998, between EQUALNET HOLDING
CORP., a Texas corporation (the "Company"), and WILLIS GROUP, LLC, a Texas
limited liability company ("Willis" and, together with any transferee of
Warrants or Warrant Shares, the "Warrant Holders(s)").
WHEREAS, Willis, the Company, EqualNet Corporation, Telesource, Inc., and
EqualNet Wholesale Services, Inc., have entered into a certain Note and Warrant
Purchase Agreement (the "Note Purchase Agreement") dated October 1, 1997, and
Willis, the Company and EQ Acquisition Sub, Inc., a Delaware corporation ("Sub")
have entered into a certain Switch Agreement (the "Switch Agreement") dated
December 2, 1997; and
WHEREAS, the Company proposes to issue to Willis as partial consideration
for Willis's sale of certain switches pursuant to the Switch Agreement, common
stock purchase warrants (the "Warrants") to purchase up to 400,000 shares (the
"Warrant Shares") of the Company's common stock, par value $0.01 per share (the
"Common Stock"), each Warrant entitling the holder thereof to purchase one share
of Common Stock.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein and in the Agreement set forth and for other good and valuable
consideration, the parties hereto agree as follows:
1. ISSUANCE OF WARRANTS: FORM OF WARRANT. As of the date hereof the
Company will issue and deliver the Warrants to Willis. The aggregate number of
Warrants to be issued and delivered shall be 400,000 (subject to any further
limitation provided herein). The Warrants shall be exercisable on or after the
date hereof. The text of each Warrant shall be substantially as set forth in
the Warrant Certificate attached as Exhibit A hereto. The Warrants shall be
executed on behalf of the Company by the manual or facsimile signature of the
present or any future Chairman of the Board, President, or Vice President of the
Company, attested by the manual or facsimile signature of the present or future
Secretary or an Assistant Secretary of the Company. A Warrant bearing the
manual or facsimile signature of individuals who were at any time the proper
officers of the Company shall bind the Company notwithstanding that such
individuals or any of them shall have ceased to hold such offices prior to the
delivery of such Warrant or did not hold such offices on the date of this
Warrant Agreement.
Warrants shall be dated as of the date of execution thereof by the Company
either upon initial issuance or upon division, exchange, substitution or
transfer.
The demand and the piggy-back registration rights set forth in Section 16
hereof may be exercised at any time during the term of the Warrants.
<PAGE>
2. REPRESENTATIONS AND WARRANTIES.
(a) The Company hereby represents and warrants as follows:
(i) POWER AND AUTHORITY. The Company has all requisite corporate power
and authority, and has taken all corporate action necessary, to execute,
deliver and perform this Warrant Agreement, to grant, issue, and deliver
the Warrants and to authorize and reserve for issuance and, upon payment
from time to time of the Exercise Price, to issue and deliver the shares of
Common Stock or other securities issuable upon exercise of the Warrants.
This Warrant Agreement has been duly executed and delivered by the Company.
(ii) RESERVATION, ISSUANCE AND DELIVERY OF COMMON STOCK. There have
been reserved for issuance, and the Company shall at all times keep
reserved, out of the authorized and unissued shares of Common Stock, a
number of shares sufficient to provide for the exercise of the rights of
purchase represented by the Warrants, and such shares, when issued upon
receipt of payment therefor or upon a net exercise in accordance with the
terms of the Warrants and of this Warrant Agreement, will be legally and
validly issued, fully paid and non-assessable and will be free of any
preemptive rights of shareholders or any restrictions.
(b) The Warrant Holder hereby represents and warrants as follows:
(i) ACCREDITED INVESTOR. The Warrant Holder 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. The Warrant Holder has made its own evaluation of
its investment in the Warrants, based upon such information as is available
to it and without reliance upon the Company or any other person or entity,
and the Warrant Holder agrees that neither the Company nor any other person
or entity has any obligation to furnish any additional information to the
Warrant Holder except as expressly set forth herein.
3. CONDITIONS TO PURCHASE. Willis's obligations hereunder shall be subject
to satisfaction of the following conditions on or before the date hereof:
(a) All corporate proceedings and other legal matters incident to the
authorization, form and validity of this Warrant Agreement and the Warrants
and all other legal matters relating to this Warrant Agreement, the
Warrants and the transactions contemplated hereby shall be satisfactory in
all respects to Vinson & Elkins L.L.P., counsel for Willis, in their
reasonable judgment, and the Company shall have furnished to such counsel
all documents and information that they may reasonably request to enable
them to pass judgment upon such matters.
(b) There shall have been duly tendered to Willis or upon the order of
Willis a certificate or certificates representing the Warrants.
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<PAGE>
4. REGISTRATION. The Warrants shall be numbered and shall be registered
on the books of the Company (the "Warrant Register") as they are issued. The
Warrants shall be registered initially in such names and such denominations as
Willis has specified to the Company.
5. EXCHANGE OF WARRANT CERTIFICATES. Subject to any restriction upon
transfer set forth in this Warrant Agreement, each Warrant certificate may be
exchanged at the option of the Warrant Holder thereof for another certificate or
certificates of different denominations entitling the Warrant Holder thereof to
purchase upon surrender to the Company or its duly authorized agent a like
aggregate number of Warrant Shares as the certificate or certificates
surrendered then entitle such Warrant Holder to purchase. Any Warrant Holder
desiring to exchange a Warrant certificate or certificates shall make such
requests in writing delivered to the Company, and shall surrender, properly
endorsed, the certificate or certificates to be so exchanged. Thereupon the
Company shall execute and deliver to the person entitled thereto a new Warrant
certificate or certificates as the case may be, as so requested. Any Warrant
issued upon exchange, transfer or partial exercise of the Warrants shall be the
valid obligation of the Company, evidencing the same generic rights and entitled
to the same generic benefits under this Warrant Agreement as the Warrants
surrendered for such exchange, transfer or exercise.
6. TRANSFER OF WARRANTS. Subject to the provisions of Section 14 hereof,
the Warrants shall be transferrable only on the Warrant Register upon delivery
to the Company of the Warrant certificate or certificates duly endorsed by the
Warrant Holder or by his duly authorized attorney-in-fact or legal
representative, or accompanied by proper evidence of succession, assignment or
authority to transfer. In all cases of transfer by an attorney-in-fact, the
original power of attorney, duly approved, or an official copy thereof, duly
certified, shall be deposited with the Company. In case of transfer by
executors, administrators, guardians or other legal representatives, duly
authenticated evidence of their authority shall be produced, and may be required
to be deposited with the Company in its discretion. Upon any registration of
transfer, the Company shall deliver a new Warrant or Warrants to the person
entitled thereto.
7. TERM OF WARRANTS; EXERCISE OF WARRANTS.
(a) Each Warrant entitles the Warrant Holder thereof to purchase one share
of Common Stock during the time period and subject to the conditions set forth
in the respective Warrant Certificates at an exercise price of $?.00 per share,
subject to adjustment in accordance with Section 12 hereof (the "Exercise
Price"). Each Warrant terminates on the fifth anniversary of the date on which
such Warrant becomes exercisable in accordance with its terms (the "Expiration
Date").
(b) The Exercise Price and the number of shares issuable upon exercise of
Warrants are subject to adjustment upon the occurrence of certain events,
pursuant to the provisions of Section 12 of this Warrant Agreement. Subject to
the provisions of this Warrant Agreement, each Warrant Holder shall have the
right, which may be exercised as expressed in such Warrants, to purchase from
the Company (and the Company shall issue and sell to such Warrant Holder) the
number of fully paid and nonassessable shares of Common Stocks specified in
such Warrants, upon surrender to the Company, or its duly authorize agent of
such Warrants, with the purchase form on the reverse thereof duly filled in and
signed and upon payment to the Company of the Exercise Price, as
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<PAGE>
adjusted in accordance with the provisions of Section 12 of this Warrant
Agreement or upon a net exercise pursuant to this subsection of this Warrant
Agreement, for the number of shares in respect of which such Warrants are then
exercised. The Warrant Holder may (i) pay the Exercise Price in cash, by
certified or official bank check payable to the order of the Company, or (ii)
make an exercise of Warrants for "Net Warrant Shares." The number of Net
Warrant Shares will be determined as described by the following formula: Net
Warrant Shares = [WS x (MP-EP)]/MP. "WS" is the number of Warrant Shares
issuable upon exercise of the Warrants or portion of Warrants in question. "MP"
is the Market Price" of the Common Stock on the last trading day preceding the
date of the request to exercise the Warrants. "Market Price" shall mean the
then current market price per share of Common Stock, as determined in paragraph
12.1(e). "EP" shall mean the Exercise Price.
Upon such surrender of Warrants and payments of the Exercise Price with
cash or securities, or upon a net exercise as aforesaid, the Company at its
expense shall issue and cause to be delivered with all reasonable dispatch to or
upon the written order of the Warrant Holder and in such name or names as the
Warrant Holder may designate, a certificate or certificates for the number of
full shares of Common Stock so purchased upon the exercise of such Warrants,
together with cash, as provided in Section 12 of this Warrant Agreement in
respect of any fraction of a share of such stock otherwise issuable upon such
surrender. Such certificate or certificates shall be deemed to have been
issued, and any person so designated to be named therein shall be deemed to have
become a holder of record of such shares, as of the date of the surrender of
such Warrants and payment of the Exercise Price or receipt of shares by net
exercise as aforesaid. The rights of purchase represented by the Warrants shall
be exercisable, at the election of the Warrant Holders thereof, either in full
or from time to time in part and, in the event that any Warrant is exercised in
respect of less than all of the shares purchasable on such exercise at any time
prior to the Expiration Date, a new certificate evidencing the remaining Warrant
or Warrants will be issued.
8. COMPLIANCE WITH GOVERNMENT REGULATIONS. The Company covenants that if
any share of Common Stock required to be reserved for purposes of exercise or
conversion of Warrants require, under any federal or state law or applicable
governing rule or regulation of any national securities exchange, registration
with or approval of any governmental authority, or listing on any such national
securities exchange, before such shares may be issued upon exercise the Company
will use its commercially reasonable efforts to cause such shares to be duly
registered approved or listed on the relevant national securities exchange as
the case may be.
9. PAYMENT OF TAXES. The Company will pay all documentary stamp taxes, if
any, attributable to the initial issuance of Warrant Shares upon the exercise of
Warrants and any securities issued pursuant to Section 12 hereof; provided,
however, that the Company shall not be required to pay any tax or taxes which
may be payable in respect of any transfer involved in the issue or delivery of
any Warrants or certificates for Warrant Shares and any securities issued
pursuant to Section 12 hereof in a name other than that of the Warrant Holder of
such Warrants.
10. MUTILATED OR MISSING WARRANTS. In case any of the Warrants shall be
mutilated, lost, stolen or destroyed, the Company shall issue and deliver in
exchange and substitution for and upon cancellation of the mutilated Warrant, or
in lieu of and in substitution for the Warrant lost, stolen, or destroyed, a new
Warrant of like tenor and representing an equivalent right or interest.
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11. RESERVATION OF WARRANT SHARES; PURCHASE AND CANCELLATION OF WARRANTS.
The Company shall at all times reserve, out of the authorized and unissued
shares of Common Stock, a number of shares sufficient to provide for the
exercise of the rights of purchase represented by the Warrants, and the transfer
agent for the Common Stock ("Transfer Agent") and every subsequent transfer
agent for any shares of the Company's capital stock issuable upon the exercise
of any of the rights of purchase aforesaid are hereby irrevocably authorized and
directed at all times until the Expiration Date to reserve such number of
authorized and unissued shares as shall be requisite for such purpose. The
Company will keep a copy of this Warrant Agreement on file with the Transfer
Agent and with every subsequent transfer agent for any shares of the Company's
capital stock issuable upon the exercise of the rights of purchase represented
by the Warrants. The Company will supply the Transfer Agent and any such
subsequent transfer agent with duly executed stock certificates for such purpose
and will itself provide or otherwise make available any cash which may be
issuable as provided by Section 13 of this Warrant Agreement. The Company will
furnish to the Transfer Agent and any such subsequent transfer agent a copy of
all notices of adjustments, and certificates related thereto, transmitted to
each Warrant Holder pursuant to Section 12.3 hereof. All warrants surrendered in
the exercise of the rights thereby evidenced shall be canceled, and such
canceled Warrants shall constitute sufficient evidence of the number of shares
of stock which have been issued upon the exercise of such Warrants (subject to
adjustment as herein provided). No shares of stock shall be subject to
reservation in respect of the Warrants subsequent to the Expiration Date except
to the extent necessary to comply with the terms of this Warrant Agreement.
12. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES. The number
and kind of securities purchasable upon the exercise of each Warrant and the
Exercise Price shall be subject to adjustment from time to time upon the
occurrence of certain events, as hereafter defined.
12.1 MECHANICAL ADJUSTMENTS. The number of Warrant Shares purchasable
upon the exercise of each Warrant and the Warrant Price shall be subject to
adjustment as follows:
(a) In case the Company shall (i) pay a dividend to holders of
Common Stock in shares of Common Stock or make a distribution to holders of
Common Stock in shares of Common Stock (ii) subdivide its outstanding shares of
Common Stock into a larger number of shares of Common Stock, (iii) combine its
outstanding shares of Common Stock into a smaller number of shares of Common
Stock or (iv) issue by reclassification of its shares of Common Stock other
securities of the Company (including any such reclassification in connection
with a consolidation or merger in which the Company is the surviving
corporation), the number of Warrant Shares purchasable upon exercise of each
Warrant immediately prior thereto shall be adjusted so that the Warrant Holder
shall be entitled to receive the kind and number of Warrant Shares or other
securities of the Company which he would have owned or have been entitled to
receive after the happening of any of the events described above, had such
Warrants been exercised immediately prior to the happening of such event or any
record date with respect thereto regardless of whether the Warrants are
exercisable at the time of the happening to such event or at the time of any
record date with respect thereto. An adjustment made pursuant to this paragraph
(a) shall become effective immediately after the effective date of such event
retroactive to the record date, if any, for such event.
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(b) In case the Company shall issue rights, options, or warrants to holders
of its outstanding Common Stock, without any charge to such holders, entitling
them to subscribe for or purchase shares of Common Stock at a price per share
which is lower at the record date mentioned below than the Exercise Price, then
(i) the Exercise in effect immediately prior to such issuance shall immediately
be reduced to the price that is equivalent to such consideration received by the
Company upon such issuance and (ii) the number of Warrant Shares thereafter
purchasable upon the exercise of each Warrant shall be increased in direct
proportion to the increase in the number of shares of Common Stock outstanding
on a fully diluted basis immediately prior to such issuance; provided that if
such shares of Common Stock, options or other convertible securities (other than
Excluded Stock (as defined in the Note Purchase Agreement)) are issued for
consideration per share less than the Exercise Price at the date of such issue
or sale, the number of shares of Common Stock that immediately prior to such
issuance the Warrant Holder shall have been entitled to purchase pursuant to
this Warrant shall be increased to the greater of (i) that number of shares of
Common Stock that immediately prior to such issuance the Warrant Holder shall
have been entitled to purchase pursuant to this Warrant multiplied by a
fraction, the numerator of which is the Exercise Price and the denominator of
which is such consideration per share, and (ii) the number of shares of Common
Stock otherwise calculated under this Section 12.1. Such adjustment shall be
made whenever such rights, options or warrants are issued, and shall become
effective immediately after the record date for the determination of
stockholders entitled to receive such rights, options, or warrants provided that
this Section 12.1(b) shall expire and be of no force and effect on or after
April 1, 1998.
(c) In case the Company shall distribute to holders of its shares of Common
Stock evidences of its indebtedness or assets (including cash dividends or other
cash distributions) or rights, options, or warrants, or convertible or
exchangeable securities containing the right to subscribe for or purchase shares
of Common Stock (excluding those referred to in paragraph (b) above), then in
each case the number of Warrant Shares thereafter purchasable upon the exercise
of each Warrant shall be determined by multiplying the number of Warrant Shares
theretofore purchasable upon the exercise of each Warrant by a fraction, of
which the numerator shall be the then current market price per share of Common
Stock (as determined in accordance within paragraph (e) below on the date of
such distribution, and of which the denominator shall be the then current market
price per share of Common Stock, less the then fair value (as determined in good
faith by the Board of Directors of the Company) of the portion of the assets or
evidences of indebtedness so distributed or of such subscription rights,
options, or warrants, or of such convertible or exchangeable securities
applicable to one share of Common Stock. Such adjustment shall be made whenever
any such distributions made, and shall become effective on the date of
distribution retroactive to the record date for the determination of
stockholders entitled to receive such distribution.
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In the event of distribution by the Company to holders of its shares of
Common Stock of stock of a subsidiary or securities convertible into or
exercisable for such stock, then in lieu of an adjustment in the number of
Warrant Shares purchasable upon the exercise of each Warrant, the Warrant
Holder, upon the exercise thereof at any time after such distribution, shall be
entitled to receive from the Company, such subsidiary, or both, as the Company
shall determine, the stock or other securities to which such Warrant Holder
would have been entitled if such Warrant Holder had exercised such Warrant
immediately prior thereto regardless of whether the Warrants are exercisable at
such time, all subject to further adjustment as provided in this subsection
12.1; provided, however, that no adjustment in respect of dividends or interest
on such stock or other securities shall be made during the term of a Warrant or
report the exercise of a Warrant; provided further, that this Section 12.1(c)
shall expire and be of no force and effect on or after April 1, 1998.
(d) In case the Company shall sell and issue shares of Common Stock (other
than pursuant to rights, options, warrants, or convertible securities initially
issued before the date of this Agreement) or rights, options, warrants, or
convertible securities containing the right to subscribe for or purchase shares
of Common Stock (excluding shares, rights options, warrants, or convertible
securities issued in any of the transactions described in paragraphs (a), (b) or
(c) above) at a price per share of Common Stock (determined, in the case of such
rights, options, warrants or convertible securities, by dividing (w) the total
of the amount received or receivable by the Company (determined as provided
below) in consideration of the sale and issuance of such rights, options,
warrants, or convertible securities, by (x) the total number of shares of Common
Stock covered by such rights, options, warrants, or convertible securities)
lower than the Exercise Price in effect immediately prior to such sale and
issuance then (i) the Exercise in effect immediately prior to such issuance
shall immediately be reduced to the price that is equivalent to such
consideration received by the Company upon such issuance (ii) the number of
Warrant Shares thereafter purchasable upon the exercise of the Warnings shall be
increased in direct proportion to the increase in the number of shares of Common
Stock outstanding on a fully diluted basis immediately prior to such issuance;
provided that if such shares of Common Stock, options or other convertible
securities (other than Excluded Stock) are issued for consideration of per share
less than the Exercise Price at the date of such issue or sale, the number of
shares of Common Stock that immediately prior to such issuance the Warrant
Holder shall have been entitled to purchase pursuant to this Warrant shall be
increased to the greater of (i) that number of shares of Common Stock that
immediately prior to such issuance the Warrant Holder shall have been entitled
to purchase pursuant to this Warrant multiplied by a fraction, the numerator of
which is the Exercise Price and the denominator of which is such consideration
per share, and (ii) the number of shares of Common Stock otherwise calculated
under this Section 12.1. Such adjustment shall be made successively whenever
such as issuance is made provided that this Section 12.1(d) shall expire and be
of no force and effect on or after April 1, 1998. For the purposes of such
adjustments, the consideration received or receivable by the Company for rights,
options, warrants, or convertible securities shall be deemed to
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be the consideration received by the Company for such rights, options, warrants,
or convertible securities, plus the consideration or premiums stated in such
rights, options, warrants, or convertible securities to be paid for the shares
of Common Stock covered thereby. In case the Company shall sell and issue
shares of Common Stock, or rights, options, warrants, or convertible securities
containing the right to subscribe for or purchase shares of Common Stock, for a
consideration consisting, in whole or in part, of property other than cash or
its equivalent then in determining the "price per share of Common Stock" and the
"consideration received or receivable by the Company" for purposes of the first
sentence of this paragraph (d) the Board of Directors shall determine, in its
discretion, the fair value of said property.
(e) For the purpose of any computation under paragraph (b), (c), and (d) of
this Section, the current market price per share of Common Stock at any date
shall be the average of the daily closing prices of the Company's Common Stock,
for five consecutive trading days ending one trading day before the date of such
computation. The closing price for each day shall be the last such reported
sales price regular way or, in case no such reported sale takes place on such
day, the average of the closing bid and asked prices regular way for such day,
in each case on the principal national securities exchange on which the shares
of Common Stock are listed or admitted to trading or, if not listed or admitted
to trading, the average of the closing bid and asked prices of the Common Stock
in the over-the-counter market as reported by NASDAQ or any comparable system.
In the absence of one or more such quotations, the Board of Directors of the
Company shall determine the current market price in good faith, on the basis of
such quotations as it considers appropriate. Notwithstanding the foregoing, for
the purpose of any calculation under paragraph (d) above (A) with respect to any
issuance of options under the Company's employee or director compensation stock
option plans as in effect or as adopted by the Board of Directors of the Company
on the date hereof, the term "current market price", in such instances, shall
mean the fair market price on the date of the issuance of any such option
determined in accordance with the Company's employee compensation stock option
plans as in effect or adopted by the Board of Directors of the Company on the
date hereof, and (B) with respect to any issuances of Common Stock (or rights,
options, warrants or convertible securities containing the right to subscribe
for or purchase shares of Common Stock) in connection with bona fide corporate
transactions (other than issuances in such transactions for cash or similar
consideration), the term "fair market price" shall mean the fair market price
per share as determined in arm's-length negotiations by the Company and such
other parties (other than affiliates or subsidiaries of the Company) to such
transactions as reflected in the definitive documentation with respect thereto,
unless such determination is not reasonably related to the closing market price
on the date of such determination.
(f) In any case in which this Section 12.1 shall require that any
adjustment in the number of Warrant Shares be made effective as of immediately
after a record date for a specified event, the Company may elect to defer until
the occurrence of the event the issuing to the holder of any Warrant exercised
after that record date the shares of Common Stock and other securities of the
Company, if any,
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issuable upon the exercise of any Warrant over and above the shares of Common
Stock and other securities of the Company, if any, issuable upon the exercise of
any Warrant prior to such adjustment; provided, however, that the Company shall
deliver to such Warrant Holder a due bill or other appropriate instrument
evidencing the holder's right to receive such additional shares or securities
upon the occurrence of the event requiring such adjustment.
(g) No adjustment in the number of Warrant Shares purchasable hereunder
shall be required unless such adjustment would require an increase or decrease
or at least one percent (1%) in the number of Warrant Shares purchasable upon
the exercise of each Warrant; provided, however, that any adjustments which by
reason of this paragraph (g) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All calculations
shall be made to the nearest one-thousandth of a share.
(h) Whenever the number of Warrant Shares purchasable upon the exercise
of each Warrant is adjusted, as herein provided, the Warrant Price payable upon
the exercise of each Warrant shall be adjusted by multiplying such Warrant Price
immediately prior to such adjustment by a fraction, of which the numerator shall
be the number of Warrant Shares purchasable upon the exercise of such Warrant
immediately prior to such adjustment, and of which the denominator shall be the
number of Warrant Shares purchasable immediately.
(i) No adjustment in the number of Warrant Shares purchasable upon the
exercise of each Warrant need be made under paragraphs (b), (c) and (d) if the
Company issues or distributes to each Warrant Holder the rights, options,
warrants, or convertible or exchangeable securities, or evidences of
indebtedness or assets referred to in those paragraphs which each Warrant Holder
would have been entitled to receive had the Warrants been exercised prior to the
happening of such event of the record date with respect thereto regardless of
whether the Warrants are exercisable at the time of the happening of such event
or at the time of any record date with respect thereto. No adjustment need be
made for a change in the par value of the Warrant Shares.
(j) For the purpose of this Section 12.1, the terms "shares of Common
Stock" shall mean (i) the class of stock designated as the Common Stock of the
Company at the date of this Agreement, or (ii) any other class of stock
resulting from successive changes or reclassifications of such shares consisting
solely of changes in par value, or from par value to no par value, or from no
par value to par value. In the event that at any time, as a result of an
adjustment made pursuant to paragraph (a) above, the Warrant Holders shall
become entitled to purchase any securities of the Company other than shares of
Common Stock, thereafter the number of such other securities so purchasable upon
exercise of each Warrant and the Exercise Price of such securities shall be
subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the Warrant Shares
contained in paragraphs (a) through (i), inclusive, above and the provisions
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of Section 7 and Section 12.2 through 12.5, inclusive, with respect to the
Warrant Shares, shall apply on like terms to any such other securities.
(k) Upon the expiration of any rights, options, warrants, or conversion or
exchange privileges, if any thereof shall not have been exercised, the Warrant
Price and the number of shares of Common Stock purchasable upon the exercise of
each warrant shall, upon such expiration, be readjusted and shall thereafter be
such as it would have been had it been originally adjusted (or had the original
adjustment not been required, as the case may be) as if (A) the only shares of
Common Stock so issued were the shares of Common Stock, if any, actually issued
or sold upon the exercise of such rights, options, warrants, or conversion or
exchange rights and (B) such shares of Common Stock, if any, were issued or sold
for the consideration actually received by the Company upon such exercise plus
the aggregate consideration, if any, actually received by the Company for the
issuance, sale or grant of all such rights, options, warrants, or conversion or
exchange rights whether or not exercised; provided, however, that no such
readjustment shall have the effect of increasing the Warrant Price or decreasing
the number of Warrant Shares by an amount in excess of the amount of the
adjustment initially made with respect to the issuance, sale or grant of such
rights, options, warrants, or conversion or exchange rights.
(l) In addition to the adjustments set forth above, the Exercise Price
shall be immediately reduced and the number of Warrant Shares shall be
immediately increased, in each case, on a pari passu basis with the conversion,
exercise, or strike price of any other derivative securities of the Company
whether now outstanding or hereafter issued.
12.1 VOLUNTARY ADJUSTMENT BY THE COMPANY. The Company may, at its option,
at any time during the term of the Warrants, reduce the then current Exercise
Price to any amount determined appropriate by the Board of Directors of the
Company.
12.3. NOTICE OF ADJUSTMENT. When the number of Warrant Shares purchasable
upon the exercise of each Warrant or the Exercise Price of such Warrant Shares
is adjusted, as herein provided, the Company shall promptly mail by first class,
postage prepaid to each Warrant Holder notice of such adjustment or adjustments
and a certificate of a firm of independent public accountants selected by the
Board of Directors of the Company (who may be the regular accountants employed
by the Company) setting forth the number of Warrant Shares purchasable upon the
exercise of each Warrant and the Exercise Price of such Warrant Shares after
such adjustment and setting forth a brief statement of the facts requiring such
adjustment and setting forth the computation by which such adjustment was made.
Such certificate, absent manifest error, shall be conclusive evidence of the
correctness of such adjustment.
12.4 PRESERVATION OF PURCHASE RIGHTS UPON MERGER, CONSOLIDATION, ETC. In
case of any consolidation of the Company with or merger of the Company into
another person or in case of any sale, transfer, or lease to another person of
all of or substantially all
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the assets of the Company, the Company or such successor or purchaser, as
the case may be, shall execute with each Warrant Holder an agreement that
each Warrant Holder shall have the right thereafter upon payment of the
Exercise Price in effect immediately prior to such action to purchase upon
exercise of each Warrant the kind and amount of shares and other securities
and property which the Warrant Holder would have owned or have been
entitled to receive after the happening of such consolidation, merger,
sale, transfer, or lease had such Warrant been exercised immediately prior
to such action regardless of whether the Warrants are exercisable at the
time of such action. Such agreement shall provide for adjustments, which
shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Section 12. The provisions of this Section 12.4 shall
similarly apply to successive consolidations, mergers, sales, transfers, or
leases.
12.5. STATEMENT ON WARRANTS. Even though Warrants heretofore or
hereafter issued may continue to express the same price and number and kind
of shares as are stated in the Warrants initially issuable pursuant to this
Warrant Agreement, the parties understand and agree that such Warrants will
represent rights consistent with any adjustments in the Exercise Price or
the number or kind of shares purchasable upon the exercise of the Warrants.
13. FRACTIONAL INTERESTS. The Company shall not be required to issue
fractional Warrant Shares on the exercise of Warrants. If more than one Warrant
shall be presented for exercise in full at the same time by the same Warrant
Holder, the number of full Warrant Shares which shall be issuable upon the
exercise thereof shall be computed on the basis of the aggregate number of
Warrant Shares purchasable on exercise of the Warrants so presented. If any
fraction of a Warrant Share would, except for the provisions of this Section 13,
be issuable on the exercise of any Warrant (or specified portion, thereof), the
Company shall pay an amount in cash equal to the closing price for one share of
the Common Stock on the trading day immediately preceding the date the Warrant
is present for exercise, multiplied by such fraction.
14. REGISTRATION UNDER THE SECURITIES ACT OF 1933. Willis represents and
warrants to the Company that it will not dispose of the Warrant or Warrant
Shares except pursuant to (i) an effective registration statement, or (ii) an
applicable exemption from registration under the Securities Act of 1933 (the
"Act"). In connection with any sale by Willis pursuant to clause (ii) of the
preceding sentence, it shall furnish to the Company an opinion of counsel
reasonably satisfactory to the Company to the effect that such exemption from
registration is available in connection with such sale.
15. CERTIFICATE TO BEAR LEGENDS. The Warrants shall be subject to a
stop-transfer order and the certificate or certificates therefor shall bear the
following legend by which each Warrant Holder shall be bound.
"THE WARRANTS REPRESENTED HEREBY AND THE SECURITIES ISSUABLE UPON EXERCISE
HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES OF 1933, AS AMENDED
(THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY OTHER STATE. THE
WARRANTS REPRESENTED HEREBY AND THE
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SECURITIES ISSUABLE UPON EXERCISE HEREOF 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."
The Warrant Shares or other securities issued upon exercise of the Warrants
shall, unless issued pursuant to an effective registration statement, be subject
to a stop-transfer order and the certificate or certificates evidencing any such
Warrant Shares or securities shall bear the following legend by which the
Warrant Holder thereof shall be bound.
"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."
16. REGISTRATION RIGHTS. The Warrant Shares shall be covered by and
subject to the registration rights set forth in Section 4.1.11 of the Note
Purchase Agreement.
17. NO RIGHTS AS STOCKHOLDERS: NOTICE TO WARRANT HOLDERS. Nothing
contained in this Warrant Agreement or in any of the Warrants shall be construed
as conferring upon the Warrant Holders or their transferees the right to vote or
to receive dividends or to consent or to receive notice as stockholders in
respect of any meeting of stockholders for the election of directors of the
Company or any other matter, or any rights whatsoever as stockholders of the
Company. If, however, at any time prior to the expiration of the Warrants and
prior to their exercise, any of the following events shall occur:
(a) the Company shall declare any dividend payable in any securities
upon its shares of Common Stock or make any distribution (other than a cash
dividend) to the holders of its shares of Common Stock; or
(b) the Company shall offer to the holders of its shares of Common
Stock any additional shares of Common Stock or securities convertible into
or exchangeable for the shares of Common Stock or any right to subscribe to
or purchase any thereof; or
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(c) a dissolution, liquidation, or winding up of the Company (other
than in connection with a consolidation, merger, sale, transfer, or lease
of all or substantially all of its property, assets, and business as an
entirety) shall be proposed.
then in any one or more of said events the Company shall give notice in writing
of such event to the Warrant Holders as provided in Section 20 hereof, with such
notice to be completed at least 15 days prior to the date fixed as a record date
or the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution, or subscription rights,
or for the determination of stockholders entitled to vote on such proposed
dissolution, liquidation or winding up. Such notice shall specify such record
date or the date of closing the transfer books, as the case may be. Failure to
provide or receive such notice or any defect therein or in the mailing thereof
shall not affect the validity of any action taken in connection with such
dividend, distribution, or subscription rights, or such proposed dissolution,
liquidation, or winding up.
18. EXPENSES. The Company shall pay all legal and other reasonable
out-of-pocket expenses of the Warrant Holders and of their counsel (up to a
maximum of $25,000). The Company agrees to reimburse Willis upon demand for its
reasonable out-of-pocket costs and expenses incurred in connection with the
preparation, review, negotiation, execution, and delivery of this Warrant
Agreement and all other related documents.
19. RIGHT TO INFORMATION. The Company, in accordance with Section 16(c)
above, will provide to all Warrant Holders and to all holders of Warrant Shares,
on a timely basis, copies of all documents and reports delivered to its
shareholders.
20. NOTICES. Any notice pursuant to this Warrant Agreement to be given or
made by the holder of any Warrant or Warrant Shares to or on the Company shall
be sufficiently given or made if sent by first-class mail, postage prepaid,
addressed as follows:
EqualNet Holding Corp.
1250 Wood Branch Park Drive
Houston, Texas 77079
Attention: General Counsel
Notices or demands authorized by this Warrant Agreement to be given or made to
or on the Warrant Holder of any Warrant or Warrant Shares shall be sufficiently
given or made (except as otherwise provided in this Warrant Agreement) if sent
by registered mail, return receipt requested, postage prepaid, addressed to such
Warrant Holder at the address of such Warrant Holder as shown on the Warrant
Register or the Common Stock Register, as the case may be.
21. GOVERNING LAW. THIS WARRANT AGREEMENT, THE WARRANTS AND ALL RELATED
DOCUMENTS SHALL BE DEEMED TO BE CONTRACTS MADE UNDER AND SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS, WITHOUT GIVING
EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. ANY DISPUTE HEREUNDER OR UNDER THE
WARRANTS OR RELATED DOCUMENTS SHALL BE DETERMINED EXCLUSIVELY IN ACCORDANCE WITH
SECTION 8.7 OF THE NOTE PURCHASE AGREEMENT.
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22. SUPPLEMENTS AND AMENDMENTS. The Company and the Warrant Holders may
from time to time supplement or amend this Warrant Agreement in order to cure
any ambiguity or to correct or supplement any provision contained herein which
may be defective or inconsistent with any other provision herein, or to make any
other provisions in regard to matters or questions arising hereunder which the
Company and the Warrant Holder may deem necessary or desirable and which shall
not be inconsistent with the provisions of the Warrants and which shall not
adversely affect the interests of the Warrant Holders. Any amendment to this
Warrant Agreement may be effected with the consent of Warrant Holders of at
least a majority of the total then outstanding Warrants (for this purpose
Warrant Shares shall be deemed to be Warrants in the proportion that Warrant
Shares are then issuable upon the exercise of Warrants); provided that any
amendment which shall have the effect of materially adversely affecting the
interests of any Warrant Holder shall not be effective with respect to such
Warrant Holder if such Warrant Holder shall not have consented thereto.
23. SURVIVAL OF COVENANTS. All covenants and agreements made herein
shall survive the execution and delivery of this Warrant Agreement and the
Warrants and shall remain in force and effect until the Expiration Date of all
Warrants.
24. SUCCESSORS. All representations and warranties of the Company and
all covenants and agreements of this Warrant Agreement by or for the benefit of
the Company or the Warrant Holders shall bind and inure to the benefit of their
respective successors and assigns hereunder.
25. BENEFITS OF THIS WARRANT AGREEMENT. Nothing in this Warrant
Agreement shall be construed to give to any person or corporation other than the
Company and the Warrant Holders, any legal or equitable right, remedy, or claim
under this Warrant Agreement, but this Warrant Agreement shall be for the sole
and exclusive benefit of the Company and the holders of the Warrants and Warrant
Shares.
26. CAPTIONS. The captions of the sections and subsections of this
Warrant Agreement have been inserted for convenience and shall have no
substantive effect.
27. COUNTERPARTS. This Warrant Agreement may be executed in any number
of counterparts, each of which so executed shall be deemed to be an original,
but such counterparts together shall constitute but one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this Warrant
Agreement to be duly executed on the day, month and year first above written.
EQUALNET HOLDING CORP.
By: /s/ Michael L. Hlinak
---------------------------------
Name: Michael L. Hlinak
-------------------------------
Title: Chief Operating Officer
------------------------------
WILLIS GROUP LLC
By: /s/ Mark Willis
---------------------------------
Name: Mark Willis
-------------------------------
Title: President
------------------------------
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EXHIBIT A
TO
WARRANT AGREEMENT
FORM OF
WARRANT CERTIFICATE
THE WARRANTS REPRESENTED HEREBY AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY OTHER STATE. THE WARRANTS
REPRESENTED HEREBY AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF 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.
THE TRANSFER OR EXCHANGE OF THE WARRANTS AND COMMON STOCK UNDERLYING SUCH
WARRANTS REPRESENTED BY THIS CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE
WARRANT AGREEMENT REFERRED TO HEREIN.
No. 400,000 Warrants
________________
VOID AFTER 5:00 P.M. NEW YORK, TIME
ON MARCH 4, 2003
EQUALNET HOLDING CORP.
WARRANT CERTIFICATE
THIS CERTIFIES THAT for value received WILLIS GROUP, LLC the registered
holder hereof or registered assigns (the "Warrant Holder"), is the owner of the
number of the Warrants set forth above, each of which entitles the owner thereof
to purchase at any time from 9:00 A.M., New York time, on March 5, 1998 until
5:00 P.M., New York time on March 4, 2003 one fully paid and nonassessable share
of the common stock (subject to adjustment), par value $0.01 per share (the
"Common Stock"), of EQUALNET HOLDING CORP., a Texas corporation (the "Company"),
at the exercise price of $1.00 per share, subject to adjustment and limitation
as described in the Warrant Agreement referred to below (the "Exercise Price").
The Warrant Holder may pay the Exercise Price in cash, or by certified or
official bank check or make a net exercise for Net Warrant Shares as described
in the Warrant Agreement.
This Warrant Certificate is subject to, and entitled to the benefits of,
all of the terms, provisions and conditions of an agreement dated March 5, 1998
(the "Warrant Agreement") between the Company and Willis Group, LLC, which
Warrant Agreement is hereby incorporated herein by
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<PAGE>
reference and made a part hereof and to which Warrant Agreement reference is
hereby made for a full description of the rights, limitations of rights,
obligations, duties and immunities hereunder of the Company and the Warrant
Holders of the Warrant Certificates. Copies of the Warrant Agreement are on file
at the principal office of the Company.
The Warrant Holder hereof may be treated by the Company and all other
persons dealing with this Warrant Certificate as the absolute owner hereof for
any purpose and as the person entitled to exercise the rights represented hereby
or to the transfer hereof on the books of the Company, any notice to the
contrary notwithstanding, and until such transfer on such books, the Company may
treat the Warrant Holder hereof as the owner for all purposes.
The Warrant Certificate, with or without other Warrant Certificates,
upon surrender at the principal office of the Company, may be exchanged for
another Warrant Certificate or Warrant Certificates of like tenor and date
evidencing Warrants entitling the Warrant Holder to purchase a like aggregate
number of shares of Common Stock as the Warrants evidenced by the Warrant
Certificate or Warrant Certificates surrendered entitled to such Warrant Holder
to purchase. If this Warrant Certificate shall be exercised in part, the Warrant
Holder shall be entitled to receive upon surrender hereof, another Warrant
Certificate or Warrant Certificates for the number of whole Warrants not
exercised.
No fractional shares of Common Stock will be issued upon the exercise of
any Warrant or Warrants evidenced hereby, but in lieu thereof a cash payment
will be made, as provided in the Warrant Agreement.
Neither the Warrants nor the Warrant Certificate entitles any Warrant
Holder hereof to any of the rights of a stockholder of the Company.
THIS WARRANT SHALL BE DEEMED TO BE CONTRACT MADE UNDER AND SHALL BE
CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS,
WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
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IN WITNESS WHEREOF, the Company has caused the signature of its President
and Secretary to be printed hereon.
EQUALNET HOLDING CORP.
By:
--------------------------
President
ATTEST:
By:
--------------------------
Secretary
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<PAGE>
EXHIBIT 10.49
WARRANT AGREEMENT
(GUARANTEE OF SWITCH FINANCING)
This WARRANT AGREEMENT, dated as of March 5, 1998, between EQUALNET HOLDING
CORP., a Texas corporation (the "Company"), and MICHAEL T. WILLIS, a resident of
Harris County, Texas ("Willis" and, together with any transferee of
Warrants or Warrant Shares, the "Warrant Holders(s)").
WHEREAS, Willis Group, LLC ("WG"), the Company, EqualNet Corporation,
Telesource, Inc., and EqualNet Wholesale Services, Inc., have entered into a
certain Note and Warrant Purchase Agreement (the "Note Purchase Agreement")
dated October 1, 1997, and WG, the Company and EQ Acquisition Sub, Inc., a
Delaware corporation ("Sub") have entered into a certain Switch Agreement (the
"Switch Agreement") dated December 2, 1997; and
WHEREAS, the Company proposes to issue to Willis as consideration
for Willis's guarantee of certain financing obtained by Sub common stock
purchase warrants (the "Warrants") to purchase up to 500,000 shares (the
"Warrant Shares") of the Company's common stock, par value $0.01 per share (the
"Common Stock"), each Warrant entitling the holder thereof to purchase one share
of Common Stock.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein and in the Agreement set forth and for other good and valuable
consideration, the parties hereto agree as follows:
1. ISSUANCE OF WARRANTS: FORM OF WARRANT. As of the date hereof the
Company will issue and deliver the Warrants to Willis. The aggregate number of
Warrants to be issued and delivered shall be 500,000 (subject to any further
limitation provided herein). The Warrants shall be exercisable on or after the
date hereof. The text of each Warrant shall be substantially as set forth in
the Warrant Certificate attached as Exhibit A hereto. The Warrants shall be
executed on behalf of the Company by the manual or facsimile signature of the
present or any future Chairman of the Board, President, or Vice President of the
Company, attested by the manual or facsimile signature of the present or future
Secretary or an Assistant Secretary of the Company. A Warrant bearing the
manual or facsimile signature of individuals who were at any time the proper
officers of the Company shall bind the Company notwithstanding that such
individuals or any of them shall have ceased to hold such offices prior to the
delivery of such Warrant or did not hold such offices on the date of this
Warrant Agreement.
Warrants shall be dated as of the date of execution thereof by the Company
either upon initial issuance or upon division, exchange, substitution or
transfer.
The demand and the piggy-back registration rights set forth in Section 16
hereof may be exercised at any time during the term of the Warrants.
<PAGE>
2. REPRESENTATIONS AND WARRANTIES.
(a) The Company hereby represents and warrants as follows:
(i) POWER AND AUTHORITY. The Company has all requisite corporate power
and authority, and has taken all corporate action necessary, to execute,
deliver and perform this Warrant Agreement, to grant, issue, and deliver
the Warrants and to authorize and reserve for issuance and, upon payment
from time to time of the Exercise Price, to issue and deliver the shares of
Common Stock or other securities issuable upon exercise of the Warrants.
This Warrant Agreement has been duly executed and delivered by the Company.
(ii) RESERVATION, ISSUANCE AND DELIVERY OF COMMON STOCK. There have
been reserved for issuance, and the Company shall at all times keep
reserved, out of the authorized and unissued shares of Common Stock, a
number of shares sufficient to provide for the exercise of the rights of
purchase represented by the Warrants, and such shares, when issued upon
receipt of payment therefor or upon a net exercise in accordance with the
terms of the Warrants and of this Warrant Agreement, will be legally and
validly issued, fully paid and non-assessable and will be free of any
preemptive rights of shareholders or any restrictions.
(b) The Warrant Holder hereby represents and warrants as follows:
(i) ACCREDITED INVESTOR. The Warrant Holder 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. The
Warrant Holder has made its own evaluation of its investment in the
Warrants, based upon such information as is available to it and without reliance
upon the Company or any other person or entity, and the Warrant Holder agrees
that neither the Company nor any other person or entity has any obligation to
furnish any additional information to the Warrant Holder except as expressly set
forth herein.
3. CONDITIONS TO PURCHASE. Willis's obligations hereunder shall be subject
to satisfaction of the following conditions on or before the date hereof:
(a) All corporate proceedings and other legal matters incident to the
authorization, form and validity of this Warrant Agreement and the Warrants
and all other legal matters relating to this Warrant Agreement, the
Warrants and the transactions contemplated hereby shall be satisfactory in
all respects to Vinson & Elkins L.L.P., counsel for Willis, in their
reasonable judgment, and the Company shall have furnished to such counsel
all documents and information that they may reasonably request to enable
them to pass judgment upon such matters.
(b) There shall have been duly tendered to Willis or upon the order of
Willis a certificate or certificates representing the Warrants.
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4. REGISTRATION. The Warrants shall be numbered and shall be registered
on the books of the Company (the "Warrant Register") as they are issued. The
Warrants shall be registered initially in such names and such denominations as
Willis has specified to the Company.
5. EXCHANGE OF WARRANT CERTIFICATES. Subject to any restriction upon
transfer set forth in this Warrant Agreement, each Warrant certificate may be
exchanged at the option of the Warrant Holder thereof for another certificate or
certificates of different denominations entitling the Warrant Holder thereof
to purchase upon surrender to the Company or its duly authorized agent a like
aggregate number of Warrant Shares as the certificate or certificates
surrendered then entitle such Warrant Holder to purchase. Any Warrant Holder
desiring to exchange a Warrant certificate or certificates shall make such
request in writing delivered to the Company, and shall surrender, properly
endorsed, the certificate or certificates to be so exchanged. Thereupon, the
Company shall execute and deliver to the person entitled thereto a new Warrant
certificate or certificates, as the case may be, as so requested. Any Warrant
issued upon exchange, transfer or partial exercise of the Warrants shall be the
valid obligation of the Company, evidencing the same generic rights and entitled
to the same generic benefits under this Warrant Agreement as the Warrants
surrendered for such exchange, transfer or exercise.
6. TRANSFER OF WARRANTS. Subject to the provisions of Section 14 hereof, the
Warrants shall be transferrable only on the Warrant Register upon delivery to
the Company of the Warrant certificate or certificates duly endorsed by the
Warrant Holder or by his duly authorized attorney-in-fact or legal
representative, or accompanied by proper evidence of succession, assignment or
authority to transfer. In all cases of transfer by an attorney-in-fact, the
original power of attorney, duly approved, or an official copy thereof duly
certified, shall be deposited with the Company. In case of transfer by
executors, administrators, guardians or other legal representatives, duly
authenticated evidence of their authority shall be produced, and may be required
to be deposited with the Company in its discretion. Upon any registration of
transfer, the Company shall deliver a new Warrant or Warrants to the person
entitled thereto.
7. TERM OF WARRANTS: EXERCISE OF WARRANTS.
(a) Each Warrant entitles the Warrant Holder thereof to purchase one share
of Common Stock during the time period and subject to the conditions set forth
in the respective Warrant Certificates at a exercise price of $1.00 per share,
subject to adjustment in accordance with Section 12 hereof (the "Exercise
Price"). Each Warrant terminates on the tenth anniversary of the date on which
such Warrant becomes exercisable in accordance with its terms (the "Expiration
Date").
(b) The Exercise Price and the number of shares issuable upon exercise of
Warrants are subject to adjustment upon the occurrence of certain events,
pursuant to the provisions of Section 12 of this Warrant Agreement. Subject to
the provisions of this Warrant Agreement, each Warrant Holder shall have the
right, which may be exercised as expressed in such Warrants to purchase from the
Company (and the Company shall issue and sell to such Warrant Holder) the number
of fully paid and nonassessable shares of Common Stock specified in such
Warrants, upon surrender to the Company, or its duly authorized agent, of such
Warrants, with the purchase form on the reverse thereof duly filled in and
signed, and upon payment to the Company of the Exercise Price, as
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adjusted in accordance with the provisions of Section 12 of this Warrant
Agreement or upon a net exercise pursuant to this subsection of this Warrant
Agreement, for the number of shares in respect of which such Warrants are then
exercised. The Warrant Holder may (i) pay the Exercise Price in cash, by
certified or official bank check payable to the order of the Company, or (ii)
make an exercise of Warrants for "Net Warrant Shares." The number of Net
Warrant Shares will be determined as described by the following formula: Net
Warrant Shares = [WS x (MP-EP)]/MP. "WS" is the number of Warrant Shares
issuable upon exercise of the Warrants or portion of Warrants in question. "MP"
is the Market Price of the Common Stock on the last trading day preceding the
date of the request to exercise the Warrants. "Market Price" shall mean the
then current market price per share of Common Stock, as determined in paragraph
12.1(e). "EP" shall mean the Exercise Price.
Upon such surrender of Warrants, and payment of the Exercise Price, with
cash or securities, or upon a net exercise as aforesaid, the Company at its
expense shall issue and cause to be delivered with all reasonable dispatch to or
upon the written order of the Warrant Holder and in such name or names as the
Warrant Holder may designate, a certificate or certificates for the number of
full shares of Common Stock so purchased upon the exercise of such Warrants,
together with cash, as provided in Section 12 of this Warrant Agreement, in
respect of any fraction of a share of such stock otherwise issuable upon such
surrender. Such certificate or certificates shall be deemed to have been issued,
and any person so designated to be named therein shall be deemed to have become
a holder of record of such shares, as of the date of the surrender of such
Warrants and payment of the Exercise Price or receipt of shares by net exercise
as aforesaid. The rights of purchase represented by the Warrants shall be
exercisable, at the election of the Warrant Holders thereof, either in full or
from time to time in part and, in the event that any Warrant is exercised in
respect of less than all of the shares purchasable on such exercise at any time
prior to the Expiration Date, a new certificate evidencing the remaining Warrant
or Warrants will be issued.
8. COMPLIANCE WITH GOVERNMENT REGULATIONS. The Company covenants that if
any share of Common Stock required to be reserved for purposes of exercise or
conversion of Warrants require, under any federal or state law or applicable
governing rule or regulation or any national securities exchange, registration
with or approval of any governmental authority or listing on any such national
securities exchange, before such shares may be issued upon exercise, the Company
will use its commercially reasonable efforts to cause such shares to be duly
registered, approved or listed on the relevant national securities exchange, as
the case may be.
9. PAYMENT OF TAXES. The Company will pay all documentary stamp taxes, if
any, attributable to the initial issuance of Warrant Shares upon the exercise of
Warrants and any securities issued pursuant to Section 12 hereof; provided,
however, that the Company shall not be required to pay any tax or taxes which
may be payable in respect of any transfer involved in the issue or delivery of
any Warrants or certificates for Warrant Shares and any securities issued
pursuant to Section 12 hereof in a name other than that of the Warrant Holder of
such Warrants.
10. MUTILATED OR MISSING WARRANTS. In case any of the Warrants shall be
mutilated, lost, stolen or destroyed, the Company shall issue and deliver in
exchange and substitution for and upon cancellation of the mutilated Warrant, or
in lieu of and in substitution for the Warrant lost, stolen or destroyed, a new
Warrant of like tenor and representing an equivalent right or interest.
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11. RESERVATION OF WARRANT SHARES; PURCHASE AND CANCELLATION OF
WARRANTS. The Company shall at all times reserve, out of the authorized and
unissued shares of Common Stock, a number of shares sufficient to provide for
the exercise of the rights of purchase represented by the Warrants, and the
transfer agent for the Common Stock ("Transfer Agent") and every subsequent
transfer agent for any shares of the Company's capital stock issuable upon the
exercise of any of the rights of purchase aforesaid are hereby irrevocably
authorized and directed at all times until the Expiration Date to reserve such
number of authorized and unissued shares as shall be requisite for such purpose.
The Company will keep a copy of this Warrant Agreement on file with the Transfer
Agent and with every subsequent transfer agent for any shares of the Company's
capital stock issuable upon the exercise of the rights of purchase represented
by the Warrants. The Company will supply the Transfer Agent and any such
subsequent transfer agent with duly executed stock certificates for such purpose
and will itself provide or otherwise make available any cash which may be
issuable as provided by Section 13 of this Warrant Agreement. The Company will
furnish to the Transfer Agent and any such subsequent transfer agent a copy of
all notices of adjustments, and certificates related thereto, transmitted to
each Warrant Holder pursuant to Section 12.3 hereof. All warrants surrendered in
the exercise of the rights thereby evidenced shall be canceled, and such
canceled Warrants shall constitute sufficient evidence of the number of shares
of stock which have been issued upon the exercise of such Warrants (subject to
adjustment as herein provided). No shares of stock shall be subject to
reservation in respect of the Warrants subsequent to the Expiration Date except
to the extent necessary to comply with the terms of this Warrant Agreement.
12. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES. The
number and kind of securities purchasable upon the exercise of each Warrant and
the Exercise Price shall be subject to adjustment from to time upon the
occurrence of certain events, as hereafter defined.
12.1. MECHANICAL ADJUSTMENTS. The number of Warrant Shares
purchasable upon the exercise of each Warrant and the Warrant Price
shall be subject to adjustment as follows:
(a) In case the Company shall (i) pay a dividend to
holders of Common Stock in shares of Common Stock or make a
distribution to holders of Common Stock in shares of Common
Stock, (ii) subdivide its outstanding shares of Common Stock
into a larger number of shares of Common Stock, (iii) combine
its outstanding shares of Common Stock into a smaller number of
shares of Common Stock or (iv) issue by reclassification of its
shares of Common Stock other securities of the Company
(including any such classification in connection with a
consolidation or merger in which the Company is the surviving
corporation), the number of Warrant Shares purchasable upon
exercise of each Warrant immediately prior thereto shall be
adjusted so that the Warrant Holder shall be entitled to receive
the kind and number of Warrant Shares or other securities of the
Company which he would have owned or have been entitled to
receive after the happening of any of the events described
above, had such Warrant been exercised immediately prior to the
happening of such event or any record date with respect thereto
regardless of whether the Warrants are exercisable at the time
of the happening of such event or at the time of any record date
with respect thereto. An adjustment made pursuant to this
paragraph (a) shall become effective immediately after the
effective date of such event retroactive to the record date, if
any, for such event.
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<PAGE>
(b) In case the Company shall issue rights, options, or warrants to
holders of its outstanding Common Stock, without any charge to such
holders, entitling them to subscribe for or purchase shares of Common Stock
at a price per share which is lower at the record date mentioned below than
the Exercise Price, then (i) the Exercise in effect immediately prior to
such issuance shall immediately be reduced to the price that is equivalent
to such consideration received by the Company upon such issuance and (ii)
the number of Warrant Shares thereafter purchasable upon the exercise of
each Warrant shall be increased in direct proportion to the increase in the
number of shares of Common Stock outstanding on a fully diluted basis
immediately prior to such issuance; provided that if such shares of Common
Stock, options or other convertible securities (other than Excluded Stock
(as defined in the Note Purchase Agreement)) are issued for consideration
per share less than the Exercise Price at the date of such issue or sale,
the number of shares of Common Stock that immediately prior to such
issuance the Warrant Holder shall have been entitled to purchase pursuant
to this Warrant shall be increased to the greater of (i) that number of
shares of Common Stock that immediately prior to such issuance the Warrant
Holder shall have been entitled to purchase pursuant to this Warrant
multiplied by a fraction, the numerator of which is the Exercise Price and
the denominator of which is such consideration per share, and (ii) the
number of shares of Common Stock otherwise calculated under this Section
12.1. Such adjustment shall be made whenever such rights, options, or
warrants are issued, and shall become effective immediately after the
record date for the determination of stockholders entitled to receive such
rights, options, or warrants; provided that this Section 12.1(b) shall
expire and be of no force and effect on or after April 1, 1998.
(c) In case the Company shall distribute to holders of its shares of
Common Stock, evidences of its indebtedness or assets (including cash
dividends or other cash distributions), or rights, options, or warrants, or
convertible or exchangeable securities containing the right to subscribe
for or purchase shares of Common Stock (excluding those referred to in
paragraph (b) above), then in each case the number of Warrant Shares
thereafter purchasable upon the exercise of each Warrant shall be
determined by multiplying the number of Warrant Shares theretofore
purchasable upon the exercise of each Warrant by a fraction, of which the
numerator shall be the then current market price per share of Common Stock
(as determined in accordance with paragraph (e) below) on the date of such
distribution, and of which the denominator shall be the then current market
price per share of Common Stock, less the then fair value (as determined in
good faith by the Board of Directors of the Company) of the portion of the
assets or evidences of indebtedness so distributed or of such subscription
rights, options, or warrants, or of such convertible or exchangeable
securities applicable to one share of Common Stock. Such adjustment shall
be made whenever any such distribution is made, and shall become effective
on the date of distribution retroactive to the record date for the
determination of stockholders entitled to receive such distribution.
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In the event of distribution by the Company to holders of its shares of
Common Stock of stock of a subsidiary or securities convertible into or
exercisable for such stock, then in lieu of an adjustment in the number of
Warrant Shares purchasable upon the exercise of each Warrant, the Warrant
Holder, upon the exercise thereof at any time after such distribution,
shall be entitled to receive from the Company, such subsidiary, or both, as
the Company shall determine, the stock or other securities to which such
Warrant Holder would have been entitled if such Warrant Holder had
exercised such Warrant immediately prior thereto regardless of whether the
Warrants are exercisable at such time, all subject to further adjustment as
provided in this subsection 12.1; provided, however, that no adjustment in
respect of dividends or interest on such stock or other securities shall be
made during the term of a Warrant or upon the exercise of a Warrant;
provided further that this Section 12.1(c) shall expire and be of no force
and effect on or after April 1, 1998.
(d) In case the Company shall sell and issue shares of Common Stock
(other than pursuant to rights, options, warrants, or convertible
securities initially issued before the date of this Agreement) or rights,
options, warrants, or convertible securities containing the right to
subscribe for or purchase shares of Common Stock (excluding shares, rights,
options, warrants, or convertible securities issued in any of the
transactions described in paragraphs (a), (b) or (c) above) at a price per
share of Common Stock (determined in the case of such rights, options,
warrants or convertible securities, by dividing (w) the total of the amount
received or receivable by the Company (determined as provided below) in
consideration of the sale and issuance of such rights, options, warrants,
or convertible securities, by (x) the total number of shares of Common
Stock covered by such rights, options, warrants, or convertible securities)
lower than the Exercise Price in effect immediately prior to such sale and
issuance, then (i) the Exercise in effect immediately prior to such
issuance shall immediately be reduced to the price that is equivalent to
such consideration received by the Company upon such issuance and (ii) the
number of Warrant Shares thereafter purchasable upon the exercise of the
Warrants shall be increased in direct proportion to the increase in the
number of shares of Common Stock outstanding on a fully diluted basis
immediately prior to such issuance; provided that if such shares of Common
Stock, options or other convertible securities (other than Excluded Stock)
are issued for consideration per share less than the Exercise Price at the
date of such issue or sale, the number of shares of Common Stock that
immediately prior to such issuance the Warrant Holder shall have been
entitled to purchase pursuant to this Warrant shall be increased to the
greater of (i) that number of shares of Common Stock that immediately prior
to such issuance the Warrant Holder shall have been entitled to purchase
pursuant to this Warrant multiplied by a fraction, the numerator of which
is the Exercise Price and the denominator of which is such consideration
per share, and (ii) the number of shares of Common Stock otherwise
calculated under this Section 12.1. Such adjustment shall be made
successively whenever such as issuance is made; provided that this Section
12.1(d) shall expire and be of no force and effect on or after April 1,
1998. For the purposes of such adjustments, the consideration received or
receivable by the Company for rights, options, warrants, or convertible
securities shall be deemed to
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<PAGE>
be the consideration received by the Company for such rights, options,
warrants, or convertible securities, plus the consideration or premiums
stated in such rights, options, warrants, or convertible securities to be
paid for the shares of Common Stock covered thereby. In case the Company
shall sell and issue shares of Common Stock, or rights, options, warrants,
or convertible securities containing the right to subscribe for or purchase
shares of Common Stock, for a consideration consisting, in whole or in
part, of property other than cash or its equivalent, then in determining
the "price per share of Common Stock" and the "consideration received or
receivable by the Company" for purposes of the first sentence of this
paragraph (d), the Board of Directors shall determine, in its discretion,
the fair value of said property.
(e) For the purpose of any computation under paragraphs (b), (c), and
(d) of this Section, the current market price per share of Common Stock at
any date shall be the average of the daily closing prices of the Company's
Common Stock, for five consecutive trading days ending one trading day
before the date of such computation. The closing price for each day shall
be the last such reported sales price regular way or, in case no such
reported sale takes place on such day, the average of the closing bid and
asked prices regular way for such day, in each case on the principal
national securities exchange on which the shares of Common Stock are listed
or admitted to trading or, if not listed or admitted to trading, the
average of the closing bid and asked prices of the Common Stock in the
over-the-counter market as reported by NASDAQ or any comparable system. In
the absence of one or more such quotations, the Board of Directors of the
Company shall determine the current market price, in good faith, on the
basis of such quotations as it considers appropriate. Notwithstanding the
foregoing, for the purpose of any calculation under paragraph (d) above (A)
with respect to any issuance of options under the Company's employee or
director compensation stock option plans as in effect or as adopted by the
Board of Directors of the Company on the date hereof, the term "current
market price", in such instances, shall mean the fair market price on the
date of the issuance of any such option determined in accordance with the
Company's employee compensation stock option plans as in effect or adopted
by the Board of Directors of the Company on the date hereof; and (B) with
respect to any issuances of Common Stock (or rights, options, warrants, or
convertible securities containing the right to subscribe for or purchase
shares of Common Stock) in connection with bona fide corporate transactions
(other than issuances in such transactions for cash or similar
consideration), the term "fair market price" shall mean the fair market
price per share as determined in arm's-length negotiations by the Company
and such other parties (other than affiliates or subsidiaries of the
Company) to such transactions as reflected in the definitive documentation
with respect thereto, unless such determination is not reasonably related
to the closing market price on the date of such determination.
(f) In any case in which this Section 12.1 shall require that any
adjustment in the number of Warrant Shares be made effective as of
immediately after a record date for a specified event, the Company may
elect to defer until the occurrence of the event the issuing to the holder
of any Warrant exercised after that record date the shares of Common Stock
and other securities of the Company, if any,
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<PAGE>
issuable upon the exercise of any Warrant over and above the shares of
Common Stock and other securities of the Company, if any, issuable upon the
exercise of any Warrant prior to such adjustment; provided, however, that
the Company shall deliver to such Warrant Holder a due bill or other
appropriate instrument evidencing the holder's right to receive such
additional shares or securities upon the occurrence of the event requiring
such adjustment.
(g) No adjustment in the number of Warrant Shares purchasable
hereunder shall be required unless such adjustment would require an
increase or decrease of at least one percent (1%) in the number of Warrant
Shares purchasable upon the exercise of each Warrant; provided, however,
that any adjustments which by reason of this paragraph (g) are not required
to be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations shall be made to the nearest one-
thousandth of a share.
(h) Whenever the number of Warrant Shares purchasable upon the
exercise of each Warrant is adjusted, as herein provided, the Warrant Price
payable upon the exercise of each Warrant shall be adjusted by multiplying
such Warrant Price immediately prior to such adjustment by a fraction, of
which the numerator shall be the number of Warrant Shares purchasable upon
the exercise of such Warrant immediately prior to such adjustment, and of
which the denominator shall be the number of Warrant Shares purchasable
immediately.
(i) No adjustment in the number of Warrant Shares purchasable upon the
exercise of each Warrant need be made under paragraphs (b), (c) and (d) if
the Company issues or distributes to each Warrant Holder the rights,
options, warrants, or convertible or exchangeable securities, or evidences
of indebtedness or assets referred to in those paragraphs which each
Warrant Holder would have been entitled to receive had the Warrants been
exercised prior to the happening of such event or the record date with
respect thereto regardless of whether the Warrants are exercisable at the
time of the happening of such event or at the time of any record date with
respect thereto. No adjustment need be made for a change in the par value
of the Warrant Shares.
(j) For the purpose of this Section 12.1, the terms "shares of Common
Stock" shall mean (i) the class of stock designated as the Common Stock of
the Company at the date of this Agreement, or (ii) any other class of stock
resulting from successive changes or reclassifications of such shares
consisting solely of changes in par value, or from par value to no par
value, or from no par value to par value. In the event that at any time, as
a result of an adjustment made pursuant to paragraph (a) above, the Warrant
Holders shall become entitled to purchase any securities of the Company
other than shares of Common Stock, thereafter the number of such other
securities so purchasable upon exercise of each Warrant and the Exercise
Price of such securities shall be subject to adjustment from time to time
in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Warrant Shares contained in paragraphs (a)
through (i), inclusive, above, and the provisions
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of Section 7 and Section 12.2 through 12.5, inclusive, with respect to the
Warrant Shares, shall apply on like terms to any such other securities.
(k) Upon the expiration of any rights, options, warrants, or
conversion or exchange privileges, if any thereof shall not have been
exercised, the Warrant Price and the number of shares of Common Stock
purchasable upon the exercise of each warrant shall, upon such expiration,
be readjusted and shall thereafter be such as it would have been had it
been originally adjusted (or had the original adjustment not been required,
as the case may be) as if (A) the only shares of Common Stock so issued
were the shares of Common Stock, if any, actually issued or sold upon the
exercise of such rights, options, warrants, or conversion on exchange
rights and (B) such shares of Common Stock, if any, were issued or sold for
the consideration actually received by the Company upon such exercise plus
the aggregate consideration, if any, actually received by the Company for
the issuance, sale or grant of all such rights, options, warrants, or
conversion or exchange rights whether or not exercised; provided, however,
that no such readjustment shall have the effect of increasing the Warrant
Price or decreasing the number of Warrant Shares by an amount in excess of
the amount of the adjustment initially made with respect to the issuance,
sale or grant of such rights, options, warrants, or conversion or exchange
rights.
(l) In addition to the adjustments set forth above, the Exercise Price
shall be immediately reduced and the number of Warrant Shares shall be
immediately increased, in each case, or a pari passu basis with the
conversion, exercise, or strike price of any other derivative securities of
the Company whether now outstanding or hereafter issued.
12.2. VOLUNTARY ADJUSTMENT BY THE COMPANY. The Company may, at its option,
at any time during the term of the Warrants, reduce the then current Exercise
Price to any amount determined appropriate by the Board of Directors of the
Company.
12.3. NOTICE OF ADJUSTMENT. When the number of Warrant Shares purchasable
upon the exercise of each Warrant or the Exercise Price of such Warrant Shares
is adjusted, as herein provided, the Company shall promptly mail by first class,
postage prepaid, to each Warrant Holder notice of such adjustment or adjustments
and a certificate of a firm of independent public accountants selected by the
Board of Directors of the Company (who may be the regular accountants employed
by the Company) setting forth the number of Warrant Shares purchasable upon the
exercise of each Warrant and the Exercise Price of such Warrant Shares after
such adjustment and setting forth a brief statement of the facts requiring such
adjustment and setting forth the computation by which such adjustment was made.
Such certificate, absent manifest error, shall be conclusive evidence of the
correctness of such adjustment.
12.4. PRESERVATION OF PURCHASE RIGHTS UPON MERGER, CONSOLIDATION, ETC. In
case of any consolidation of the Company with or merger of the Company into
another person or in case of any sale, transfer, or lease to another person of
all or substantially all
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the assets of the Company, the Company or such successor or purchaser, as
the case may be, shall execute with each Warrant Holder an agreement that
each Warrant Holder shall have the right thereafter upon payment of the
Exercise Price in effect immediately prior to such action to purchase upon
exercise of each Warrant the kind and amount of shares and other securities
and property which the Warrant Holder would have owned or have been
entitled to receive after the happening of such consolidation, merger,
sale, transfer, or lease had such Warrant been exercised immediately prior
to such action regardless of whether the Warrants are exercisable at the
time of such action. Such agreement shall provide for adjustments, which
shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Section 12. The provisions of this Section 12.4 shall
similarly apply to successive consolidations, mergers, sales, transfers, or
leases.
12.5 STATEMENT ON WARRANTS. Even though Warrants heretofore or
hereafter issued may continue to express the same price and number and kind
of shares as are stated in the Warrants initially issuable pursuant to this
Warrant Agreement, the parties understand and agree that such Warrants will
represent rights consistent with any adjustments in the Exercise Price or
the number or kind of shares purchasable upon the exercise of the Warrants.
13. FRACTIONAL INTERESTS. The Company shall not be required to issue
fractional Warrant Shares on the exercise of Warrants. If more than one Warrant
shall be presented for exercise in full at the same time by the same Warrant
Holder, the number of full Warrant Shares which shall be issuable upon the
exercise thereof shall be computed on the basis of the aggregate number of
Warrant Shares purchasable on exercise of the Warrants so presented. If any
fraction of a Warrant Share would, except for the provisions of this Section 13,
be issuable on the exercise of any Warrant (or specified portion, thereof), the
Company shall pay an amount in cash equal to the closing price for one share of
the Common Stock on the trading day immediately preceding the date the Warrant
is presented for exercise, multiplied by such fraction.
14. REGISTRATION UNDER THE SECURITIES ACT OF 1933. Willis represents and
warrants to the Company that it will not dispose of the Warrant or Warrant
Shares except pursuant to (i) an effective registration statement, or (ii) an
applicable exemption from registration under the Securities Act of 1933 (the
"Act"). In connection with any sale by Willis pursuant to clause (ii) of the
preceding sentence, it shall furnish to the Company an opinion of counsel
reasonably satisfactory to the Company to the effect that such exemption from
registration is available in connection with such sale.
15. CERTIFICATE TO BEAR LEGENDS. The Warrants shall be subject to a
stop-transfer order and the certificate or certificates therefor shall bear the
following legend by which each Warrant Holder shall be bound:
"THE WARRANTS REPRESENTED HEREBY AND THE SECURITIES ISSUABLE UPON EXERCISE
HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY OTHER STATE. THE WARRANTS
REPRESENTED HEREBY AND THE
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<PAGE>
SECURITIES ISSUABLE UPON EXERCISE HEREOF 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."
The Warrant Shares or other securities issued upon exercise of the Warrants
shall, unless issued pursuant to an effective registration statement, be subject
to a stop-transfer order and the certificate or certificates evidencing any such
Warrant Shares or securities shall bear the following legend by which the
Warrant Holder thereof shall be bound:
"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."
16. REGISTRATION RIGHTS. The Warrant Shares shall be covered by and subject
to the registration rights set forth in Section 4.1.11 of the Note Purchase
Agreement.
17. NO RIGHTS AS STOCKHOLDERS; NOTICE TO WARRANT HOLDERS. Nothing contained
in this Warrant Agreement or in any of the Warrants shall be construed as
conferring upon the Warrant Holders or their transferees the right to vote or to
receive dividends or to consent or to receive notice as stockholders in respect
of any meeting of stockholders for the election of directors of the Company or
any other matter, or any rights whatsoever as stockholders of the Company. If,
however, at any time prior to the expiration of the Warrants and prior to their
exercise, any of the following events shall occur:
(a) the Company shall declare any dividend payable in any securities
upon its shares of Common Stock or make any distribution (other than a cash
dividend) to the holders of its shares of Common Stock; or
(b) the Company shall offer to the holders of its shares of Common
Stock any additional shares of Common Stock or securities convertible into
or exchangeable for shares of Common Stock or any right to subscribe to or
purchase any thereof; or
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<PAGE>
(c) a dissolution, liquidation, or winding up of the Company (other
than in connection with a consolidation, merger, sale, transfer, or lease
or all or substantially all of its property, assets, and business as an
entirety) shall be proposed,
then in any one or more of said events the Company shall give notice in writing
of such event to the Warrant Holders as provided in Section 20 hereof, with such
notice to be completed at least 15 days prior to the date fixed as a record date
or the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution, or subscription rights,
or for the determination of stockholders entitled to vote on such proposed
dissolution, liquidation or winding up. Such notice shall specify such record
date or the date of closing the transfer books, as the case may be. Failure to
provide or receive such notice on any defect therein or in the mailing thereof
shall not affect the validity of any action taken in connection with such
dividend, distribution, or subscription rights, or such proposed dissolution,
liquidation, or winding up.
18. EXPENSES. The Company shall pay all legal and other reasonable
out-of-pocket expenses of the Warrant Holders and of their counsel (up to a
maximum of $25,000). The Company agrees to reimburse Willis upon demand for its
reasonable out-of-pocket costs and expenses incurred in connection with the
preparation, review, negotiation, execution, and delivery of this Warrant
Agreement and all other related documents.
19. RIGHT TO INFORMATION. The Company, in accordance with Section 16(c)
above, will provide to all Warrant Holders and to all holders of Warrant Shares,
on a timely basis, copies of all documents and reports delivered to its
shareholders.
20. NOTICES. Any notice pursuant to this Warrant Agreement to be given
or made by the holder of any Warrant or Warrant Shares in or on the Company
shall be sufficiently given or made if sent by first-class mail, postage
prepaid, addressed as follows:
EqualNet Holding Corp.
1250 Wood Branch Park Drive
Houston, Texas 77079
Attention: General Counsel
Notices or demands authorized by this Warrant Agreement to be given or made to
or on the Warrant Holder of any Warrant or Warrant Shares shall be sufficiently
given or made (except as otherwise provided in this Warrant Agreement) if sent
by registered mail, return receipt requested, postage prepaid, addressed to such
Warrant Holder at the address of such Warrant Holder as shown on the Warrant
Register or the Common Stock Register, as the case may be.
21. GOVERNING LAW. THIS WARRANT AGREEMENT, THE WARRANTS AND ALL RELATED
DOCUMENTS SHALL BE DEEMED TO BE CONTRACTS MADE UNDER AND SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS, WITHOUT GIVING
EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. ANY DISPUTE HEREUNDER OR UNDER THE
WARRANTS OR RELATED DOCUMENTS SHALL BE DETERMINED EXCLUSIVELY IN ACCORDANCE WITH
SECTION 8.7 OF THE NOTE PURCHASE AGREEMENT.
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<PAGE>
22. SUPPLEMENTS AND AMENDMENTS. The Company and the Warrant Holders may
from time to time supplement or amend this Warrant Agreement in order to cure
any ambiguity or to correct or supplement any provision contained herein which
may be defective or inconsistent with any other provision herein, or to make any
other provisions in regard to matters or questions arising hereunder which the
Company and the Warrant Holder may deem necessary or desirable and which shall
not be inconsistent with the provisions of the Warrants and which shall not
adversely affect the interests of the Warrant Holders. Any amendment to this
Warrant Agreement may be effected with the consent of Warrant Holders of at
least a majority of the total then outstanding Warrants (for this purpose
Warrant Shares shall be deemed to be Warrants in the proportion that Warrant
Shares are then issuable upon the exercise of Warrants); provided that any
amendment which shall have the effect of materially adversely affecting the
interests of any Warrant Holder shall not be effective with respect to such
Warrant Holder if such Warrant Holder shall not have consented thereto.
23. SURVIVAL OF COVENANTS. All covenants and agreements made herein shall
survive the execution and delivery of this Warrant Agreement and the Warrants
and shall remain in force and effect until the Expiration Date of all Warrants.
24. SUCCESSORS. All representations and warranties of the Company and all
covenants and agreements of this Warrant Agreement by or for the benefit of the
Company or the Warrant Holders shall bind and inure to the benefit of their
respective successors and assigns hereunder.
25. BENEFITS OF THIS WARRANT AGREEMENT. Nothing in this Warrant
Agreement shall be construed to give to any person or corporation other than the
Company and the Warrant Holders, any legal or equitable right, remedy, or claim
under this Warrant Agreement, but this Warrant Agreement shall be for the sole
and exclusive benefit of the Company and the holders of the Warrants and Warrant
Shares.
26. CAPTIONS. The captions of the sections and subsections of this
Warrant Agreement have been inserted for convenience and shall have no
substantive effect.
27. COUNTERPARTS. This Warrant Agreement may be executed in any number of
counterparts, each of which so executed shall be deemed to be an original, but
such counterparts together shall constitute but one and the same instrument.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Warrant Agreement
to be duly executed on the day, month and year first above written.
EQUALNET HOLDING CORP.
By: /s/ Michael L. Hlinak
---------------------------------------
Name: Michael L. Hlinak
---------------------------------------
Title: Chief Operating Officer
---------------------------------------
----------------------------------------------
MICHAEL T. WILLIS
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<PAGE>
EXHIBIT A
FORM OF
WARRANT CERTIFICATE
THE WARRANTS REPRESENTED HEREBY AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY OTHER STATE. THE WARRANTS
REPRESENTED HEREBY AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF 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.
THE TRANSFER OR EXCHANGE OF THE WARRANTS AND COMMON STOCK UNDERLYING SUCH
WARRANTS REPRESENTED BY THIS CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE
WARRANT AGREEMENT REFERRED TO HEREIN.
No. _________________ 500,000 Warrants
VOID AFTER 5:00 P.M. NEW YORK, TIME
ON MARCH 4, 2003
EQUALNET HOLDING CORP.
WARRANT CERTIFICATE
THIS CERTIFIES THAT for value received MICHAEL T. WILLIS the registered
holder hereof or registered assigns (the "Warrant Holder"), is the owner of the
number of the Warrants set forth above, each of which entitles the owner thereof
to purchase at any time from 9:00 A.M., New York time, on March 5, 1998 until
5:00 P.M., New York time on March 4, 2008 one fully paid and nonassessable share
of the common stock (subject to adjustment), par value $0.01 per share (the
"Common Stock"), of EQUALNET HOLDING CORP., a Texas corporation (the "Company"),
at the exercise price of $1.00 per share, subject to adjustment and limitation
as described in the Warrant Agreement referred to below (the "Exercise Price").
The Warrant Holder may pay the Exercise Price in cash, or by certified or
official bank check or make a net exercise for Net Warrant Shares as described
in the Warrant Agreement.
This Warrant Certificate is subject to, and entitled to the benefits of,
all of the terms, provisions and conditions of an agreement dated March 5, 1998
(the "Warrant Agreement"), between the Company and Michael T. Willis, which
Warrant Agreement is hereby incorporated herein by reference and made a part
hereof and to which Warrant Agreement reference is hereby made for a
-1-
<PAGE>
full description of the rights, limitations of rights, obligations, duties and
immunities hereunder of the Company and the Warrant Holders of the Warrant
Certificates. Copies of the Warrant Agreement are on file at the principal
office of the Company.
The Warrant Holder hereof may be treated by the Company and all other
persons dealing with this Warrant Certificate as the absolute owner hereof for
any purpose and as the person entitled to exercise the rights represented
hereby, or to the transfer hereof on the books of the Company, any notice to the
contrary notwithstanding, and until such transfer on such books, the Company may
treat the Warrant Holder hereof as the owner for all purposes.
The Warrant Certificate, with or without other Warrant Certificates, upon
surrender at the principal office of the Company, may be exchanged for another
Warrant Certificate or Warrant Certificates of like tenor and date evidencing
Warrants entitling the Warrant Holder to purchase a like aggregate number of
shares of Common Stock as the Warrants evidenced by the Warrant Certificate or
Warrant Certificates surrendered entitled to such Warrant Holder to purchase. If
this Warrant Certificate shall be exercised in part, the Warrant Holder shall be
entitled to receive upon surrender hereof, another Warrant Certificate or
Warrant Certificates for the number of whole Warrants not exercised.
No fractional shares of Common Stock will be issued upon the exercise of
any Warrant or Warrants evidenced hereby, but in lieu thereof a cash payment
will be made as provided in the Warrant Agreement.
Neither the Warrants nor the Warrant Certificate entitles any Warrant
Holder hereof to any of the rights of a stockholder of the Company.
THIS WARRANT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND SHALL BE
CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS,
WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
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<PAGE>
IN WITNESS WHEREOF, the Company has caused the signature of its President
and Secretary to be printed hereon.
EQUALNET HOLDING CORP.
By: _____________________________________
President
ATTEST:
By: ________________________________
Secretary
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EXHIBIT 10.50
EQUALNET HOLDING CORP.
STOCK PURCHASE WARRANT
This Stock Purchase Warrant ("Warrant"), issued this 6th day of March,
1998, by EqualNet Holding Corp., a Texas corporation (the "Company"), to J. C.
Bradford & Co., L.L.C. (the "Purchaser").
WITNESSETH:
1. Issuance of Warrant, Term; Vesting.
(a) For and in consideration of the sum of $10.00 and other good and
valuable consideration, including services rendered, the receipt and sufficiency
of which are hereby acknowledged, the Company hereby grants to the Purchaser,
subject to the provisions hereinafter set forth, the right to purchase 50,000
shares of Common Stock, $.01 par value, of the Company (the "Common Stock"). The
shares of Common Stock issuable upon exercise of this Warrant are hereinafter
referred to as the "Shares".
(b) This Warrant shall be exercisable at any time on or before the
fifth anniversary of the date hereof.
2. Exercise Price. The exercise price per share for which all or any of
the Shares may be purchased pursuant to the terms of this Warrant shall be $2.47
(hereinafter referred to as the "Exercise Price").
3. Exercise.
(a) This Warrant may be exercised by the Purchaser for the purchase of
any of the Shares for which this Warrant is then exercisable pursuant to Section
1(b) hereof in whole or in part, upon delivery of written notice of intent to
the Company at the following address: 1250 Wood Branch Park Drive, Houston,
Texas 77079 or such other address as the Company shall designate in written
notice to the Purchaser, together with this Warrant and payment (in the manner
described in Section 3(b) below) for the aggregate Exercise Price of the Shares
so purchased. Upon exercise of this Warrant as aforesaid, the Company shall as
promptly as practicable execute and deliver to the Purchaser a certificate or
certificates for the total number of whole Shares for which this Warrant is
being exercised in such names and denominations as are requested by the
Purchaser. If this Warrant shall be exercised with respect to less than all of
the Shares, the Purchaser shall be entitled to receive a new Warrant covering
the number of Shares in respect of which this Warrant shall not have been
exercised, which new Warrant shall in all other respects be identical to this
Warrant.
(b) Payment for the Shares to be purchased upon exercise of this
Warrant may be made by the delivery of a certified or cashier's check payable to
the Company for the aggregate Exercise Price of the Shares to be purchased.
<PAGE>
4. Covenants and Conditions. The above provisions are subject to the
following:
(a) Neither this Warrant nor the Shares have been registered under the
Securities act of 1933, as amended (the "Act"), or any state securities laws
("Blue Sky Laws"). This Warrant and the Shares have been acquired for investment
purposes and not with a view to distribution or resale and the Shares may not be
made subject to a security interest, pledged, hypothecated, sold or otherwise
transferred without an effective registration statement therefor under the Act
and such applicable Blue Sky Laws or an opinion of counsel (which opinion and
counsel rendering same shall be reasonably acceptable to the Company) that
registration is not required under the Act and under any applicable Blue Sky
Laws. The certificates representing the Shares shall bear substantially the
following legend:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY
APPLICABLE STATE SECURITIES LAWS, BUT HAVE BEEN ACQUIRED FOR THE PRIVATE
INVESTMENT OF THE HOLDER HEREOF AND MAY NOT BE OFFERED, SOLD OR TRANSFERRED
UNTIL A REGISTRATION STATEMENT UNDER THE ACT OR SUCH APPLICABLE STATE
SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR IN THE
OPINION OF COUNSEL (WHOSE OPINION AND COUNSEL SHALL BE REASONABLY
ACCEPTABLE TO THE COMPANY) REGISTRATION UNDER THE ACT OR SUCH APPLICABLE
STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED
OFFER, SALE OR TRANSFER.
Other legends as required by applicable federal and state laws may be placed on
such certificates. The Purchaser and the Company agree to execute such documents
and instruments as counsel for the Company reasonably deems necessary to effect
compliance of the issuance of this Warrant and any Shares issued upon exercise
hereof with applicable federal and state securities laws. The Purchaser agrees
that the Company may decline to permit a transfer of this Warrant if the
proposed transferee does not meet then applicable qualifications for investors
in securities offerings exempt from registration.
(b) The Company covenants and agrees that all Shares which may be
issued upon exercise of this Warrant will, upon issuance and payment therefor,
be legally and validly issued and outstanding, fully paid and nonassessable. The
Company shall at all times, commencing on the date this Warrant shall become
exercisable, reserve and keep available for issuance upon the exercise of this
Warrant such number of authorized but unissued shares of Common Stock as will be
sufficient to permit the exercise in full of the Warrant.
5. Warrant Holder not Stockholder. This Warrant does not confer upon the
Purchaser any right whatsoever as a stockholder of the Company.
6. Anti-Dilution. In case at any time or from time to time after the date
of this Warrant, all of the holders of Common Stock of the Company shall have
received or shall have become legally entitled to receive:
2
<PAGE>
(i) other or additional stock or other securities or property
(other than cash) by way of a dividend or other distribution; or
(ii) other or additional (or less) stock or other securities or
property (including cash) by way of stock-split, spin-off, split-up,
reclassification, combination of shares or similar corporate rearrangement
(but not including any cash dividends),
then and in each such case the Purchaser, upon the exercise hereof as provided
in Section 3, shall be entitled to receive, in lieu of (or in addition to, as
the case may be) the Shares theretofore receivable upon the exercise of this
Warrant, the amount of stock and other securities and property (including cash
in the case referred to in clause (ii) above) which the Purchaser would have
held on the date of such exercise if on the date of such conversion, dividend,
distribution, corporate rearrangement or such other event as described in clause
(ii) above the Purchaser had been the holder of record of the number of Shares
receivable upon exercise of this Warrant and had thereafter, during the period
from the date thereof to and including the date of such exercise, obtained such
Shares and all other or additional (or less) stock and other securities and
property (including cash in the case referred to in clause (ii) above)
receivable by the Purchaser as aforesaid during such period.
7. Notices. All notices, requests, offers, elections and other
communications under this Warrant shall be in writing and shall be deemed to
have been given at the time when deposited in the United States mail at a
general or branch post office, postage prepaid, registered or certified mail
(return receipt requested), and addressed to the respective parties at the
addresses stated below or to such other changed addresses as the parties may
have fixed by notice; provided, however, that any notice of change of address
shall be effective only upon receipt.
Notices addressed to the Purchaser shall be addressed as indicated on the
signature page below. Notices to the Company shall be addressed to:
EqualNet Holding Corp.
1250 Wood Branch Park Drive
Houston, Texas 77079
Attn: General Counsel
Telephone: (281) 529-4648
Facsimile: (281) 529-4686
With a copy to:
Fulbright & Jaworski L.L.P.
1301 McKinney, Suite 5100
Houston, Texas 77010
Attn: Robert F. Gray, Jr.
Telephone: (713) 651-5566
Facsimile: (713) 651-5246
3
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Stock Purchase Warrant to
be executed and delivered by its duly authorized officer as of the date first
above written.
EQUALNET HOLDING CORP.
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
4
<PAGE>
EXHIBIT 10.51
THE SECURITIES REPRESENTED BY THIS WARRANT AND THE COMMON STOCK ISSUABLE THEREBY
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAW. THE SECURITIES
REPRESENTED BY THIS WARRANT MAY NOT BE TRANSFERRED, EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER, OR IN A TRANSACTION EXEMPT FROM
REGISTRATION UNDER, THE SECURITIES ACT AND IN ACCORDANCE WITH ANY OTHER
APPLICABLE SECURITIES LAWS.
STOCK PURCHASE WARRANT
EQUALNET HOLDING CORP.
This Stock Purchase Warrant (this "Warrant"), issued this 15th day of
April, 1998, by EqualNet Holding Corp., a Texas corporation (the "Company"), to
Mezzanine Telecom, Inc., formerly known as Creative Communications
International, Inc. (the "Holder").
WITNESSETH:
ARTICLE I
ISSUANCE OF WARRANT; TERM; EXERCISE PRICE
For and in consideration of the promises and the mutual covenants in this
Warrant and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the Company hereby grants to the Holder,
subject to the provisions hereinafter set forth, the right to purchase 85,000
shares of Common Stock, $.01 par value per share, of the Company (the "Common
Stock"). The Warrant shall be exercisable at any time after the date hereof and
on or before 5:00 p.m. Houston, Texas time on November 1, 2001 (the "Expiration
Date "). The exercise price per share for which all or any of the Warrant Shares
(as hereinafter defined) may be purchased pursuant to the terms of this Warrant
shall be $7.50.
ARTICLE 2
DEFINITIONS
As used herein, the following terms shall have the meanings set forth
below:
1. "Company" shall mean EqualNet Holding Corp., a Texas corporation, and
shall also include any successor thereto with respect to the obligations
hereunder, by merger, consolidation or otherwise.
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2. "Common Stock" shall mean and include the Company's Common Stock, par
value $.01 per share, authorized on the date of the original issue of this
Warrant and shall also include (i) in case of any reorganization,
reclassification, consolidation, merger, share exchange or sale, transfer or
other disposition of assets, the stock or other securities provided for herein,
and (ii) any other shares of common stock of the Company into which such shares
of Common Stock may be converted.
3. "Exercise Price" shall mean the initial purchase price of $7.50 per
share of Common Stock payable upon exercise of the Warrant, as adjusted from
time to time pursuant to the provisions hereof
4. "Market Price" for any day, when used with reference to Common Stock,
shall mean the price of said Common Stock determined by reference to the last
reported sale price for the Common Stock on such day on the principal securities
exchange on which the Common Stock is listed or admitted to trading or if no
such sale takes place on such date, the average of the closing bid and asked
prices thereof as officially reported, or, if not so listed or admitted to
trading on any securities exchange, the last sale price for the Common Stock on
the National Association of Securities Dealers national market system on such
date, or, if there shall have been no trading on such date or if the Common
Stock shall not be listed on such system, the average of the closing bid and
asked prices in the over-the-counter market as furnished by any NASD member firm
selected from time to time by the Company for such purpose.
5. "Outstanding" when used with reference to Common Stock, shall mean
(except as otherwise expressly provided herein) at any date as of which the
number of shares thereof is to be determined, all issued shares of Common Stock,
except shares then owned or held by or for the account of the Company.
6. "Person" shall mean an individual, corporation, limited liability
company, partnership, limited partnership, joint venture, joint stock company,
firm, company, syndicate, trust, estate, association, governmental authority,
business, organization or any other incorporated or unincorporated entity.
7. "Trading Days" shall mean any days during the course of which the
principal securities exchange on which the Common Stock is listed or admitted to
trading is open for the exchange of securities.
8. "Warrant Shares" shall mean the shares of Common Stock purchased or
purchasable by the holder hereof upon the exercise of the Warrant.
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<PAGE>
ARTICLE 3
EXERCISE OF WARRANT
1. Method of Exercise. The Warrant represented hereby maybe exercised by
the holder hereof, in whole or in part, at any time and from time to time on or
after the date hereof until 5:00 p.m., Houston, Texas time, on the Expiration
Date. To exercise the Warrant, the holder hereof shall deliver to the Company,
at the Warrant Office (as hereinafter defined) designated herein, (i) a written
notice in the form of the Subscription Notice attached as an exhibit hereto,
stating therein the election of such holder to exercise the Warrant in the
manner provided in the Subscription Notice; (ii) payment in full of the Exercise
Price (A) in cash or by bank check for all Warrant Shares purchased hereunder,
or (B) through a "cashless" or "net-issue" exercise of each such Warrant
("Cashless Exercise"); the holder shall exchange each Warrant subject to a
Cashless Exercise for that number of Warrant Shares determined by multiplying
the number of Warrant Shares issuable hereunder by a fraction, the numerator of
which shall be the difference between (x) the Market Price and (y) the Exercise
Price for each such Warrant, and the denominator of which shall be the Market
Price; the Subscription Notice shall set forth the calculation upon which the
Cashless Exercise is based, or (C) a combination of (A) and (B) above; and (iii)
this Warrant. The Warrant shall be deemed to be exercised on the date of receipt
by the Company of the Subscription Notice, accompanied by payment for the
Warrant Shares and surrender of the Warrant, as aforesaid, and such date is
referred to herein as the "Exercise Date". Upon such exercise, the Company
shall, as promptly as practicable and in any event within five business days,
issue and deliver to such holder a certificate or certificates for the full
number of the Warrant Shares purchased by such holder hereunder, and shall,
unless the Warrant has expired, deliver to the holder hereof a new Warrant
representing the number of Warrant Shares, if any, that shall not have been
exercised, in all other respects identical to this Warrant. As permitted by
applicable law, the Person in whose name the certificates for Common Stock are
to be issued shall be deemed to have become a holder of record of such Common
Stock on the Exercise Date and shall be entitled to all of the benefits of such
holder on the Exercise Date, including without limitation the right to receive
dividends and other distributions for which the record date falls on or after
the Exercise Date and to exercise voting rights.
2. Expenses and Taxes. The Company shall pay all expenses and taxes
(including, without limitation, all documentary, stamp, transfer or other
transactional taxes) other than income taxes attributable to the preparation,
issuance or delivery of the Warrant and of the shares of Common Stock issuable
upon exercise of the Warrant.
3. Reservation of Shares. The Company shall reserve at all times so long
as the Warrant remain outstanding, free from preemptive rights, out of its
authorized but unissued shares of Common Stock, solely for the purpose of
effecting the exercise of the Warrant, a sufficient number of shares of Common
Stock to provide for the exercise of the Warrant.
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<PAGE>
4. Valid Issuance. All shares of Common Stock that may be issued upon
exercise of the Warrant will, upon issuance by the Company, be duly and validly
issued, fully paid and nonassessable and free from all taxes, liens and charges
with respect to the issuance thereof and, without limiting the generality of the
foregoing, the Company shall take no action or fail to take any action which
will cause a contrary result (including, without limitation, any action that
would cause the Exercise Price to be less than the par value, if any, of the
Common Stock).
5. Purchase Agreement. The Warrant represented hereby is a duly authorized
issue and sale of a warrant to purchase Common Stock issued and sold pursuant to
that certain Asset Purchase Agreement between the Company and the Holder, dated
the date hereof (the "Agreement").
6. No Fractional Shares. The Company shall not be required to issue
fractional shares of Common Stock on the exercise of this Warrant. If any
fraction of a share of Common Stock would, except for the provisions of this
Section, be issuable on the exercise of this Warrant, the Company shall pay an
amount in cash calculated by it to be equal to the Market Price of one share of
Common Stock at the time of such exercise multiplied by such fraction computed
to the nearest whole cent.
ARTICLE 4
TRANSFER
1. Warrant Office. The Company shall maintain an office for certain
purposes specified herein (the "Warrant Office"), which office shall initially
be the Company's offices at EqualNet Plaza, 1250 Wood Branch Park Drive,
Houston, Texas 77079-1212 and may subsequently be such other office of the
Company or of any transfer agent of the Common Stock in the continental United
States as to which written notice has previously been given to the Holder. The
Company shall maintain, at the Warrant Office, a register for the Warrant in
which the Company shall record the name and address of the Person in whose name
this Warrant has been issued, as well as the name and address of each permitted
assignee of the rights of the registered owner hereof.
2. Ownership of Warrant. The Company may deem and treat the Person in
whose name the Warrant is registered as the holder and owner hereof until
provided with notice to the contrary.
3. Restrictions on Transfer of Warrant. Subject to the provisions of
Section 4.4 hereof this Warrant may be transferred, in whole or in part, by the
Holder. The Company agrees to maintain at the Warrant Office books for the
registration and transfer of the Warrant. The Company, from time to time, shall
register any transfer of the Warrant in such books upon surrender of this
Warrant at the Warrant Office properly endorsed or accompanied by appropriate
instruments of transfer and written instructions for transfer. Upon any such
transfer and upon payment by the Holder or its transferee of any applicable
transfer taxes, a new Warrant shall be issued to the transferee and the
transferor (as their respective interests may appear) and the surrendered
Warrant shall be canceled
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<PAGE>
by the Company. The Company shall pay all taxes (other than securities transfer
taxes or income taxes) and all other expenses and charges payable in connection
with the transfer of the Warrant pursuant to this Section.
4. Compliance With Securities Laws Regarding Transfers. Neither this
Warrant nor the Warrant Shares have been registered under the Securities Act of
1933, as amended (the "Securities Act"), or any state securities laws ("Blue Sky
Laws"). The Holder hereby agrees and acknowledges that this Warrant and the
Warrant Shares have been acquired for investment purposes and not with a view to
distribution or resale and the Warrant Shares may not be made subject to
security interest, pledged., hypothecated, sold or otherwise transferred without
an effective registration therefor under the Securities Act and such applicable
Blue Sky Laws or an opinion of counsel (which opinion and counsel rendering same
shall be reasonably acceptable to the Company) that registration is not required
under the Securities Act and under any applicable Blue Sky Laws. The certificate
representing the Warrant Shares shall bear substantially the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE "SECURITIES")
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE AND ARE BEING
OFFERED AND SOLD IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND SUCH LAWS. THE SECURITIES HAVE BEEN
ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD OR OFFERED FOR SALE IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES OR AN
OPINION OF COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE CORPORATION THAT
SUCH REGISTRATION IS NOT REQUIRED."
Other legends as required by applicable federal and state laws may be placed on
such certificates. The Holder and the Company agree to execute such documents
and instruments as counsel for the Company reasonably deems necessary to effect
compliance of the issuance of this Warrant and any Warrant Shares issuable upon
exercise hereof with applicable federal and state securities laws. The Holder
agrees that the Company may decline to permit a transfer of this Warrant if the
proposed transferee does not meet then applicable qualifications for investors
in securities offerings exempt from registration.
5. Stop transfer instructions will be imposed with respect to the Warrant
Shares so as to restrict resale or other transfer thereof.
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<PAGE>
ARTICLE 5
ANTI-DILUTION
1. In case at any time or from time to time after the date of this
Warrant, the holders of Common Stock shall have received or shall have become
entitled legally to receive:
(i) other or additional stock or other securities or property (other
than cash) by way of a dividend or other distribution or
(ii) other or additional (or less) stock or other securities or
property (including cash) by way of a stock-split, spin-off, split-up,
reclassification, combination of shares or similar corporate rearrangement
(but not including any cash dividends),
then and in such case the Holder, upon the exercise of this Warrant as provided
in Article III hereof, shall be entitled to receive, in lieu of (or in addition
to, as the case may be) the Warrant Shares theretofore receivable upon the
exercise of this Warrant, the amount of stock and other securities and property
(including cash in the case referred to in clause (ii) above) which the Holder
would have held on the date of such exercise if, on the date of such conversion,
dividend, distribution, corporate rearrangement or such other event as described
in clause (ii) above, the Holder had been the holder of record of the number of
Warrant Shares receivable upon exercise of this Warrant and had thereafter,
during the period from the date thereof to and including the date of such
exercise, obtained such Warrant Shares and all other or additional (or less)
stock and other securities and property (including cash in the case referred to
in clause (ii) above) receivable by it as aforesaid during such period.
ARTICLE 6
MISCELLANEOUS
1. Entire Agreement. This Warrant, together with the Agreement and the
Registration Rights Agreement, contains the entire agreement between the Company
and the Holder hereof
2. Governing Law. This Warrant shall be governed by and construed in
accordance with the laws of the State of Texas.
3. Waiver and Amendment. Any term or provision of this Warrant may be
waived at any time by the party which is entitled to the benefits thereof and
any term or provision of this Warrant may be amended or supplemented at any time
by agreement of the holder hereof and the Company, except that any waiver of any
term or condition, or any amendment or supplementation, of this Warrant shall be
in writing. A waiver of any breach or failure to enforce any of the terms or
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conditions of this warrant shall not in any way effect, limit or waive a party's
rights hereunder at any time to enforce strict compliance thereafter with every
term or condition of this Warrant.
4. Illegality. In the event that any one or more of the provisions
contained in this Warrant shall be determined to be invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in any other respect and the remaining
provisions of this Warrant shall not, at the election of the party for whom the
benefit of the provision exists, be in any way impaired.
5. Copy of Warrant. A copy of this Warrant shall be filed among the
records of the Company.
6. Notice. Any notice or other document required or permitted to be given
or delivered to the Holder hereof shall be in writing and delivered at, or sent
by certified or registered mail to such holder at the last address shown on the
books of the Company maintained at the Warrant Office for the registration of
this Warrant or at any more recent address of which the holder hereof shall have
notified the Company in writing. Any notice or other document required or
permitted to be given or delivered to the Company, other than such notice or
documents required to be delivered to the Warrant Office, shall be delivered at,
or sent by certified or registered mail to, the offices of the Company at
EqualNet Plaza, Attn: General Counsel, 1250 Wood Branch Park Drive, Houston,
Texas 77079-1212 or such other address within the continental United States of
America as shall have been furnished by the Company to the holder of this
Warrant.
7. Limitation of Liability; Not Stockholders. No provision of this Warrant
shall be construed as conferring upon the holder hereof the right to vote,
consent, receive dividends or receive notices (other than as herein expressly
provided) in respect of meetings of stockholders for the election of directors
of the Company or any other matter whatsoever as a stockholder of the Company.
No provision hereof, in the absence of affirmative action by the holder hereof
to purchase shares of Common Stock, and no mere enumeration herein of the rights
or privileges of the holder hereof, shall give rise to any liability of such
holder for the purchase price of any shares of Common Stock or as a stockholder
of the Company, whether such liability is asserted by the Company or by
creditors of the Company.
8. Exchange, Loss, Destruction, etc. of Warrant. Upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft, mutilation or
destruction of this Warrant, and in the case of any such loss, theft or
destruction upon delivery of an appropriate affidavit in such form as shall be
reasonably satisfactory to the Company and include reasonable indemnification of
the Company, or in the event of such mutilation upon surrender and cancellation
of this Warrant, the Company will make and deliver a new Warrant of like tenor,
in lieu of such lost, stolen, destroyed or mutilated Warrant. Any Warrant issued
under the provisions of this Section in lieu of any Warrant alleged to be lost,
destroyed or stolen, or in lieu of any mutilated Warrant, shall constitute an
original contractual obligation on the part of the Company. This Warrant shall
be promptly canceled by the Company upon the surrender hereof in connection with
any exchange or replacement. The Company
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<PAGE>
shall pay all taxes (other than securities transfer taxes or income taxes) and
all other expenses and charges payable in connection with the preparation,
execution and delivery of the Warrant pursuant to this Section.
9. Headings. The Article and Section and other headings herein are for
convenience only and are not a part of this Warrant and shall not affect the
interpretation thereof.
10. Registration Rights. The Warrant Shares shall be entitled to such
registration rights under the Securities Act and under applicable state
securities laws as are specified in the Registration Rights Agreement.
11. Replacement of Old Warrant. This Warrant, together with that certain
stock purchase warrant of even date herewith numbered W-9 issued to John Dalton
amends and restates in its entirety, and supersedes and replaces in all
respects, that certain stock purchase warrant issued to Creative Communications
International, Inc. on November 12, 1996.
[SIGNATURE PAGE TO FOLLOW]
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in its
name.
Dated: April 15, 1998
EQUALNET HOLDING CORP.
By: /s/ Dean H. Fisher
------------------------------------
Name: Dean H. Fisher
----------------------------------
Title: Senior Vice President
----------------------------------
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<PAGE>
EXHIBIT 10.52
THE SECURITIES REPRESENTED BY THIS WARRANT AND THE COMMON STOCK ISSUABLE THEREBY
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAW. THE SECURITIES
REPRESENTED BY THIS WARRANT MAY NOT BE TRANSFERRED, EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER, OR IN A TRANSACTION EXEMPT FROM
REGISTRATION UNDER, THE SECURITIES ACT AND IN ACCORDANCE WITH ANY OTHER
APPLICABLE SECURITIES LAWS.
STOCK PURCHASE WARRANT
EQUALNET HOLDING CORP.
This Stock Purchase Warrant (this "Warrant"), issued this 15th day of
April, 1998, by EqualNet Holding Corp., a Texas corporation (the "Company"), to
John Dalton (the "Holder").
WITNESSETH:
ARTICLE I
ISSUANCE OF WARRANT; TERM; EXERCISE PRICE
For and in consideration of the promises and the mutual covenants in this
Warrant and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the Company hereby grants to the Holder,
subject to the provisions hereinafter set forth, the right to purchase 15,000
shares of Common Stock, $.01 par value per share, of the Company (the "Common
Stock"). The Warrant shall be exercisable at any time after the date hereof and
on or before 5:00 p.m. Houston, Texas time on November 1, 2001 (the "Expiration
Date"). The exercise price per share for which all or any of the Warrant Shares
(as hereinafter defined) may be purchased pursuant to the terms of this Warrant
shall be $7.50.
ARTICLE 2
DEFINITIONS
As used herein, the following terms shall have the meanings set forth
below:
1. "Company" shall mean EqualNet Holding Corp., a Texas corporation, and
shall also include any successor thereto with respect to the obligations
hereunder, by merger, consolidation or otherwise.
<PAGE>
2. "Common Stock" shall mean and include the Company's Common Stock, par
value $.01 per share, authorized on the date of the original issue of this
Warrant and shall also include (i) in case of any reorganization,
reclassification, consolidation, merger, share exchange or sale, transfer or
other disposition of assets, the stock or other securities provided for herein,
and (ii) any other shares of common stock of the Company into which such shares
of Common Stock may be converted.
3. "Exercise Price" shall mean the initial purchase price of $7.50 per
share of Common Stock payable upon exercise of the Warrant, as adjusted from
time to time pursuant to the provisions hereof.
4. "Market Price" for any day, when used with reference to Common Stock,
shall mean the price of said Common Stock determined by reference to the last
reported sale price for the Common Stock on such day on the principal securities
exchange on which the Common Stock is listed or admitted to trading or if no
such sale takes place on such date, the average of the closing bid and asked
prices thereof as officially reported, or, if not so listed or admitted to
trading on any securities exchange, the last sale price for the Common Stock on
the National Association of Securities Dealers national market system on such
date, or, if there shall have been no trading on such date or if the Common
Stock shall not be listed on such system, the average of the closing bid and
asked prices in the over-the-counter market as furnished by any NASD member firm
selected from time to time by the Company for such purpose.
5. "Outstanding" when used with reference to Common Stock, shall mean
(except as otherwise expressly provided herein) at any date as of which the
number of shares thereof is to be determined, all issued shares of Common Stock,
except shares then owned or held by or for the account of the Company.
6. "Person" shall mean an individual, corporation, limited liability
company, partnership, limited partnership, joint venture, joint stock company,
firm, company, syndicate, trust, estate, association, governmental authority,
business, organization or any other incorporated or unincorporated entity.
7. "Trading Days" shall mean any days during the course of which the
principal securities exchange on which the Common Stock is listed or admitted to
trading is open for the exchange of securities.
8. "Warrant Shares" shall mean the shares of Common Stock purchased or
purchasable by the holder hereof upon the exercise of the Warrant.
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ARTICLE 3
EXERCISE OF WARRANT
1. Method of Exercise. The Warrant represented hereby may be exercised by
the holder hereof, in whole or in part, at any time and from time to time on or
after the date hereof until 5:00 p.m., Houston, Texas time, on the Expiration
Date. To exercise the Warrant, the holder hereof shall deliver to the Company,
at the Warrant Office (as hereinafter defined) designated herein, (i) a written
notice in the form of the Subscription Notice attached as an exhibit hereto,
stating therein the election of such holder to exercise the Warrant in the
manner provided in the Subscription Notice; (ii) payment in full of the Exercise
Price (A) in cash or by bank check for all Warrant Shares purchased hereunder,
or (B) through a "cashless" or "net-issue" exercise of each such Warrant
("Cashless Exercise"); the holder shall exchange each Warrant subject to a
Cashless Exercise for that number of Warrant Shares determined by multiplying
the number of Warrant Shares issuable hereunder by a fraction, the numerator of
which shall be the difference between (x) the Market Price and (y) the Exercise
Price for each such Warrant, and the denominator of which shall be the Market
Price; the Subscription Notice shall set forth the calculation upon which the
Cashless Exercise is based, or (C) a combination of (A) and (B) above; and (iii)
this Warrant. The Warrant shall be deemed to be exercised on the date of receipt
by the Company of the Subscription Notice, accompanied by payment for the
Warrant Shares and surrender of the Warrant, as aforesaid, and such date is
referred to herein as the "Exercise Date". Upon such exercise, the Company
shall, as promptly as practicable and in any event within five business days,
issue and deliver to such holder a certificate or certificates for the full
number of the Warrant Shares purchased by such holder hereunder, and shall,
unless the Warrant has expired, deliver to the holder hereof a new Warrant
representing the number of Warrant Shares, if any, that shall not have been
exercised, in all other respects identical to this Warrant. As permitted by
applicable law, the Person in whose name the certificates for Common Stock are
to be issued shall be deemed to have become a holder of record of such Common
Stock on the Exercise Date and shall be entitled to all of the benefits of such
holder on the Exercise Date, including without limitation the right to receive
dividends and other distributions for which the record date falls on or after
the Exercise Date and to exercise voting rights.
2. Expenses and Taxes. The Company shall pay all expenses and taxes
(including, without limitation, all documentary, stamp, transfer or other
transactional taxes) other than income taxes attributable to the preparation,
issuance or delivery of the Warrant and of the shares of Common Stock issuable
upon exercise of the Warrant.
3. Reservation of Shares. The Company shall reserve at all times so long
as the Warrant remain outstanding, free from preemptive rights, out of its
authorized but unissued shares of Common Stock, solely for the purpose of
effecting the exercise of the Warrant, a sufficient number of shares of Common
Stock to provide for the exercise of the Warrant.
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<PAGE>
4. Valid Issuance. All shares of Common Stock that may be issued upon
exercise of the Warrant will, upon issuance by the Company, be duly and validly
issued, fully paid and nonassessable and free from all taxes, liens and charges
with respect to the issuance thereof and, without limiting the generality of the
foregoing, the Company shall take no action or fail to take any action which
will cause a contrary result (including, without limitation, any action that
would cause the Exercise Price to be less than the par value, if any, of the
Common Stock).
5. Purchase Agreement. The Warrant represented hereby is a duly authorized
issue and sale of a warrant to purchase Common Stock issued and sold pursuant to
that certain Asset Purchase Agreement between the Company and the Holder, dated
the date hereof (the "Agreement").
6. No Fractional Shares. The Company shall not be required to issue
fractional shares of Common Stock on the exercise of this Warrant. If any
fraction of a share of Common Stock would, except for the provisions of this
Section, be issuable on the exercise of this Warrant, the Company shall pay an
amount in cash calculated by it to be equal to the Market Price of one share of
Common Stock at the time of such exercise multiplied by such fraction computed
to the nearest whole cent.
ARTICLE 4
TRANSFER
1. Warrant Office. The Company shall maintain an office for certain
purposes specified herein (the "Warrant Office"), which office shall initially
be the Company's offices at EqualNet Plaza, 1250 Wood Branch Park Drive,
Houston, Texas 77079-1212 and may subsequently be such other office of the
Company or of any transfer agent of the Common Stock in the continental United
States as to which written notice has previously been given to the Holder. The
Company shall maintain, at the Warrant Office, a register for the Warrant in
which the Company shall record the name and address of the Person in whose name
this Warrant has been issued, as well as the name and address of each permitted
assignee of the rights of the registered owner hereof.
2. Ownership of Warrant. The Company may deem and treat the Person in
whose name the Warrant is registered as the holder and owner hereof until
provided with notice to the contrary.
3. Restrictions on Transfer of Warrant. Subject to the provisions of
Section 4.4 hereof, this Warrant may be transferred, in whole or in part, by the
Holder. The Company agrees to maintain at the Warrant Office books for the
registration and transfer of the Warrant. The Company, from time to time, shall
register any transfer of the Warrant in such books upon surrender of this
Warrant at the Warrant Office properly endorsed or accompanied by appropriate
instruments of transfer and written instructions for transfer. Upon any such
transfer and upon payment by the Holder or its transferee of any applicable
transfer taxes, a new Warrant shall be issued to the transferee and the
transferor (as their respective interests may appear) and the surrendered
Warrant shall be canceled
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by the Company. The Company shall pay all taxes (other than securities transfer
taxes or income taxes) and all other expenses and charges payable in connection
with the transfer of the Warrant pursuant to this Section.
4. Compliance With Securities Laws Regarding Transfers. Neither this
Warrant nor the Warrant Shares have been registered under the Securities Act of
1933, as amended (the "Securities Act"), or any state securities laws ("Blue Sky
Laws"). The Holder hereby agrees and acknowledges that this Warrant and the
Warrant Shares have been acquired for investment purposes and not with a view to
distribution or resale and the Warrant Shares may not be made subject to
security interest, pledged, hypothecated, sold or otherwise transferred without
an effective registration therefor under the Securities Act and such applicable
Blue Sky Laws or an opinion of counsel (which opinion and counsel rendering same
shall be reasonably acceptable to the Company) that registration is not required
under the Securities Act and under any applicable Blue Sky Laws. The certificate
representing the Warrant Shares shall bear substantially the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE "SECURITIES")
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE AND ARE BEING
OFFERED AND SOLD IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND SUCH LAWS. THE SECURITIES HAVE BEEN
ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD OR OFFERED FOR SALE IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES OR AN
OPINION OF COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE CORPORATION THAT
SUCH REGISTRATION IS NOT REQUIRED."
Other legends as required by applicable federal and state laws may be placed on
such certificates. The Holder and the Company agree to execute such documents
and instruments as counsel for the Company reasonably deems necessary to effect
compliance of the issuance of this Warrant and any Warrant Shares issuable upon
exercise hereof with applicable federal and state securities laws. The Holder
agrees that the Company may decline to permit a transfer of this Warrant if the
proposed transferee does not meet then applicable qualifications for investors
in securities offerings exempt from registration.
5. Stop transfer instructions will be imposed with respect to the Warrant
Shares so as to restrict resale or other transfer thereof.
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ARTICLE 5
ANTI-DILUTION
1. In case at any time or from time to time after the date of this
Warrant, the holders of Common Stock shall have received or shall have become
entitled legally to receive:
(i) other or additional stock or other securities or property (other
than cash) by way of a dividend or other distribution or
(ii) other or additional (or less) stock or other securities or
property (including cash) by way of a stock-split, spin-off, split-up,
reclassification, combination of shares or similar corporate rearrangement
(but not including any cash dividends),
then and in such case the Holder, upon the exercise of this Warrant as provided
in Article III hereof, shall be entitled to receive, in lieu of (or in addition
to, as the case may be) the Warrant Shares theretofore receivable upon the
exercise of this Warrant, the amount of stock and other securities and property
(including cash in the case referred to in clause (ii) above) which the Holder
would have held on the date of such exercise if, on the date of such conversion,
dividend, distribution, corporate rearrangement or such other event as described
in clause (ii) above, the Holder had been the holder of record of the number of
Warrant Shares receivable upon exercise of this Warrant and had thereafter,
during the period from the date thereof to and including the date of such
exercise, obtained such Warrant Shares and all other or additional (or less)
stock and other securities and property (including cash in the case referred to
in clause (ii) above) receivable by it as aforesaid during such period.
ARTICLE 6
MISCELLANEOUS
1. Entire Agreement. This Warrant contains the entire agreement between
the Company and the Holder hereof.
2. Governing Law. This Warrant shall be governed by and construed in
accordance with the laws of the State of Texas.
3. Waiver and Amendment. Any term or provision of this Warrant may be
waived at any time by the party which is entitled to the benefits thereof and
any term or provision of this Warrant may be amended or supplemented at any time
by agreement of the holder hereof and the Company, except that any waiver of any
term or condition, or any amendment or supplementation, of this Warrant shall be
in writing. A waiver of any breach or failure to enforce any of the terms or
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conditions of this Warrant shall not in any way effect, limit or waive a party's
rights hereunder at any time to enforce strict compliance thereafter with every
term or condition of this Warrant.
4. Illegality. In the event that any one or more of the provisions
contained in this Warrant shall be determined to be invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in any other respect and the remaining
provisions of this Warrant shall not, at the election of the party for whom the
benefit of the provision exists, be in any way impaired.
5. Copy of Warrant. A copy of this Warrant shall be filed among the
records of the Company.
6. Notice. Any notice or other document required or permitted to be given
or delivered to the Holder hereof shall be in writing and delivered at, or sent
by certified or registered mail to such Holder at, the last address shown on the
books of the Company maintained at the Warrant Office for the registration of
this Warrant or at any more recent address of which the holder hereof shall
have notified the Company in writing. Any notice or other document required or
permitted to be given or delivered to the Company, other than such notice or
documents required to be delivered to the Warrant Office, shall be delivered at,
or sent by certified or registered mail to, the offices of the Company at
EqualNet Plaza, Attn.: General Counsel, 1250 Wood Branch Park Drive, Houston,
Texas 77079-1212 or such other address within the continental United States of
America as shall have been finished by the Company to the holder of this
Warrant.
7. Limitation of Liability; Not Stockholders. No provision of this Warrant
shall be construed as conferring upon the holder hereof the right to vote,
consent, receive dividends or receive notices (other than as herein expressly
provided) in respect of meetings of stockholders for the election of directors
of the Company or any other matter whatsoever as a stockholder of the Company.
No provision hereof, in the absence of affirmative action by the holder hereof
to purchase shares of Common Stock, and no mere enumeration herein of the rights
or privileges of the holder hereof, shall give rise to any liability of such
holder for the purchase price of any shares of Common Stock or as a stockholder
of the Company, whether such liability is asserted by the Company or by
creditors of the Company.
8. Exchange, Loss, Destruction, etc. of Warrant. Upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft, mutilation or
destruction of this Warrant, and in the case of any such loss, theft or
destruction upon delivery of an appropriate affidavit in such form as shall be
reasonably satisfactory to the Company and include reasonable indemnification of
the Company, or in the event of such mutilation upon surrender and cancellation
of this Warrant, the Company will make and deliver a new Warrant of like tenor,
in lieu of such lost, stolen, destroyed or mutilated Warrant. Any Warrant issued
under the provisions of this Section in lieu of any Warrant alleged to be lost,
destroyed or stolen, or in lieu of any mutilated Warrant, shall constitute an
original contractual obligation on the part of the Company. This Warrant shall
be promptly canceled by the Company upon the surrender hereof in connection with
any exchange or replacement. The Company
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shall pay all taxes (other than securities transfer taxes or income taxes) and
all other expenses and charges payable in connection with the preparation,
execution and delivery of the Warrant pursuant to this Section.
9. Headings. The Article and Section and other headings herein are for
convenience only and are not a part of this Warrant and shall not affect the
interpretation thereof.
10. Replacement of Old Warrant. This Warrant, together with that certain
stock purchase warrant of even date herewith numbered W-10 issued to Mezzanine
Telecom, Inc. (formerly known as Creative Communications International, Inc.)
amends and restates in its entirety, and supersedes and replaces in all
respects, that certain stock purchase warrant issued to Creative Communications
International, Inc. on November 12, 1996.
[SIGNATURE PAGE TO FOLLOW]
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in its
name.
Dated: April 15, 1998
EQUALNET HOLDING CORP.
By: /s/ Dean H. Fisher
-------------------------------
Name: Dean H. Fisher
-----------------------------
Title: Senior Vice President
----------------------------
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EXHIBIT 10.53
EXHIBIT A
No._____
EQUALNET HOLDING CORP.
Stock Purchase Warrant
This Stock Purchase Warrant ("Warrant") is issued as of the 15th day of
April, 1998, by EqualNet Holding Corp., a Texas corporation ("EqualNet"), to
Zane Russell ("Russell") pursuant to that certain Severance Agreement dated as
of April 1, 1998 between EqualNet and Russell.
WITNESSETH:
-----------
(a) ISSUANCE OF WARRANT; TERM.
(i) For and in consideration of the sum of $10.00 and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, EqualNet hereby grants to Russell, subject to the provisions
hereinafter set forth, the right to purchase up to 90,000 shares of EqualNet's
common stock, par value $.01 per share ("Common Stock"). The shares of Common
Stock issuable upon exercise of this Warrant are hereinafter referred to as the
"Shares".
(ii) This Warrant shall be exercisable at any time on or before the
third anniversary of the date hereof, provided that the shareholders of EqualNet
shall have ratified the issuance of this Warrant by the vote, in person or by
proxy, of the holders of a majority of the shares of EqualNet's capital stock
present, entitled to vote and voting at a duly called meeting of EqualNet
shareholders at which a quorum is present.
(b) EXERCISE PRICE. The exercise price per share for which all or any of
the Shares may be purchased pursuant to the terms of this Warrant shall be $2.00
(hereinafter referred to as the "Exercise Price").
(c) EXERCISE.
(i) This Warrant may be exercised by Russell for the purchase of any
of the Shares for which this Warrant is then exercisable pursuant to Section 1
(b) hereof in whole or in part, upon delivery of written notice of intent to
EqualNet at the following address: 1250 Wood Branch Park Drive, Houston, Texas
77079 or such other address as EqualNet shall designate in written notice to
Russell, together with this Warrant and payment (in the manner described in
Section 3(b) below) for the aggregate Exercise Price of the Shares so purchased.
Upon exercise of this Warrant as aforesaid, EqualNet shall as promptly as
practicable execute and deliver to Russell a certificate or certificates for the
total number of whole Shares for which this Warrant is being exercised in such
names and denominations as are requested by Russell. If this Warrant shall be
exercised with respect to less than all of the Shares, Russell shall be entitled
to receive a new Warrant covering the number of Shares in respect of which this
Warrant shall not have been exercised, which new Warrant shall in all other
respects be identical to this Warrant.
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(ii) Payment for the Shares to be purchased upon exercise of this
Warrant may be made by the delivery of a certified or cashier's check payable to
EqualNet for the aggregate Exercise Price of the Shares to be purchased.
(d) COVENANTS AND CONDITIONS. The above provisions are subject to the
following:
(i) Neither this Warrant nor the Shares have been registered under the
Securities Act of 1933, as amended (the "Act"), or any state securities laws
("Blue Sky Laws"). This Warrant and the Shares have been acquired for investment
purposes and not with a view to distribution or resale and the Shares may not be
made subject to a security interest, pledged, hypothecated, sold or otherwise
transferred without an effective registration statement therefor under the Act
and such applicable Blue Sky Laws or an opinion of counsel (which opinion and
counsel rendering same shall be reasonably acceptable to EqualNet) that
registration is not required under the Act and under any applicable Blue Sky
Laws. The certificates representing the Shares shall bear substantially the
following legend:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR ANY APPLICABLE
STATE SECURITIES LAWS, BUT HAVE BEEN ACQUIRED FOR THE PRIVATE INVESTMENT OF
THE HOLDER HEREOF AND MAY NOT BE OFFERED, SOLD OR TRANSFERRED UNTIL A
REGISTRATION STATEMENT UNDER THE ACT OR SUCH APPLICABLE STATE SECURITIES
LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR IN THE OPINION OF
COUNSEL REGISTRATION UNDER THE ACT OR SUCH APPLICABLE STATE SECURITIES LAWS
IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED OFFER, SALE OR TRANSFER.
Other legends as required by applicable federal and state laws may be placed on
such certificates. Russell and EqualNet agree to execute such documents and
instruments as counsel for EqualNet reasonably deems necessary to effect
compliance of the issuance of this Warrant and any Shares issued upon exercise
hereof with applicable federal and state securities laws.
(ii) EqualNet covenants and agrees that all Shares which may be issued
upon exercise of this Warrant will, upon issuance and payment therefor, be
legally and validly issued and outstanding, fully paid and nonassessable.
EqualNet shall at all times, commencing on the date this Warrant shall become
exercisable, reserve and keep available for issuance upon the exercise of this
Warrant such number of authorized but unissued shares of Common Stock as will be
sufficient to permit the exercise in full of the Warrant.
(iii) This Warrant shall not be subject to voluntary or involuntary
alienation, assignment or transfer.
(e) WARRANT HOLDER NOT STOCKHOLDER. This Warrant does not confer upon
Russell any right whatsoever as a stockholder of EqualNet.
(f) ANTI-DILUTION. In case at any time or from time to time after the date
of this Warrant, all of the holders of Common Stock of EqualNet shall have
received or shall have become legally entitled to receive:
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(A) other or additional stock or other securities or property (other
than cash) by way of a dividend or other distribution; or
(B) other or additional (or less) stock or other securities or
property (including cash) by way of stock-split, spin-off, split-up,
reclassification, combination of shares or similar corporate rearrangement
(but not including any cash dividends),
then and in each such case Russell, upon the exercise hereof as provided in
Section 3, shall be entitled to receive, in lieu of (or in addition to, as the
case may be) the Shares theretofore receivable upon the exercise of this
Warrant, the amount of stock and other securities and property (including cash
in the case referred to in clause (ii) above) which Russell would have held on
the date of such exercise if on the date of such conversion, dividend,
distribution, corporate rearrangement or such other event as described in clause
(ii) above Russell had been the holder of record of the number of Shares
receivable upon exercise of this Warrant and had thereafter, during the period
from the date thereof to and including the date of such exercise, obtained such
Shares and all other or additional (or less) stock and other securities and
property (including cash in the case referred to in clause (ii) above)
receivable by Russell as aforesaid during such period.
(g) Notices. All notices, requests, offers, elections and other
communications under this Warrant shall be in writing and shall be deemed to
have been given at the time when deposited in the United States mail at a
general or branch post office, postage prepaid, registered or certified mail
(return receipt requested), and addressed to the respective parties at the
addresses stated below or to such other changed addresses as the parties may
have fixed by notice; provided, however, that any notice of change of address
shall be effective only upon receipt. Notices addressed as follows:
If to EqualNet: EqualNet Holding Corp.
1250 Wood Branch Park Drive
Houston, Texas 77079
Attention: General Counsel
If to Russell: Zane Russell
20607 Shadow Mill Court
Katy, Texas 77450
IN WITNESS WHEREOF, EqualNet has caused this Stock Purchase Warrant to be
executed and delivered by its duly authorized officer as of the date first above
written.
EQUALNET HOLDING CORP.
By: ________________________
Name: ______________________
Title: _____________________
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EXHIBIT 10.54
EXHIBIT A
No.____
EQUALNET HOLDING CORP.
Stock Purchase Warrant
This Stock Purchase Warrant ("Warrant") is issued as of the 15th day of
April, 1998, by EqualNet Holding Corp., a Texas corporation ("EqualNet"), to
Michael L. Hlinak ("Hlinak") pursuant to that certain Severance Agreement dated
as of April 1, 1998 between EqualNet and Hlinak.
WITNESSETH:
-----------
(a) ISSUANCE OF WARRANT; TERM.
(i) For and in consideration of the sum of $10.00 and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, EqualNet hereby grants to Hlinak, subject to the provisions
hereinafter set forth, the right to purchase up to 90,000 shares of EqualNet's
common stock, par value $.01 per share ("Common Stock"). The shares of Common
Stock issuable upon exercise of this Warrant are hereinafter referred to as the
"Shares".
(ii) This Warrant shall be exercisable at any time on or before the
fifth anniversary of the date hereof, provided that the shareholders of EqualNet
shall have ratified the issuance of this Warrant by the vote, in person or by
proxy, of the holders of a majority of the shares of EqualNet's capital stock
present, entitled to vote and voting at a duly called meeting of EqualNet
shareholders at which a quorum is present.
(b) EXERCISE PRICE. The exercise price per share for which all or any of
the Shares may be purchased pursuant to the terms of this Warrant shall be $2.00
(hereinafter referred to as the "Exercise Price").
(c) EXERCISE.
(i) This Warrant may be exercised by Hlinak for the purchase of any of
the Shares for which this Warrant is then exercisable pursuant to Section 1(b)
hereof in whole or in part, upon delivery of written notice of intent to
EqualNet at the following address: 1250 Wood Branch Park Drive, Houston, Texas
77079 or such other address as EqualNet shall designate in written notice to
Hlinak, together with this Warrant and payment (in the manner described in
Section 3(b) below) for the aggregate Exercise Price of the Shares so
purchased. Upon exercise of this Warrant as aforesaid, EqualNet shall as
promptly as practicable execute and deliver to Hlinak a certificate or
certificates for the total number of whole Shares for which this Warrant is
being exercised in such names and denominations as are requested by Hlinak. If
this Warrant shall be exercised with respect to less than all of the Shares,
Hlinak shall be entitled to receive a new Warrant covering the number of Shares
in respect of which this Warrant shall not have been exercised, which new
Warrant shall in all other respects be identical to this Warrant.
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(ii) Payment for the Shares to be purchased upon exercise of this
Warrant may be made by the delivery of a certified or cashier's check payable to
EqualNet for the aggregate Exercise Price of the Shares to be purchased.
(d) COVENANTS AND CONDITIONS. The above provisions are subject to the
following:
(i) Neither this Warrant nor the Shares have been registered under the
Securities Act of 1933, as amended (the "Act"), or any state securities laws
("Blue Sky Laws"). This Warrant and the Shares have been acquired for investment
purposes and not with a view to distribution or resale and the Shares may not be
made subject to a security interest pledged, hypothecated, sold or otherwise
transferred without an effective registration statement therefor under the Act
and such applicable Blue Sky Laws or an opinion of counsel (which opinion and
counsel rendering same shall be reasonably acceptable to EqualNet) that
registration is not required under the Act and under any applicable Blue Sky
Laws. The certificates representing the Shares shall bear substantially the
following legend:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR ANY APPLICABLE
STATE SECURITIES LAWS, BUT HAVE BEEN ACQUIRED FOR THE PRIVATE INVESTMENT OF
THE HOLDER HEREOF AND MAY NOT BE OFFERED, SOLD OR TRANSFERRED UNTIL A
REGISTRATION STATEMENT UNDER THE ACT OR SUCH APPLICABLE STATE SECURITIES
LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR IN THE OPINION OF
COUNSEL REGISTRATION UNDER THE ACT OR SUCH APPLICABLE STATE SECURITIES LAWS
IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED OFFER, SALE OR TRANSFER.
Other legends as required by applicable federal and state laws may be placed on
such certificates. Hlinak and EqualNet agree to execute such documents and
instruments as counsel for EqualNet reasonably deems necessary to effect
compliance of the issuance of this Warrant and any Shares issued upon exercise
hereof with applicable federal and state securities laws.
(ii) EqualNet covenants and agrees that all Shares which may be issued
upon exercise of this Warrant will, upon issuance and payment therefor, be
legally and validly issued and outstanding, fully paid and nonassessable.
EqualNet shall at all times, commencing on the date this Warrant shall become
exercisable, reserve and keep available for issuance upon the exercise of this
Warrant such number of authorized but unissued shares of Common Stock as will be
sufficient to permit the exercise in full of the Warrant.
(iii) This Warrant shall not be subject to voluntary or involuntary
alienation, assignment or transfer.
(e) WARRANT HOLDER NOT STOCKHOLDER. This Warrant does not confer upon
Hlinak any right whatsoever as a stockholder of EqualNet.
(f) ANTI-DILUTION. In case at any time or from time to time after the date
of this Warrant, all of the holders of Common Stock of EqualNet shall have
received or shall have become legally entitled to receive:
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(A) other or additional stock or other securities or property (other
than cash) by way of a dividend or other distribution; or
(B) other or additional (or less) stock or other securities or
property (including cash) by way of stock-split, spin-off, split-up,
reclassification, combination of shares or similar corporate rearrangement
(but not including any cash dividends),
then and in each such case Hlinak, upon the exercise hereof as provided in
Section 3, shall be entitled to receive, in lieu of (or in addition to, as the
case may be) the Shares theretofore receivable upon the exercise of this
Warrant, the amount of stock and other securities and property (including cash
in the case referred to in clause (ii) above) which Hlinak would have held on
the date of such exercise if on the date of such conversion, dividend,
distribution, corporate rearrangement or such other event, as described in
clause (ii) above, Hlinak had been the holder of record of the number of Shares
receivable upon exercise of this Warrant and had thereafter, during the period
from the date thereof to and including the date of such exercise, obtained such
Shares and all other or additional (or less) stock and other securities and
property (including cash in the case referred to in clause (ii) above)
receivable by Hlinak as aforesaid during such period.
(g) NOTICES. All notices, requests, offers, elections and other
communications under this Warrant shall be in writing and shall be deemed to
have been given at the time when deposited in the United States mail at a
general or branch post office, postage prepaid, registered or certified mail
(return receipt requested), and addressed to the respective parties at the
addresses stated below or to such other changed addresses as the parties may
have fixed by notice; provided, however, that any notice of change of address
shall be effective only upon receipt. Notices addressed as follows:
If to EqualNet: EqualNet Holding Corp.
1250 Wood Branch Park Drive
Houston, Texas 77079
Attention: General Counsel
If to Hlinak: Michael L. Hlinak
19910 Erika Way
Katy, Texas 77450
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IN WITNESS WHEREOF, EqualNet has caused this Stock Purchase Warrant to be
executed and delivered by its duly authorized officer as of the date first above
written.
EQUALNET HOLDING CORP.
By: ___________________
Name: __________________
Title: _________________
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EXHIBIT 10.55
EQUALNET HOLDING CORP.
Stock Purchase Warrant
(Agent Warrant)
This Stock Purchase Warrant ("Warrant"), issued this 27th day of June,
1998, by EqualNet Holding Corp., a Texas corporation (the "Company"), to Pacific
Global Networks, Inc. (the "Agent").
WITNESSETH:
-----------
1. ISSUANCE OF WARRANT; TERM.
(a) For and in consideration of the sum of $10.00 and other good and
valuable consideration, including services rendered and to be rendered as
provided herein, the receipt and sufficiency of which are hereby acknowledged,
the Company hereby grants to the Agent, subject to the provisions hereinafter
set forth, the right to purchase up to 1,066,665
(b) shares (the "Shares") of Common Stock, $.01 par value, of the
Company (the "Common Stock").
(b) This Warrant expires on the fifth anniversary of the date hereof
and shall not be exercisable after the fifth anniversary of the date hereof.
(c) This Warrant shall be exercisable only with respect to Shares in
which the Agent has become vested in accordance with the provisions of Section 2
("Vested Shares"). This Warrant shall be exercisable with respect to Vested
Shares only on or before the first anniversary of the date such Shares become
Vested Shares in accordance with the provisions of Section 2.
2. VESTING. Shares shall become Vested Shares in connection with the
telecommunications business of the Company generated by the Agent as follows:
(a) Blocks of Orders and Blocks of Shares.
(i) In the first month (the "First Block Month") as the Agent has
submitted to the Company customer orders (the "First Block of Orders")
aggregating a number of Average Daily Commissionable Minutes (as defined below)
for such month equal to or exceeding 4,444,444 (the "Threshold Amount"), 355,000
of the Shares shall be designated as the "First Block of Shares"; provided that
Agent may postpone the designation of the First Block Month as allowed in
provision 2.(a)(viii) hereof, and provided further that if the Closing price per
share of the Common Stock as reported by The NASDAQ Stock Market, Inc. (or such
other national exchange or quotation system on which the Common Stock is then
listed or quoted) (such price on any trading day being the "Closing Price") on
the last trading day of the month that would otherwise be
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designated the First Block Month is less than $4.00, then the First Block
Month (and the designation of the First Block of Shares) shall be postponed
until after the Closing Price on any trading day equals or exceeds $4.00.
(ii) In the first month (the "Second Block Month") as the Agent has
submitted to the Company customer orders (the "Second Block of Orders") such
that orders, excluding the First Block of Orders, aggregate a number of Average
Daily Commissionable Minutes for such month equal to or exceeding the Threshold
Amount, 355,555 of the Shares shall be designated as the "Second Block of
Shares"; provided that Agent may postpone the designation of the Second Block
Month as allowed in provision 2.(a)(viii) hereof, and provided further that if
the Closing Price on the last trading day of the month that would otherwise be
designated the Second Block Month is less than $7.00, then the Second Block
Month (and the designation of the Second Block of Shares) shall be postponed
until after the Closing Price on any trading day equals or exceeds $7.00.
(iii) In the first month (the "Third Block Month") as the Agent has
submitted to the Company customer orders (the "Third Block of Orders") such that
orders, excluding the First Block of Orders and the Second Block of Orders,
aggregate a number of Average Daily Commissionable Minutes for such month equal
to or exceeding the Threshold Amount, 355,555 of the Shares shall be designated
as the "Third Block of Shares"; provided that Agent may postpone the designation
of the Third Block Month as allowed in provision 2.(a)(viii) hereof, and
provided further that if the Closing Price on the last trading day of the month
that would otherwise be designated the Third Block Month is less than $9.00,
then the Third Block Month (and the designation of the Third Block of Shares)
shall be postponed until after the Closing Price on any trading day equals or
exceeds $9.00.
(iv) No customer shall be included in more than one Block of Orders.
(v) If the First Block Month does not occur on or before the first
anniversary of the date hereof, this Warrant shall expire and no Shares shall be
exercisable hereunder.
(vi) If the Second Block Month does not occur within sixteen months of
the date hereof, then no Shares shall be designated as the Second Block of
Shares or the Third Block of Shares, and this Warrant will not be exercisable
other than for the First Block of Shares, subject to vesting as provided below.
(vii) If the Third Block Month does not occur within sixteen months of
the date hereof, then no Shares shall be designated as the Third Block of
Shares, and this Warrant will not be exercisable other than for the First Block
of Shares or the Second Block of Shares, subject to vesting as provided below.
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<PAGE>
(viii) Agent may, by written designation prior to starting to submit
orders for the Second Block Month, continue to submit additional customer orders
that will be included in the First Block Month for the purpose of offsetting any
attrition that may be experienced during the vesting period. In the event Agent
elects to submit such additional customers orders, all such additional customer
orders will be included in the First Block Month until written notice is
received from Agent to begin the Second Block Month. Similarly, after completion
of the First Block Month, Agent may, by written designation prior to starting to
submit orders for the Third Block Month, continue to submit additional customer
orders that will be included in the Second Block Month for the purpose of
offsetting any attrition that may be experienced during the vesting period. In
the event Agent elects to submit such additional customers orders, all such
additional customer orders will be included in the Second Block Month until
written notice is received from Agent to begin the Third Block Month. Similarly,
after completion of the Second Block Month, Agent may, by written designation
prior to the end of sixteen months of the date hereof, continue to submit
additional customer orders that will be included in the Third Block Month for
the purpose of offsetting any attrition that may be experienced during the
vesting period for the Third Block Month.
(b) Definitions. For purposes of this Section 2:
(i) The term "Average Daily Commissionable Minutes", for any given
month, shall mean the quotient of (A) the number of Commissionable Minutes in a
given month as reflected on the Company's Monthly Commission Report divided by
(B) the number of Business Days in that month, rounded to the nearest whole
number;
(ii) The term "Business Day" shall mean any day that is not a Saturday,
Sunday or day on which banks in the state of Texas are required or authorized by
law to be closed; and
(iii) The term "Commissionable Minutes" shall mean minutes of
telecommunications usage relating to net billed direct domestic and
international switched calls that may be billed by the Company.
(c) Attrition Calculation/Vesting.
(i) Within 30 days after the end of the fourth month following the
First Block Month (the "First Calculation Date"), the Company shall calculate
the ratio (the "First Vesting Ratio") of (A) the number of Average Daily
Commissionable Minutes in the third month following the First Block Month
represented by the customers included in the First Block of Orders to (B) the
Threshold Amount. If the First Vesting Ratio is equal to or greater than one,
then the First Block of Shares shall become Vested Shares on the First
Calculation Date. If the First Vesting Ratio is less than one, then a number of
Shares equal to the product of (X) the First Block of Shares multiplied by (Y)
the First Vesting Ratio, rounded to the nearest whole Share shall become Vested
Shares on the First Calculation Date.
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(ii) Within 30 days after the end of the fourth month following the
Second Block Month (the "Second Calculation Date"), the Company shall calculate
the ratio (the "Second Vesting Ratio") of (A) the number of Average Daily
Commissionable Minutes in the third month following the Second Block Month
represented by the customers included in the Second Block of Orders to (B) the
Threshold Amount. If the Second Vesting Ratio is equal to or greater than one,
then the Second Block of Shares shall become Vested Shares on the Second
Calculation Date. If the Second Vesting Ratio is less than one, then a number of
Shares equal to the product of (X) the Second Block of Shares multiplied by (Y)
the Second Vesting Ratio, rounded to the nearest whole Share shall become Vested
Shares on the Second Calculation Date.
(iii) Within 30 days after the end of the fourth month following the
Third Block Month (the "Third Calculation Date"), the Company shall calculate
the ratio (the "Third Vesting Ratio") of (A) the number of Average Daily
Commissionable Minutes in the third month following the Third Block Month
represented by the customers included in the Third Block of Orders to (B) the
Threshold Amount. If the Third Vesting Ratio is equal to or greater than one,
then the Third Book of Shares shall become Vested Shares on the Third
Calculation Date. If the Third Vesting Ratio is less than one, then a number of
Shares equal to the product of (X) the Third Block of Shares multiplied by (Y)
the Third Vesting Ratio, rounded to the nearest whole Share shall become Vested
Shares on the Third Calculation Date.
(d) Compliance With Authorized Agent Contract. No Shares shall become
Vested Shares at any time that the Agent is not in compliance with all of the
terms and conditions of the Authorized Agent Contract, dated effective January
23, 1998, between the Agent and the Company, as the same may be amended from
time to time. Notwithstanding the foregoing, the Company may not terminate
Agent's right to submit new customer orders prior to the closing of the First
Block of Orders.
3. EXERCISE PRICE.
(a) The exercise price per share for which all or any of the Shares
included in the First Block of Shares may be purchased pursuant to the terms of
this Warrant shall be $2.00.
(b) The exercise price per share for which all or any of the Shares
included in the Second Block of Shares may be purchased pursuant to the terms of
this Warrant shall be equal to the Closing Price on the last trading day of the
First Block Month.
(c) The exercise price per share for which all or any of the, Shares
included in the Third Block of Shares may be purchased pursuant to the terms of
this Warrant shall be equal to the Closing Price on the last trading day of the
Second Block Month.
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(d) Each such exercise price is hereinafter referred to as an "Exercise
Price".
4. EXERCISE.
(a) This Warrant may be exercised by the Agent for the purchase of any of
the Shares for which this Warrant is then exercisable pursuant to Section l(b)
hereof in whole or in part, upon delivery of written notice of intent to the
Company at the following address: 1250 Wood Branch Park Drive, Houston, Texas
77079 or such other address as the Company shall designate in written notice to
the Agent, together with this Warrant and payment (in the manner described in
Section 3(b) below) for the aggregate Exercise Price of the Shares so purchased.
Upon exercise of this Warrant as aforesaid, the Company shall as promptly as
practicable execute and deliver to the Agent a certificate or certificates for
the total number of whole Shares for which this Warrant is being exercised in
such names and denominations as are requested by the Agent. If this Warrant
shall be exercised with respect to less than all of the Shares, the Agent shall
be entitled to receive a new Warrant covering the number of Shares in respect of
which this Warrant shall not have been exercised, which new Warrant shall in all
other respects be identical to this Warrant.
(b) Payment for the Shares to be purchased upon exercise of this Warrant
may be made (i) by the delivery of a certified or cashier's check payable to the
Company for the aggregate Exercise Price of the Shares to be purchased of (ii)
by delivery of this Warrant and a notice that the Agent wished to make an
exercise of Warrants for "Net Warrant Shares". The number of Net Warrant Shares
to be issued in the case of (b)(ii) shall be determined as described by the
following formula: Net Warrant Shares = [WS x (MP-EP)]/MP. "WS" is the number of
Warrant Shares issuable upon exercise of the Warrants or portion of Warrants
being exercised. "MP" is the closing Market Price of the Common Stock on the
last trading day preceding the date request to exercise the Warrants is received
by the Company, as reported by The Nasdaq Stock Market or such other exchange or
quotation system on which the Common Stock may be listed or quoted. "EP" shall
mean the Exercise Price of the Shares to be purchased.
(5) COVENANTS AND CONDITIONS. The above Provisions are subject to the
following:
(a) Neither this Warrant nor the Shares have been registered under the
Securities Act of 1933, as amended (the "Act"), or any state securities laws
("Blue Sky Laws"). This Warrant and the Shares have been acquired for investment
purposes and not with a view to distribution or resale and the Shares may not be
made subject to a security interest, pledged, hypothecated, sold or otherwise
transferred without an effective registration statement therefor under the Act
and such applicable Blue Sky Laws or an opinion of counsel (which opinion and
counsel rendering same shall be reasonably acceptable to the Company) that
registration is not required under the Act and under any
5
<PAGE>
applicable Blue Sky Laws. The certificates representing the Shares shall bear
substantially the following legend:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFCATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY APPLICABLE
STATE SECURITIES LAWS, BUT HAVE BEEN ACQUIRED FOR THE PRIVATE INVESTMENT OF
THE HOLDER HEREOF AND MAY NOT BE OFFERED, SOLD OR TRANSFERRED UNTIL A
REGISTRATION STATEMENT UNDER THE ACT OR SUCH APPLICABLE STATE SECURITIES
LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR IN THE OPINION OF
COUNSEL (WHOSE OPINION AND COUNSEL SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY) REGISTRATION UNDER THE ACT OR SUCH APPLICABLE STATE SECURITIES
LAWS IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED OFFER, SALE OR
TRANSFER.
Other legends as required by applicable federal and state laws may be placed on
such certificates. The Agent and the Company agree to execute such documents and
instruments as counsel for the Company reasonably deems necessary to effect
compliance of the issuance of this Warrant and any Shares issued upon exercise
hereof with applicable federal and state securities laws. The Agent agrees that
the Company may decline to permit a transfer of this Warrant if the proposed
transferee does not meet then applicable qualifications for investors in
securities offerings exempt from registration.
(b) The Company covenants and agrees that all Shares which may be issued
upon exercise of this Warrant will, upon issuance and payment therefor, be
legally and validly issued and outstanding, fully paid and nonassessable. The
Company shall at all times, commencing on the date this Warrant shall become
exercisable, reserve and keep available for issuance upon the exercise of this
Warrant such number of authorized but unissued shares of Common Stock as will be
sufficient to permit the exercise in full of the Warrant.
6. WARRANT HOLDER NOT STOCKHOLDER. This Warrant does not confer upon the
Agent any right whatsoever as a stockholder of the Company.
7. ANTI-DILUTION. If at any time or from time to time after the date of
this Warrant, all of the holders of Common Stock of the Company shall have
received or shall have become legally entitled to receive:
(i) other or additional stock or other securities or property (other
than cash) by way of a dividend or other distribution; or
(ii) other or additional (or less) stock or other securities or
property (including cash) by way of stock-split, spin-off, split-up,
reclassification, combination of shares or similar corporate rearrangements (but
not including any cash dividends),
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<PAGE>
then and in each such case the Agent, upon the exercise hereof as provided in
Section 3, shall be entitled to receive, in lieu of (or in addition to, as the
case may be) the Shares theretofore receivable upon the exercise of this
Warrant, the amount of stock and other securities and property (including cash
in the case referred to in clause (ii) above) which the Agent would have held on
the date of such exercise if on the date of such conversion, dividend,
distribution, corporate rearrangement or such other event as described in clause
(ii) above the Agent had been the holder of record of the number of Shares.
receivable upon exercise of this Warrant and had thereafter, during the period
from the date thereof to and including the date of such exercise, obtained such
Shares and all other or additional (or less) stock and other securities and
property (including cash in the case referred to in clause (ii) above)
receivable by the Agent as aforesaid during such period.
8. NOTICES. All notices, requests, offers, elections and other
communications under this Warrant shall be in writing and shall be deemed to
have been given at the time when deposited in the United States mail at a
general or branch post office, postage prepaid, registered or certified mail
(return receipt requested), and addressed to the respective parties at the
addresses stated below or to such other changed addresses as the parties may
have fixed by notice; provided, however, that any notice of change of address
shall be effective only upon receipt.
Notices to the Company shall be addressed to:
EqualNet Holding Corp.
1250 Wood Branch Park Drive
Houston, Texas 77079
Attn: General Counsel
Telephone: (281) 529-4648
Facsimile: (281) 529-4686
With a copy to:
Fulbright & Jaworski, L.L.P.
1301 McKinney, Suite 5100
Houston, Texas 77010
Attn: Robert F. Gray, Jr.
Telephone: (713) 651-5566
Facsimile: (713) 651-5246
7
<PAGE>
Notices addressed to the Agent shall be addressed to:
Pacific Global Network, Inc.
Attention: Sam Shorez, President
4241 Jutland Drive, Suite #100-B
San Diego, California 92117-3654
IN WITNESSS WBEREOF, the Company has caused this Stock Purchase Warrant to
be issued an delivered by its duly authorized officer as of the date first above
written.
EQUALNET HOLDING CORP.
BY: /s/ Robert H. Turner
----------------------
Name: Robert H. Turner
--------------------
Title: Chief Exec. Officer
-------------------
8
<PAGE>
EXHIBIT 10.56
EQUALNET HOLDING CORP.
Stock Purchase Warrant
(Agent Warrant)
This Stock Purchase Warrant ("Warrant"), issued this 27th day of June,
1998, by EqualNet Holding Corp., a Texas corporation (the "Company"), to Future
Telecom Networks, Inc. (the "Agent").
WITNESSETH:
-----------
1. ISSUANCE OF WARRANT, TERM.
(a) For and in consideration of the sum of $10.00 and other good and
valuable consideration, including services rendered and to be rendered as
provided herein, the receipt and sufficiency of which are hereby acknowledged,
the Company hereby grants to the Agent, subject to the provisions hereinafter
set forth, the right to purchase up to 1,650,000 shares (the "Shares") of Common
Stock, $.01 par value, of the Company (the "Common Stock").
(b) This Warrant expires on the fifth anniversary of the date hereof
and shall not be exercisable after the fifth anniversary of the date hereof.
(c) This Warrant shall be exercisable only with respect to Shares in
which the Agent has become vested in accordance with the provisions of Section 2
("Vested Shares"). This Warrant shall be exercisable with respect to Vested
Shares only on or before the first anniversary of the date such Shares become
Vested Shares in accordance with the provisions of Section 2.
2. VESTING. Shares shall become Vested Shares in connection with the
telecommunications business of the Company generated by the Agent as follows:
(a) Blocks of Orders and Blocks of Shares.
(i) In the first month (the "First Block Month") as the Agent has
submitted to the Company customer orders (the "First Block of Orders")
aggregating a number of Average Daily Commissionable Minutes (as defined below)
for such month equal to or exceeding 6,666,666 (the "Threshold Amount"), 550,000
of the Shares shall be designated as the "First Block of Shares"; provided that
Agent may postpone the designation of the First Block Month as allowed in
provision 2.(a)(viii) hereof, and provided further that if the closing price per
share of the Common Stock as reported by The Nasdaq Stock Market, Inc. (or such
other national exchange or quotation system on which the Common Stock is then
listed or quoted) (such price on any trading day being the "Closing Price") on
the last trading day of the month that would otherwise be designated the First
Block Month is less than $4.00, then the First Block Month (and the
<PAGE>
designation of the First Block of Shares) shall be postponed until after
the Closing Price on any trading day equals or exceeds $4.00.
(ii) In the first month (the "Second Block Month") as the Agent
has submitted to the Company customer orders (the "Second Block of Orders") such
that orders, excluding the First Block of Orders, aggregate a number of Average
Daily Commissionable Minutes for such month equal to or exceeding the Threshold
Amount, 550,000 of the Shares shall be designated as the "Second Block of
Shares"; provided that Agent may postpone the designation of the Second Block
Month as allowed in provision 2.(a)(viii) hereof, and provided further that if
the Closing Price on the last trading day of the month that would otherwise be
designated the Second Block Month is less than $7.00, then the Second Block
Month (and the designation of the Second Block of Shares) shall be postponed
until after the Closing Price on any trading day equals or exceeds $7.00.
(iii) In the first month (the "Third Block Month") as the Agent
has submitted to the Company customer orders (the "Third Block of Orders") such
that orders, excluding the First Block of Orders and the Second Block of Orders,
aggregate a number of Average Daily Commissionable Minutes for such month equal
to or exceeding the Threshold Amount, 550,000 of the Shares shall be designated
as the "Third Block of Shares"; provided that Agent may postpone the designation
of the Third Block Month as allowed in provision 2.(a)(viii) hereof, and
provided further that if the Closing Price on the last trading day of the month
that would otherwise be designated the Third Block Month is less than $9.00,
then the Third Block Month (and the designation of the Third Block of Shares)
shall be postponed until after the Closing Price on any trading day equals or
exceeds $9.00.
(iv) No customer shall be included in more than one Block of Orders.
(v) If the First Block Month does not occur on or before the first
anniversary of the date hereof, this Warrant shall expire and no Shares shall be
exercisable hereunder.
(vi) If the Second Block Month does not occur within sixteen months of
the date hereof, then no Shares shall be designated as the Second Block of
Shares or the Third Block of Shares, and this Warrant will not be exercisable
other than for the First Block of Shares, subject to vesting as provided below.
(vii) If the Third Block Month does not occur within sixteen months of
the date hereof, then no Shares shall be designated as the Third Block of
Shares, and this Warrant will not be exercisable other than for the First Block
of Shares or the Second Block of Shares, subject to vesting as provided below.
(viii) Agent may, by written designation prior to starting to submit
orders for the Second Block Month, continue to submit additional customer orders
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<PAGE>
that will be included in the First Block Month for the purpose of offsetting any
attrition that may be experienced during the vesting period. In the event Agent
elects to submit such additional customers orders, all such additional customer
orders will be included in the First Block Month until written notice is
received from Agent to begin the Second Block Month. Similarly, after completion
of the First Block Month, Agent may, by written designation prior to starting to
submit orders for the Third Block Month, continue to submit additional customer
orders that will be included in the Second Block Month for the purpose of
offsetting any attrition that may be experienced during the vesting period. In
the event Agent elects to submit such additional customers orders, all such
additional customer orders will be included in the Second Block Month until
written notice is received from Agent to begin the Third Block Month. Similarly,
after completion of the Second Block Month, Agent may, by written designation
prior to the end of sixteen months of the date hereof, continue to submit
additional customer orders that will be included in the Third Block Month for
the purpose of offsetting any attrition that may be experienced during the
vesting period for the Third Block Month.
(b) Definitions. For purposes of this Section 2:
(i) The term "Average Daily Commissionable Minutes", for any given
month, shall mean the quotient of (A) the number of Commissionable Minutes in a
given month as reflected on the Company's Monthly Commission Report divided by
(B) the number of Business Days in that month, rounded to the nearest whole
number;
(ii) The term "Business Day" shall mean any day that is not a Saturday,
Sunday or day on which banks in the state of Texas are required or authorized by
law to be closed; and
(iii) The term "Commissionable Minutes" shall mean minutes of
telecommunications usage relating to net billed direct domestic and
international switched calls that may be billed by the Company.
(c) Attrition Calculation/Vesting.
(i) Within 30 days after the end of the fourth month following the
First Block Month (the "First Calculation Date"), the Company shall calculate
the ratio (the "First Vesting Ratio") of (A) the number of Average Daily
Commissionable Minutes in the third month following the First Block Month
represented by the customers included in the First Block of Orders to (B) the
Threshold Amount. If the First Vesting Ratio is equal to or greater than one,
then the First Block of Shares shall become Vested Shares on the First
Calculation Date. If the First Vesting Ratio is less than one, then a number of
Shares equal to the product of (X) the First Block of Shares multiplied by (Y)
the First Vesting Ratio, rounded to the nearest whole Share shall become Vested
Shares on the First Calculation Date.
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<PAGE>
(ii) Within 30 days after the end of the fourth month following
the Second Block Month (the "Second Calculation Date"), the Company shall
calculate the ratio (the "Second Vesting Ratio") of (A) the number of Average
Daily Commissionable Minutes in the third month following the Second Block Month
represented by the customers included in the Second Block of Orders to (B) the
Threshold Amount. If the Second Vesting Ratio is equal to or greater than one,
then the Second Block of Shares shall become Vested Shares on the Second
Calculation Date. If the Second Vesting Ratio is less than one, then a number of
Shares equal to the product of (X) the Second Block of Shares multiplied by (Y)
the Second Vesting Ratio, rounded to the nearest whole Share shall become Vested
Shares on the Second Calculation Date.
(iii) Within 30 days after the end of the fourth month following
the Third Block Month (the "Third Calculation Date"), the Company shall
calculate the ratio (the "Third Vesting Ratio") of (A) the number of Average
Daily Commissionable Minutes in the third month following the Third Block Month
represented by the customers included in the Third Block of Orders to (B) the
Threshold Amount. If the Third Vesting Ratio is equal to or greater than one,
then the Third Book of Shares shall become Vested Shares on the Third
Calculation Date. If the Third Vesting Ratio is less than one, then a number of
Shares equal to the product of (X) the Third Block of Shares multiplied by (Y)
the Third Vesting Ratio, rounded to the nearest whole Share shall become Vested
Shares on the Third Calculation Date.
(d) Compliance With Authorized Agent Contract. No Shares shall become
Vested Shares at any time that the Agent is not in compliance with all of the
terms and conditions of the Authorized Agent Contract, dated effective January
23, 1998, between the Agent and the Company, as the same may be amended from
time to time. Notwithstanding the foregoing, the Company may not terminate
Agent's right to submit new customer orders prior to the closing of the First
Block of Orders.
3. EXERCISE PRICE.
(a) The exercise price per share for which all or any of the Shares
included in the First Block of Shares may be purchased pursuant to the terms of
this Warrant shall be $2.00.
(b) The exercise price per share for which all or any of the Shares
included in the Second Block of Shares may be purchased pursuant to the terms of
this Warrant shall be equal to the Closing Price on the last trading day of the
First Block Month.
(c) The exercise price per share for which all or any of the Shares
included in the Third Block of Shares may be purchased pursuant to the terms. of
this Warrant shall be equal to the Closing Price on the last trading day of the
Second Block Month.
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<PAGE>
(d) Each such exercise price is hereinafter referred to as an "Exercise
Price".
4. EXERCISE.
(a) This Warrant may be exercised by the Agent for the purchase of any
of the Shares for which this Warrant is then exercisable pursuant to Section
l(b) hereof in whole or in part, upon delivery of written notice of intent to
the Company at the following address: 1250 Wood Branch Park Drive, Houston,
Texas 77079 or such other address as the Company shall designate in written
notice to the Agent, together with this Warrant and payment (in the manner
described in Section 3(b) below) for the aggregate Exercise Price of the Shares
so purchased. Upon exercise of this Warrant as aforesaid, the Company shall as
promptly as practicable execute and deliver to the Agent a certificate or
certificates for the total number of whole Shares for which this Warrant is
being exercised in such names and denominations as are requested by the Agent.
If this Warrant shall be exercised with respect to less than all of the Shares,
the Agent shall be entitled to receive a new Warrant covering the number of
Shares in respect of which this Warrant shall not have been exercised, which new
Warrant shall in all other respects be identical to this Warrant.
(b) Payment for the Shares to be purchased upon exercise of this
Warrant may be made (i) by the delivery of a certified or cashier's check
payable to the Company for the aggregate Exercise Price of the Shares to be
purchased of (ii) by delivery of this Warrant and a notice that the Agent wished
to make an exercise of Warrants for "Net Warrant Shares". The number of Net
Warrant Shares to be issued in the case of (b)(ii) shall be determined as
described by the following formula: Net Warrant Shares = [WS x (MP-EP)]/MP. "WS"
is the number of Warrant Shares issuable upon exercise of the Warrants or
portion of Warrants being exercised. "MP" is the closing Market Price of the
Common Stock on the last trading day preceding the date request to exercise the
Warrants is received by the Company, as reported by The Nasdaq Stock Market or
such other exchange or quotation system on which the Common Stock may be listed
or quoted. "EP" shall mean the Exercise Price of the Shares to be purchased.
(5) Covenants and Conditions. The above Provisions are subject to the
following:
(a) Neither this Warrant nor the Shares have been registered under the
Securities Act of 1933, as amended (the "Act"), or any state securities laws
("Blue Sky Laws"). This Warrant and the Shares have been acquired for investment
purposes and not with a view to distribution or resale and the Shares may not be
made subject to a security interest, pledged, hypothecated, sold or otherwise
transferred without an effective registration statement therefor under the Act
and such applicable Blue Sky Laws or an opinion of counsel (which opinion and
counsel rendering same shall be reasonably acceptable to the Company) that
registration is not required under the Act and under any
5
<PAGE>
applicable Blue Sky Laws. The certificates representing the Shares shall bear
substantially the following legend:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFCATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY APPLICABLE
STATE SECURITIES LAWS, BUT HAVE BEEN ACQUIRED FOR THE PRIVATE INVESTMENT OF
THE HOLDER HEREOF AND MAY NOT BE OFFERED, SOLD OR TRANSFERRED UNTIL A
REGISTRATION STATEMENT UNDER THE ACT OR SUCH APPLICABLE STATE SECURITIES
LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR IN THE OPINION OF
COUNSEL (WHOSE OPINION AND COUNSEL SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY) REGISTRATION UNDER THE ACT OR SUCH APPLICABLE STATE SECURITIES
LAWS IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED OFFER, SALE OR
TRANSFER.
Other legends as required by applicable federal and state laws may be placed on
such certificates. The Agent and the Company agree to execute such documents and
instruments as counsel for the Company reasonably deems necessary to effect
compliance of the issuance of this Warrant and any Shares issued upon exercise
hereof with applicable federal and state securities laws. The Agent agrees that
the Company may decline to permit a transfer of this Warrant if the proposed
transferee does not meet then applicable qualifications for investors in
securities offerings exempt from registration.
(b) The Company covenants and agrees that all Shares which may be issued
upon exercise of this Warrant will, upon issuance and payment therefor, be
legally and validly issued and outstanding, fully paid and nonassessable. The
Company shall at all times, commencing on the date this Warrant shall become
exercisable, reserve and keep available for issuance upon the exercise of this
Warrant such number of authorized but unissued shares of Common Stock as will be
sufficient to permit the exercise in full of the Warrant.
6. WARRANT HOLDER NOT STOCKHOLDER. This Warrant does not confer upon the
Agent any right whatsoever as a stockholder of the Company.
7. ANTI-DILUTION. If at any time or from time to time after the date of
this Warrant, all of the holders of Common Stock of the Company shall have
received or shall have become legally entitled to receive:
(i) other or additional stock or other securities or property (other
than cash) by way of a dividend or other distribution; or
(ii) other or additional (or less) stock or other securities or
property (including cash) by way of stock-split, spin-off, split-up,
reclassification, combination of shares or similar corporate rearrangements (but
not including any cash dividends),
6
<PAGE>
then and in each such case the Agent, upon the exercise hereof as provided in
Section 3, shall be entitled to receive, in lieu of (or in addition to, as the
case may be) the Shares theretofore receivable upon the exercise of this
Warrant, the amount of stock and other securities and property (including cash
in the case referred to in clause (ii) above) which the Agent would have held on
the date of such exercise if on the date of such conversion, dividend,
distribution, corporate rearrangement or such other event as described in clause
(ii) above the Agent had been the holder of record of the number of Shares
receivable upon exercise of this Warrant and had thereafter, during the period
from the date thereof to and including the date of such exercise, obtained such
Shares and all other or additional (or less) stock and other securities and
property (including cash in the case referred to in clause (ii) above)
receivable by the Agent as aforesaid during such period.
8. NOTICES. All notices, requests, offers, elections and other
communications under this Warrant shall be in writing and shall be deemed to
have been given at the time when deposited in the United States mail at a
general or branch post office, postage prepaid, registered or certified mail
(return receipt requested), and addressed to the respective parties at the
addresses stated below or to such other changed addresses as the parties may
have fixed by notice; provided, however, that any notice of change of address
shall be effective only upon receipt.
Notices to the Company shall be addressed to:
EqualNet Holding Corp.
1250 Wood Branch Park Drive
Houston, Texas 77079
Attn: General Counsel
Telephone: (281) 529-4648
Facsimile: (281) 529-4686
With a copy to:
Fulbright & Jaworski, L.L.P.
1301 McKinney, Suite 5100
Houston, Texas 77010
Attn: Robert F. Gray, Jr.
Telephone: (713) 651-5566
Facsimile: (713) 651-5246
7
<PAGE>
Notices addressed to the Agent shall be addressed to:
Future Telecom Networks, Inc.
Attention: Ronald R. Davis, General Counsel
4241 Jutland Drive, Suite # 103
San Diego, California 92117-3654
IN WITNESSS WHEREOF, the Company has caused this Stock Purchase Warrant to
be issued an delivered by its duly authorized officer as of the date first above
written.
EQUALNET HOLDING CORP.
By: /s/ Robert H. Turner
----------------------
Name: Robert H. Turner
--------------------
Title: Chief Exec. Officer
-------------------
8
<PAGE>
EXHIBIT 10.57
THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE. SUCH SECURITIES MAY
NOT BE SOLD, ASSIGNED OR OTHERWISE TRANSFERRED EXCEPT UPON SUCH REGISTRATION OR
UPON DELIVERY TO THE COMPANY OF AN OPINION OF COUNSEL IN FORM SATISFACTORY TO
THE CORPORATION THAT REGISTRATION IS NOT REQUIRED FOR SUCH SALE, ASSIGNMENT OR
TRANSFER.
THE TRANSFER OF THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF IS
SUBJECT TO COMPLIANCE WITH THE CONDITIONS SPECIFIED BELOW, AND NO TRANSFER OF
THIS WARRANT OR SUCH SECURITIES SHALL BE VALID UNTIL SUCH CONDITIONS HAVE BEEN
FULFILLED.
EQUALNET COMMUNICATIONS CORP.
COMMON STOCK PURCHASE WARRANT
Certificate No. 13 Issuance Date: July 23, 1998
EQUALNET COMMUNICAT10NS CORP. f/k/a EqualNet Holding Corp., a Texas
corporation (the "Company"), located at 1250 Wood Branch Park Drive, Houston,
Texas 77079, hereby certifies that, for value received, and in connection with
that certain Loan and Security Agreement of even date herewith (the "Loan
Agreement") between the Company and RFC Capital Corporation, a Delaware
corporation ("RFC"), and the Senior Promissory Note granted to RFC by the
Company (the "Promissory Note"), RFC, or subject to Section 11, its transferee
(the "Holder"), is entitled to purchase from the Company 210,000 shares (the
"Initial Warrant Shares") of the Company's common stock, $.01 par value (the
"Common Stock"), on terms specified below, which right to purchase the Warrant
Shares (as defined below) shall vest immediately after the Closing and, unless
specified otherwise herein, shall be exercisable at any time at the sole
discretion of the Holder hereof before the close of business on July 23, 2003
(the "Expiration Date"). All capitalized terms used herein and not otherwise
defined shall have the meaning ascribed thereto in the Loan Agreement.
The number and exercise price of such Warrant Shares shall be subject to
adjustment as provided below.
1. Terms of Warrant.
(a) Subject to adjustment as provided in Section 6 below, the exercise
price (the "Exercise Price") for the Initial Warrant Shares shall equal to the
arithmetic average of the closing price of the Company's stock on the Nasdaq
National Market for the three trading days immediately preceding the Closing
Date.
<PAGE>
(b) Upon the funding Of Tranche B, RFC shall relinquish such number of
shares under the Warrant in an amount equal to the difference between (a)
$1,750,000 and (b) the Loan Amount, with such difference divided by $100,000 and
then multiplied by 12,000.
(c) Upon the occurrence of a material monetary Event of Default the Company
shall immediately issue to RFC a warrant to purchase an additional 84,000 shares
(the "Additional Warrant Shares") under the same terms and conditions, and the
same Exercise Price, as provided in this Warrant.
The term "Warrant Shares" shall refer to the Initial Warrant Shares and the
Additional Warrant Shares, or either the Initial Warrant Shares or Additional
Warrant Shares, or any part thereof, as the case requires.
2. Exchange of Warrants. This Warrant, at any time prior to the exercise
hereof, upon presentation and surrender to the Company, may be exchanged, alone
or with other Warrants of like tenor registered in the name of Holder, for
another Warrant or several Warrants in the name of Holder, which shall each
provide for the purchase of the number of Warrant Shares as requested by Holder
thereof, so long as the aggregate number of Warrant Shares purchasable under the
new Warrant or Warrants equals the aggregate number of Warrant Shares
purchasable under the Warrant or Warrants surrendered.
3. Exercise of Warrant.
The Holder of this Warrant may, at any time on or after the Closing Date,
and on or before the Expiration Date, exercise this Warrant in whole at any time
or in part from time to time for the purchase of the Warrant Shares which such
Holder is then entitled to purchase hereunder at the Exercise Price. In order to
exercise this Warrant in whole or in part, Holder hereof shall deliver to the
Company (i) a written notice of such Holder's election to exercise this Warrant
(the "Exercise Notice"), which notice shall specify the number of the Warrant
Shares to be purchased, (ii) payment of the Exercise Price, and (iii) this
Warrant; provided, that, in case the issuance of such securities shall not have
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), the Company may require that such Holder furnish to the Company a written
statement that such Holder is purchasing such securities for such Holder's own
account for investment and not with a view to the distribution thereof and that
none of such securities are being or will be offered or sold in violation of the
provisions of the Securities Act. Upon receipt thereof, the Company shall, as
promptly as practicable and in any event within five days, execute or cause to
be executed and deliver to such Holder a certificate representing the aggregate
number of such Warrant Shares to be issued (unless the Exercise Notice specifies
a greater number of certificates, in which case such greater number of
certificates shall be delivered in the denominations so specified). The stock
certificate or certificates so delivered shall be registered in the name of such
Holder, or subject to Section 11, such other name as shall be designated in such
Exercise Notice.
No fractional shares are to be issued upon the exercise of this Warrant,
but the Company shall pay cash in respect of any fraction of a share which would
otherwise be issuable in an amount equal to the same fraction of the market
price per share of the Warrant Shares on the day of the exercise, as
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reasonably determined by the Company. If this Warrant shall have been exercised
only in part, the Company shall, at the time of delivery of said certificate or
certificates, make appropriate notation on this Warrant and return the same to
such Holder. The Company shall pay all expenses, taxes and other charges payable
in connection with the preparation, execution and delivery of stock certificates
under this Section, except that, in case such stock certificates shall be
registered in a name or names other than the name of the Holder of this Warrant,
all stock transfer taxes payable upon the execution and delivery of such stock
certificate or certificates shall be paid by the Company hereof at the time of
delivering the Exercise Notice mentioned above. Promptly on notice from the
Company, the Holder hereof shall deliver with such Exercise Notice evidence,
satisfactory to the Company, that such taxes have been paid.
4. Shelf Registration Under the Securities Act. As soon as practicable
after the Issuance Date of this Warrant (the "Effective Time"), but not later
than 90 days after the Effective Time, the Company shall file a registration
statement on Form S-1 for a continuous registered shelf offering under Rule 415
of the Securities Act (the "Shelf Registration Statement") covering the
registration of all of the Warrant Shares (the "Shelf Registered Securities").
The Company shall use its best efforts to cause the Shelf Registration Statement
and the registration of the Shelf Registered Securities thereunder to be
declared effective by the SEC as soon as practicable following the Effective
Time, but not later than 105 days after the Effective Time, and shall
continuously maintain the effectiveness of the Shelf Registration Statement at
all times following the Effective Time until the third anniversary after the
exercise of the last Warrant Shares (the "Last Exercise Date"). RFC's right to
offer and sell Shelf Registered Securities pursuant to the Shelf Registration
Statement shall be subject to the following limitations:
(a) Notice of Proposed Sale. RFC shall give the Company written notice of
its bona fide intention to sell Shelf Registered Securities pursuant to the
Shelf Registration Statement at least three (3) business days in advance of the
proposed date of sale, and the Company shall act as soon as practicable to make
any necessary filings with the Securities and Exchange Commission and regulatory
bodies as may be necessary to permit the sale of the Shelf Registered
Securities.
(b) Expenses. RFC shall bear all discounts, commissions or other amounts
payable to underwriters or brokers and fees and disbursements of counsel for RFC
in connection with sales of Shelf Registered Securities by RFC. All other
expenses incurred in connection with a sale of Shelf Registered Securities
pursuant to this Section 4, including, without limitation all federal and "blue
sky" registration and qualification fees, printers' and accounting fees, and
fees and disbursements of counsel for the Company shall be borne by the Company.
(c) Curative Measures. If for any reason the Shelf Registration Statement
ceases to be effective at any time prior to the third anniversary after the Last
Exercise Date, then the Company shall use its best efforts to cause the Shelf
Registration Statement (or a new shelf registration statement conforming to the
provisions of this Section 4) to be declared effective by the SEC and remain
effective until the third anniversary after the Last Exercise Date.
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5. Piggyback Registration Under the Securities Act.
If at any time, the Company proposes to register under the Securities Act,
any of its Common Stock (whether in a primary or secondary offering), or
securities convertible into or exercisable for Common Stock, on a form under the
Securities Act permitting registration of primary or secondary offerings, it
will each such time give written notice of its intention to do so to Holder, and
Holder shall have the right to participate in such registration as provided in
this Section 5. The Company will give Holder at least 30 days' prior written
notice of the filing of any such registration statement. There shall be no limit
on the number of times Holder shall have the right to participate in such
registrations or qualifications of Common Stock or other securities. If Holder
desires to participate in such registration or qualification of Common Stock or
other securities, Holder shall notify the Company, within 15 days after notice
from the Company of the proposed filing of any such registration statement, of
the number of Warrant Shares acquired upon exercise of this Warrant or which may
be acquired upon conversion of this Warrant (and which will be acquired in
accordance with the terms of this Warrant prior to the effectiveness of any
registration statement referred to herein) which Holder desires to have so
included. In the event the Company decides to proceed with such registration or
qualification, the Company will, at its sole expense, use its reasonable efforts
to cause all such Warrant Shares so requested by Holder to be registered or
qualified to permit the sale thereof; provided, however, that if, in connection
with the offering by the Company of Common Stock or other securities pursuant to
a registration under the Securities Act, the managing underwriter shall impose a
limitation on the number of secondary common shares of the Company which may be
included in any such registration statement because, in its judgment, the
inclusion of additional secondary shares would materially and adversely affect
such public offering, then any shares to be sold by the Company shall have
priority of registration and sale and in determining the number of secondary
shares to be registered and sold, the number of shares of Common Stock otherwise
required to be included in the underwritten public offering may be reduced,
provided, however, that after any such reduction the common shares to be
included in such offering shall be allocated among all holders having such
registration rights in proportion, as nearly as possible, to the respective
number of shares of Common Stock held by each shareholder to the number of
common shares then issued and outstanding. The Company shall bear all of the
expense of any registrations pursuant to this Section 5, except for the pro rata
portion of brokerage or underwriters' discounts or commissions relating to the
shares sold on behalf of the selling shareholders and Holder.
6. Share Dividends, Reclassification, Reorganization, Antidilution
Provisions, Etc. This Warrant is subject to the following further provisions:
(a) If, prior to the expiration of this Warrant by exercise or by its
terms, the Company shall issue any of its shares as a share dividend or
subdivide the number of outstanding shares into a greater number of shares,
then, in either of such cases, the exercise price shall be proportionately
reduced and the number of Warrant Shares at the time purchasable pursuant to
this Warrant shall be proportionately increased; and conversely, in the event
the Company shall contract the number of outstanding shares by combining the
shares into a smaller number of shares, then, in such case, the exercise price
shall be proportionately increased and the number of Warrant Shares at that time
purchasable pursuant to this Warrant shall be proportionately decreased. If the
Company shall, at any time during the life of this
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Warrant, declare a dividend payable in cash on its shares and shall at
substantially the same time offer to its shareholders a right to purchase new
shares from the proceeds of such dividend or for an amount substantially equal
to the dividend, all shares so issued shall, for the purpose of this Warrant be
deemed to have been issued as a share dividend. Any dividend paid or distributed
upon the shares in shares of any other class or securities convertible into
shares shall be treated as a dividend paid in shares to the extent that shares
are issuable upon the conversion thereof.
(b) If, prior to the expiration of this Warrant by exercise or by its
terms, the Company shall be recapitalized by reclassifying its outstanding
shares into shares with a different par value, or the Company or a successor
corporation shall consolidate or merge with or convey all or substantially all
of its or any successor corporation's property and assets to any other
corporation or corporations (any such corporation being included within the
meaning of the term "successor corporation" hereinbefore used in the event of
any consolidation or merger of any such corporation with, or the sale of all or
substantially all of the property of any such corporation to, another
corporation or corporations), the Holder shall thereafter have the right to
purchase the number of shares of the Company, or of any successor corporation,
to which the Holder would have been entitled had the Holder owned the number of
shares represented by this Warrant at the time of such recapitalization,
consolidation, merger or conveyance of all or substantially all of the property
or assets, upon the basis and on the terms and conditions and during the time
specified in this Warrant in lieu of the Warrant Shares of the Company
theretofore purchasable upon the exercise of this Warrant had such
recapitalization, consolidation, merger, or conveyance not taken place; and in
any such event, the rights of the Holder to an adjustment in the number of
Warrant Shares purchasable upon the exercise of this Warrant as herein provided
shall continue and be preserved in respect of any shares, securities or assets
which the holder of this Warrant becomes entitled to purchase.
(c) In case:
(i) the Company shall take a record of the holders of its shares for
the purpose of entitling them to receive a dividend payable otherwise
than in cash, or any other distribution in respect of the shares
(including cash), pursuant to, without limitation, any spin-off,
split-off or distribution of the Company's assets; or
(ii) the Company shall take a record of the holders of its shares for
the purpose of entitling them to subscribe for or purchase any shares
of any class or to receive any other rights; or
(iii) of any classification, reclassification or other reorganization
of the shares which the Company is authorized to issue, consolidation
or merger of the Company with or into another corporation, or
conveyance of all or substantially all of the assets of the Company;
or
(iv) of the voluntary or involuntary dissolution, liquidation or
winding up of the Company;
5
<PAGE>
then, and in any such case, the Company shall mail to the Holder, at least 20
days prior thereto, a notice stating the date or expected date on which a record
is to be taken for the purpose of such dividend, distribution or rights, or the
date on which such classification, reclassification, reorganization,
consolidation, merger, conveyance, dissolution, liquidation or winding up is to
take place, as the case may be. Such notice shall also specify the date or
expected date, if any is to be fixed, as of which holders of shares of record
shall be entitled to exchange their shares for securities or other property
deliverable upon such classification, reclassification, reorganization,
consolidation, merger, conveyance, dissolution, liquidation or winding up, as
the case may be.
(d) In case the Company at any time while this Warrant shall remain
unexpired and unexercised shall sell all or substantially all of its property or
dissolve, liquidate or wind up its affairs, the Holder may thereafter receive
upon exercise hereof in lieu of each share of the Company which it would have
been entitled to receive the same kind and amount of any securities or assets as
may be issuable, distributable or payable upon any such sale, dissolution,
liquidation or winding up with respect to each share of the Company.
7. Representations and warranties of the Company.
(a) The Company represents and Warrants that it has complied with all
Federal and state securities laws.
(b) The Company represents and warrants that the Shares to be issued upon
exercise of this Warrant will be validly issued, fully paid, and nonassessable.
8. Reservation of Shares Issuable on Exercise of Warrants. The Company will
at all times reserve and keep available out of its authorized shares, solely for
issuance upon the exercise of this Warrant and other similar Warrants, such
number of Warrant Shares and other shares as from time to time shall be issuable
upon the exercise of this Warrant and all other similar Warrants at the time
outstanding.
9. Loss, Theft, Destruction or Mutilation. Upon receipt by the Company of
evidence satisfactory to it (in the exercise of its reasonable discretion) of
the ownership of and the loss, theft, destruction or mutilation of this Warrant
and (in the case of loss, theft or destruction) of an indemnity satisfactory to
it (in the exercise of its reasonable discretion), and (in the case of
mutilation) upon surrender and cancellation thereof, the Company will execute
and deliver, in lieu thereof, a new Warrant of like tenor.
10. Warrant Holder Not a Shareholder. The Holder, as such, shall not be
entitled by reason of this Warrant to any rights whatsoever of a shareholder of
the Company.
11. Restrictions on Transfer. Compliance with the Securities Act. Each
Holder of the Warrant or Warrant Shares hereby acknowledges being informed that
the Warrant or Warrant Shares must be held by him indefinitely unless the
Warrant or Warrant Shares are registered for sale by such
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Holder under the Securities Act or an exemption from such registration is
available. Each certificate for Warrant Shares issued upon exercise of Warrants
shall bear a legend to the effect that such Warrant Shares may not be
transferred except upon compliance with the provisions of the Securities Act.
This Warrant is transferable only on the books of the Company by the Holder in
person or by attorney, on surrender of this Warrant, properly endorsed. The
Company agrees to provide the Holder hereof with any evidence necessary to
demonstrate that any such transfer will not be a violation of the Securities
Act.
12. Recognition of Holder. Prior to due presentment for registration of
transfer of this Warrant, the Company may treat the Holder as the person
exclusively entitled to receive notices and otherwise to exercise rights
hereunder.
13. Taxes and Expenses. Except as otherwise provided herein, the Company
will pay any applicable transfer taxes and other reasonable transfer expenses
incurred with respect to the issue of this Warrant or the Warrant Shares
issuable upon exercise thereof.
14. Mailing of Notices, Etc. All notices and other communications from the
Company to the Holder of this Warrant shall be mailed by first-class, registered
mail, postage prepaid, to the address furnished to the Company in writing by the
Holder of this Warrant.
15. Applicable Law. This Warrant shall be governed by, and construed in
accordance with, the laws of the State of Delaware.
Dated: July 23, 1998 EQUALNET COMMUNICATIONS CORP.
Attest: By: /s/ LANCE HACK
Name: Lance Hack
Its: Vice President and Treasurer
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EXHIBIT 10.58
No. 19
EQUALNET COMMUNICATIONS CORP.
STOCK PURCHASE WARRANT
This Stock Purchase Warrant ("Warrant") is issued as of the 19th day of
August, 1998, by Equalnet Communications Corp., a Texas corporation
("Equalnet"), to Lance A. Hack ("Hack") pursuant to that certain Severance
Agreement dated as of August 19, 1998 between Equalnet and Hack.
W I T N E S S E T H :
- - - - - - - - - -
(a) Issuance of Warrant; Term.
(i) For and in consideration of the sum of $10.00 and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Equalnet hereby grants to Hack, subject to the provisions
hereinafter set forth, the right to purchase up to 22,500 shares of Equalnet
common stock, par value $.01 per share ("Common Stock)". The shares of Common
Stock issuable upon exercise of this Warrant are hereinafter referred to as the
"Shares".
(ii) This Warrant shall be exercisable at any time on or before the
third anniversary of the date hereof.
(b) Exercise Price. The exercise price per share for which all or any of
the Shares may be purchased pursuant to the terms of this Warrant shall be
$1.863 (hereinafter referred to as the "Exercise Price").
(c) Exercise.
(i) This Warrant may be exercised by Hack for the purchase of any of
the Shares for which this Warrant is then exercisable pursuant to Section 1(b)
hereof in whole or in part, upon delivery of written notice of intent to
Equalnet at the following address: 1250 Wood Branch Park Drive, Houston, Texas
77079 or such other address as Equalnet shall designate in written notice to
Hack, together with this Warrant and payment (in the manner described in Section
3(b) below) for the aggregate Exercise Price of the Shares so purchased. Upon
exercise of this Warrant as aforesaid, Equalnet shall as promptly as practicable
execute and deliver to Hack a certificate or certificates for the total number
of whole Shares for which this Warrant is being exercised in such names and
denominations as are requested by Hack. If this Warrant shall be exercised with
respect to less than all of the Shares, Hack shall be entitled to receive a new
Warrant covering the number of Shares in respect of which this Warrant shall not
have been exercised, which new Warrant shall in all other respects be identical
to this Warrant.
(ii) Payment for the Shares to be purchased upon exercise of this
Warrant may be made by the delivery of a certified or cashier's check payable to
Equalnet for the aggregate Exercise Price of the Shares to be purchased.
<PAGE>
(d) Covenants and Conditions. The above provisions are subject to the
following:
(i) Neither this Warrant nor the Shares have been registered under
the Securities Act of 1933, as amended (the "Act"), or any state securities laws
("Blue Sky Laws"). This Warrant and the Shares have been acquired for
investment purposes and not with a view to distribution or resale and the Shares
may not be made subject to a security interest, pledged, hypothecated, sold or
otherwise transferred without an effective registration statement therefor under
the Act and such applicable Blue Sky Laws or an opinion of counsel (which
opinion and counsel rendering same shall be reasonably acceptable to Equalnet)
that registration is not required under the Act and under any applicable Blue
Sky Laws. The certificates representing the Shares shall bear substantially the
following legend:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR ANY APPLICABLE
STATE SECURITIES LAWS, BUT HAVE BEEN ACQUIRED FOR THE PRIVATE INVESTMENT OF
THE HOLDER HEREOF AND MAY NOT BE OFFERED, SOLD OR TRANSFERRED UNTIL A
REGISTRATION STATEMENT UNDER THE ACT OR SUCH APPLICABLE STATE SECURITIES
LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR IN THE OPINION OF
COUNSEL REGISTRATION UNDER THE ACT OR SUCH APPLICABLE STATE SECURITIES
LAWS IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED OFFER, SALE OR
TRANSFER.
Other legends as required by applicable federal and state laws may be placed on
such certificates. Hack and Equalnet agree to execute such documents and
instruments as counsel for Equalnet reasonably deems necessary to effect
compliance of the issuance of this Warrant and any Shares issued upon exercise
hereof with applicable federal and state securities laws.
(ii) Equalnet covenants and agrees that all Shares which may be
issued upon exercise of this Warrant will, upon issuance and payment therefor,
be legally and validly issued and outstanding, fully paid and nonassessable.
Equalnet shall at all times, commencing on the date this Warrant shall become
exercisable, reserve and keep available for issuance upon the exercise of this
Warrant such number of authorized but unissued shares of Common Stock as will be
sufficient to permit the exercise in full of the Warrant.
(iii) This Warrant shall not be subject to voluntary or involuntary
alienation, assignment or transfer.
(e) Warrant Holder not Stockholder. This Warrant does not confer upon
Hack any right whatsoever as a stockholder of Equalnet.
(f) Anti-Dilution. In case at any time or from time to time after the
date of this Warrant, all of the holders of Common Stock of Equalnet shall have
received or shall have become legally entitled to receive:
(A) other or additional stock or other securities or property
(other than cash) by way of a dividend or other distribution;; or
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(B) other or additional (or less) stock or other securities or
property (including cash) by way of stock-split, spin-off, split-up,
reclassification, combination of shares or similar corporate rearrangement (but
not including any cash dividends),
then and in each such case Hack, upon the exercise hereof as provided in
Section 3, shall be entitled to receive, in lieu of (or in addition to, as the
case may be) the Shares theretofore receivable upon the exercise of this
Warrant, the amount of stock and other securities and property (including cash
in the case referred to in clause (ii) above) which Hack would have held on the
date of such exercise if on the date of such conversion, dividend, distribution,
corporate rearrangement or such other event, as described in clause (ii) above,
Hack had been the holder of record of the number of Shares receivable upon
exercise of this Warrant and had thereafter, during the period from the date
thereof to and including the date of such exercise, obtained such Shares and all
other or additional (or less) stock and other securities and property (including
cash in the case referred to in clause (ii) above) receivable by Hack as
aforesaid during such period.
(g) Notices. All notices, requests, offers, elections and other
communications under this Warrant shall be in writing and shall be deemed to
have been given at the time when deposited in the United States mail at a
general or branch post office, postage prepaid, registered or certified mail
(return receipt requested), and addressed to the respective parties at the
addresses stated below or to such other changed addresses as the parties may
have fixed by notice; provided, however, that any notice of change of address
shall be effective only upon receipt. Notices addressed as follows:
If to Equalnet: Equalnet Communications Corp.
1250 Wood Branch Park Drive
Houston, Texas 77079
Attention: General Counsel
If to Hack: Lance A. Hack
P. O. Box 980672
Houston, Texas 77098
IN WITNESS WHEREOF, Equalnet has caused this Stock Purchase Warrant to be
executed and delivered by its duly authorized officer as of the date first above
written.
EQUALNET COMMUNICATIONS CORP.
By:
---------------------------------
Name: Mitchell H. Bodian
Title: President & C.E.O.
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EXHIBIT 10.59
THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE. SUCH SECURITIES MAY
NOT BE SOLD, ASSIGNED OR OTHERWISE TRANSFERRED EXCEPT UPON SUCH REGISTRATION OR
UPON DELIVERY TO THE COMPANY OF AN OPINION OF COUNSEL IN FORM SATISFACTORY TO
THE CORPORATION THAT REGISTRATION IS NOT REQUIRED FOR SUCH SALE, ASSIGNMENT OR
TRANSFER.
THE TRANSFER OF THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF IS
SUBJECT TO COMPLIANCE WITH THE CONDITIONS SPECIFIED BELOW, AND NO TRANSFER OF
THIS WARRANT OR SUCH SECURITIES SHALL BE VALID UNTIL SUCH CONDITIONS HAVE BEEN
FULFILLED.
EQUALNET COMMUNICATIONS CORP.
COMMON STOCK PURCHASE WARRANT
Certificate No. 16 Issuance Date: September 10, 1998
EQUALNET COMMUNICATIONS CORP. f/k/a EqualNet Holding Corp., a Texas
corporation (the "Company"), located at 1250 Wood Branch Park Drive, Houston,
Texas 77079, hereby certifies that, for value received, and in connection with
that certain Loan and Security Agreement of even date herewith (the "Loan
Agreement") between the Company and RFC Capital Corporation, a Delaware
corporation ("RFC"), and the Senior Promissory Note granted to RFC by the
Company (the "Promissory Note"), RFC, or subject to Section 11, its transferee
(the "Holder"), is entitled to purchase from the Company 294,000 shares (the
"Warrant Shares") of the Company's common stock, $.01 par value (the "Common
Stock"), on terms specified below, which right to purchase the Warrant Shares
(as defined below) shall vest immediately after the Closing and, unless
specified otherwise herein, shall be exercisable at any time at the sole
discretion of the Holder hereof before the close of business on July 23, 2003
(the "Expiration Date"). All capitalized terms used herein and not otherwise
defined shall have the meaning ascribed thereto in the Loan Agreement.
The number and exercise price of such Warrant Shares shall be subject to
adjustment as provided below.
1. Terms of Warrant. Subject to adjustment as provided in Section 6
below, the exercise price (the "Exercise Price") for the Warrant Shares shall
equal to the arithmetic average of the closing price of the Company's stock on
the Nasdaq National Market for the three trading days immediately preceding the
consummation of the loan represented as Tranche B.
2. Exchange of Warrants. This Warrant, at any time prior to the exercise
hereof, upon presentation and surrender to the Company, may be exchanged, alone
or with the Warrants of like tenor registered in the name of Holder, for
another Warrant or several Warrants in the name of Holder, which shall each
provide for the purchase of the number of Warrant Shares as requested by Holder
thereof, so long as the aggregate number of Warrant Shares purchasable under the
new Warrant or Warrants equals the aggregate number of Warrant Shares
purchasable under the Warrant or Warrants surrendered.
3. Exercise of Warrant.
The Holder of this Warrant may, at any time on or after the Closing Date,
and on or before the Expiration Date, exercise this Warrant in whole at any
time or in part from time to time for the purchase of the Warrant Shares which
such Holder is then entitled to purchase hereunder at the Exercise Price. In
order to
<PAGE>
exercise this Warrant in whole or in part, Holder hereof shall deliver to the
Company (i) a written notice of such Holder's election to exercise this Warrant
(the "Exercise Notice"), which notice shall specify the number of the Warrant
Shares to be purchased, (ii) payment of the Exercise Price, and (iii) this
Warrant; provided, that, in case the issuance of such securities shall not have
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), the Company may require that such Holder furnish to the Company a
written statement that such Holder is purchasing such securities for such
Holder's own account for investment and not with a view to the distribution
thereof and that none of such securities are being or will be offered or sold in
violation of the provisions of the Securities Act. Upon receipt thereof, the
Company shall, as promptly as practicable and in any event within five days,
execute or cause to be executed and deliver to such Holder a certificate
representing the aggregate number of such Warrant Shares to be issued (unless
the Exercise Notice specifies a greater number of certificates, in which case
such greater number of certificates shall be delivered in the denominations so
specified). The stock certificate or certificates so delivered shall be
registered in the name of such Holder, or subject to Section 11, such other name
as shall be designated in such Exercise Notice.
No fractional shares are to be issued upon the exercise of this Warrant,
but the Company shall pay cash in respect of any fraction of a share which would
otherwise be issuable in an amount equal to the same fraction of the market
price per share of the Warrant Shares on the day of the exercise, as reasonably
determined by the Company. If this Warrant shall have been exercised only in
part, the Company shall, at the time of delivery of said certificate or
certificates, make appropriate notation on this Warrant and return the same to
such Holder. The Company shall pay all expenses, taxes and other charges payable
in connection with the preparation, execution and delivery of stock certificates
under this Section, except that, in case such stock certificates shall be
registered in a name or names other than the name of the Holder of this Warrant,
all stock transfer taxes payable upon the execution and delivery of such stock
certificate or certificates shall be paid by the Company hereof at the time of
delivering the Exercise Notice mentioned above. Promptly on notice from the
Company, the Holder hereof shall deliver with such Exercise Notice evidence,
satisfactory to the Company, that such taxes have been paid.
4. Shelf Registration Under the Securities Act. As soon as practicable
after the Issuance Date of this Warrant (the "Effective Time"), but not later
than 90 days after the Effective Time, the Company shall file a registration
statement on Form S-1 for a continuous registered shelf offering under Rule 415
of the Securities Act (the "Shelf Registration Statement") covering the
registration of all of the Warrant Shares (the "Shelf Registered Securities").
The Company shall use its best efforts to cause the Shelf Registration Statement
and the registration of the Shelf Registered Securities thereunder to be
declared effective by the SEC as soon as practicable following the Effective
Time, but not later than 105 days after the Effective Time, and shall
continuously maintain the effectiveness of the Shelf Registration Statement at
all times following the Effective Time until the third anniversary after the
exercise of the last Warrant Shares (the "Last Exercise Date"). RFC's right to
offer and sell Shelf Registered Securities pursuant to the Shelf Registration
Statement shall be subject to the following limitations:
(a) Notice of Proposed Sale. RFC shall give the Company written notice
of its bona fide intention to sell Shelf Registered Securities pursuant to the
Shelf Registration Statement at least three (3) business days in advance of the
proposed date of sale, and the Company shall act as soon as practicable to make
any necessary filings with the Securities and Exchange Commission and regulatory
bodies as may be necessary to permit the sale of the Shelf Registered
Securities.
(b) Expenses. RFC shall bear all discounts, commissions or other
amounts payable to underwriters or brokers and fees and disbursements of counsel
for RFC in connection with sales of Shelf Registered Securities by RFC. All
other expenses incurred in connection with a sale of Shelf Registered
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Securities pursuant to this Section 4, including without limitation all federal
and "blue sky" registration and qualification fees, printers' and accounting
fees, and fees and disbursements of counsel for the Company shall be borne by
the Company.
(c) Curative Measures. If for any reason the Shelf Registration
Statement ceases to be effective at any time prior to the third anniversary
after the Last Exercise Date, then the Company shall use its best efforts to
cause the Shelf Registration Statement (or a new shelf registration statement
conforming to the provisions of this Section 4) to be declared effective by the
SEC and remain effective until the third anniversary after the Last Exercise
Date.
5. Piggyback Registration Under the Securities Act.
If, at any time, the Company proposes to register under the Securities Act,
any of its Common Stock (whether in a primary or secondary offering), or
securities convertible into or exercisable for Common Stock, on a form under the
Securities Act permitting registration of primary or secondary offerings, it
will each such time give written notice of its intention to do so to Holder, and
Holder shall have the right to participate in such registration as provided in
this Section 5. The Company will give Holder at least 30 days' prior written
notice of the filing of any such registration statement. There shall be no limit
on the number of times Holder shall have the right to participate in such
registrations or qualifications of Common Stock or other securities. If Holder
desires to participate in such registration or qualification of Common Stock or
other securities, Holder shall notify the Company, within 15 days after notice
from the Company of the proposed filing of any such registration statement, of
the number of Warrant Shares acquired upon exercise of this Warrant or which may
be acquired upon conversion of this Warrant (and which will be acquired in
accordance with the terms of this Warrant prior to the effectiveness of any
registration statement referred to herein) which Holder desires to have so
included. In the event the Company decides to proceed with such registration or
qualification, the Company will, at its sole expense, use its reasonable
efforts to cause all such Warrant Shares so requested by Holder to be registered
or qualified to permit the sale thereof; provided, however, that if, in
connection with the offering by the Company of Common Stock or other securities
pursuant to a registration under the Securities Act, the managing underwriter
shall impose a limitation on the number of secondary common shares of the
Company which may be included in any such registration statement because, in its
judgment, the inclusion of additional secondary shares would materially and
adversely affect such public offering, then any shares to be sold by the Company
shall have priority of registration and sale and in determining the number of
secondary shares to be registered and sold, the number of shares of Common Stock
otherwise required to be included in the underwritten public offering may be
reduced, provided, however, that after any such reduction the common shares to
be included in such offering shall be allocated among all holders having such
registration rights in proportion, as nearly as possible, to the respective
number of shares of Common Stock held by each shareholder to the number of
common shares then issued and outstanding. The Company shall bear all of the
expense of any registrations pursuant to this Section 5, except for the pro rata
portion of brokerage or underwriters' discounts or commissions relating to the
shares sold on behalf of the selling shareholders and Holder.
6. Share Dividends, Reclassification, Reorganization, Antidilution
Provisions, Etc. This Warrant is subject to the following further provisions:
(a) If, prior to the expiration of this Warrant by exercise or by its
terms, the Company shall issue any of its shares as a share dividend or
subdivide the number of outstanding shares into a greater number of shares,
then, in either of such cases, the exercise price shall be proportionately
reduced and the number of Warrant Shares at the time purchasable pursuant to
this Warrant shall be proportionately increased; and conversely, in the event
the Company shall contract the number of outstanding shares by combining the
shares
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into a smaller number of shares, then, in such case, the exercise price shall be
proportionately increased and the number of Warrant Shares at that time
purchasable pursuant to this Warrant shall be proportionately decreased. If the
Company shall, at any time during the life of this Warrant, declare a dividend
payable in cash on its shares and shall at substantially the same time offer to
its shareholders a right to purchase new shares from the proceeds of such
dividend or for an amount substantially equal to the dividend, all shares so
issued shall, for the purpose of this Warrant, be deemed to have been issued as
a share dividend. Any dividend paid or distributed upon the shares in shares
of any other class or securities convertible into shares shall be treated as a
dividend paid in shares to the extent that shares are issuable upon the
conversion thereof.
(b) If, prior to the expiration of this Warrant by exercise or by its
terms, the Company shall be recapitalized by reclassifying its outstanding
shares into shares with a different par value, or the Company or a successor
corporation shall consolidate or merge with or convey all or substantially all
of its or any successor corporation's property and assets to any other
corporation or corporations (any such corporation being included within the
meaning of the term "successor corporation" hereinbefore used in the event of
any consolidation or merger of any such corporation with, or the sale of all or
substantially all of the property of any such corporation to, another
corporation or corporations), the Holder shall thereafter have the right to
purchase the number of shares of the Company, or of any successor corporation,
to which the Holder would have been entitled had the Holder owned the number of
shares represented by this Warrant at the time of such recapitalization,
consolidation, merger or conveyance of all or substantially all of the property
or assets, upon the basis and on the terms and conditions and during the time
specified in this Warrant in lieu of the Warrant Shares of the Company
theretofore purchasable upon the exercise of this Warrant had such
recapitalization, consolidation, merger, or conveyance not taken place; and in
any such event, the rights of the Holder to an adjustment in the number of
Warrant Shares purchasable upon the exercise of this Warrant as herein provided
shall continue and be preserved in respect of any shares, securities or assets
which the holder of this Warrant becomes entitled to purchase.
(c) In case:
(i) the Company shall take a record of the holders of its shares for
the purpose of entitling them to receive a dividend payable otherwise
than in cash, or any other distribution in respect of the shares
(including cash), pursuant to, without limitation, any spin-off,
split-off or distribution of the Company's assets; or
(ii) the Company shall take a record of the holders of its shares for
the purpose of entitling them to subscribe for or purchase any shares
of any class or to receive any other rights; or
(iii) of any classification, reclassification or other reorganization
of the shares which the Company is authorized to issue, consolidation
or merger of the Company with or into another corporation, or
conveyance of all or substantially all of the assets of the Company;
or
(iv) of the voluntary or involuntary dissolution, liquidation or
winding up of the Company;
then, and in any such case, the Company shall mail to the Holder, at least 20
days prior thereto, a notice stating the date of expected date on which a record
is to be taken for the purpose of such dividend, distribution or rights, or the
date on which such classification, reclassification, reorganization,
consolidation, merger, conveyance, dissolution, liquidation or winding up is to
take place, as the case may be. Such notice shall also specify the date or
expected date, if any is to be fixed, as of which holders of shares of record
shall be entitled to exchange
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their shares for securities or other property deliverable upon such
classification, reclassification, reorganization, consolidation, merger,
conveyance, dissolution, liquidation or winding up, as the case may be.
(d) In case the Company at any time while this Warrant shall remain
unexpired and unexercised shall sell all or substantially all of its property or
dissolve, liquidate or wind up its affairs, the Holder may thereafter receive
upon exercise hereof in lieu of each share of the Company which it would have
been entitled to receive the same kind and amount of any securities or assets as
may be issuable, distributable or payable upon any such sale, dissolution,
liquidation or winding up with respect to each share of the Company.
7. Representations and Warranties of the Company.
(a) The Company represents and warrants that it has complied with all
Federal and state securities laws.
(b) The Company represents and warrants that the Shares to be issued
upon exercise of this Warrant will be validly issued, fully paid, and
nonassessable.
8. Reservation of Shares Issuable on Exercise of Warrants. The Company
will at all times reserve and keep available out of its authorized shares,
solely of issuance upon the exercise of this Warrant and other similar Warrants,
such number of Warrant Shares and other shares as from time to time shall be
issuable upon the exercise of this Warrant and all other similar Warrants at the
time outstanding.
9. Loss. Theft, Destruction or Mutilation. Upon receipt by the Company
of evidence satisfactory to it (in the exercise of its reasonable discretion) of
the ownership of and the loss, theft, destruction or mutilation of this Warrant
and (in the case of loss, theft or destruction) of an indemnity satisfactory to
it (in the exercise of its reasonable discretion), and (in the case of
mutilation) upon surrender and cancellation thereof the Company will execute and
deliver, in lieu thereof, a new Warrant of like tenor.
10. Warrant Holder Not a Shareholder. The Holder, as such, shall not be
entitled by reason of this Warrant to any rights whatsoever of a shareholder of
the Company.
11. Restrictions on Transfer. Compliance with the Securities Act. Each
Holder of the Warrant or Warrant Shares hereby acknowledges being informed that
the Warrant or Warrant Shares must be held by him indefinitely unless the
Warrant or Warrant Shares are registered for sale by such Holder under the
Securities Act or an exemption from such registration is available. Each
certificate for Warrant Shares issued upon exercise of Warrants shall bear a
legend to the effect that such Warrant Shares may not be transferred except upon
compliance with the provisions of the Securities Act. This Warrant is
transferable only on the books of the Company by the Holder in person or by
attorney, on surrender of this Warrant, properly endorsed. The Company agrees to
provide the Holder hereof with any evidence necessary to demonstrate that any
such transfer will not be a violation of the Securities Act.
12. Recognition of Holder. Prior to due presentment for registration of
transfer of this Warrant, the Company may treat the Holder as the person
exclusively entitled to receive notices and otherwise to exercise rights
hereunder.
13. Taxes and Expenses. Except as otherwise provided herein, the Company
will pay any applicable transfer taxes and other reasonable transfer expenses
incurred with respect to the issue of this Warrant or the Warrant Shares
issuable upon exercise thereof.
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14. Mailing of Notices, Etc. All notices and other communications from
the Company to the Holder of this Warrant shall be mailed by first-class,
registered mail, postage prepaid, to the address furnished to the Company in
writing by the Holder of this Warrant.
15. Applicable Law. This Warrant shall be governed by, and construed in
accordance with, the laws of the State of Delaware.
Dated: September 10, 1998 EQUALNET COMMUNICATIONS CORP.
ATTEST: /s/ Signature Appears Here By: /s/ Mitchell Bodian
____________________________ __________________________
Name: Mitchell Bodian
Its: Chief Executive Officer
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EXHIBIT 10.60
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement dated November 12, 1996 (this
"Registration Agreement"), is between EqualNet Holding Corp., a Texas
corporation ("EqualNet"), and Creative Communications International, Inc., a
Texas corporation ("Creative").
WITNESSETH:
WHEREAS, under an Asset Purchase Agreement by and between EqualNet and
Creative dated November , 1996 (the "Asset Purchase Agreement"), EqualNet is
this date issuing to Creative: (i) 150,000 shares (the "Shares") of the common
stock of EqualNet, $.01 par value per share (the "Common Stock"); and (ii) a
Warrant (the "Warrant") for the purchase of 100,000 shares of the Common Stock
(subject to adjustment as provided in the Warrant); and
WHEREAS, the Asset Purchase Agreement requires that this Registration
Agreement be entered into between EqualNet and Creative upon the issuance to
Creative of the Shares and the Warrant to purchase the Common Stock.
NOW, THEREFORE, EqualNet and Creative (collectively, the "Parties") agree
that:
ARTICLE I
DEFINITIONS
1.1 Definitions. In this Registration Agreement:
"Affiliate" when used to indicate a relationship with any Person, means:
(i) any corporation or organization of which such Person is an officer, director
or partner or is directly or indirectly the beneficial owner of at least 10% of
the outstanding shares of any class of equity securities or financial interest
therein; (ii) any trust or other estate in which such Person has a beneficial
interest or as to which such Person serves as trustee or in any similar
fiduciary capacity; (iii) the mother, father, brother, sister, child or spouse
of such Person, or of such Person's spouse; (iv) any Person that directly, or
indirectly through one or more intermediaries, controls, or is controlled by, or
is under common control with, or is acting as agent on behalf of, or as an
officer or director of, such Person; (v) any Person who is the payee of a
promissory note to such Person or (vi) any Person who is a creditor of such
Person on the date hereof As used in the definition of Affiliate, the term
"control" (including the terms "controlling," "controlled by" or "under common
control with") means the possession, direct or indirect, of the power to direct,
cause the direction of or influence the management and policies of a Person,
whether through the ownership of voting securities, by contract, through the
holding of a position as a director or officer of such Person, or otherwise.
"Exchange Act" means the United States Securities Exchange Act of 1934, as
amended, and the rules and regulations of the SEC promulgated under such Act.
<PAGE>
"Registrable Shares" means (i) any of the Shares; (ii) any shares of Common
Stock issued to Creative upon any exercise or exercises of the Warrant, and (ii)
any shares of Common Stock issued to Creative in connection with any stock
dividend on, or any stock split or reclassification of, shares of Common Stock.
"Person" means an individual, corporation, limited liability EqualNet,
partnership, limited partnership, joint venture, joint stock EqualNet, firm,
company, syndicate, trust, estate, association, governmental authority,
business, organization or any other incorporated or unincorporated entity.
"SEC" means the United States Securities and Exchange Commission or any
successor agency.
"Securities Act" means the United States Securities Act of 1933, as
amended, and the rules and regulations of the SEC promulgated under such Act.
ARTICLE II
REGISTRATION RIGHTS
2.1. Shelf Registration. Prior to February 15, 1996, EqualNet shall cause
to be filed at its own expense as provided in Section 4.1, pursuant to Rule 415
under the Securities Act a shelf registration statement (the "Shelf Registration
Statement") registering the resale of the Registrable Shares. EqualNet shall use
commercially reasonable efforts to have such Shelf Registration Statement
declared effective as soon as reasonably practicable after such filing, but in
no event shall such Shelf Registration Statement be declared effective later
than April 15, 1996. EqualNet shall also use commercially reasonable efforts to
keep such Shelf Registration Statement continuously effective (and to take any
and all other actions necessary in order to maintain the registration of the
resale of the Registrable Shares including, without limitation, the filing of
any additional registration statements that may be required) for three years
following the date on which such Shelf Registration Statement becomes effective
under the Securities Act; provided, however, that EqualNet may voluntarily
suspend the effectiveness of such Shelf Registration Statement for a limited
time, which in no event shall be longer than 90 days, if EqualNet has been
advised by counsel that the offering of the Registrable Shares pursuant to the
Shelf Registration Statement would adversely affect a proposed financing,
reorganization, recapitalization, merger, consolidation or similar transaction
involving EqualNet, in which case EqualNet shall be required to keep such Shelf
Registration Statement effective for an additional period of time beyond three
years following the date of the effectiveness thereof equal to the number of
days the effectiveness thereof is suspended pursuant to this Section 2.1. Upon
the occurrence of any event that would cause the Shelf Registration Statement
(i) to contain an untrue statement of material fact or to omit to state a
material fact necessary in order to make the statements made, in light of the
circumstances in which they were made, not misleading or (ii) not to be
effective and usable for Registrable Shares during the period that such Shelf
Registration Statement is required to be effective and usable, EqualNet shall
promptly file an
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amendment to the Shelf Registration Statement, in the case of clause (i),
correcting any such misstatement or omission, and in the case of either clause
(i) or (ii), use commercially reasonable efforts to cause such amendment to be
declared effective and such Shelf Registration Statement to become usable as
soon as practicable thereafter.
2.2. "Piggyback" Rights. If at any time or from time to time, prior to the
effective date of the Shelf Registration Statement EqualNet proposes to file
with the SEC a registration statement (whether on Form S-1, S-2, or S-3, or any
equivalent form then in effect) for the registration under the Securities Act of
any shares of Common Stock for sale to the public by EqualNet or on behalf of
one or more shareholders of EqualNet (excluding any sale of securities
convertible into or exercisable for Common Stock, and any shares of Common Stock
issuable by EqualNet upon the exercise of employee stock options, or to any
employee stock ownership plan, or in connection with the merger or consolidation
of EqualNet with one or more other corporations if EqualNet is the surviving
corporation), EqualNet shall give Creative at least 15 days prior written notice
of the proposed filing. On the written request of Creative received by EqualNet
within 5 days after the date of EqualNet's delivery to Creative of the notice of
intended registration, EqualNet shall, under the terms and subject to the
conditions of this Article II, and at its own expense as provided in
Section 4.1, include in the coverage of such registration statement and qualify
for sale under the blue sky or securities laws of the various states, the number
of Registrable Shares (herein called the "Specified Shares") which Creative
requests to be registered.
If the managing underwriter for EqualNet indicates its reasonable belief
that including all or part of the Specified Shares in the coverage of such
registration statement will materially and adversely affect the sale of shares
of Common Stock proposed to be sold by EqualNet (which statement of the managing
underwriter shall also state the maximum number of shares, if any, which can be
sold by Creative requesting registration under this Section 2.2 without
materially adversely affecting the sale of the shares proposed to be sold by
EqualNet), then the number of Specified Shares which Creative shall have the
right to include in such registration statement shall be reduced to the maximum
number of shares specified by the managing underwriter. In such a case, priority
shall be afforded to shares of Common Stock covered by a registration statement
filed in response to the exercise of a demand registration right by another
holder of Common Stock. As to all other proposed selling shareholders of Common
Stock, including Creative requesting to include Registrable Shares in the
inclusion of such a registration statement, any such reduction in the number of
shares of Common Stock proposed to be sold by the selling shareholders shall be
effected on a pro rata basis in accordance with the relationship which the
number of shares of Common Stock proposed to be sold by each selling shareholder
bears to the number of shares of Common Stock proposed to be sold by all selling
shareholders.
EqualNet shall have the right to select any underwriters, including the
managing underwriter, of any public offering of shares of Common Stock subject
to this Section 2.2. Nothing in this Section 2.2 shall create any liability on
the part of EqualNet to Creative if EqualNet for any reason decides not to file
a registration statement.
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2.3. Registration Conditions. Notwithstanding any other provision of this
Registration Agreement, EqualNet shall not be required to effect a registration
of any Common Stock under this Article II, or file any post-effective amendment
to such a registration:
(a) unless Creative agrees to (x) sell and distribute a portion or all
of its Registrable Shares in accordance with the plan or plans of
distribution adopted by and through underwriters, if any, acting for
EqualNet, and (y) bear a pro rata share of underwriter's discounts and
commissions;
(b) if a registration requested under Section 2.1, or any post-
effective amendment to such a registration, requires, under applicable
statutes and rules, a special audit (other than a normal fiscal year-end
audit) of the financial statements of EqualNet, unless Creative agrees to
pay its proportionate share (determined by the number of shares to be sold
by Creative in the offering in proportion to the total number of shares to
be sold by all other participants in such offering) of the reasonable fees
and expenses of accountants incurred in connection with the special audit
and which would otherwise not be incurred;
(c) if, in the case of a request for registration under Section 2.1 or
2.2, in the opinion of counsel for EqualNet and counsel for Creative
requesting registration (x) the Registrable Shares for which registration
has been requested may be disposed of within a comparable time frame
without registration under the Securities Act and (y) upon such disposition
all legends on certificates representing such shares which restrict their
transfer under the Securities Act and applicable state securities laws may
be removed;
(d) if, in the case of a request for registration under Section 2.1,
(x) the effectiveness of any registration statement covering Common Stock
regarding which Creative could have exercised registration rights under
Section 2.2 of this Registration Agreement was suspended under the
Securities Act within six months following the date of such request, or (y)
EqualNet has given notice under Section 2.2 of its intention to file a
registration statement under the Securities Act and has not completed or
abandoned the proposed offering; and
(e) unless EqualNet has received from Creative all information
EqualNet has reasonably requested concerning Creative and its method of
distribution of its Registrable Shares, so as to enable EqualNet to include
in the registration statement all material facts required to be disclosed
in it.
2.4. Covenants and Procedures. If EqualNet becomes obligated under this
Article II to effect a registration of Registrable Shares on behalf of Creative
(hereinafter called a "Selling Shareholder" then:
(a) EqualNet, at its expense as provided in Section 4.1, shall
prepare and file with the SEC a registration statement covering such
Registrable Shares and shall cause the registration statement to become
effective. EqualNet will also file such post-effective
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amendments to the registration statement to be filed pursuant to
Section 2.1 (and use reasonable efforts to cause them to become effective)
and such supplements as are necessary so that current prospectuses are at
all times available for a period of at least 120 days after the effective
date of the registration statement or for such longer period, not to exceed
180 days, as may be required under the plan or plans of distribution set
forth in the registration statement. Each Selling Shareholder shall
promptly provide EqualNet with such information with respect to such
Selling Shareholder's Registrable Shares to be so registered and, if
applicable, the proposed terms of their offering, as is required for the
registration. If the Registrable Shares to be covered by the registration
statement are not to be sold to or through underwriters acting for
EqualNet, EqualNet shall:
(i) deliver to each Selling Shareholder, as promptly as
practicable, as many copies of preliminary prospectuses as each
Selling Shareholder may reasonably request (in which case each Selling
Shareholder shall keep a written record of the distribution of the
preliminary prospectuses and shall refrain from delivery of the
preliminary prospectuses in any manner or under any circumstances
which would violate the Securities Act or the securities laws of any
other jurisdiction, including the various states of the United
States);
(ii) deliver to each Selling Shareholder, as soon as practicable
after the effective date of the registration statement, (and from time
to time thereafter during such 120-day or longer period), as many
copies of the relevant prospectuses as such Selling Shareholder may
reasonably request; and
(iii) in case of the happening, after the effective date of the
registration statement and prior to completion of the offering covered
by such registration statement, of any event or occurrence which would
be set forth in an amendment of or supplement to the prospectus in
order to make any statements in it not misleading, give each Selling
Shareholder written notice of the event or occurrence and prepare and
furnish to each Selling Shareholder, in such quantities as it may
reasonably request, copies of the amended prospectus or supplement to
be attached to the prospectus in order that the prospectus, as so
amended or supplemented, will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
(b) On or before the date on which the registration statement is
declared effective, EqualNet shall use its reasonable efforts to:
(i) register or qualify (and cooperate with each Selling
Shareholder, the underwriter or underwriters, if any, and their
counsel, in connection with the registration or qualification of) the
Common Stock covered by the registration
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statement for offer and sale under the securities or blue sky laws of
each state and other jurisdiction as any Selling Shareholder or
underwriter reasonably requests;
(ii) use its reasonable efforts to keep each such registration
or qualification effective, including through new filings, or
amendments or renewals, during the period the registration statement
is required to be kept effective; and
(iii) do any and all other acts or things necessary or advisable
to enable the disposition in all such jurisdictions of the Common
Stock covered by the applicable registration statement, provided that
EqualNet will not be required to qualify generally to do business in
any jurisdiction where it is not then so qualified.
(c) EqualNet shall use its reasonable efforts to cause all
Registrable Shares of a Selling Shareholder included in the registration
statement to be listed, by the date of the first sale of such shares
pursuant to such registration statement, on each securities exchange on
which the Common Stock is then listed or proposed to be listed, if any.
(d) EqualNet shall make generally available to each Selling
Shareholder and any underwriter participating in the offering conducted
pursuant to the registration statement an earnings statement satisfying
Section 11(a) of the Securities Act no later than 45 days after the end of
the 12-month period beginning with the first day of EqualNet's first fiscal
quarter commencing after the effective date of the registration statement.
The earnings statement shall cover such 12-month period. This requirement
will be deemed to be satisfied if EqualNet timely files complete and
accurate information on Forms 10-Q, 10-Y, and 8-K under the Exchange Act,
and otherwise complies with Rule 158 under the Securities Act as soon as
feasible.
(e) Upon consummation of the offering covered by the registration
statement, EqualNet shall cooperate with each Selling Shareholder and the
managing underwriter or underwriters, if any, to facilitate the timely
preparation and delivery of certificates representing Registrable Shares
sold under the registration statement, and to enable such securities to be
in such denominations and registered in such names as the managing
underwriter or underwriters, if any, or the Selling Shareholder, may
request, subject to the underwriters' obligation to return any certificates
representing unsold securities.
(f) EqualNet shall use its reasonable efforts to cause Registrable
Shares covered by the registration statement to be registered with or
approved by such other governmental agencies or authorities as may be
necessary to enable the Selling Shareholder or the underwriter or
underwriters, if any, to consummate the disposition of such Common Stock.
(g) EqualNet shall, during normal business hours and upon reasonable
notice, make available for inspection by each Selling Shareholder, any
underwriter participating in any offering pursuant to the registration
statement, and any attorney, accountant or other
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agent retained by a Selling Shareholder or any such underwriter
(collectively, the "Inspectors"), all nonconfidential financial and other
records, pertinent corporate documents, and properties of EqualNet, as
shall be reasonably necessary to enable the Inspectors to exercise their
due diligence responsibilities. EqualNet shall also cause its officers,
directors, and employees to supply all nonconfidential information
reasonably requested by any Inspector in connection with the registration
statement.
ARTICLE III
INDEMNIFICATION
3.1. Indemnification by EqualNet. In the event of any registration under
the Securities Act and this Registration Agreement of Registrable Shares held by
Creative in the capacity of a Selling Shareholder, EqualNet will hold harmless
Creative and each other person, if any, who controls Creative, against any
losses, claims, damages, or liabilities (including legal fees and costs of
court), joint or several, to which Creative or such controlling person may
become subject under the Securities Act or otherwise, insofar as such losses,
claims, damages, or liabilities (or any actions in respect thereof) arise out of
or are based upon any untrue statement or alleged untrue statement of any
material fact contained, on its effective date, in any registration statement
under which such Registrable Shares were registered under the Securities Act,
any related preliminary or final prospectus, or any amendment or supplement to
it, or which arise out of or are based upon the omission or alleged omission to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, in light of the circumstances in which they
were made, and will reimburse Creative and each such controlling person for any
legal or any other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, or liability; provided,
however, that EqualNet shall not be liable to Creative or such controlling
persons in any such case to the extent that any such loss, claim, damage, or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in such registration statement,
preliminary or final prospectus, or such amendment or supplement, in reliance
upon and in conformity with information furnished to EqualNet through a written
instrument duly executed by Creative or such underwriter specifically for use in
the preparation thereof, and provided, further that the foregoing indemnity with
respect to any untrue statement contained in or omission from a registration
statement or in any amendment thereof or in a preliminary or final prospectus,
or any amendment or supplement to it, shall not inure to the benefit of Creative
from whom the person is asserting such losses, claims damages or liabilities
purchased any of the Registrable Shares which are the subject thereof if
Creative did not send or give a copy of the prospectus (or any amendment or
supplement thereto) at or prior to the written confirmation of the sale of such
Registrable Shares to such person in any case required by the Securities Act and
the untrue statement contained in or omission from such preliminary or final
prospectus was corrected in the final prospectus or any amendment or supplement
thereto, unless such failure to deliver the final prospectus or any amendment or
supplement thereto, as the case may be, was the result of noncompliance by
EqualNet of Section 2.4(a)(i) of this Agreement.
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3.2. Indemnification by Creative shall indemnify and hold harmless (in the
same manner and to the same extent as set forth in Section 3.1) EqualNet, each
director of EqualNet, each officer of EqualNet who shall sign the registration
statement, and any person who controls EqualNet within the meaning of the
Securities Act, (i) with respect to any statement or omission from such
registration statement, any related preliminary or final prospectus, or any
amendment or supplement to it, if such statement or omission was made in
reliance upon and in conformity with information furnished to EqualNet through a
written instrument duly executed by Creative specifically for use in the
preparation of such registration statement, preliminary or final prospectus, or
amendment or supplement, and (ii) with respect to compliance by Creative with
applicable laws in effecting the sale or other disposition of the shares of
Common Stock covered by such registration statement.
3.3. Indemnification Procedures. Promptly after receipt by an indemnified
party of notice of the commencement of any action involving a claim referred to
in the preceding Sections of this Article III, the indemnified party will, if a
resulting claim is to be made or may be made against an indemnifying party, give
written notice to the indemnifying party of the commencement of the action. If
any such action is brought against an indemnified party, the indemnifying party
will be entitled to participate in and to assume the defense of the action with
counsel reasonably satisfactory t o the indemnified party, and after notice from
the indemnifying party to such indemnified party of its election to assume
defense of the action, the indemnifying party will not be liable to such
indemnified party for any legal or other expenses incurred by the latter in
connection with the action's defense. An indemnified party shall have the right
to employ separate counsel in any action or proceeding and participate in the
defense thereof, but the fees and expenses of such counsel shall be at such
indemnified party's expense unless (a) the employment of such counsel has been
specifically authorized in writing by the indemnifying party, which
authorization shall not be unreasonably withheld, (ii) the indemnifying party
has not assumed the defense and employed counsel reasonably satisfactory to the
indemnified party within 30 days after notice of any such action or proceeding,
or (iii) the named parties to any such action or proceeding (including any
impleaded parties) include the indemnified party and the indemnifying party and
the indemnified party shall have been advised by such counsel that there may be
one or more legal defenses available to the indemnified party that are different
from or additional to those available to the indemnifying party (in which case
the indemnifying party shall not have the right to assume the defense of such
action or proceeding on behalf of the indemnified party), it being understood,
however, that the indemnifying party shall not, in connection with any one such
action or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of more than one separate firm of
attorneys (in addition to all local counsel which is necessary, in the good
faith opinion of both counsel for the indemnifying party and counsel for the
indemnified party in order to adequately represent the indemnified parties) for
the indemnified party and that all such fees and expenses shall be reimbursed as
they are incurred upon written request and presentation of invoices. Whether or
not a defense is assumed by the indemnifying party, the indemnifying party will
not be subject to any liability for any settlement made without its consent. No
indemnifying party will consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term the giving by the
claimant or plaintiff, to the indemnified party, of a release from all liability
in respect of such claim or litigation.
8
<PAGE>
3.4. Contribution. If the indemnification required by this Article III from
the indemnifying party is unavailable to an indemnified party in respect of any
indemnifiable losses, claims, damages, liabilities, or expenses, then the
indemnifying party, in lieu of indemnifying the indemnified party, shall
contribute to the amount paid or payable by the indemnified party as a result of
such losses, claims, damages, liabilities, or expenses in such proportion as is
appropriate to reflect (i) the relative fault and (ii) the relative benefit of
the indemnifying and indemnified parties in connection with the actions which
resulted in such losses, claims, damages, liabilities, or expenses, as well as
any other relevant equitable considerations. The relative fault of the
indemnifying party and the indemnified party shall be determined by reference
to, among other things, whether any action in question, including any untrue or
alleged untrue statement of a material fact, has been made by, or relates to
information supplied by, such indemnifying party or parties, and the parties'
relative intent, knowledge, access to information, and opportunity to correct or
prevent such action. The amount paid or payable by a party as a result of the
losses, claims, damage, liabilities, and expenses referred to above shall be
deemed to include any legal or other fees or expenses reasonably incurred by
such party in connection with any investigation or proceeding. EqualNet and
Creative agree that it would not be just and equitable if contribution pursuant
to this Section 3.4 were determined by pro rata allocation or by any other
method of allocation which does not take account of the equitable considerations
referred to in the prior provisions of this Section 3.4.
Notwithstanding the provisions of this Section 3.4, no indemnifying party
shall be required to contribute any amount in excess of the amount by which the
total price at which the Common Stock was offered to the public by the
indemnifying party exceeds the amount of any damages which the indemnifying
party has otherwise been required to pay by reason of an untrue statement or
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such a fraudulent misrepresentation.
ARTICLE IV
OTHER AGREEMENTS
4.1. Expenses. All expenses incurred by EqualNet in connection with any
registration statement covering Registrable Shares offered by Creative,
including, without limitation, all registration and filing fees (including all
expenses incident to filing with the National Association of Securities Dealers,
Inc.), printing expenses, fees and disbursements of counsel (except for the fees
and disbursements of counsel for Creative) and of the independent certified
public accountants (except, in the case of any special audits, if required in
connection with any such registration, Creative's proportionate share of their
expense as provided in Section 2.3), and the expense of qualifying such shares
under state blue sky laws, shall be borne by EqualNet. However, all underwriting
expenses incurred by Creative, including underwriter's discounts and
commissions, shall be borne by Creative.
9
<PAGE>
4.2. Transfers of Registration Rights. The rights granted to Creative under
this Registration Agreement may be transferred or succeeded to only by: (i) an
Affiliate of Creative who agrees to and becomes party to this Registration
Agreement and who executes an investment letter for the benefit of EqualNet in
substantially the same form as Exhibit A attached hereto; or (ii) a transferee
who agrees to and becomes party to this Registration Agreement and who acquires
at least 25% of the Registrable Shares acquired by Creative on the date of this
Registration Agreement; provided, however, that EqualNet is given written notice
prior to or promptly following such transfer stating the name and address of the
transferee and identifying the securities with respect to which such rights are
being assigned. Such notice shall include or be accompanied by a written
undertaking by the transferee to comply with the obligations imposed on Creative
under this Registration Agreement. In the event any registration rights are
transferred in accordance with the terms hereof, any actions required to be
taken by Creative will be taken with the approval of the holders of such
registration rights who hold the Shares or the holders of a majority of the
Warrants, whose action shall bind all such holders of registration rights.
ARTICLE V
MISCELLANEOUS
5.1. Notices. All notices or other communications which are required or may
be given under this Registration Agreement shall be in writing and shall be
deemed to have been duly given when delivered in person or transmitted by
telecopier (with receipt confirmed) to a party at the address or telecopy
number, as applicable, set forth below (as any such address or telecopier number
may be changed from time to time by notice similarly given):
(a) if to Creative, to: Attn: Dan D. Sudduth
2710 Dryden
Houston, Texas 77030
With copy to: Porter & Hedges, L.L.P.
700 Louisiana, 35th Floor
Houston, Texas 77002-2764
Attn: Robert G. Reedy
Facsimile #:713/228-1331
(b) if to EqualNet, to: EqualNet Holding Corp.
EqualNet Plaza
1250 Wood Branch Park Drive
Houston, Texas 77079-1212
Attn: Michael L. Hlinak
Attn: Duane W. Richardson
Facsimile #: 281/529-4760
10
<PAGE>
With copy to: Fulbright & Jaworski L.L.P.
1301 McKinney, Suite 5100
Houston, Texas 77010-3095
Attn: Robert F. Gray, Jr.
Facsimile #: 713/651-5246
5.2. Section Headlines. The article and section headings in this
Registration Agreement are for reference purposes only and shall not affect the
meaning or interpretation of this Registration Agreement. References in this
Registration Agreement to a designated "Article" or "Section" refer to an
Article or Section of this Registration Agreement unless otherwise specifically
indicated.
5.3. Governing Law. This Registration Agreement shall be construed and
enforced in accordance with and governed by the law of Texas.
5.4. Amendments and Waivers. Except as otherwise provided in this
Registration Agreement the terms and provisions of this Registration Agreement
may not be modified or amended except in a writing executed by EqualNet and the
holders in interest of in excess of the majority of the then outstanding
Registrable Shares, provided, however, that the effect of such modification or
amendment will be such that all holders of Registrable Shares will be treated
equally. Waivers and exceptions to the requirements and limitations of the
provisions of Article II hereof and the other provisions hereof may be given,
and shall be effective if given, in writing by the holders in interest of in
excess of a majority of the then outstanding Registrable Shares, provided,
however, that the effect of such waiver or exception will be such that all
holders of Registrable Shares will be treated equally. Notice of all waivers and
amendments shall be promptly provided to all holders of Registrable Shares and
to EqualNet. No waivers of or exceptions to any term, condition or provision of
this Registration Agreement, in any one or more instances, shall be deemed to
be, or construed as, a further or continuing waiver of any such term, condition
or provision.
5.5. Entire Agreement. This Registration Agreement, the Asset Purchase
Agreement and the Warrant Agreement constitute the entire agreement between its
Parties concerning the subject matter.
5.6. Severability. The invalidity or unenforceability of any specific
provision of this Registration Agreement shall not invalidate or render
unenforceable any of its other provisions. Any provision of this Registration
Agreement held invalid or unenforceable shall be deemed reformed, if
practicable, to the extent necessary to render it valid and enforceable and to
the extent permitted by law and consistent with the intent of the Parties to
this Registration Agreement.
5.7. Counterparts. This Registration Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, but all of which
together shall constitute the same instrument.
11
<PAGE>
IN WITNESS WHEREOF, the Parties have executed this Registration Agreement
as of the date first above written.
EQUALNET HOLDING CORP.
By: /s/ MICHAEL L. HLINAK
-------------------------------------
Michael L. Hlinak, Senior Vice President
and Chief Operating Officer
CREATIVE COMMUNICATIONS INTERNATIONAL, INC.
By: /s/ DUANE W. RICHARDSON
-------------------------------------
Duane W. Richardson, President
12
<PAGE>
EXHIBIT A
---------
INVESTMENT LETTER
CREATIVE COMMUNICATIONS INTERNATIONAL, INC.
EqualNet Holding Corp.
1250 Wood Branch Park Drive
Houston, Texas 77079
Ladies and Gentlemen:
In connection with the proposed issuance to the undersigned person (the
"Purchaser") by EqualNet Holding Corp., a Texas corporation ("EqualNet"), of
shares of its common stock, $.01 par value per share (the "Shares"), the
Purchaser understands that the Shares will not be registered under the
Securities Act of 1933 (the "Act") or registered or qualified under Texas
securities laws or any other applicable state securities laws (together, the
"Blue Sky Laws") pursuant to exemptions from the registration provisions of the
Act and the Blue Sky Laws, the availability of which depends in part on the
accuracy of the following representations and on compliance with the following
agreements.
1. Representations. The Purchaser hereby represents that it is acquiring
the Shares for its own account for investment and not with a view to the
distribution thereof. The Purchaser further represents that it is an "accredited
investor" as such term is defined in Rule 501(a) promulgated under the Act.
2. Acknowledgment of Information. The Purchaser acknowledges that
EqualNet has furnished it with such financial and other data relating to
EqualNet as to enable it to make an informed decision concerning its acquisition
of the Shares. The Purchaser further represents and acknowledges that it has had
the opportunity to obtain additional information to verify the accuracy of the
information supplied by EqualNet and to evaluate the merits of such decision.
3. Economic Risk. The Purchaser represents and warrants that it realizes
that its purchase of the Shares will be a highly speculative investment and that
it is able, without impairing its financial condition, to hold the Shares for an
indefinite period of time and to suffer a complete loss of its investment.
4. Restrictions on Transfer of the Shares. With respect to any
disposition of the Shares in the future, the Purchaser represents and
acknowledges that the Shares have not been registered under the Act or any Blue
Sky Laws and that, consequently, the Shares must be held indefinitely
<PAGE>
unless subsequently registered under the Act and such Blue Sky Laws for sale or
disposition or unless a sale or disposition may be made without registration
under the Act and such Blue Sky Laws. The Purchaser hereby agrees that the
Shares shall not be sold, transferred, pledged or hypothecated unless there is
furnished an opinion in form and substance satisfactory to EqualNet of counsel
satisfactory to EqualNet that registration of such Shares under the Act and such
Blue Sky Laws is not required, and that the certificate evidencing such Shares
shall bear a legend in substantially the following form:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
OR QUALIFIED UNDER APPLICABLE STATE SECURITIES LAWS AND NO INTEREST THEREIN
MAY BE SOLD OR OTHERWISE TRANSFERRED IN ABSENCE OF SUCH REGISTRATION AND
QUALIFICATION WITHOUT AN OPINION OF COUNSEL FOR THE HOLDER THAT SUCH
REGISTRATION AND QUALIFICATION ARE NOT REQUIRED."
In addition, the Purchaser hereby agrees that, if EqualNet maintains its own
transfer records relating to the Shares, a notation consistent with such legend
may be made in such transfer records restricting any such sale, transfer, pledge
or hypothecation or, if such transfer records are maintained by a transfer
agent, EqualNet may issue stop transfer instructions to such transfer agent. The
foregoing restrictions and related legend provisions shall remain in effect
until, in the opinion of counsel satisfactory to EqualNet, they are no longer
required.
5. Principal Residence. The Purchaser represents and warrants that its
principal residence or place of business is within the State of Texas.
Dated as of November , 1996.
--
Very truly yours,
PURCHASER
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
2
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<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 459,581
<SECURITIES> 0
<RECEIVABLES> 6,873,537
<ALLOWANCES> 1,034,253
<INVENTORY> 0
<CURRENT-ASSETS> 11,019,139
<PP&E> 20,211,617
<DEPRECIATION> 4,837,626
<TOTAL-ASSETS> 27,760,447
<CURRENT-LIABILITIES> 24,578,748
<BONDS> 0
50
0
<COMMON> 217,935
<OTHER-SE> 2,739,797
<TOTAL-LIABILITY-AND-EQUITY> 27,760,447
<SALES> 0
<TOTAL-REVENUES> 24,876,242
<CGS> 0
<TOTAL-COSTS> 20,331,086
<OTHER-EXPENSES> 19,682,688
<LOSS-PROVISION> 1,660,594
<INTEREST-EXPENSE> 1,145,262
<INCOME-PRETAX> (17,943,388)
<INCOME-TAX> 0
<INCOME-CONTINUING> (17,995,388)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,995,388)
<EPS-PRIMARY> (1.64)
<EPS-DILUTED> (1.64)
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