UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _____________, 19___ to _____________, 19___.
Commission File Number: 0-25482
EQUALNET HOLDING CORP.
(Exact Name of Registrant as Specified in its Charter)
TEXAS 76-0457803
(State of Other Jurisdiction of (I.R.S. Employer Identi-
Incorporation or Organization) fication Number)
1250 WOOD BRANCH PARK DRIVE
HOUSTON, TEXAS 77079
Address of Principal Executive Offices, Including Zip Code
(281) 529-4600
(Registrant's Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
There were 6,287,724 shares of the Registrant's $.01 par value common stock
outstanding as of February 13, 1998.
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
EQUALNET HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1997
------------ ------------
(NOTE) (UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and equivalents ............................ $ 828,478 $ 65,600
Accounts receivable, net of allowance
for doubtful accounts of $1,450,954 at June 30,
1997 and $567,458 at December 31, 1997 ........ 9,048,961 5,321,893
Receivable from officers ........................ 28,367 28,367
Due from agents ................................. 2,907,922 1,898,593
Prepaid expenses and other ...................... 285,516 277,570
------------ ------------
Total current assets .................................. 13,099,244 7,592,023
Property and equipment
Computer equipment .............................. 3,435,121 3,509,845
Office furniture and fixtures ................... 1,209,032 1,209,032
Leasehold improvements .......................... 1,174,777 1,174,777
------------ ------------
5,818,930 5,893,654
Accumulated depreciation and
amortization ................................... (3,028,768) (3,711,228)
------------ ------------
2,790,162 2,182,426
Customer acquisition costs, net of
accumulated amortization of $13,050,667
at June 30, 1997 and $13,791,407 at
December 31, 1997 ............................... 1,262,939 522,199
Other assets .......................................... 1,027,507 1,454,186
Goodwill, net of accumulated amortization of $46,020 at
June 30, 1997 and $ 111,402 at December 31, 1997 .... 982,308 916,926
------------ ------------
Total assets .......................................... $ 19,162,160 $ 12,667,760
============ ============
</TABLE>
Note: The balance sheet at June 30, 1997 has been derived from the audited
financial statements at that date.
<PAGE>
EQUALNET HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1997
------------ ------------
(NOTE) (UNAUDITED)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable ................................ $ 1,858,065 $ 1,836,333
Accrued expenses ................................ 1,398,319 1,750,286
Accrued sales taxes ............................. 591,182 348,289
Brokerage commissions payable ................... 151,755 70,304
Payable to providers of long distance services .. 7,977,531 6,422,435
Current maturities of capital lease obligations . 51,000 9,000
Note payable to long distance provider .......... 1,183,059 1,183,059
Convertible note payable ........................ 1,183,059 978,630
Subordinated note payable - in default .......... -- 2,908,464
Revolving line of credit ........................ 4,555,442 --
Contractual obligations with regard to receivable
sales agreement ................................ -- 2,317,276
------------ ------------
Total current liabilities ............................. 17,766,353 17,824,076
Subordinated note payable ............................. 2,864,058 --
Deferred rent ......................................... 220,288 229,861
Commitments and contingencies ......................... -- --
Shareholders' equity (deficit)
Preferred stock (non-voting), $.01 par value
1,000,000 shares authorized and 0 shares
issued and outstanding ......................... -- --
Common stock, $.01 par value, 20,000,000
shares authorized and 6,173,750 shares
issued and outstanding at June 30, 1997
and 6,682,718 at December 31, 1997 ............. 61,738 66,828
Treasury stock at cost, 21,750 shares at
June 30, 1997 and 394,994 at December 31, 1997 . (104,881) (804,881)
Additional paid in capital ...................... 20,390,927 21,585,837
Warrants outstanding ............................ 368,000 410,740
Deferred compensation ........................... (245,829) (210,827)
Retained earnings ............................... (22,158,494) (26,433,874)
------------ ------------
Total shareholders' deficit ........................... (1,688,539) (5,386,177)
------------ ------------
Total liabilities and shareholders' deficit ........... $ 19,162,160 $ 12,667,760
============ ============
</TABLE>
<PAGE>
EQUALNET HOLDING CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------------- ---------------------------------
1996 1997 1996 1997
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Sales ........................................... $ 12,090,069 $ 6,481,336 $ 25,404,968 $ 14,808,555
Cost of Sales ................................... 9,645,373 4,728,835 19,932,937 10,993,553
------------ ----------- ------------ ------------
2,444,696 1,752,501 5,472,031 3,815,002
Selling, general and administrative
expenses .................................. 3,036,984 2,588,125 6,214,681 5,255,731
Depreciation and amortization ................... 1,847,675 1,043,588 3,697,823 2,155,788
Write down of assets ............................ 4,400,000 -- 4,400,000 --
------------ ----------- ------------ ------------
Operating loss .................................. (6,839,963) (1,879,212) (8,840,473) (3,596,517)
Other income (expense)
Interest income ........................... 30 33 62 1,163
Interest expense .......................... (208,363) (432,069) (478,640) (785,454)
Miscellaneous ............................. (102,674) 132,765 (193,237) 105,428
------------ ----------- ------------ ------------
(311,007) (299,271) (671,815) (678,863)
Loss before federal income taxes ................ (7,150,970) (2,178,483) (9,512,288) (4,275,380)
Benefit for federal income taxes ................ -- -- (802,845) --
------------ ----------- ------------ ------------
Net loss ........................................ $ (7,150,970) $(2,178,483) $ (8,709,443) $ (4,275,380)
============ =========== ============ ============
Net loss per share .............................. $ (1.18) $ (0.35) $ (1.44) $ (0.68)
============ =========== ============ ============
Weighted average number of shares ............... 6,083,552 6,287,724 6,042,761 6,328,294
============ =========== ============ ============
</TABLE>
<PAGE>
EQUALNET HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
--------------------------------
1996 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income ................................................................... $(8,709,443) $(4,275,380)
Adjustments to reconcile net income to
cash provided by (used in) operating
activities
Depreciation and amortization ......................................... 3,697,823 2,155,788
Provision for bad debt ................................................ 1,211,714 754,225
Interest charge on convertible debt
issued at discount ................................................... -- 150,000
Equity in loss on investment .......................................... 150,704 --
Benefit for deferred income taxes ..................................... (802,845) --
Change in deferred rent ............................................... -- 9,573
Loss on sale of assets ................................................ 341 --
Compensation expense recognized
for common stock issue ............................................... 45,004 35,002
Write down of long term assets ........................................ 4,400,000 --
Change in operating assets and
liabilities:
Accounts receivable ............................................. 1,692,832 2,972,843
Prepaid commissions ............................................. (979,698) 769,650
Prepaid expenses and other ...................................... 920,562 (104,108)
Other assets .................................................... (374,023) (742,152)
Accounts payable and accrued liabilities ........................ 4,140,052 (1,483,429)
----------- -----------
Net cash provided by (used in) operating activities .......................... 5,393,023 242,012
INVESTING ACTIVITIES
Purchase of property and equipment ........................................... (48,999) (74,724)
Purchase of customer accounts ................................................ (76,455) --
Proceeds from sale of equipment .............................................. 800 --
----------- -----------
Net cash used in investing activities ........................................ (124,654) (74,724)
FINANCING ACTIVITIES
Proceeds from subordinated notes payable ..................................... -- 957,260
Net repayments on revolving line of credit ................................... (5,112,182) (4,555,442)
Net proceeds on contractual obligations with regard
to receivable sales agreement ............................................... -- 2,317,276
Repayments on capital lease obligations ...................................... (42,000) (42,000)
Proceeds from issuance of stock .............................................. -- 350,000
Proceeds from issuance of warrants ........................................... -- 42,740
----------- -----------
Net cash provided by financing activities .................................... (5,154,182) (930,166)
----------- -----------
Net increase (decrease) in cash .............................................. 114,187 (762,878)
Cash, beginning of period .................................................... 381,849 828,478
----------- -----------
Cash, end of period .......................................................... $ 496,036 $ 65,600
=========== ===========
</TABLE>
<PAGE>
EQUALNET HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - MANAGEMENT'S REPRESENTATION
The consolidated financial statements included herein have been
prepared by the management of EqualNet Holding Corp. (the "Company")
without audit. Certain information and note disclosures normally
included in consolidated financial statements prepared in accordance
with generally accepted accounting principles have been omitted. In
the opinion of the management of the Company, all adjustments
considered necessary for fair presentation of the consolidated
financial statements have been included and were of a normal recurring
nature, and the accompanying consolidated financial statements present
fairly the financial position of the Company as of December 31, 1997,
and the results of operation and cash flows for the six months ended
December 31, 1997.
It is suggested that these consolidated financial statements be read
in conjunction with the consolidated financial statements and notes
for the three years ended June 30, 1997, included in the Company's
Annual Report on Form 10-K for the year ended June 30, 1997, as
amended, which was filed with the Securities and Exchange Commission.
The interim results are not necessarily indicative of the results for
a full year.
NOTE 2 - ACCOUNTING CHANGE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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. All earnings
per share amounts for all periods have been presented, and where
necessary, restated to conform to the Statement 128 requirements.
NOTE 3 - INCOME TAXES
The Company recorded a valuation allowance amounting to the entire net
deferred tax asset balance at June 30, 1997, due to recent operating
losses which give rise to uncertainty as to whether the deferred tax
asset is realizable. The Company has recorded no income tax benefit
for the period ended December 31, 1997.
NOTE 4 - PENDING TRANSACTIONS
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 provide for a
recapitalization of the Company and for the Company to acquire certain
telecommunications network assets and switches. The Agreements include
the Switch
<PAGE>
Agreement, the Merger Agreement, and the Stock Purchase Agreement (in
each case defined below). The Agreements and the transactions provided
for thereby (the "Transactions") are described individually below.
However, each of the Transactions is conditioned upon, among other
things, the approval of the holders of a majority of the Common Stock
present and voting at the shareholder meeting.
On September 25, 1997, the Company announced that it was in
discussions with the Willis Group relating to a possible transaction
or series of transactions in which the Company might ultimately
acquire certain assets of a switch-based provider of
telecommunications services. The Company simultaneously announced that
its negotiations regarding its previously announced merger with
another telecommunications company had been terminated. On September
24, 1997, a plan presented by The Willis Group to purchase the
telecommunications switches and the intangible rights and switch-based
assets of Total National Telecommunications ("TNT"), an operating
subsidiary of Total World Telecommunications which is currently in
Chapter 7 protection of the United States Bankruptcy Code, was
approved by the bankruptcy court administering that case
On October 1, 1997, the Company issued to the Willis Group a
$1,000,000 Convertible Secured Note, bearing interest at the rate of
12% per year and maturing April 1, 1998 (the "Note"), and a warrant
for the purchase of up to 200,000 shares of Common Stock at an
exercise price of $1.00 per share, subject to adjustment (the "October
Warrant"). The October Warrant is exercisable for five years. The
outstanding balance of the Note is convertible at any time into a
number of shares of Common Stock determined by dividing the
outstanding balance by the lesser of $1.00 or 85% of the market price
of the Common Stock. As of the date of issuance of the convertible
debt the Company recorded an interest charge of $150,000 to record the
impact of the debt being convertible at a discount to market. The
Company has reserved an aggregate of 1,200,000 shares of Common Stock
for issuance upon conversion of the Note and the October Warrant. The
Company received $1.0 million from the Willis Group in exchange for
the Note and the warrant. The Note is secured by a lien on
substantially all of the Company's assets.
Under the terms of the Switch Agreement the Company will acquire nine
telecommunications switches (the "Switches") from the Willis Group in
exchange for $5.9 million in cash, 1.4 million shares of Common Stock,
and warrants to purchase an additional 400,000 shares of Common Stock
at $1.00 per share. The Company is seeking financing for the Switches
through a loan from an unaffiliated third party lender. There can be
no assurance that the Company will be able to obtain this financing on
favorable terms. If the Company is unable to secure this financing
from a third party lender before the consummation of the Transaction,
it expects that it will enter into an interim financing agreement with
Mr. Michael Willis pursuant to which Mr. Willis will loan the Company
$5.9 million to be secured by the Switches. Mr. Willis has committed
to the Company to provide such financing on a 48 month amortization at
12% interest in exchange for 500,000 warrants excerciseable at $1.00
per share.
Under the terms of the Merger Agreement the Company will acquire Netco
Acquisition Corp. ("Netco"), a Delaware corporation, which holds
certain intangible rights and assets formerly held by TNT. These
assets consist of intangible rights to use certain software and codes
necessary to operate the Switches. The Company will purchase these
assets in exchange for 2,081,633 shares of Common Stock, a number of
shares of Common Stock equal to the working capital loans made by the
members of Netco LLC or their affiliates to Netco prior to the closing
(which amount is expected to be $1.5 million, but could be as high as
$3.0 million) divided by $1.00, and 2,000 shares of Series A Preferred
Stock. The
<PAGE>
Series A Preferred Stock has a stated value of $1,000 and will be
entitled to received dividends at the rate of $80.00 per year, payable
quarterly. Holders of Series A Preferred will have the right to
convert their shares into Common Stock initially at the rate of 1000.0
shares of Common Stock per share of Series A Preferred (or the stated
value divided by $1.00), or an aggregate of 2,000,000 shares of Common
Stock, subject to adjustment pursuant to certain anti-dilution
provisions.
Under the terms of the Stock Purchase Agreement the Company will issue
and sell to the Willis Group 4,000,000 shares of Common Stock at a
price of $1.00 per share in cash.
The closing of each of the Transactions is conditioned upon, among
other things, the election of certain persons nominated to the Board
of Directors of the Company, the approval of the Transactions by the
shareholders of the Company, and the closing of the other
Transactions. While the Company believes that the proposed
Transactions can recapitalize the Company, there can be no assurance
such Transactions will occur. In the event the proposed Transactions
do not occur, the Company may be required to seek protection under
United States bankruptcy laws.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
The Company'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 are 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. At the quarter ended September
30, 1997 the Company had recorded an accrual of $390,000 for such
estimated settlements. For the quarter ended December 31, 1997, the
Company recognized $165,208 into income in reversal of this accrual in
the income statement under "Other Income - Miscellaneous". 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 be insignificant.
<PAGE>
NOTE 6 - ACCRUALS
The Company has been maintaining certain balances related to usage
charges incurred by a joint venture. Since the time that these charges
were first accrued the joint venture has ceased doing business
actively. The Company is disputing some of these charges with its
joint venture partner. During the quarter ended December 31, 1997, the
Company recognized $334,792 into income under "Cost of sales" to
adjust this accrual to its estimate of what its ultimate liability may
be.
NOTE 7 - DEFAULT ON SUBORDINATED NOTE
At December 31, 1997, the Company was not in compliance with the
interest payment covenant of its subordinated note agreement. To have
been in compliance with this covenant the Company would have needed to
pay $277,952.78 in interest to the holders of the subordinated notes.
Because of this default the balance has been reclassified to current
liabilities.
NOTE 8 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED DEC. 31, SIX MONTHS ENDED, DEC. 31,
------------------------------- -------------------------------
1996 1997 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NUMERATOR:
- ----------
NUMERATOR FOR BASIC EARNINGS PER SHARE -
INCOME AVAIL. TO COMMON SHAREHOLDERS ........... $(7,150,970) $(2,178,483) $(8,709,443) $(4,275,380)
EFFECT OF DILUTIVE SECURITIES: ..................... 0 0 0 0
----------- ----------- ----------- -----------
NUMERATOR FOR DILUTED EARNINGS PER SHARE -
INCOME AVAILABLE TO COMMON SHAREHOLDERS
AFTER ASSUMED CONVERSIONS ....................... $(7,150,970) $(2,178,483) $(8,709,443) $(4,275,380)
DENOMINATOR:
- ------------
DENOMINATOR FOR BASIC EARNINGS PER SHARE -
WEIGHTED AVERAGE SHARES ......................... 6,083,552 6,287,724 6,042,761 6,328,294
DILUTIVE POTENTIAL COMMON SHARES ................... 0 0 0 0
----------- ----------- ----------- -----------
DENOMINATOR FOR DILUTED EARNINGS PER SHARE -
ADJUSTED WEIGHTED-AVERAGE SHARES AND
ASSUMED CONVERSIONS ............................ 6,083,552 6,287,724 6,042,761 6,328,294
=========== =========== =========== ===========
BASIC AND DILUTED EARNINGS PER SHARE ............... $ (1.18) $ (.35) $ (1.44) $ (.68)
=========== =========== =========== ===========
</TABLE>
The analysis assumes that there are no conversions of any securities
during the periods shown because there is a loss in each quarter, and
therefore the effect of the conversion of any security would be
anti-dilutive.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion of operations and financial condition of the Company
should be read in conjunction with the Financial Statements and Notes thereto
included elsewhere in this Quarterly Report on Form 10-Q. Special Note: Certain
statements set forth below constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended. See "Special Note Regarding
Forward-Looking Statements" and "Cautionary Statements".
RESULTS OF OPERATIONS
Sales for the three months ended December 31, 1997 decreased 46.4% to $6.5
million compared with sales of $12.1 million for the same period of the prior
year. Gross margin decreased to $1.8 million compared to $2.4 million for the
same period of the prior year. The Company recorded a $2.2 million loss for the
three months ended December 31, 1997, compared to a loss of $7.2 million for the
same period in the prior year. The net loss for the three months ended December
31, 1996, included a $4.4 million charge to decrease the net book value of
acquired customers to an estimate of future discounted cash flows associated
with those customers.
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------ ------------------------
1996 1997 1996 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Total sales ................................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales .............................................. 79.8% 73.0% 78.5% 74.2%
------ ------ ------ ------
Gross margin ............................................... 20.2% 27.0% 21.5% 25.8%
Selling, general and administrative expense ................ 25.1% 39.9% 24.5% 35.5%
Depreciation and amortization .............................. 15.3% 16.1% 14.5% 14.6%
Write down of assets ....................................... 36.4% 0.0% 17.3% 0.0%
------ ------ ------ ------
Operating loss ............................................. (56.6%) (29.0%) (34.8%) (24.3%)
Other income (expense)
Interest income ............................................ 0.0% 0.0% 0.0% 0.0%
Interest expense ........................................... (1.7%) (6.6%) (1.9%) (5.3%)
Miscellaneous .............................................. (0.8%) 2.0% (0.8%) 0.7%
------ ------ ------ ------
(2.5%) (4.6%) (2.7%) (4.6%)
Loss before federal income taxes ........................... (59.1%) (33.6%) (37.5%) (28.9%)
Benefit for federal income taxes ........................... (0.0%) 0.0% (3.2%) (0.0%)
------ ------ ------ ------
Net loss ................................................... (59.1%) (33.6%) (34.3%) (28.9%)
====== ====== ====== ======
</TABLE>
<PAGE>
SALES
The Company's sales in the three months ended December 31, 1997 decreased
46.4% to $6.5 million compared to $12.1 million for the comparable period
of the prior year. For the six months ended December 31, 1997 sales
decreased 41.7% to $14.8 million compared to $25.4 million for the same
period in the previous year. The decrease for both periods was due
primarily to a decrease in the number of customer accounts and a
corresponding decrease in billable minutes. Total billable minutes for the
quarter ended December 31, 1997 decreased 54.6% to 20.2 million minutes
from 44.5 million minutes for the same period of the prior year and for the
six months ended December 31, 1997 decreased 42.9% to 49.7 million minutes
from 87.0 million minutes for the comparable period of fiscal 1997. The
decline in revenues and billable minutes was the result of the continued
rate of attrition for existing customers and a continuing decline in order
activity. The Company's continuing liquidity problems during this time
frame have not allowed for the funding of order activity as significant as
that in the same period of the prior year.
COST OF SALES
The cost of sales for the three months ended December 31, 1997 decreased
51.0% to $4.7 million compared to $9.6 million for the comparable period of
the prior year. Cost of sales for the six months ended December 31, 1997
decreased 44.8% to $11.0 million compared to $19.9 million for the six
months ended December 31, 1996. The decreases were primarily attributable
to a decrease in sales. Cost of sales as a percentage of sales decreased to
73.0% and 74.2% for the three and six months ended December 31, 1997,
respectively, from 79.8% and 78.5% for the corresponding periods in the
previous year. The decreases were the result of a reduction in the
Company's cost of long distance from its primary underlying carrier, as
well as a reversal of an accrual for usage charges for a joint venture
which has ceased doing business actively (see Note 6).
The Company's cost of long-distance (which is a component of cost of sales)
decreased as a percentage of sales to 52.0% and 53.4% from 60.6% and 62.0%
for the three and six months ended December 31, 1997 and 1996,
respectively. The decreases were the result of the Company reducing its
cost of long-distance by negotiating more favorable rates with providers,
as well as a reversal of an accrual for usage charges for a joint venture
which has ceased doing business actively (see Note 6).
Commission expense as a percent of sales decreased to 6.9% for the second
quarter of fiscal 1998, compared to 7.6% for the second quarter of fiscal
1997. Commission expense as a percent of sales for the six months ended
December 31, 1997 was 7.2%, an increase over the first six months of fiscal
1997 which was 5.4%.This increase is due primarily to the Company's return
to acquiring new customers utilizing advances and residual commissions
rather than through purchased orders.
Billing expense as a percentage of sales increased to 8.1% for the three
months ended December 31, 1997 compared to 6.9% for the same period in the
previous year, and 8.3% for the six months ended December 31, 1997 compared
to 6.2% for the same period in fiscal 1997 as a result of the Company
continuing to bill a larger percentage of its customers through Local
Exchange Carriers ("LECs"). Billings through the LECs represented 41.9% and
43.9% of the Company's revenues for the three and six months ended December
31, 1997, respectively. The cost of billing through LECs is generally
greater than billing customers through independent billing companies;
however, the Company believes that by billing customers through the LECs,
savings will also be recognized by decreased bad debt expense and reduced
customer attrition. In addition, because the majority of
<PAGE>
customer service is performed by the LECs, the Company believes it will be
able to reduce overhead related to the cost of servicing these customers
directly.
Bad debt expense as a percentage of sales increased for the three and six
months ended December 31, 1997 to 5.7% and 5.1% of sales, respectively, as
compared to 4.5% and 4.8% of sales for the three and six months ended
December 31, 1996, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased 14.8% to $2.6
million for the three months ended December 31, 1997, from $3.0 million for
the same period of the prior year. Selling, general and administrative
expenses increased as a percentage of sales to 39.9% for the three months
ended December 31, 1997 from 25.1% for the same period of the prior year.
Selling, general and administrative expense decreased 15.4% to $5.3 million
from $6.2 million for the six months ended December 31, 1997 and 1996,
respectively. These expenses as a percent of sales increased to 35.5% from
24.5% for the first six months of fiscal 1998 and 1997, respectively. The
increase in selling, general and administrative expenses as a percentage of
sales relates primarily to the substantial decrease in sales and the
corresponding loss of back office economies of scale.
Salary expense decreased $269,000 for the quarter ended December 31, 1997
as compared to the quarter ended December 31, 1996 and $674,000 for the six
months ended December 31, 1997 versus the same period in 1996. Staffing
decreased from 162 employees at December 31, 1996 to 118 employees at
December 31, 1997.
The Company also reduced administrative expenses $180,000 in the second
quarter of fiscal 1998 compared to the same period in fiscal 1997 and
$285,000 for the six months ended December 31, 1997 as compared to the six
months ending December 31, 1996, as part of overall cost reduction efforts.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased 43.5% to $1.0 million for the
quarter ended December 31, 1997 as compared to $1.8 million for the same
period in the previous year and decreased 41.7% to $2.2 million for the six
months ended December 31, 1997 as compared to $3.7 million for the six
months ended December 31, 1996. The decrease is the result of the write off
of significant purchases of customer accounts during the 1997 fiscal year.
Purchased accounts are amortized utilizing a declining balance method. The
write offs resulted in significant reductions in quarterly and six month
amortization expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $242,000 in cash flow from operations for the six
months ended December 31, 1997, compared to $5.4 million for the same
period of the prior year. Cash flow from operations for the six month
period ending December 31, 1997, was generated primarily through the
decrease in net accounts receivable due to the aggressive collection of
accounts receivable.
Cash used in investing activities totaled $75,000 for the six months ended
December 31, 1997, compared to $125,000 for the same period of the previous
year. Cash used in investing activities in the first two quarters of fiscal
1998 consisted solely of asset additions, primarily computer equipment and
software development costs related to the Company's new proprietary billing
system.
<PAGE>
Cash used in financing activities was $930,000 for the six months ended
December 31, 1997, which primarily related to net repayments under the
Company's receivable sales agreement. The Company's declining revenue base,
and the resulting reduction in receivables, have resulted in a significant
decrease in funds available under the Company's receivables funding
arrangement. The use of cash was offset by $350,000 in proceeds received
from the issuance of stock to a private investment group, and a note
payable from The Willis Group for $1,000,000.
At December 31, 1997, the Company had a receivables sale agreement with
Receivables Funding Corporation ("RFC"). The agreement funded on July 7,
1997. The agreement provides for accounts receivable purchase commitments
of up to $8,000,000 for the purchase of the Company's receivables from
customers that meet specified eligibility requirements. Funding is based on
a percentage of the Company's outstanding receivables and allows for RFC to
cease funding new receivables without prior written consent at RFC's
option. The program fee applied to the outstanding balance of net purchased
receivables is prime plus 4.5% (13% at December 31, 1997).
At December 31, 1997, the Company was not in compliance with the interest
payment covenant of its subordinated note agreement. To have been in
compliance with this covenant the Company would have needed to pay
$277,952.78 in interest to the holders of the subordinated notes. Because
of this default the balance has been reclassified to current liabilities.
The Company is continuing to pursue the Transactions with the Willis Group
(see Note 4). While the Company believes that the potential Transactions
with the Willis Group can recapitalize the Company, there is currently no
assurance such transaction will occur. In the event that the Transactions
do not occur, the Company may be required to seek protection under United
States bankruptcy laws.
The Company is seeking financing for the Switches through a loan from an
unaffiliated third party lender. There can be no assurance that the Company
will be able to obtain this financing on favorable terms. If the Company is
unable to secure this financing from a third party lender before the
consummation of the Transaction, it expects that it will enter into an
interim financing agreement with Mr. Michael Willis pursuant to which Mr.
Willis will loan the Company $5.9 million to be secured by the Switches.
Mr. Willis has committed to the Company to provide such financing on a 48
month amortization at 12% interest in exchange for 500,000 warrants
excerciseable at $1.00 per share.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company'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 are 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. At the quarter ended September 30, 1997 the Company
had recorded an accrual of $390,000 for such estimated
settlements. 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 be
insignificant.
ITEM 2. CHANGES IN SECURITIES
On October 1, 1997, the Company issued to the Willis Group a
$1,000,000 Convertible Secured Note, bearing interest at the rate
of 12% per year and maturing April 1, 1998 (the "Note"), and a
warrant for the purchase of up to 200,000 shares of Common Stock
at an exercise price of $1.00 per share, subject to adjustment
(the "October Warrant"). The October Warrant is exercisable for
five years. The outstanding balance of the Note is convertible at
any time into a number of shares of Common Stock determined by
dividing the outstanding balance by the lesser of $1.00 or 85% of
the market price of the Common Stock. As of the date of issuance
of the convertible debt the Company recorded an interest charge of
$150,000 to record the impact of the debt being convertible at a
discount to market. The Company has reserved an aggregate of
1,200,000 shares of Common Stock for issuance upon conversion of
the Note and the October Warrant. The Company received $1.0
million from the Willis Group in exchange for the Note and the
warrant. The Note is secured by a lien on substantially all of the
Company's assets.
The Company believes that the offering and sale of the Note and
the October Warrant is exempt from registration under section 4(2)
of the Securities Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
At December 31, 1997, the Company was not in compliance with the
interest payment covenant of its subordinated note agreement. To
have been in compliance with this covenant the Company would have
needed to pay $277,952.78 in interest to the holders of the
subordinated notes. Because of this default the balance has been
reclassified to current liabilities.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS:
This Quarterly Report on Form 10-Q includes "forward-looking
statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). All
statements other than statements of historical facts included in
this report, including without limitation, statements regarding
the Company's financial position, business strategy, products,
products under development, markets, budgets and plans and
objectives of management for future operations, are
forward-looking statements. Although the Company believes that the
expectation of such forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to have
been correct. Important factors that could cause actual results to
differ materially from the Company's expectations ("Cautionary
Statements") are disclosed under "Cautionary Statements" and
elsewhere in this Report, including, without limitation, in
conjunction with the forward-looking statements included in this
Report. All subsequent written and oral forward-looking statements
attributable to the Company, or persons on its behalf, are
expressly qualified in their entirety by the Cautionary
Statements.
CAUTIONARY STATEMENTS:
See "Special Note Regarding Forward-Looking Statements".
POTENTIAL DELISTING - On October 7, 1997, the Nasdaq notified the
Company that the Company was not in compliance with the Nasdaq's
tangible net assets requirements. On November 7, 1997, Nasdaq
notified the Company that it will not continue listing the
Company's stock on the Nasdaq National Market. The Company
requested a formal hearing on the matter with Nasdaq and on
December 18, 1997 management of the Company met with Nasdaq. The
Company has been notified by Nasdaq that the Company's Common
Stock will be delisted from the Nasdaq National Market (the "NNM")
if the Company is unable to demonstrate compliance with the
continuing listing requirements of the NNM . The company expects
that the Common Stock will be delisted from Nasdaq if the
Transactions described in Note 3 above are not consummated.
Furthermore, the Company can provide no assurance that Nasdaq will
not delist the Company's Common Stock even if the Transactions are
consummated. If the Common Stock is delisted, the liquidity of the
Common Stock will be materially and adversely impacted, as there
can be no assurances that any alternative market for the Common
Stock will be available.
POSSIBLE ADVERSE CONSEQUENCES OF THE TRANSACTIONS - The
Transactions could have adverse consequences for holders of Common
Stock including, but not limited to, a change of control of the
Board of Directors of the Company. There can be no assurance of
the Company's ability to service the additional debt incurred in
the Transactions. Further, there can be no assurance regarding the
condition of the Switches and Network Assets, to be acquired in
the Transactions.
<PAGE>
POSSIBLE FAILURE TO APPROVE THE TRANSACTIONS - If the holders of a
majority of the outstanding Common Stock present and voting at the
Company's next Shareholder's meeting do not vote in favor of the
Transactions, then each of the Switch Agreement, the Merger
Agreement and the Stock Purchase Agreement will be terminable by
the parties thereto, and the Company will have no further
obligations thereunder. In that event, the Company will be forced
to continue to seek other sources of capital. If the Company is
not able to secure additional funds it may be forced to seek
protection under the United States bankruptcy laws.
NO ASSURANCE OF SUCCESS OF VENTURE -.The objective of the proposed
Transactions (see Note 4) is to strengthen the Company's financial
position and its operations and competitive position in the
industry by transforming it from a reseller to a facilities-based
carrier with a nationwide network. The Company believes that by
becoming a switch-based carrier it can increase margins and cash
flow. However, there can be no assurances that the consumation of
the Transactions will return the company to profitability. In that
event, the Company may be forced to seek protection under the
United States bankruptcy laws.
NO ASSURANCE OF ADDITIONAL NECESSARY CAPITAL - There can be no
assurance such Transactions will occur. In the event the proposed
Transactions do not occur, the Company will continue to pursue
other options including seeking additional capital and/or an
alliance with a strategic partner. In the event no strategic
alliance is accomplished, the Company may be required to seek
protection under United States bankruptcy laws.
ATTRITION RATES - In the event that the Company experiences
attrition rates in excess of those anticipated either as a result
of increased provisioning times by its underlying carrier, the
purchase of poor performing traffic, or the inability to properly
manage the existing customer base due to difficulties with the
NetBase system, additional charges that affect earnings may be
incurred.
DEPENDENCE ON INDEPENDENT MARKETING AGENTS - The Company has a
small internal sales force and obtains a significant majority of
its new customers from independent marketing agents ("Agents").
The Company's near-term ability to expand its business depends
upon whether it can continue to maintain favorable relationships
with existing Agents and recruit and establish new relationships
with additional Agents. No assurances can be made as to the
willingness of the existing Agents to continue to provide new
orders to the Company or as to the Company's ability to attract
and establish relationships with new Agents.
DEPENDENCE ON AT&T AND OTHER FACILITIES-BASED CARRIERS - The
Company does not own transmission facilities and currently depends
primarily upon AT&T and, to a lesser extent, upon Sprint, through
its contract with The Furst Group, to provide the
telecommunications services that it resells to its customers and
the detailed information upon which it bases its customer
billings. The Company's near-term ability to expand its business
depends upon whether it can continue to maintain favorable
relationships with these carriers. Although the Company believes
that its relationships with these carriers are good and should
remain so with continued contract compliance, the termination of
the Company's current contract with AT&T or the loss of the
telecommunications services that the Company receives from AT&T or
Sprint (through the Furst Group) could have a material adverse
effect on the Company's results of operations and financial
condition.
CARRIER COMMITMENTS - The Company has significant commitments with
its primary carrier to resell long-distance services. The
Company's contract with its carrier contains
<PAGE>
clauses that could materially and adversely impact the Company
should the Company incur a shortfall in meeting its commitments.
Although the Company has from time to time failed to meet its
commitment levels under a particular contract and in each case has
been able to negotiate a settlement with the carrier which
resulted in no penalty being incurred by the Company, there can be
no assurances that the Company will be able to reach similar
favorable settlements with its carriers in the event that the
Company should fail to meet its future commitments.
In recent years, AT&T, MCI Communications Corporation ("MCI") and
Sprint have consistently followed one another in pricing their
long-distance products. If MCI and Sprint were to lower their
rates for long-distance service and AT&T did not adopt a similar
price reduction, adverse customer reaction could affect the
Company's ability to meet its commitments under the AT&T contract
which could have a material adverse affect on the Company's
financial position and results of operations.
RELATIONSHIPS WITH STATE REGULATORY AGENCIES - The Company's
intrastate long-distance telecommunications operations are subject
to various state laws and regulations, including prior
certification, notification or registration requirements. The
Company must generally obtain and maintain certificates of public
convenience and necessity from regulatory authorities in most
states in which it offers service. Any failure to maintain proper
certification in jurisdictions in which the Company provides a
significant amount of intrastate long-distance service could have
a material adverse effect on the Company's business.
VOLATILITY OF SECURITIES PRICES - Historically, the market price
of the Common Stock has been highly volatile. During the period
January 1, 1996, to December 31, 1997, the market price for the
Common Stock as reported by The Nasdaq Stock Market has ranged
from a high of $10 1/2 per share to a low of $0.9/16 per share.
There can be no assurance that the market price of the Common
Stock will remain at any level for any period of time or that it
will increase or decrease to any level. Changes in the market
price of the Common Stock may bear no relation to EqualNet's
actual operational or financial results.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
4.1 $1,000,000 Note dated October 1, 1997, issued by the
Company to the Willis Group.
10.1 Note and Warrant Purchase Agreement, dated October
1, 1997, by and among the Company and the Willis
Group., as amended February 12, 1998.
10.2 Switch Agreement, dated December 2, 1997, between
the Company and the Willis Group, as amended by
First Amendment dated December 19, 1997, and Second
Amendment dated February 12, 1998.
10.3 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 First
Amendment dated December 19, 1997, and Second
Amendment dated February 12, 1998.
10.4 Stock Purchase Agreement, dated December 2, 1997, by
and among the Company and the Willis Group., as
amended by First Amendment dated December 19, 1997.
27.1 Financial Data Schedule
b. Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EQUALNET HOLDING CORP.
Date February 16, 1998 /s/ MICHAEL L. HLINAK
Michael L. Hlinak, Executive
Vice President and Chief
Financial Officer
(duly authorized officer and
principal financial officer)
12% CONVERTIBLE SECURED NOTE
EqualNet Holding Corp.
$1,000,000 October 1, 1997
EQUALNET HOLDING CORP., a Texas corporation (the "COMPANY"), EQUALNET
CORPORATION, a Delaware corporation ("EC"), TELESOURCE, INC., a Texas
corporation ("TI"), and EQUALNET WHOLESALE SERVICES, INC. ("EWS", together with
the Company, EC, and TI, the "CO-OBLIGORS"), a Delaware corporation, for value
received, hereby promise, jointly and severally, to pay to THE WILLIS GROUP,
LLC, a limited liability company organized under the laws of Texas (together
with its successors and permitted assigns, the "PAYEE"), the principal sum of
ONE MILLION AND NO/100 DOLLARS ($1,000,000) (the "PRINCIPAL SUM"), due and
payable in full on April 1, 1998.
The Co-obligors hereby promise, jointly and severally, to pay interest
(computed on the basis of a 360-day year of twelve 30-day months) on the unpaid
principal balance hereof from the date of this Note until April 1, 1998, (the
"MATURITY DATE") at a rate per annum equal to twelve percent (12%), payable
monthly in arrears on the last day of each month, commencing on November 30,
1997, and continuing thereafter until the principal hereof shall have become due
and payable.
If any principal or installment of interest is not paid in full on the
due date thereof (taking into account any applicable grace periods) (whether by
maturity, prepayment or acceleration), and upon and during the continuance of
any Event of Default (as defined in the Note Purchase Agreement), the
outstanding principal balance of this Note and any overdue installment of
interest (to the extent permitted by applicable law) shall bear interest
thereafter at a rate per annum equal to the Default Rate as determined pursuant
to the terms of the Note Purchase Agreement until such payment is paid in full
or such Event of Default is cured or waived in accordance with the terms of the
Note Purchase Agreement.
This Note is issued under and pursuant to the terms and provisions of,
and is subject to the terms of, the Note and Warrant Purchase Agreement dated as
of October 1, 1997, by and among the Co-obligors and the Payee (as the same may
be amended, supplemented, or otherwise modified from time to time and as in
effect from time to time, the "NOTE PURCHASE AGREEMENT"), and this Note and the
holder hereof is entitled to all of the rights and benefits provided for thereby
or referred to therein.
All payments on or in respect of this Note, including principal,
interest, and premium thereon, shall be made in such coin and currency of the
United States of America as at the time of payment is legal tender for the
payment of public and private debts by wire transfer of immediately available
funds to holder's account in New York, or, at the option of the holder hereof,
in shares of Common Stock of the Company valued at the Conversion Price per
share, or
<PAGE>
in such manner and at such other place in the United States of America as the
holder hereof shall have designated to the Co-obligors in writing pursuant to
the provisions of the Note Purchase Agreement. Whenever a payment to be made
hereunder shall be due on a day which is not a Business Day in New York, New
York, or Houston, Texas, such payment shall be made on the next succeeding
Business Day and such extension of time shall be included in the computation of
the payment of interest hereunder.
Under certain circumstances as specified in the Note Purchase
Agreement, the principal of this Note may be declared due and payable in the
manner and with the effect provided in the Note Purchase Agreement. The
principal of this Note may be prepaid in whole at any time prior to the Maturity
Date upon (i) 15 day's prior written notice to the holder hereof and (ii) the
payment by the Sellers of a prepayment premium equal to $15,000.
This Note is convertible into shares of the Company's common stock in
the manner set forth in Article V of the Note Purchase Agreement.
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.
The Co-obligors hereby waive diligence, presentment, demand, protest,
and notice of every kind whatsoever. The failure of the holder hereof to
exercise any of its rights hereunder in any particular instance shall not
constitute a waiver of the same or of any other right in that or any subsequent
instance.
This Note shall be binding upon the Co-obligors, their successors, and
their permitted assigns, and shall inure to the benefit of the Payee, its
successors, and permitted assigns.
This Note is a contract made under and governed by, and shall be
construed and enforced in accordance with, the laws of the State of New York,
without regard to conflict of laws principles.
EQUALNET HOLDING CORP.
By: /s/ ZANE RUSSELL
Name: Zane Russell
Title: President
<PAGE>
EQUALNET CORPORATION
By: /s/ ZANE RUSSELL
Name: Zane Russell
Title: President
TELESOURCE, INC.
By: /s/ MARK VAN EMAN
Name: Mark Van Eman
Title: President
EQUALNET WHOLESALE SERVICES, INC.
By: /s/ ZANE RUSSELL
Name: Zane Russell
Title: President
EXHIBIT 10.1
NOTE AND WARRANT PURCHASE AGREEMENT
This NOTE AND WARRANT PURCHASE AGREEMENT (this "AGREEMENT") is made as
of October 1, 1997, by and among THE WILLIS GROUP, LLC, a Texas limited
liability company ("WILLIS" and, together with any transferee of the Note, the
"PURCHASER"), and EQUALNET HOLDING CORP., a Texas corporation (the "COMPANY"),
EQUALNET CORPORATION, a Delaware corporation ("EC"), TELESOURCE, INC., a Texas
corporation ("TI"), and EQUALNET WHOLESALE SERVICES, INC., a Delaware
corporation ("EWS", together with the Company, EC, and TI, the "SELLERS").
RECITALS
Purchaser desires to purchase from the Sellers, and the Sellers desire
to issue and sell to Purchaser, subject to the terms and conditions set forth
herein, (i) a 12% convertible secured note due April 1, 1998, payable by the
Sellers, as co-obligors, in the original principal amount of $1,000,000 and (ii)
warrants to purchase up to an aggregate of 200,000 shares of Common Stock (as
hereinafter defined) of the Company, subject to adjustment as provided herein
and in the Warrant Agreement (as hereinafter defined).
AGREEMENTS
In consideration of the recitals and the mutual covenants herein
contained and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
In addition to the capitalized terms defined elsewhere in this
Agreement, the following capitalized terms shall have the following respective
meanings when used in this Agreement:
"AFFILIATE" as applied to any specified Person means any other
Person directly or indirectly controlling, controlled by, or under
direct or indirect common control with, such specified Person. The term
"control" (including, with correlative meanings, the terms
"controlling," "controlled by" and "under common control with"), as
applied to any Person, means the possession, directly or indirectly, of
20% or more of the voting power (or in the case of a Person which is
not a corporation, 20% or more of the ownership interest, beneficial or
otherwise) of such Person or the power otherwise to direct or cause the
direction of the management and policies of that Person, whether
through voting, by contract or otherwise. For purposes of this
paragraph, "voting power" of any Person means the total number of votes
which may be cast by the holders of the total number of outstanding
shares of stock of any class or classes of such Person in any election
of directors (or Persons performing similar functions) of such Person.
For purposes of this Agreement, all executive officers and directors of
a Person shall be deemed to be Affiliates of such Person.
"ANNUAL PLAN" shall have the meaning assigned to such term in
Section 4.2.9 hereof.
"BUSINESS DAY" means any day other than a Saturday, a Sunday,
or a day on which commercial banks in New York City, New York or
Houston, Texas are required or authorized to be closed.
"CAPITAL EXPENDITURES" shall mean expenditures in respect of
fixed or capital assets by a Person, including the capital portion of
lease payments made in respect of Capitalized Lease Obligations, but
EXCLUDING expenditures for the restoration, repair or replacement of
any fixed or capital asset which was destroyed or damaged, in whole or
in part, to the extent financed by the proceeds of an insurance policy
maintained by such Person. Expenditures in respect of replacements and
maintenance consistent with the business practices of such Person in
respect of plant facilities, machinery, fixtures and other like capital
assets utilized in the ordinary course of business are not Capital
Expenditures to the extent such expenditures are not capitalized in
preparing a balance sheet of such Person in accordance with GAAP.
"CAPITALIZED LEASE OBLIGATIONS" means all payment obligations
arising under any lease of property which, in accordance with GAAP,
would be capitalized on the Company's or any Subsidiary's balance sheet
or for which the amount of the asset and liability thereunder as if so
capitalized should, in accordance with GAAP, be disclosed in a note to
such balance sheet.
"CASH FLOW" means, for any period, the total of:
(a) Net Income for each period; PLUS
(b) all amounts deducted in computing such Net Income
in respect of (i) depreciation and amortization; (ii) interest
on Indebtedness (including payments in the nature of interest
under Capitalized Lease Obligations and interest costs that
were capitalized); and (iii) the provision for taxes for such
period based on income or profits to the extent such income or
profits were included in calculating Net Income.
"CHANGE OF CONTROL" means the occurrence of any of the
following: (i) the sale, lease, transfer, conveyance or other
disposition, in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries
taken as a whole to any "person" (as such term is used in Section
13(d)(3) of the Securities Exchange Act); (ii) the Company consolidates
with or merges into another Person or any Person consolidates with, or
merges into, the Company, in any such event pursuant to a transaction
in which the outstanding voting stock of the Company is changed into or
exchanged for cash, securities, or other property, other than any such
transaction where the holders of the voting stock of the Company
immediately prior to such transaction own, directly or indirectly, not
less than a majority of the voting stock of the surviving or resulting
Person immediately after such transaction; (iii) the adoption of a plan
relating to the liquidation or dissolution of the Company, or (iv) the
consummation of any transaction (including, without limitation, any
merger or consolidation) the result of which is that any "person" (as
defined above) becomes the "beneficial owner" (as such term is defined
in Rule 13d-3 and Rule 13d-5 under the Securities Exchange Act),
directly or indirectly, of more than 30% of the voting stock of the
Company. For purposes of this definition, any transfer of an equity
interest of an entity that was formed for the purpose of acquiring
voting stock of the Company will be deemed to be a transfer of such
portion of such voting stock as corresponds to the portion of the
equity of such entity that has been so transferred.
"CHARTER" means, for any Person, such Person's certificate or
articles of incorporation or other organizational documents.
"CLAIMS" shall have the meaning assigned to such term in
Section 6.3 hereof.
"CLOSING" means the closing of the sale and purchase of the
Note and the Warrants pursuant to this Agreement.
"CLOSING DATE"shall have the meaning assigned to such term in
Section 2.2 hereof.
"CODE" means the Internal Revenue Code of 1986, as amended
from time to time, and all rules and regulations promulgated
thereunder, and any successor statute.
"COMERICA LOC" means the $100,000 Letter of Credit issued by
Comerica Bank-Texas on behalf of EC for the benefit of Caroline
Partners, Ltd., dated August 5, 1997, and having an expiry of February
17, 1998, as the same may be amended, supplemented, extended, reissued,
or otherwise modified from time to time.
"COMMISSION" shall have the meaning assigned to such term in
Section 4.1.11(e) hereof.
"COMMON STOCK" means the Company's common stock, par value
$0.01 per share.
"CONSOLIDATED" refers to the consolidation of financial
statements in accordance with GAAP.
"CONVERSION DATE" shall have the meaning assigned to such term
in Section 5.1.3 hereof.
"CONVERSION PRICE" shall have the meaning assigned to such
term in Section 5.1.2 hereof.
"DEFAULT RATE" shall have the meaning assigned to such term in
Section 6.1 hereof.
"DEMAND SECURITIES" shall have the meaning assigned to such
term in Section 4.1.11(a) hereof.
"DOLLARS" and "$" shall mean lawful money of the United States
of America.
"ENVIRONMENTAL LAWS" means any and all Federal, state, local,
and foreign statutes, laws, regulations, ordinances, rules, judgments,
orders, decrees, permits, concessions, grants franchises, licenses,
agreements, or governmental restrictions relating to environmental
matters, including, without limitation, those relating to fines,
orders, injunctions, penalties, damages, contribution, cost recovery
compensation, losses or injuries resulting from the release of
Hazardous Materials and to the generation, use, storage,
transportation, handling or disposal of Hazardous Materials, in any
manner applicable to the Company or any of its Subsidiaries or any of
their respective properties.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time.
"ERISA AFFILIATE" means each trade or business (whether or not
incorporated) which together with the Company or a Subsidiary of the
Company would be deemed to be a "single employer" within the meaning of
Section 4001 of ERISA.
"ERISA TERMINATION EVENT" means (i) a "Reportable Event"
described in Section 4043 of ERISA and the regulations issued
thereunder (other than a "Reportable Event" not subject to the
provision for 30-day notice to the PBGC under such regulations), or
(ii) the withdrawal of the Company or any of its ERISA Affiliates from
a Plan during a plan year in which it was a "substantial employer" as
defined in Section 4001(a)(2) of ERISA, or (iii) the filing of a notice
of intent to terminate a Plan or the treatment of a Plan amendment as a
termination under Section 4041 of ERISA, or (iv) the institution of
proceedings to terminate a Plan by the PBGC or (v) any other event or
condition which might constitute grounds under Section 4042 of ERISA
for the termination of, or the appointment of a trustee to administer,
any Plan.
"EVENT OF DEFAULT" shall have the meaning as set forth in
Section 6.1 hereof.
"EXCLUDED STOCK" shall have the meaning assigned to such term
in Section 5.1.5(ii) hereof.
"FINANCIAL STATEMENTS" shall mean the Consolidated Financial
Statement or Statements of the Company and its Subsidiaries described
or referred to in Sections 4.2.1 and 4.2.2 hereof.
"FURST AGREEMENT" means that certain Note and Warrant Purchase
Agreement dated as of February 11, 1997, by and among the Furst Group,
Inc., the Company, EC, TI, and EWS, and the notes and warrants executed
and delivered in connection therewith.
"GAAP" means generally accepted accounting principles
(including principles of consolidation) in the United States of
America, in effect from time to time, consistently applied.
"GOVERNMENTAL AUTHORITY" means any foreign or domestic
federal, state, county, municipal, or other governmental or regulatory
authority, agency, board, body, commission, instrumentality, court, or
any political subdivision thereof.
"GOVERNMENTAL REQUIREMENT" means any law, statute, code,
ordinance, order, rule, regulation, judgment, decree, injunction,
franchise, permit, certificate, license, authorization, or other
direction or requirement (including but not limited to any of the
foregoing which relate to Environmental Laws, energy regulations and
occupational, safety and health standards or controls) of any
Governmental Authority.
"HAZARDOUS MATERIALS" means (a) any chemical, material or
substance defined as or included in the definition of "hazardous
substances," "hazardous wastes," "hazardous materials," "extremely
hazardous waste," "restricted hazardous waste," "toxic pollutants,"
"contaminants," "pollutants," "toxic substances" or words of similar
import under any Environmental Laws, (b) any oil, petroleum or
petroleum derived substance, (c) any flammable substances or
explosives, (d) any radioactive materials, (e) any other materials or
pollutants which cause properties to be in violation of any
Environmental Laws, (f) asbestos in any form which is or could become
friable, radon gas, urea formaldehyde foam insulation, or transformers
or other electrical equipment which contain any oil or dielectric fluid
containing polychlorinated biphenyls, and (g) any other chemical,
material or substance, exposure to which is prohibited, limited, or
regulated by any Governmental Authority.
"HIGHEST LAWFUL RATE" shall have the meaning assigned to such
term in Section 8.14 hereof.
"INDEBTEDNESS" means, with respect to any Person, the
principal of, premium, if any, and interest on: (a) indebtedness for
money borrowed from others whether or not evidenced by notes, bonds,
debentures or otherwise; (b) indebtedness of another Person guaranteed,
directly or indirectly, in any manner by such Person, including,
without limitation, through an agreement, contingent or otherwise, (i)
to purchase or pay any such indebtedness, (ii) to advance or supply
funds for the purchase or payment of such indebtedness, (iii) to
purchase and pay for property if not delivered or pay for services if
not performed, primarily for the purpose of enabling such other Person
to make payment of such indebtedness or to assure the owners of the
indebtedness against loss, or (iv) to maintain working capital, equity
capital or other financial condition of such other Person so as to
enable it to pay such indebtedness; (c) all indebtedness secured by any
Lien upon property owned by such Person, even though such Person has
not in any manner become liable for the payment of such indebtedness;
(d) all indebtedness of such Person created or arising under any
conditional sale, lease (intended primarily as a financing device) or
other title retention or security agreement with respect to property
acquired by such Person even though the rights and remedies of the
seller, lessor or lender under such agreement or lease in the event of
default may be limited to repossession or sale of such property; (e)
all obligations of such Person issued or assumed for the deferred
purchase price of property or services, including all trade credit; (f)
Capitalized Lease Obligations and the present value of all future lease
payments under a lease other than Capitalized Lease Obligations; (g)
all unfunded postretirement and postemployment benefits including,
without limitation, unfunded pension liabilities; (h) mandatory
redemption or mandatory dividend rights on common or preferred stock
(or other equity) (other than rights (if any) of the Furst Group (or
its assignee) to cause the Company to repurchase Common Stock; (i)
obligations of discontinued businesses that are subsumed within the
single-sum amount of the net assets of the discontinued operations
being held for sale; and (j) all obligations of such Person under or
with respect to letters of credit if in the aggregate or individually
such letters of credit equal or exceed $100,000.
"INITIAL CONVERSION PRICE" shall have the meaning assigned to
such term in Section 5.1.2 hereof.
"INITIATING HOLDERS" shall have the meaning assigned to such
term in Section 4.1.11(a) hereof.
"INTELLECTUAL PROPERTY" shall have the meaning assigned to
such term in Section 3.1.21(a) hereof.
"INTEREST EXPENSE" shall mean, for any period, the sum of (a)
the cash interest payments by an obligor made or accrued in accordance
with GAAP during such period in connection with all of its
interest-bearing Indebtedness and (b) the interest component of any
Capitalized Lease Obligations.
"INTERMEDIARY" shall have the meaning assigned to such term in
Section 3.1.17 hereof.
"INVESTMENT" means any stock, partnership, or joint venture
interest or other security, any loan, advance, contribution to capital,
any acquisitions of real or personal property (other than real and
personal property acquired in the ordinary course of business), and any
purchase or commitment or option to purchase stock or other securities
of or any interest in another Person or any integral part of any
business or the assets comprising such business or part thereof if the
aggregate consideration for such purchase, commitment or option was in
excess of $10,000, and whether existing on the date of this Agreement
or hereafter made.
"LEASE AGREEMENT" means the Lease Agreement dated June 28,
1994, between Caroline Partners, Ltd. and EC (as successor-in-interest
to EqualNet Communications, Inc.), as amended by the First Amendment to
Lease Agreement, dated effective as of August 15, 1994, as amended by
the Second Amendment to Lease Agreement, dated effective as of
September 8, 1994, as amended by the Third Amendment to Lease
Agreement, dated effective as of April 10, 1995, as amended by the
Fourth Amendment to Lease Agreement, dated effective as of August 14,
1997, as the same may be further amended, supplemented, or otherwise
modified from time to time.
"LEASEHOLD DEED OF TRUST" means the Leasehold Deed of Trust
and Security Agreement to be executed by EC, as grantor, to Clifton S.
Rankin, as trustee, for the benefit of Purchaser, substantially in the
form of Exhibit E hereto, as the same may be amended, supplemented, or
otherwise modified from time to time.
"LIEN" means, with respect to any Person, any mortgage, deed
of trust, lien, security interest, pledge, lease, conditional sale
contract, claim, charge, easement, right of way, assessment,
restriction and other encumbrance of every kind.
"MARGIN STOCK" shall have the meaning assigned to such term in
Section 3.1.6 hereof.
"MATERIAL ADVERSE EFFECT" means any material and adverse
effect on (i) the assets, liabilities, financial condition, business,
or operations of the Company and its Subsidiaries on a Consolidated
basis, or (ii) the ability of the Company and its Subsidiaries on a
Consolidated basis to carry out their business as at the date of this
Agreement or meet its obligations under the Operative Documents on a
timely basis.
"MULTIEMPLOYER PLAN" means a Plan defined as such in Section
3(37) of ERISA to which contributions have been made by the Company or
any ERISA Affiliate and which is covered by Title IV of ERISA.
"NOTE" means the 12% convertible secured note payable by the
Sellers, as co-obligors, in the original principal amount of
$1,000,000, substantially in the form of Exhibit A hereto, as the same
may be amended, supplemented, or otherwise modified from time to time,
and any notes issued in exchange for such Note.
"OPERATIVE DOCUMENTS" means this Agreement, the Leasehold Deed
of Trust, the Note, the Security Agreement, the Warrant Agreement, and
the Warrant Certificates.
"PERMITS" means all licenses, permits, exceptions, franchises,
accreditations, privileges, rights, variances, waivers, approvals and
other authorizations (including, without limitation, those relating to
environmental matters) of, by or from Governmental Authorities
necessary for the conduct of the business of the Company and its
Subsidiaries immediately prior to the Closing and as proposed to be
conducted by the Company and its Subsidiaries after the Closing.
"PERMITTED LIENS" shall have the meaning assigned to such term
in Section 4.3.2 hereof.
"PERSON" means an individual or individuals, a partnership, a
corporation, a company, a limited liability company, an association, a
joint stock company, a trust, a joint venture, an unincorporated
organization, any other form of legal entity, or a Governmental
Authority.
"PIGGY-BACK SECURITIES" shall have the meaning assigned to
such term in Section 4.1.11(b) hereof.
"PIGGY-BACK TERMINATION DATE " shall have the meaning assigned
to such term in Section 4.1.11(b) hereof.
"PLAN" means any multi-employer plan or single employer plan,
as defined in Section 4001 and subject to Title IV of ERISA, which is
maintained, or at any time during the five calendar years preceding the
date of this Agreement was maintained, for employees of the Company or
a Subsidiary of the Company or an ERISA Affiliate.
"PROPERTY" means any interest in any kind of property or
asset, whether real, personal or mixed, or tangible or intangible.
"PROPRIETARY INFORMATION AGREEMENT" shall have the meaning
assigned to such term in Section 3.1.21(b) hereof.
"PURCHASE PRICE" shall have the meaning set forth in Section
2.1 hereof.
"REGISTRABLE SECURITIES" shall have the meaning assigned to
such term in Section 4.1.11(b) hereof.
"RESPONSIBLE OFFICER" means with respect to any Person (other
than a Person that is an individual), the chairman of the board, the
president, any executive or senior vice president, the vice president
of finance, the chief executive officer, the chief operating officer or
the treasurer of such Person.
"RFC AGREEMENT" means the Receivables Sale Agreement dated as
of June 18, 1997, by and between EC and Receivables Funding
Corporation.
"SECURITIES ACT" shall have the meaning set forth in Section
3.2.1 hereof.
"SECURITY AGREEMENT" means the Security Agreement to be
executed by each of the Sellers, as debtor, and Purchaser, as secured
party, substantially in the form of Exhibit D hereto, as the same may
be amended, supplemented, or otherwise modified from time to time.
"SENIOR OBLIGATIONS" means Indebtedness arising under (a) the
Furst Agreement in an amount not to exceed $3,000,000 (plus interest),
(b) the RFC Agreement (and the obligations arising thereunder) in an
amount not to exceed the Purchase Commitment (as defined in the RFC
Agreement on the date hereof), and (c) the Comerica LOC in an amount
not to exceed $100,000 (plus related costs and expenses arising in
connection therewith).
"SUBSIDIARY" means, as to any Person, any corporation,
company, association, partnership, limited liability company or other
business entity of which such Person or one or more of its Subsidiaries
or such Person and one or more of its Subsidiaries owns sufficient
equity or voting interests to enable it or them (as a group)
ordinarily, in the absence of contingencies, to elect a majority of the
directors (or Persons performing similar functions) of such entity, and
any partnership, limited liability company or joint venture if more
than a 50% interest in the profits of capital thereof is owned by such
Person or one or more of its Subsidiaries or such Person and one or
more of its Subsidiaries.
"TECHNICAL EMPLOYEES" shall have the meaning assigned to such
term in Section 3.1.21(b) hereof.
"TERMINATION DATE" shall have the meaning assigned to such
term in Section 4.1.11(a) hereof.
"WARRANT AGREEMENT" means the Warrant Agreement to be executed
by the Company, substantially in the form of Exhibit B hereto, as the
same may be amended, supplemented, or otherwise modified from time to
time.
"WARRANT CERTIFICATE" means the certificate evidencing
Warrants, substantially in the form of Exhibit A to the Warrant
Agreement, as the same may be amended, supplemented, or otherwise
modified from time to time.
"WARRANT HOLDER" means any holder of the Warrants.
"WARRANT SHARES" means the shares of common stock issued or
issuable upon the exercise of the Warrants.
"WARRANTS" means warrants to purchase shares of common stock
of the Company issued to Purchaser pursuant to this Agreement and the
Warrant Agreement and evidenced by the Warrant Certificate.
"WEB AGREEMENT" means that certain Web Site Services and Long
Distance Agreement between International Center for Entrepreneurial
Development, Inc. and EC dated August 1, 1997.
ARTICLE II
PURCHASE AND SALE OF THE NOTE; CLOSING
2.1 SALE AND PURCHASE OF NOTE AND WARRANTS. Subject to the satisfaction
of the terms and conditions herein set forth and in reliance upon the respective
representations and warranties of the parties set forth herein or in any
document delivered pursuant hereto, at the Closing, the Sellers agree to sell to
Purchaser, and Purchaser agrees to purchase from the Sellers, the Note and the
Warrants free and clear of any Liens whatsoever. The aggregate purchase price
for the Note and the Warrants is $1,000,000 (the "PURCHASE Price").
2.2 CLOSING. The Closing of the purchase and sale of the Note and
Warrants will be held at the offices of Vinson & Elkins L.L.P., 1001 Fannin,
3500 First City Tower, Houston, Texas 77002, on October 1, 1997 (the "CLOSING"),
at 10:00 a.m., Houston time, or at such other time, date and place as the
parties may agree (the "CLOSING DATE"). On the Closing Date, the Sellers will
deliver to Purchaser the Note and the Warrant Certificate, each duly executed
and registered in the name of Purchaser, and Purchaser will pay the Purchase
Price by wire transfer of funds to an account designated by the Sellers, which
account shall be (a) designated by the Sellers not less than three Business Days
prior to the Closing Date and (b) at a commercial bank or other financial
institution located in New York, New York.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 REPRESENTATIONS AND WARRANTIES OF THE SELLERS. In order to induce
Purchaser to enter into this Agreement, each Seller (on its own behalf and on
behalf of its Subsidiaries) represents and warrants to Purchaser (which
representations and warranties will survive the delivery of the Note) that:
3.1.1 CORPORATE EXISTENCE. Each Seller and each of its
Subsidiaries is duly organized, legally existing, and in good standing
under the laws of the jurisdictions in which it is incorporated and is
duly qualified as a foreign corporation (or other legal entity) in all
jurisdictions in which the nature of its business activities or its
ownership or leasing of property makes such qualification necessary,
except where the failure to so qualify will not have a Material Adverse
Effect.
3.1.2 CORPORATE POWER AND AUTHORIZATION. Each Seller has the
requisite corporate power and authority to create and issue the Note
and the Warrants (as applicable), to execute, deliver, and perform its
obligations under this Agreement and the other Operative Documents, and
to consummate the transactions contemplated hereby and thereby. All
action on each Seller's part requisite for the due creation and
issuance of the Note and the Warrants (as applicable) and for the due
execution, delivery, and performance of this Agreement and the other
Operative Documents to which it is a party has been duly and
effectively taken.
3.1.3 BINDING OBLIGATIONS. This Agreement is and, upon the
execution, issuance, and delivery by the Sellers, the Note, the
Warrants, and each of the other Operative Documents will be,
enforceable in accordance with its terms (except that enforcement may
be subject to (i) any applicable bankruptcy, insolvency or similar laws
generally affecting the enforcement of creditors' rights and (ii)
general principles in equity regardless of whether such enforcement is
sought in a proceeding in equity or at law).
3.1.4 NO VIOLATION. Neither the execution and delivery of this
Agreement or any of the other Operative Documents to which it is a
party, the consummation of the transactions provided for herein and
therein or contemplated hereby or thereby nor the fulfillment by the
Sellers of the terms hereof or thereof will (a) violate any provision
of the Charter or the by-laws of any Seller, (b) result in a default,
give rise to any right of termination, cancellation, acceleration or
imposition of any Lien upon the Note, or require any consent or
approval (other than any consent or approval that has previously been
obtained) under any of the terms, conditions or provisions of any of
the Permits or any note, bond, mortgage, indenture, loan, distribution
agreement, license, agreement, lease, or instrument or obligation to
which any Seller is a party or by which any Seller may be bound (except
where the failure to obtain such consent or approval will not have a
Material Adverse Effect), or (c) violate any law, judgment, order,
writ, injunction, decree, statute, rule, or regulation of any
Governmental Authority applicable to any Seller or the Note (except
where such violation will not have a Material Adverse Effect).
3.1.5 CONSENTS. All consents, approvals, qualifications,
orders, or authorizations of, or filings with, any Governmental
Authority, and all consents under any material contracts, agreements,
or instruments by which any Seller is bound or to which it is subject,
and required in connection with each Seller's valid execution,
delivery, or performance of this Agreement and the other Operative
Documents to which it is a party and the offer, sale, and delivery of
the Note and the consummation of any other transaction contemplated on
the part of the Sellers have been obtained or made.
3.1.6 USE OF PROCEEDS. The proceeds from the sale of the Note
and the Warrants will be used for working capital and other general
corporate purposes. No part of the proceeds from the sale of the Note
will be used, directly or indirectly, for the purpose of buying or
carrying any margin stock within the meaning of Regulation G of the
Board of Governors of the Federal Reserve System (12 CFR 207), or for
the purpose of buying or carrying or trading in any securities under
such circumstances as to involve any Seller in a violation of
Regulation X of said Board (12 CFR 224) or to involve any broker or
dealer in a violation of Regulation T of said Board (12 CFR 220). As
used herein, the terms "margin stock" and "purpose of buying or
carrying" shall have the meanings assigned to them in said Regulation
G.
3.1.7 FINANCIAL INFORMATION
(a) The Consolidated balance sheet of the Company and its
Subsidiaries as at June 30, 1996, and the related Consolidated
statements of operations, shareholders' equity and cash flows for the
12-month period then ended, including in each case the related
schedules and notes, reported on by Ernst & Young LLP, are complete and
correct and fairly present in all material respects the Consolidated
financial position of the Company and its Subsidiaries as at the date
thereof and the Consolidated results of operations and changes in cash
flows for such period, in accordance with GAAP.
(b) The unaudited Consolidated balance sheet of the Company
and its Subsidiaries as at March 31, 1997, and the related unaudited
Consolidated statements of operations, shareholders' equity and cash
flows for the nine-month period then ended, as included in the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1997, true copies of which have been previously delivered to
Purchaser, are complete and correct and fairly present in all material
respects the Consolidated financial position of the Company and its
Subsidiaries as at the date thereof and the Consolidated results of
operations and changes in cash flows for such period in conformity with
GAAP, subject only to normal year-end audit adjustments.
(c) Since March 31, 1997, there has been no Material Adverse
Effect.
3.1.8 LIABILITIES. Except for liabilities incurred in the
ordinary course of business, none of the Sellers has any material
(individually or in the aggregate) liabilities, direct or contingent
(including but not limited to liability with respect to any Plan)
except as disclosed or referred to in SCHEDULE 3.1.8 or in the
financial statements referred to in Section 3.1.7. The Sellers have no
Indebtedness other than Indebtedness disclosed in SCHEDULE 3.1.8.
3.1.9 LITIGATION. Except as discussed in SCHEDULE 3.1.9 or as
described in any report filed by the Company with the Commission and
delivered to Purchaser, there is no action, suit, or proceeding, or any
governmental investigation or any arbitration, in each case pending or,
to the knowledge of the Sellers, threatened against any Seller or any
material property of any thereof before any court or arbitrator or any
governmental or administrative body, agency or official (i) which
challenges the validity of this Agreement, the Note, or any of the
Operative Documents or the attachment, perfection, or priority of any
Operative Document or the Liens to be created thereunder; or (ii)
which, if adversely determined, would have a Material Adverse Effect.
3.1.10 COMPLIANCE WITH ERISA. Each Plan is in substantial
compliance with ERISA, no Plan has an accumulated or waived funding
deficiency within the meaning of Section 412 or Section 418(B) of the
Code, no proceedings have been instituted to terminate any Plan, and
except as disclosed in SCHEDULE 3.1.10, none of the Sellers nor any
ERISA Affiliate has incurred any material liability to or on account of
a Plan under ERISA, and except as disclosed in SCHEDULE 3.1.10, no
condition exists which presents a material risk to any Seller of
incurring such a liability.
3.1.11 TAXES; GOVERNMENTAL CHARGES. Each of the Sellers has
filed all tax returns and reports required to be filed and has paid all
taxes, assessments, fees, and other governmental charges levied upon
any of them or upon any of their respective properties or income which
are due and payable, including interest and penalties, or has provided
adequate reserves for the payment thereof, except where the failure to
so file, pay, or reserve would not have a Material Adverse Effect.
3.1.12 DEFAULTS. Except as disclosed in SCHEDULE 3.1.12, none
of the Sellers is in default, nor has any event or circumstance
occurred which, but for the passage of time or the giving of notice, or
both, would constitute a default (in any respect which may have a
Material Adverse Effect) under any loan or credit agreement, indenture,
mortgage, deed of trust, security agreement, or other instrument or
agreement evidencing or pertaining to any Indebtedness of any Seller or
any Subsidiary, or under any material agreement or instrument to which
any Seller or any Subsidiary is a party or by which any Seller or any
Subsidiary is bound. No default hereunder has occurred and is
continuing.
3.1.13 COMPLIANCE WITH THE LAW. None of the Sellers (a) is in
violation of any Governmental Requirement or (b) has failed to obtain
any license, permit, franchise, or other governmental authorization
necessary to the ownership of any of their respective properties or the
conduct of their respective business, which violation or failure would
have (in the event that such a violation or failure were asserted by
any Person through appropriate action) a Material Adverse Effect.
3.1.14 INTENTIONALLY OMITTED.
3.1.15 INVESTMENT COMPANY ACT. None of the Sellers is an
"investment company" or a company "controlled" by an "investment
company," within the meaning of the Investment Company Act of 1940, as
amended.
3.1.16 PUBLIC UTILITY HOLDING COMPANY ACT. None of the Sellers
is a "holding company," or a "subsidiary company" of a "holding
company," or an "affiliate" of a "holding company" or of a "subsidiary
company" of a "holding company," or a "public utility" within the
meaning of the Public Utility Holding Company Act of 1935, as amended.
3.1.17 FEES AND COMMISSIONS. None of the Sellers nor, to the
knowledge of any of the Sellers, their Affiliates has retained a
finder, broker, agent, financial advisor, or other intermediary
(collectively, an "INTERMEDIARY") in connection with the transactions
contemplated by this Agreement and the other Operative Documents, and
the Sellers agree, jointly and severally, to pay and to indemnify and
hold harmless Purchaser from and against liability for any compensation
to any Intermediary and the fees and expenses of defending against such
liability or alleged liability.
3.1.18 DISCLOSURE. The Company's filings made pursuant to the
Securities Exchange Act of 1934, as amended and listed on SCHEDULE
3.1.18 hereto as of their respective dates, do not contain any untrue
statement of a material fact and do not omit to state any material fact
necessary in order to make the statements contained therein or herein
not misleading in the light of the circumstances under which they were
made.
3.1.19 STRUCTURE; CAPITALIZATION.
(a) SCHEDULE 3.1.19 contains (except has noted therein) a
complete and correct list of the Company's Subsidiaries, showing, as to
each Subsidiary, the correct name thereof, the jurisdiction of its
organization, and the percentage of shares of each class of its capital
stock or similar equity interests outstanding owned by the Company and
each other Subsidiary.
(b) All of the outstanding shares of capital stock or similar
equity interests of each Subsidiary shown in SCHEDULE 3.1.19 as being
owned by the Company and its Subsidiaries have been validly issued, are
fully paid and nonassessable, and are owned by the Company or such
other Subsidiaries free and clear of any Lien (except as otherwise
disclosed in SCHEDULE 3.1.19.
(c) No Subsidiary of the Company is a party to, or otherwise
subject to any legal restriction of any agreement (other than this
Agreement and customary limitations imposed by corporate law statutes)
restricting the ability of such Subsidiary to pay dividends out of
profits or make any other similar distributions of profits to the
Company or any of its Subsidiaries that owns outstanding shares of
capital stock or similar equity interests of such Subsidiary.
(d) As of the Closing Date and after giving effect to the
transactions contemplated in this Agreement (i) the Company's
authorized capital stock will consist of 21,000,000 shares, of which
20,000,000 are designated Common Stock; (ii) 6,173,750 shares of Common
Stock, issued and outstanding and 2,317,900 shares are or will be
reserved for issuance in connection with the Company's outstanding
warrants and stock options (200,000 of which will be reserved for
issuance in connection with the Warrants), all of which, when issued in
accordance with the terms of such warrants and stock options, will be
validly issued, fully paid, and non-assessable; (iii) no shares of
Common Stock are owned or held by or for the account of the Company or
any of its Subsidiaries (except as disclosed in the financial
statements described in Section 3.1.7); (iv) except as disclosed on
SCHEDULE 3.1.19, neither the Company nor any of its Subsidiaries has
outstanding any stock or other securities convertible into or
exchangeable for any shares of capital stock, any rights to subscribe
for or to purchase or any options for the purchase of, or any
agreements providing for the issuance (contingent or otherwise) of, or
any calls, commitments or claims of any other character relating to the
issuance of, any capital stock, or any stock or securities convertible
into or exchangeable for any capital stock which have not been waived
(other than as contemplated by this Agreement); and (v) except as
disclosed in SCHEDULE 3.1.19, neither the Company nor any of its
Subsidiaries is subject to any obligation (contingent or otherwise) to
repurchase or otherwise acquire or retire any shares of capital stock.
3.1.20 ENVIRONMENTAL MATTERS
(a) Neither any property of any Seller nor the operations
conducted thereon violate any order of any court or Governmental
Authority or Environmental Laws which violations could reasonably be
expected to result in liability in excess of $250,000 or which could
reasonably be expected to result in remedial obligations in excess of
$250,000, assuming disclosure to the applicable Governmental Authority
of all relevant facts, conditions and circumstances, if any, pertaining
to the relevant property.
(b) Without limitation of clause (a) above, no property of any
Seller nor the operations currently conducted thereon or by any prior
owner or operator of such property or operation, are in violation of or
subject to any existing, pending or, to the knowledge of any Seller,
threatened action, suit, investigation, inquiry or proceeding by or
before any court or Governmental Authority or to any remedial
obligations under Environmental Laws which could reasonably be expected
to result in liability in excess of $250,000, or which could reasonably
be expected to result in remedial obligations in excess of $250,000
assuming disclosure to the applicable Governmental Authority of all
relevant facts, conditions and circumstances, if any, pertaining to the
relevant property.
(c) All notices, permits, licenses or similar authorizations,
if any, required to be obtained or filed in connection with the
operation or use of any and all property of each Seller and its
Subsidiaries, including but not limited to past or present treatment,
storage, disposal or release of Hazardous Materials into the
environment, have been duly obtained or filed, except where the failure
to so obtain or file would not have a Material Adverse Effect.
3.1.21 INTELLECTUAL PROPERTY AND OTHER INTANGIBLE ASSETS.
(a) The Sellers (i) own or have the right to use, free and
clear of all liens, claims, and restrictions, all patents, trademarks,
service marks, trade names, and copyrights, and all applications,
licenses, and rights with respect to the foregoing, and all trade
secrets, including know-how, inventions, designs, processes, works of
authorship, computer programs, and technical data and information
(collectively, "INTELLECTUAL PROPERTY") used and sufficient for use in
the conduct of its business as now conducted and/or as presently
proposed to be conducted (including, without limitation, the
development, manufacture, operation, and sale of all products and
services sold or proposed to be sold by the Sellers during the next 24
months following the date of this Agreement) without infringing upon or
violating any right, lien, or claim of others, including, without
limitation, former employees and former employers of its past and
present employees, and (ii) except described in SCHEDULE 3.1.21, is not
obligated or under any liability whatsoever to make any payments by way
of royalties, fees, or otherwise to any owner or licensee of, or other
claimant to, any patent, trademark, service mark, trade name,
copyright, or other intangible asset, with respect to the use thereof
or in connection with the conduct of its business or otherwise.
(b) Any and all Intellectual Property of any kind, relating to
the business of the Sellers, currently being developed, or developed in
the future, by any employee of the Sellers while in the employ of the
Sellers shall be the property solely of the Sellers. The Sellers have
taken security measures to protect the secrecy, confidentiality, and
value of all Intellectual Property, which measures are reasonable and
customary in the industry in which the Sellers operate. The Sellers'
employees and other persons who, either alone or in concert with
others, developed, invented, discovered, derived, programmed, or
designed the Intellectual Property (the "TECHNICAL EMPLOYEES"), or who
have knowledge of or access to information about the Intellectual
Property, have entered into a written agreement with the Sellers, in
form and substance satisfactory to the Company's management (the
"PROPRIETARY INFORMATION AGREEMENT") regarding ownership and treatment
of the Intellectual Property.
(c) Except as described in SCHEDULE 3.1.21,, none of the
Sellers has received any communications alleging that such Seller has
violated, or by conducting its business as proposed would violate, any
of the patents, trademarks, service marks, trade names, copyrights, or
trade secrets or other proprietary rights of any other Person or
entity. None of the Sellers' employees is obligated under any contract
(including licenses, covenants, or commitments of any nature) or other
agreement, or subject to any judgment, decree, or order of any court or
administrative agency, that would interfere with the use of such
employee's best efforts to promote the interests of the Sellers or that
would conflict with the Sellers' business as presently conducted and as
proposed to be conducted. Neither the execution nor delivery of this
Agreement, nor the carrying on of the Sellers' business by the
employees of the Sellers, nor the conduct of the Sellers' business as
proposed to be conducted, will conflict with or result in a breach of
the terms, conditions, or provisions of, or constitute a default under,
any contract, covenant, or instrument under which any of such employees
is now obligated. It is not, and will not become, necessary to utilize
any inventions of any of the Sellers' employees (or people the Sellers
currently intends to hire) made prior to their employment by the
Sellers other than those that have been assigned to the Sellers
pursuant to the Proprietary Information Agreement signed by such
employee.
3.1.22 INSURANCE COVERAGE. The properties of the Sellers are
insured for the benefit of such Seller in amounts deemed adequate by
the Company's management against risks usually insured against by
Persons operating businesses similar to those of the Sellers in the
localities where such properties are located.
3.2 REPRESENTATIONS AND WARRANTIES OF PURCHASER. To induce the Sellers
to enter into this Agreement, Purchaser represents and warrants to the Sellers
that:
3.2.1 PURCHASE FOR INVESTMENT.
(a) Purchaser is acquiring the Note and Warrants for its own
account and not with a view to the public resale or distribution of all
or any part thereof in any transaction which would constitute a
"distribution" within the meaning of the Securities Act of 1933, as
amended (the "SECURITIES ACT").
(b) Purchaser acknowledges that the Note, the shares of Common
Stock issuable upon conversion of the Note, the Warrants, and the
Warrant Shares have not been registered under the Securities Act.
(c) Purchaser is an "accredited investor" within the meaning
of Rule 501 under Regulation D promulgated under the Securities Act, is
experienced in evaluating investments in companies such as the Company,
has such knowledge and experience in financial and business matters as
to be capable of evaluating the merits and risks of its investment and
has the ability to bear the entire economic risk of its investment.
Purchaser has made its own evaluation of its investment in the Note and
the Warrants, based upon such information as is available to it and
without reliance upon the Company or any other person or entity, and
Purchaser agrees that neither the Company nor any other person or
entity has any obligation to furnish any additional information to
Purchaser except as expressly set forth herein.
(d) Purchaser acknowledges that the Note, the shares of Common
Stock issuable upon conversion of the Note, the Warrants, and the
Warrant Shares may not be sold, transferred, pledged, hypothecated, or
otherwise disposed of without registration under the Securities Act or
an exemption therefrom, and that in the absence of an effective
registration statement covering the Note, the shares of Common Stock
issuable upon conversion of the Note, the Warrants, or the Warrant
Shares or an available exemption from registration under the Securities
Act, the Note, the shares of Common Stock issuable upon conversion of
the Note, the Warrants, and the Warrant Shares must be held
indefinitely.
(e) Purchaser agrees that the Note, the shares of Common Stock
issuable upon conversion of the Note, the Warrants, and the Warrant
Shares shall bear legends in substantially the following form:
"THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR
INVESTMENT AND MAY NOT BE SOLD OR OFFERED FOR SALE OR
OTHERWISE TRANSFERRED, 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."
3.2.2 AUTHORIZATION; NO CONFLICT. Purchaser has all requisite
power and authority to enter into this Agreement and to carry out and
perform its obligations under the terms of this Agreement. This
Agreement is a legal, valid, and binding obligation of Purchaser. The
execution, delivery, and performance of this Agreement by Purchaser and
the consummation by Purchaser of the transactions contemplated hereby
will not conflict with or result in a default under the terms of any
material contract, agreement, obligation, commitment, or organizational
document applicable to Purchaser.
ARTICLE IV
COVENANTS
The Sellers covenant and agree (each on its own behalf and on behalf of
each of its Subsidiaries, as applicable) as set forth below, and acknowledges
that Purchaser is entering into this Agreement on the expectation that the
Sellers and their Subsidiaries honor such covenants and agreements.
4.1 AFFIRMATIVE COVENANTS. So long as any principal or other amounts
due and owing remain outstanding under the Note, the Sellers will at all times
comply with the following covenants:
4.1.1 COMPLIANCE WITH LAWS. Each Seller will, and will cause
its Subsidiaries to, comply in all material respects with all
applicable Governmental Requirements.
4.1.2 INSURANCE. Each Seller will, and will cause its
Subsidiaries to, maintain with financially sound and reputable
insurers, insurance with respect to its properties and business against
such liabilities, casualties, risks and contingencies and in such types
and amounts as is customary in the case of Persons engaged in the same
or similar businesses and similarly situated. Upon request of
Purchaser, each Seller will furnish or cause to be furnished to
Purchaser from time to time a summary of the insurance coverage of such
Seller in form and substance satisfactory to Purchaser and if requested
will furnish Purchaser copies of the applicable policies.
4.1.3 PAYMENT OF TAXES AND CLAIMS. Each Seller agrees to pay
or cause to be paid all taxes, assessments, and other governmental
charges levied upon any of its assets or those of its Subsidiaries or
in respect of its or their respective franchises, businesses, income or
profits, all trade accounts payable in accordance with the Company's
usual and customary business terms, and all claims for work, labor, or
materials, which if unpaid might become a lien or charge upon any asset
of such Seller or any of its Subsidiaries, before the same become
delinquent, except that (unless and until foreclosure, sale or other
similar proceedings shall have been commenced) no such charge need be
paid if being contested in good faith and by appropriate measures
promptly initiated and diligently conducted if (a) such reserve or
other appropriate provision, if any, as shall be required by GAAP shall
have been made therefor, and (b) such contest does not have a Material
Adverse Effect on the ability of such Seller or any of its Subsidiaries
to pay any Indebtedness and no material assets are in imminent danger
of forfeiture.
4.1.4 PERFORMANCE OF OBLIGATIONS.
(a) Each Seller will, and will cause its Subsidiaries to, use
its commercially reasonable efforts to pay, discharge, or otherwise
satisfy at or before maturity or before they become delinquent, as the
case may be, all of its obligations of whatever nature, except when the
amount or validity thereof is currently being contested in good faith
by appropriate proceedings and reserves, if any, as shall be required
by GAAP with respect thereto have been provided on the books of such
Seller or its Subsidiaries, as the case may be, and except where the
failure to so pay, discharge or satisfy such obligations would not have
a Material Adverse Effect.
(b) The Sellers will pay the Note according to the reading,
tenor, and effect thereof.
4.1.5 CORPORATE EXISTENCE; PROPERTY. Each Seller (i) will do
or cause to be done all things reasonably necessary to preserve and
keep in full force and effect the corporate existence and material
rights of such Seller and all of its Subsidiaries, (ii) will cause its
properties and the properties of its Subsidiaries used and useful in
the conduct of their respective businesses to be maintained and kept in
good condition, repair and working order and will use its commercially
reasonable efforts to cause to be made all necessary repairs, renewals,
replacements, betterments and improvements thereto, and (iii) will, and
will cause each of its Subsidiaries to, qualify and remain qualified to
conduct business in each jurisdiction where the nature of the business
or the ownership of property by such Seller or such Subsidiary may
require such qualification and where the failure to so qualify would
have a Material Adverse Effect.
4.1.6 USE OF PROCEEDS. The Seller shall use the proceeds from
the sale of the Note and the Warrants for the purposes and in the
manner described in Section 3.1.6.
4.1.7 ENVIRONMENTAL MATTERS. Each Seller and its Subsidiaries
shall comply with all applicable Environmental Laws the failure to
comply with which would have a Material Adverse Effect. If any Seller
or its Subsidiaries shall receive written notice that there exists a
violation of Environmental Law with respect to its operations or any
real property owned, formerly owned, used, or leased thereby, which
violation could have a Material Adverse Effect, such Seller shall
immediately notify Purchaser in writing. Furthermore, if any Seller or
its Subsidiaries shall receive written notice that there exists a
violation of Environmental Law with respect to its operations or any
real property owned, formerly owned, used or leased thereby, which
violation could have a Material Adverse Effect, such Seller shall
within the time period permitted by the applicable Governmental
Authority (unless otherwise contested by such Seller in good faith)
remove or remedy such violation in accordance with all applicable
Environmental Laws unless the Board of Directors of such Seller
determines that it would be in the best interest of such Seller to
delay the remedy of such violation, so long as no Material Adverse
Effect is suffered by such Seller during such delay.
4.1.8 FEES AND EXPENSES.
(a) The Sellers will bear all of their expenses in connection
with this Agreement and the other Operative Documents and the
transactions contemplated hereby and thereby, and will also reimburse
Purchaser for or pay any expenses Purchaser incurs (including, without
limitation, the fees incurred by Purchaser in connection with due
diligence and the reasonable legal fees) in connection with the
negotiation of and closing under this Agreement and any other Operative
Documents and the transactions contemplated hereby and thereby (up to a
maximum of $25,000), including, without limitation, all expenses
incurred in connection with (i) the preparation of, negotiation of,
closing under, amendment of, waiver under, or enforcement of, or the
preservation of any rights under, this Agreement or any other Operative
Documents, (ii) any stamp and other taxes (other than income taxes)
payable with respect to this Agreement or the other Operative
Documents, and (iii) any filing with any Governmental Authority with
respect to Purchaser's purchase of the Note and the Warrants.
(b) The Sellers will also bear the legal fees and
disbursements of counsel (up to a maximum of $25,000) to Purchaser in
connection with any mutually agreed upon amendments to this Agreement
or any of the other Operative Documents, or any amendments proposed by
the Sellers whether or not effected, or in connection with the
consummation of any future transaction related thereto.
4.1.9 BOOKS AND RECORDS; INSPECTION OF PROPERTY. Each Seller
will keep, and will cause each of its Subsidiaries to keep, proper
books of record and accounts in which full, true and correct entries in
conformity with GAAP shall be made of all dealings and transactions in
relation to its business and activities. Each Seller covenants that it
will permit any Person representing Purchaser and designated in writing
by such Investors, at the Investors' expense, to visit and inspect any
of the properties of such Seller and its Subsidiaries, to examine the
corporate, financial, and operating records of such Seller and its
Subsidiaries and make copies thereof or extracts therefrom and to
discuss the affairs, finances, and accounts of any of such corporations
with the directors, officers and independent accountants of such Seller
and its Subsidiaries, all at such reasonable times and as often as
Purchaser may reasonably request.
4.1.10 STOCK TO BE RESERVED. The Company covenants that all
shares of Common Stock that may be issued upon the exercise of the
Warrants will, upon issuance and upon full payment therefor in
accordance with the terms thereof, be validly issued, fully paid, and
non-assessable and free from all taxes, liens, and charges with respect
to the issuance thereof. The Company further covenants that during the
period within which the Warrants may be exercised, the Company will at
all times have authorized and reserved a sufficient number of shares of
Common Stock to permit the exercise of the Warrants.
4.1.11 REGISTRATION RIGHTS.
(A) DEMAND REGISTRATION RIGHTS. The Company covenants and
agrees with the Purchaser and any subsequent holders of the Note, the
Warrants and/or Warrant Shares that, at any time after the earliest of
(i) the Conversion Date, (ii) the date on which the Warrants (or any
portion thereof) are exercised, or (iii) the maturity date of the Note,
within 60 days after receipt of a written request from the Purchaser
(the "INITIATING HOLDERS"), the Company shall file a registration
statement (and use its commercially reasonable efforts to cause such
registration statement to become effective under the Securities Act)
with respect to the offering and sale or other disposition of any
number of shares of Common Stock issued upon conversion of the Note or
Warrant Shares or both (all such securities, the "DEMAND SECURITIES");
PROVIDED that the Company may defer its obligations under this Section
4.1.11(a) for a period of no more than 90 days if the Company's Board
of Directors adopts a resolution that filing such a registration
statement would require a public disclosure by the Company which
disclosure would have material adverse consequences for the Company,
such as a disclosure regarding a pending material acquisition by the
Company; PROVIDED FURTHER that once such information has been publicly
disclosed, then the Company shall promptly proceed to fulfill its
obligations under this Section 4.1.11(a). The Company shall
continuously maintain the effectiveness of such registration statement
for the lesser of (i) 180 days after the effective date of the
registration statement or (ii) the consummation of the distribution by
the holders of the Demand Securities covered by such registration
statement (the "TERMINATION DATE"); PROVIDED, HOWEVER, that if at the
Termination Date, the Demand Securities are covered by a registration
statement which also covers other securities and which is required to
remain in effect beyond the Termination Date, the Company shall
maintain in effect such registration statement as it relates to the
Demand Securities for so long as such registration statement (or any
subsequent registration statement) remains or is required to remain in
effect for any of such other securities. The Company shall not be
required to comply with more than two requests for registration
pursuant to this Section 4.1.11(a). In addition, the Company shall be
required to effect up to three Short-form Registrations at the request
of Purchaser. All expenses of such registration shall be borne by the
Company, except that underwriting commissions and expenses attributable
to the Demand Securities and fees and disbursements of counsel and
other advisors (if any) to the Initiating Holders will be borne by such
holders requesting that such securities be offered.
If the Initiating Holders intend to distribute the Demand
Securities covered by their request by means of an underwriting, they
shall so advise the Company as a part of their request made pursuant to
this Section 4.1.11(a). The right of any other holder to registration
pursuant to this Section 4.1.11(a) shall be conditioned upon such
holder's participation in such underwriting and the inclusion of such
holder's Demand Securities in the underwriting (unless otherwise
mutually agreed by a majority in interest of the Initiating Holders and
such holder with respect to such participation and inclusion) to the
extent provided herein. A holder may elect to include in such
underwriting all or a part of the Demand Securities he holds. If other
holders of registration rights request inclusion in any registration
statement pursuant to this Section 4.1.11(a), such holders may be
included in the underwriting conditioned on their acceptance of the
further applicable provisions of this Section 4.1.11(a). The Company
shall (together with other holders proposed to distribute their
securities through such underwriting) enter into an underwriting
agreement in customary form with a representative of the underwriter or
underwriters selected for such underwriting by a majority in interest
of the Initiating Holders. If the representative advises the Initiating
Holders in writing that marketing factors require a limitation on the
number of shares to be underwritten, then securities held by holders
other than the Initiating Holders shall be excluded from such
registration to the extent so required by such limitation.
(B) PIGGY-BACK REGISTRATION RIGHTS. The Company covenants and
agrees with the Purchaser and any subsequent holders of the Note, the
Warrants and/or Warrant Shares that, in the event the Company proposes
to file a registration statement under the Securities Act with respect
to a firm commitment offering of Common Stock (other than in connection
with an exchange offer or a registration statement on Form S-4 or S-8
or other similar registration statements not available to register
securities so requested to be included), the Company shall in each case
give written notice of such proposed filing to the Purchaser at least
30 days before the earlier of the anticipated or the actual effective
date of the registration statement and at least ten days before the
initial filing of such registration statement and such notice shall
offer to such holders the opportunity to include in such registration
statement such number of shares of Common Stock issued upon conversion
of the Note or Warrant Shares or both (the "PIGGY-BACK SECURITIES", and
together with the securities referred to in Section 4.1.11(a) above,
the "REGISTRABLE SECURITIES") as they may request. Holders desiring
inclusion of Piggy-back Securities in such registration statement shall
so inform the Company by written notice, given within ten days of the
giving of such notice by the Company in accordance with the provisions
of Section 8.11 hereof. The Company shall permit, or shall cause the
managing underwriter of a proposed offering to permit, the holders of
Piggy-back Securities requested to be included in the registration to
include such securities in the proposed offering on the same terms and
conditions as applicable to securities of the Company, if any, included
therein for the account of any person other than the Company and the
holders. Notwithstanding the foregoing, if any such managing
underwriter shall advise the Company in writing that, in its opinion,
the distribution of securities by holders thereof, including all or a
portion of the Piggy-back Securities, requested to be included in the
registration concurrently with the securities being registered by the
Company, would materially adversely affect the distribution of such
securities by the Company for its own account, then the holders of the
Registrable Securities shall delay their offering and sale of the
Registrable Securities (or the portions thereof so designated by such
managing underwriter) for such period, not to exceed 120 days, as the
managing underwriter shall request, provided that if any other
securities are included in such registration statement for the account
of any person other than the Company and the holders of Piggy-back
Securities, then such securities, including the Piggy-back Securities,
so included shall be apportioned among holders who wish to be included
therein pro rata according to amounts so requested to be included by
each such person. No such delay shall in any event impair any right
granted hereunder to make subsequent requests for inclusion pursuant to
the terms of this Section 4.1.11(b). The Company shall continuously
maintain in effect any registration statement with respect to which the
Piggy-back Securities have been requested to be included (and so
included) for a period of not less than 180 days after the
effectiveness of such registration statement ("PIGGY-BACK TERMINATION
DATE"); PROVIDED, HOWEVER, that if at the Piggy-back Termination Date
the Piggy-back Securities are covered by a registration statement which
is, or is required to remain, in effect beyond the Piggy-back
Termination Date, the Company shall maintain in effect the registration
statement as it relates to the Piggy-back Securities for so long as
such registration statement remains or is required to remain in effect
for any of such other securities. All expenses of such registration
shall be borne by the Company, except that underwriting commissions and
expenses attributable to the Piggy-back Securities and fees and
distributions of counsel and other advisors (if any) to the holders
requesting that the Piggy-back Securities be offered will be borne by
such holders.
(C) OTHER MATTERS. In connection with the registration of
Registrable Securities in accordance with Sections 4.1.11(a) or (b)
above, the Company agrees to:
(i) Use its commercially reasonable efforts to
register or qualify the Registrable Securities for offer or
sale under state securities or Blue Sky laws of such
jurisdictions in which the holders of such Registrable
Securities shall designate; PROVIDED that in no event shall
the Company be obligated to qualify to do business in any
jurisdiction where it is not now so qualified or to take any
action which would subject it to general service of process in
any jurisdiction where it is not now so subject, and use its
commercially reasonable efforts to do any and all other acts
and things which may be necessary or advisable to enable the
holders of Registrable Securities to consummate the sale,
transfer, or other disposition of such securities in any
jurisdiction;
(ii) Enter into indemnity and contribution
agreements, each in customary form, with each underwriter, if
any, and each holder of Registrable Securities included in
such registration statement; and, if requested, enter into an
underwriting agreement containing customary representations,
warranties, covenants, allocation of expenses, and customary
closing conditions including, but not limited to, opinions of
counsel and accountants' cold comfort letters with any
underwriter who participates in the offering of Registrable
Securities;
(iii) Pay all expenses in connection with the
registration of the Registrable Securities under the
Securities Act and compliance with the provisions of clause
(i) above, except to the extent otherwise provided in Sections
4.1.11(a) and (b); and
(iv) List the Registrable Securities on each
securities exchange, if any, on which the Common Stock is
listed.
In connection with the registration of Registrable Securities
in accordance with Paragraph (b) above, the holders agree to enter into
an underwriting agreement containing customary representations,
warranties, covenants, allocation of expenses (not otherwise
inconsistent with this Agreement), and customary closing conditions,
with any underwriter who participates in the offering of Registrable
Securities.
(D) RESTRICTIONS ON PUBLIC SALE BY THE COMPANY. The Company
agrees not to effect any public sale or distribution of any shares of
Common Stock or any securities convertible into or exchangeable or
exercisable for such shares of Common Stock (or any option or other
right for such securities), except for any securities that may be
issued to the holders pursuant to the Note or the Warrants during the
15-day period prior to, and during the 60-day period beginning on the
effective date of any registration statement under which the
Registrable Securities are registered in accordance with Section
4.1.11(a) (other than as part of such registration).
(E) RULE 144. With a view to making available to Purchaser the
benefits of certain rules of the Securities and Exchange Commission
(the "COMMISSION") that may permit the sale of Registrable Securities
to the public without registration, the Company hereby covenants and
agrees to use its commercially reasonable best efforts to: (i) file in
a timely manner all reports and other documents required to be filed by
it under the Securities Act and the Securities Exchange Act of 1934, as
amended, and the rules and regulations adopted by the Commission
thereunder necessary to permit sales under Rule 144 under the
Securities Act, and the Company will take such further action to the
extent reasonably required from time to time to permit the Purchaser to
sell Registrable Securities (whether or not any such securities have
been the subject of a demand or piggy-back request under Section
4.1.11(a) and (b) hereof) without registration under the Securities Act
within the limitation of the exemptions provided by (A) Rule 144 under
the Securities Act, as such Rule may be amended from time to time, or
(B) any similar rule or regulation hereafter adopted by the Commission
and (ii) promptly furnish Purchaser a copy of all such reports and
documents upon request. Upon the request of Purchaser, the Company will
deliver to Purchaser a written statement as to whether it has complied
with such requirements.
(F) OTHER REGISTRATION RIGHTS. The Company hereby agrees that
it shall not grant any additional registration rights with respect to
shares of its Common Stock, warrants to purchase its Common Stock or
securities convertible into its Common Stock, which are inconsistent
with the provisions of this Agreement.
4.1.12 FURTHER ASSURANCES. Each Seller covenants that it shall
cooperate with Purchaser and execute such further instruments and
documents as Purchaser shall reasonably request to carry out to the
satisfaction of Purchaser the transactions contemplated by this
Agreement.
4.2 REPORTING COVENANTS. So long as any principal or other amounts due
and owing under the Note remain outstanding, the Sellers will furnish to
Purchaser:
4.2.1 ANNUAL FINANCIAL STATEMENTS. As soon as available and in
any event within 120 days after the end of each fiscal year of the
Company occurring after the date hereof, a Consolidated and
consolidating balance sheet of the Company and its Subsidiaries as at
the end of such year and the related Consolidated and consolidating
statements of operations, shareholders' equity and cash flows of the
Company and its Subsidiaries for such fiscal year, setting forth in
each case in comparative form the figures for the previous fiscal year,
all in reasonable detail and accompanied by a report thereon of Ernst &
Young LLP or other independent public accountants of comparable
recognized national standing, which such report shall state that such
Consolidated Financial Statements present fairly the Consolidated
financial position as at the end of such fiscal year, and the
Consolidated results of operations and cash flows for such fiscal year,
in accordance with GAAP, of the Company and its Subsidiaries.
4.2.2 QUARTERLY FINANCIAL STATEMENTS. As soon as available and
in any event within 50 days after the end of each fiscal quarter of the
Company occurring after the date hereof (other than the fourth quarter
of each fiscal year of the Company), an unaudited Consolidated and
consolidating balance sheet of the Company and its Subsidiaries as at
the end of such quarter and the related Consolidated and consolidating
statements of operations, shareholders' equity and cash flows of the
Company and its Subsidiaries for such fiscal quarter and for the
portion of the Company's fiscal year ended at the end of such quarter,
setting forth in each case in comparative form the figures for the
corresponding quarter and the corresponding portion of the Company's
previous fiscal year, all in reasonable detail and certified by a
Responsible Officer of the Company that they are complete and correct
and that they fairly present in all material respects the Consolidated
financial position as at the end of such fiscal quarter, and the
Consolidated results of operations and cash flows for such fiscal
quarter and such portion of the Company's fiscal year, in accordance
with GAAP, of the Company and its Subsidiaries (subject to normal,
year-end audit adjustments).
4.2.3 COMPLIANCE CERTIFICATE. Together with the Financial
Statements required pursuant to Sections 4.2.1 and 4.2.2 above, a
certificate of a Responsible Officer of the Company, substantially in
the form of Exhibit F, together with or accompanied by such financial
or other details, information, and material as Purchaser may reasonably
request to evidence such compliance.
4.2.4 AUDITORS' NO DEFAULT CERTIFICATE; MANAGEMENT LETTERS.
Together with the Financial Statements required pursuant to Section
4.2.1 above, a certificate of the accountants who prepared the annual
report referred to therein, to the effect that, in making the review
necessary for their certification of such Financial Statements, they
have obtained no knowledge of any Default or Event of Default, or if
they have obtained knowledge of any Default or Event of Default,
specifying the nature and period of existence thereof. Promptly
following the preparation thereof, copies of each management letter
formally issued to the Company by such accountants (together with any
response thereto prepared by the Company).
4.2.5 NOTICE OF CERTAIN EVENTS. Promptly after a Responsible
Officer obtains knowledge of the receipt or occurrence of any of the
following, a certificate of a Responsible Officer of any Seller
specifying (i) any official notice of any violation, non-compliance, or
claim made by any Governmental Authority pertaining to all or any part
of the properties of such Seller or any of its Subsidiaries (which
violation, non-compliance, or claim could have a Material Adverse
Effect); (ii) any event which constitutes a default or an Event of
Default, together with a detailed statement specifying the nature
thereof and the steps being taken to cure such default or Event of
Default; (iii) the receipt of any notice from, or the taking of any
other action by, the holder of any promissory note, debenture or other
evidence of indebtedness of such Seller or any of its Subsidiaries or
of any security (as defined in the Securities Act) of such Seller or
any of its Subsidiaries with respect to a claimed default, together
with a detailed statement specifying the notice given or other action
taken by such holder and the nature of the claimed default and what
action such Seller or its Subsidiary is taking or proposes to take with
respect thereto; (iv) any dispute between such Seller or any of its
Subsidiaries and any Governmental Authority, which, if adversely
determined, would have a Material Adverse Effect; (v) any default or
noncompliance of any party to any of the Operative Documents with any
of the terms and conditions thereof or any notice of termination or
other proceedings or actions which might adversely affect any of the
Operative Documents; (vi) any event or condition which violates any
Environmental Law which could potentially result in liability in excess
of $250,000, or which could potentially result in remedial obligations
in excess of $250,000, assuming disclosure to the applicable
Governmental Authority of all relevant facts, conditions and
circumstances, if any, pertaining to such event or condition; or (vii)
any event or condition which may reasonably be expected to have a
Material Adverse Effect.
4.2.6 SHAREHOLDER COMMUNICATIONS, FILINGS, ETC. Promptly upon
the mailing or filing thereof, copies of all Financial Statements,
reports and proxy statements mailed to the Company's shareholders, and
copies of all effective registration statements or periodic reports
filed with the Commission.
4.2.7 INTENTIONALLY OMITTED.
4.2.8 ERISA. Promptly (and in any event within 30 days) after
the Company or any of its Subsidiaries knows or has reason to know that
a Reportable Event with respect to any Plan has occurred, that any Plan
is or may be terminated, reorganized, partitioned or declared insolvent
under Title IV of ERISA or that any Seller or any of its Subsidiaries
will or may incur any liability to or on account of a Plan under
Sections 4062, 4063, 4064, 4201, or 4204 of ERISA, such Seller will
deliver to Purchaser a certificate of the Chief Financial Officer of
such Seller setting forth information as to such occurrence and what
action, if any, such Seller is required or proposes to take with
respect thereto, together with any notices concerning such occurrences
which are (a) required to be filed by such Seller or the plan
administrator of any such Plan controlled by such Seller or its
Subsidiaries, with the PBGC or (b) received by such Seller or its
Subsidiaries from any plan administrator of a multiemployer or other
Plan not under their control. Each Seller shall furnish to Purchaser
and each other holder of securities a copy of each annual report (Form
5500 Series) of any Plan received or prepared by such Seller or any of
its Subsidiaries. Each annual report and any notice required to be
delivered hereunder shall be delivered no later than 10 days after the
later of the date such report or notice is filed with the Internal
Revenue Service or the PBGC or the date such report or notice is
received by any Seller or any of its Subsidiaries, as the case may be.
4.3 NEGATIVE COVENANTS. So long as any principal or other amounts due
and owing under the Note remain outstanding, without the prior written consent
of the holders of a majority of the principal outstanding under the Note, the
Sellers:
4.3.1 INDEBTEDNESS INCURRED. Shall not, and shall not permit
any of their Subsidiaries to, issue, incur, assume or permit to exist
any Indebtedness, except (a) the Note, (b) Indebtedness not in excess
of $50,000 at any one time and secured by Permitted Liens described in
Section 4.3.2 of this Agreement, (c) Indebtedness for unsecured trade
payables and lease payables incurred in the ordinary course, (d) the
Senior Obligations, (e) Indebtedness existing on the date of this
Agreement and described on SCHEDULE 4.3.1 hereto, and (f) preferred
stock issued pursuant to that certain letter of intent attached hereto
as Exhibit H hereto.
4.3.2 LIENS. Shall not, and shall not permit any of its
Subsidiaries to, create or permit to exist any Lien with respect to any
assets now or hereafter existing or acquired, except the following
(herein collectively called the "PERMITTED LIENS"): (a) Liens for
current taxes or special assessments not delinquent or for taxes or
special assessments being contested in good faith and by appropriate
proceedings that do not subject any Seller or any of its Subsidiaries
to penalties under the Code or other applicable tax laws and for which
adequate reserves shall have been established and are then being
maintained in accordance with GAAP; (b) Liens in connection with the
acquisition of tangible property after the date hereof and attaching
only to the property acquired; (c) Liens incurred in the ordinary
course of business in connection with worker's compensation,
unemployment insurance or other forms of governmental insurance or
benefits; (d) mechanics', workers', materialmen's, and other like Liens
arising in the ordinary course of business in respect of obligations
which are not delinquent or which are being contested in good faith and
by appropriate proceedings and for which adequate reserves shall have
been established and are then maintained in accordance with GAAP; (e)
easements, municipal and zoning ordinances, and rights of way
restrictions not interfering with the ordinary conduct of the business
of any Seller as conducted on the date of execution hereof; (f) Liens
or deposits required by law as a condition to the transaction of
business in the ordinary course; (g) intentionally omitted; (h) Liens
incurred to secure the obligations incurred or undertaken in connection
with this Agreement and the other Operative Documents; (i) Liens
subject to a subordination agreement pursuant to which the Indebtedness
evidenced thereby is subordinated to the Indebtedness evidenced by this
Agreement and the other Operative Documents; and (j) Liens existing on
the date of this Agreement and described on SCHEDULE 4.3.2 hereto.
4.3.3 MERGERS. Shall not, and shall not permit any of their
Subsidiaries to, enter into any transaction of merger or consolidation
or liquidate, wind up, or dissolve itself (or suffer any liquidation or
dissolution), or convey, sell, lease, transfer, or otherwise dispose
of, in one transaction or a series of transactions, all or
substantially all of its business, property, or assets, whether now
owned or hereafter acquired, or acquire by purchase or otherwise all or
substantially all the business, property or assets of, or stock or
other evidence of beneficial ownership of, any Person (other than any
sales or transfers by a Subsidiary to any Seller or to another
Subsidiary), except that the Company may enter into or permit a
transaction of purchase, merger or consolidation if (i) (A) the Company
is the surviving entity, (B) immediately after such purchase, merger or
consolidation (and giving effect thereto) no default under any
Indebtedness shall have occurred and be continuing, and (C) the
consolidated net worth of the surviving entity shall be equal to or
greater than the consolidated net worth of the Company and its
Subsidiaries immediately preceding such purchase, merger or
consolidation, in each case as determined in accordance with GAAP, or
(ii) the merger or consolidation is (X) between two or more wholly
owned Subsidiaries of the Company or (Y) of one or more of the
Subsidiaries with and into the Company.
4.3.4 DISPOSITION OF SUBSTANTIAL ASSETS. Shall not, and shall
not permit any of their Subsidiaries to, sell, dispose of, or otherwise
convey (by merger, consolidation, sale of stock or otherwise), in any
single or related series of sales, dispositions, or conveyances, any
assets of the Sellers or any Subsidiary if the aggregate fair market
value (determined in good faith by the Board of Directors or management
of the Sellers, as appropriate) of all assets (taking into account all
liabilities related to such assets) so sold, disposed of or conveyed by
the Company and its Subsidiaries after the date hereof would exceed the
lesser of (a) $1,000,000 or (b) 25% of the aggregate fair market value
of total assets of the Company and its Subsidiaries taken as a whole
(taking into account all liabilities related to such assets) as of the
end of the most recently ended fiscal year of the Company (other than
any sales or transfers by a Subsidiary to any Seller or to another
Subsidiary); PROVIDED that the Sellers may dispose of assets that are
no longer used in or useful to the operations or business of the
Sellers. Notwithstanding this Section 4.3.4, no assets of any Seller or
its Subsidiaries shall be sold, disposed or otherwise conveyed at less
than fair market value as determined in good faith by the Board of
Directors or management of the Company, as appropriate, except (i) in
accordance with the terms of the RFC Agreement and (ii) for compromises
of accounts in the ordinary course of business.
4.3.5 CHARTER. Other than the Company, shall not, and shall
not permit any of its Subsidiaries to, amend its Charter or its by-laws
or create additional series or classes of shares.
4.3.6 SUBSIDIARY PAYMENTS AND ISSUANCES.
(a) Shall not, and shall not permit any of its Subsidiaries
to, enter into or permit to exist any agreement or undertaking which
prohibits, restricts, or limits the ability of any of the Company's
Subsidiaries to pay dividends or distributions to the Company; or
(b) Other than the Company, shall not, and shall not permit
any of its Subsidiaries to, issue any securities.
4.3.7 TRANSACTIONS WITH AFFILIATES. Shall not enter into or
maintain, and shall not permit any Subsidiary to enter into or
maintain, any transaction or agreement with any of its or any
Subsidiary's Affiliates other than any other Seller, except in the
ordinary course of business and upon fair and reasonable terms no less
favorable to the Seller or any of its Subsidiaries than would be
obtained by such Seller or any such Subsidiary in a comparable arm's
length transaction with a Person who is not an Affiliate of such Seller
or any of its Subsidiaries.
4.3.8 LOAN, ADVANCES, AND INVESTMENTS. Shall not, and shall
not permit any Subsidiary to, make or permit to remain outstanding any
loan or advance to, or guarantee, endorse, or otherwise be or become
contingently liable, directly or indirectly, in connection with the
obligations, stock, or dividends of, or own, purchase, or acquire any
stock, obligations, or securities of, or, except in the ordinary course
of business as reasonably deemed appropriate by the management of the
Company, make any Investment in any Person other than (a) the Sellers
or any of their Subsidiaries or (b) United Network Services, L.L.C., a
Delaware limited liability company (to the extent such loan, advance,
guarantee, or Investment exists on the date of this Agreement), except
that the Sellers or any of their Subsidiaries may:
(i) own, purchase or acquire (a) commercial paper
rated A-1 by Standard & Poor's Corporation or P-1 by Moody's
Investors Service, Inc. on the date of acquisition; (b)
certificates of deposit of United States commercial banks
(having a combined capital and surplus in excess of
$100,000,000), (c) obligations of or guaranteed by the United
States government or any agency thereof; and (d) money market
funds organized under the laws of the United States or any
state thereof that invest substantially all of their assets in
any of the types of investments described in clauses (a), (b)
or (c) of this clause (i);
(ii) endorse negotiable instruments for collection in
the ordinary course of business, make or permit to remain
outstanding travel, moving and other like advances to
officers, employees and consultants in the ordinary course of
business or make or permit to remain outstanding lease,
utility and other similar deposits in the ordinary course of
business;
(iii) make loans or advances to or Investments in a
Person, in an aggregate amount of up to $100,000 at any one
time outstanding; and
(iv) normal and prudent extensions of credit to
customers buying goods and services in the ordinary course of
business, which extensions shall not be for longer periods
that those extended by similar businesses operated in a normal
and prudent manner.
4.3.9 ENVIRONMENTAL MATTERS. Shall not cause or permit, and
shall not allow any of its Subsidiaries to cause or permit, any of
their respective properties to be in violation of, or do anything to
permit anything to be done which will subject such property to any
remedial obligations under any Environmental Laws, that could
reasonably be expected to result in liability in excess of $250,000 or
which could reasonably be expected to result in remedial obligations in
excess of $250,000 assuming disclosure to the applicable Governmental
Authority of all relevant facts, conditions and circumstances, if any,
pertaining to the relevant property.
4.3.10 ERISA COMPLIANCE. Shall not permit any Plan maintained
by it or any Subsidiary to:
(a) engage in any "prohibited transaction" as such
term is defined in Section 4975 of the Code:
(b) incur any "accumulated funding deficiency" as
such term is defined in Section 302 of ERISA; or
(c) terminate any such Plan in a manner which could
result in the imposition of a Lien on the property of the
Sellers or their Subsidiaries pursuant to Section 4068 of
ERISA.
4.3.11 SALE AND LEASEBACK. Shall not, and shall not permit any
of its Subsidiaries to, enter into any arrangements with any lender or
investor or to which such lender or investor is a party providing for
the leasing by the Sellers or any Subsidiary of real or personal
property which has been or is to be sold or transferred by the Sellers
or any Subsidiary to such lender or investor or any Person to whom
funds have been or are to be advanced by such lender or investor on the
security of such property or rental obligations of the Sellers or any
Subsidiary.
4.3.12 SALE OF STOCK AND DEBT OF SUBSIDIARIES. Shall not, and
shall not permit any of its Subsidiaries to, sell or otherwise dispose
of, or part with control of, any shares of stock or Indebtedness of any
Subsidiary, except to the Company or another Subsidiary and except that
all shares of stock and Indebtedness of any Subsidiary at the time
owned by or owed to the Company and all Subsidiaries may be sold as an
entirety for a cash consideration which represents the fair value (as
determined in good faith by the Board of Directors of the Company) at
the time of sale of the shares of stock and Indebtedness so sold;
PROVIDED that such sale or disposition does not violate Section 4.3.4
hereof; PROVIDED FURTHER that, at the time of such sale, such
Subsidiary shall not own, directly or indirectly, any shares of stock
or Indebtedness of any other Subsidiary (unless all of the shares of
stock and Indebtedness of such other Subsidiary owned, directly or
indirectly, by the Company, and all its Subsidiaries are simultaneously
being sold as permitted by this Section 4.3.12).
4.3.13 CERTAIN CONTRACTS. Except as otherwise specifically
permitted by any other provision of Section 4.3, shall not, and shall
not permit any of its Subsidiaries to, enter into or be a party to (i)
any contract to rent or lease (as lessee) any real or personal property
if such contract (or any related document) provides an obligation to
make payments under conditions not customarily found in commercial
leases then in general use or requires that the lessee purchase or
otherwise acquire securities or obligations of the lessor (unrelated to
the lease in question), (ii) any contract for the sale or use of
materials, supplies, or other property, or the rendering of services,
if such contract (or any related document) provides that payment for
such materials, supplies or other property, or the use thereof or
payment for such services, shall be subordinated to any indebtedness
(of the purchaser or user of such materials, supplies or other property
or the Person entitled to the benefit of such services) owed or to be
owed to any Person, or (iii) any other contract which is, or, in the
economic effect, is substantially equivalent to, a guarantee, except,
with respect to (iii) hereof, as permitted under Section 4.3.1 hereof.
ARTICLE V
CONVERSION RIGHTS
5.1 CONVERSION RIGHTS. The Note shall be convertible into Common Stock
as follows:
5.1.1 CONVERSION AT HOLDER'S OPTION. Subject to the provisions
of Section 5.2 hereof, the holder of the Note shall have the right at
such holder's option, at any time and from time to time after the date
of issuance of the Note and without the payment of any additional
consideration, to convert the Note, in whole or in part, into fully
paid and nonassessable shares of Common Stock at the Conversion Price
(as defined in Section 5.1.2 below) in effect on the Conversion Date
(as defined in Section 5.1.3 below) upon the terms hereinafter set
forth.
5.1.2 NUMBER OF SHARES. In the event of a conversion pursuant
to Sections 5.1.1 and 5.2, the Note shall be converted into such number
of shares of Common Stock as is determined by dividing (x) $1,000,000
(plus accrued and unpaid interest on the portion of the Note so
converted through the Conversion Date) by (y) the Conversion Price in
effect on the Conversion Date. If less than the full principal amount
of the Note is converted, the accrued and unpaid interest shall be
calculated on a PRO RATA basis. The "CONVERSION PRICE" shall be the
lesser of (i) $1.00 per share of Common Stock (the "INITIAL CONVERSION
PRICE") and (ii) 85% of the Current Market Price, as defined in Section
5.1.6 below, on the Conversion Date. Such Initial Conversion Price
shall be subject to adjustment in order to adjust the number of shares
of Common Stock into which the Note is convertible, as hereinafter
provided.
5.1.3 MECHANICS OF CONVERSION. The holder of the Note may
exercise the conversion right specified in Section 5.1.1 by
surrendering to the Company or any transfer agent of the Company the
Note to be converted. If the certificate representing shares of Common
Stock issuable upon conversion of the Note is to be issued in a name
other than the name on the face of the Note, such Note shall be
accompanied by such evidence of the assignment and such evidence of the
signatory's authority with respect thereto as deemed appropriate by the
Company or its transfer agent. Conversion shall be deemed to have been
effected with respect to conversions pursuant to Section 5.1.1, on the
date when delivery of notice of an election to convert pursuant to
Section 5.1.1 is made, and such applicable date is referred to herein
as the "CONVERSION DATE." Subject to the provisions of Section
5.1.5(f), as promptly as practicable after the Conversion Date (and
after surrender of the Note to the Company), the Company shall issue
and deliver to or upon the written order of such holder a certificate
or certificates for the number of full shares of Common Stock to which
such holder is entitled upon such conversion, and a check or cash with
respect to any fractional interest in a share of Common Stock, as
provided in Section 5.1.4. Subject to the provisions of Section
5.1.5(f), the person in whose name the certificate or certificates for
Common Stock are to be issued shall be deemed to have become a holder
of record of such Common Stock on the applicable Conversion Date. Upon
conversion of only a portion of the Note the Company shall issue and
deliver to or upon the written order of the holder of the certificate
so surrendered for conversion, at the expense of the Company, a new
Note representing the remaining unconverted principal amount of the
Note so surrendered.
5.1.4 FRACTIONAL SHARES. No fractional shares of Common Stock
or scrip shall be issued upon conversion of the Note. The number of
full shares of Common Stock issuable upon conversion thereof shall be
computed on the basis of the aggregate principal amount of the Note to
be converted. Instead of any fractional shares of Common Stock which
would otherwise be issuable upon conversion of the Note, the Company
shall pay a cash adjustment in respect of such fractional interest in
an amount equal to that fractional interest of the then Current Market
Price, as defined in Section 5.1.6 below.
5.1.5 CONVERSION PRICE AND NUMBER OF SHARES ADJUSTMENTS. The
Initial Conversion Price shall be subject to adjustment from time to
time as follows:
(a) COMMON STOCK ISSUED AT LESS THAN THE CONVERSION
PRICE. If the Company shall issue any Common Stock, other than
Excluded Stock, without consideration or for consideration per
share less than the lower of (1) the Initial Conversion Price
in effect immediately prior to such issuance and (2) the
Current Market Price, the Initial Conversion Price in effect
immediately prior to each such issuance shall immediately
(except as otherwise expressly provided below) be reduced to
the price that is equivalent to such consideration received by
the Company upon such issuance; PROVIDED that this Section
5.1.5(a) shall expire and be of no force and effect after
April 1, 1998.
(i) ISSUANCE FOR CASH. In the case of the
issuance of Common Stock for cash, the amount of the
consideration received by the Company shall be deemed
to be the amount of the cash proceeds received by the
Company for such Common Stock before deducting
therefrom any discounts, commissions, taxes or other
expenses allowed, paid or incurred by the Company for
any underwriting or otherwise in connection with the
issuance and sale thereof.
(ii) CONSIDERATION OTHER THAN CASH. In the
case of the issuance of Common Stock (otherwise than
upon the conversion of shares of capital stock or
other securities of the Company) for a consideration
in whole or in part other than cash, including
securities acquired in exchange therefor (other than
securities that by their terms are exchangeable for
such Common Stock), the consideration other than cash
shall be deemed to be the fair value thereof as
determined in good faith by the Board of Directors,
irrespective of any accounting treatment; PROVIDED
that such fair value as determined by the Board of
Directors shall not exceed the aggregate Current
Market Price of the shares of Common Stock being
issued as of the date the Board of Directors
authorizes the issuance of such shares.
(iii) OPTIONS AND CONVERTIBLE SECURITIES. In
the case of the issuance of (x) options, warrants or
other rights to purchase or acquire Common Stock
(whether or not at the time exercisable), (y)
securities by their terms convertible into or
exchangeable for Common Stock (whether or not at the
time so convertible or exchangeable, or (z) options,
warrants or rights to purchase such convertible or
exchangeable securities (whether or not at the time
exercisable), other than in each case Excluded Stock
as defined in Section 5.1.5(b) below:
(A) the aggregate maximum number of
shares of Common Stock deliverable upon
exercise of such options, warrants or other
rights to purchase or acquire Common Stock
shall be deemed to have been issued at the
time such options, warrants or rights were
issued and for a consideration equal to the
consideration (determined in the manner
provided in Sections 5.1.5(a)(i) and (ii)
above), if any, received by the Company upon
the issuance of such options, warrants or
rights plus the minimum purchase price
provided in such options, warrants or rights
for the Common Stock covered thereby;
(B) the aggregate maximum number of
shares of Common Stock deliverable upon
conversion of or in exchange for any such
convertible or exchangeable securities, or
upon the exercise of options, warrants or
other rights to purchase or acquire such
convertible or exchangeable securities and
the subsequent conversion or exchange
thereof, shall be deemed to have been issued
at the time such securities were issued or
such options, warrants or rights were issued
and for a consideration equal to the
consideration if any, received by the
Company for any such securities and related
options, warrants or rights (excluding any
cash received on account of accrued interest
or accrued dividends), plus the additional
consideration (determined in the manner
provided in Sections 5.1.5(a)(i) and (ii)
above), if any, to be received by the
Company upon the conversion or exchange of
such securities, or upon the exercise of any
related options, warrants or rights to
purchase or acquire such convertible or
exchangeable securities and the subsequent
conversion or exchange thereof;
(C) on any change in the number of
shares of Common Stock deliverable upon
exercise of any such options, warrants or
rights or conversion or exchange of such
convertible or exchangeable securities or
any change in the consideration to be
received by the Company upon such exercise,
conversion or exchange, including, but not
limited to, a change resulting from the
anti-dilution provisions thereof, the
Conversion Price as then in effect shall
forthwith be readjusted to such Conversion
Price as would have been obtained had an
adjustment been made upon the issuance of
such options, warrants or rights not
exercised prior to such change, or of such
convertible or exchangeable securities not
converted or exchanged prior to such change,
upon the basis of such change;
(D) on the expiration or
cancellation of any such options, warrants
or rights, or the termination of the right
to convert or exchange such convertible or
exchangeable securities, if the Initial
Conversion Price shall have been adjusted
upon the issuance thereof, the Initial
Conversion Price shall forthwith be
readjusted to such Initial Conversion Price
as would have been obtained had an
adjustment been made upon the issuance of
such options, warrants, rights or such
convertible or exchangeable securities on
the basis of the issuance of only the number
of shares of Common Stock actually issued
upon the exercise of such options, warrants
or rights, or upon the conversion or
exchange of such convertible or exchangeable
securities; and
(E) if the Initial Conversion Price
shall have been adjusted upon the issuance
of any such options, warrants, rights or
convertible or exchangeable securities, no
further adjustment of the Conversion Price
shall be made for the actual issuance of
Common Stock upon the exercise, conversion
or exchange thereof.
In addition to the adjustments set forth above, the Initial
Conversion Price shall be immediately reduced 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.
(b) EXCLUDED STOCK. "Excluded Stock" shall mean (i)
shares of Common Stock issued or reserved for issuance by the
Company upon exercise of warrants outstanding on the date
hereof, other than warrants described in SCHEDULE 5.1.5
hereto, (ii) shares of Common Stock issued or reserved for
issuance by the Company as a stock dividend payable in shares
of Common Stock, or upon any subdivision or split-up of the
outstanding shares of Common Stock, each of which is subject
to the provisions of Section 5.1.5(c) below, (iii) shares of
Common Stock issued to Purchaser or any holder of the Note or
the Warrants, or (iv) grants of options and shares of Common
Stock issuable or issued thereunder pursuant to the Company's
stock option plans existing on the date hereof. All shares of
Excluded Stock which the Company has reserved for issuance
shall be deemed to be outstanding for all purposes of
computations under Section 5.1.5(a).
(c) STOCK DIVIDENDS, SUBDIVISIONS, RECLASSIFICATIONS
OR COMBINATIONS. If the Company shall (i) declare a dividend
or make a distribution on its Common Stock in shares of its
Common Stock, (ii) subdivide or reclassify the outstanding
shares of Common Stock into a greater number of shares, or
(iii) combine or reclassify the outstanding Common Stock into
a smaller number of shares, the Initial Conversion Price in
effect at the time of the record date for such dividend or
distribution or the effective date of such subdivision,
combination or reclassification shall be proportionately
adjusted so that the holder of the Note surrendered for
conversion after such date shall be entitled to receive the
number of shares of Common Stock which he would have owned or
been entitled to receive had the Note been converted
immediately prior to such date. Successive adjustments in the
Initial Conversion Price shall be made whenever any event
specified above shall occur.
(d) OTHER DISTRIBUTIONS. In case the Company shall
fix a record date for the making of a distribution to all
holders of shares of its Common Stock (i) of shares of any
class other than its Common Stock or (ii) of evidences of
Indebtedness of the Company or any Subsidiary or (iii) of
assets (excluding cash dividends or distributions, and
dividends or distributions referred to in 5.1.5(c) above), or
(iv) of rights or warrants (excluding those referred to in
Section 5.1.5(a) above), in each case the Initial Conversion
Price in effect immediately prior thereto shall be reduced
immediately thereafter to the price determined by dividing (A)
an amount equal to the difference resulting from (1) the
number of shares of Common Stock outstanding on such record
date multiplied by the Initial Conversion Price per share on
such record date, less (2) the fair market value (as
determined by the Board of Directors, whose determination
shall be conclusive) of said shares or evidences of
indebtedness or assets or rights or warrants to be so
distributed, by (B) the number of shares of Common Stock
outstanding on such record date. Such adjustment shall be made
successively whenever such a record date is fixed. In the
event that such distribution is not so made, the Initial
Conversion Price then in effect shall be readjusted, effective
as of the date when the Board of Directors determines not to
distribute such shares, evidences of indebtedness, assets,
rights or warrants, as the case may be, to the Initial
Conversion Price which would then be in effect if such record
date had not been fixed.
(e) ROUNDING OF CALCULATIONS; MINIMUM ADJUSTMENT. All
calculations under this Section 5.1.5 shall be made to the
nearest cent or to the nearest one thousandth (1/1000th) of a
share, as the case may be. Any provision of this Section 5.1.5
to the contrary notwithstanding, no adjustment in the Initial
Conversion Price shall be made if the amount of such
adjustment would be less than $0.05, but any such amount shall
be carried forward and an adjustment with respect thereto
shall be made at the time of and together with any subsequent
adjustment which, together with such amount and any other
amount or amounts so carried forward, shall aggregate $0.05 of
more; PROVIDED that if the events giving rise to such
adjustments occur within three months of each other, then such
adjustments shall be calculated as if the events giving rise
to them had occurred simultaneously on the date of the first
such event.
(f) TIMING OF ISSUANCE OF ADDITIONAL COMMON STOCK
UPON CERTAIN ADJUSTMENTS. In any case in which the provisions
of this Section 5.1.5 shall require that an adjustment shall
become effective immediately after a record date for an event,
the Company may defer until the occurrence of such event (i)
issuing to the holder of the Note converted after such record
date and before the occurrence of such event the additional
shares of Common Stock issuable upon such conversion by reason
of the adjustment required by such event over and above the
shares of Common Stock issuable upon such conversion before
giving effect to such adjustment and (ii) paying to such
holder any amount of cash in lieu of a fractional share of
Common Stock pursuant to Section 5.1.4; PROVIDED that the
Company upon request shall deliver to such holder a due bill
or other appropriate instrument evidencing such holder's right
to receive such additional shares, and such cash, upon the
occurrence of the event requiring such adjustment.
5.1.6 CURRENT MARKET PRICE. The Current Market Price at any
date shall mean, in the event the Common Stock is publicly traded, the
average of the daily closing prices per share of Common Stock for five
consecutive trading days ending one trading day before such date (as
adjusted for any stock dividend, split, combination or reclassification
that took effect during such five trading day period). The closing
price for each day shall be the last reported sale price regular way
or, in case no such reported sale takes place on such day, the average
of the last closing bid and asked prices regular way, in either case on
the principal national securities exchange on which the Common Stock is
listed or admitted to trading, or if not listed or admitted to trading
on any national securities exchange, the closing sale price for such
day reported by The Nasdaq Stock Market, if the Common Stock is traded
over-the-counter and quoted in the National Market System, or if the
Common Stock is so traded, but not so quoted, the average of the
closing reported bid and asked prices of the Common Stock as reported
by The Nasdaq Stock Market or any comparable system, or, if the common
stock is not listed on The Nasdaq Stock Market or any comparable
system, the average of the closing bid and asked prices as furnished by
two members of the National Association of Securities Dealers, Inc.
selected from time to time by the Company for that purpose. If the
Common Stock is not traded in such manner that the quotations referred
to above are available for the period required hereunder, Current
Market Price per share of Common Stock shall be deemed to be the fair
value per share of Common Stock as determined in good faith by the
Board of Directors, irrespective of any accounting treatment.
5.1.7 STATEMENT REGARDING ADJUSTMENTS. Whenever the Initial
Conversion Price shall be adjusted as provided in Section 5.1.5, the
Company shall forthwith file, at the office of any transfer agent for
the Note and Common Stock and at the principal office of the Company, a
statement showing in detail the facts requiring such adjustment and the
Initial Conversion Price that shall be in effect after such adjustment,
and the Company shall also cause a copy of such statement to be sent by
mail, first class postage prepaid, to the holder the Note at its
address appearing on the Company's records. Each such statement shall
be signed by the Company's chief financial officer. Where appropriate,
such copy may be given in advance and may be included as part of a
notice required to be mailed under the provisions of Section 5.1.8.
5.1.8 NOTICE TO HOLDERS. In the event the Company shall
propose to take any action of the type described in clause (i) (but
only if the action of the type described in clause (i) would result in
an adjustment in the Initial Conversion Price), (iii) or (iv) of
Section 5.1.5, or described in Section 5.1.11, the Company shall give
notice to each holder of the Notes, in the manner set forth in Section
5.1.7, which notice shall specify the record date, if any, with respect
to any such action and the approximate date on which such action is to
take place. Such notice shall also set forth such facts with respect
thereto as shall be reasonably necessary to indicate the effect on the
Initial Conversion Price and the number, kind or class of shares or
other securities or property which shall be deliverable upon conversion
of the Note. In the case of any action which would require the fixing
of a record date, such notice shall be given at least ten days prior to
the date so fixed, and in case of all other action, such notice shall
be given at least 15 days prior to the taking of such proposed action.
Failure to give such notice, or any defect therein, shall not affect
the legality or validity of any such action.
5.1.9 TREASURY STOCK. For the purposes of this Section 5.1,
the sale or other disposition of any Common Stock theretofore held in
the Company's treasury shall be deemed to be an issuance thereof.
5.1.10 COSTS. The Company shall pay all documentary, stamp,
transfer or other transactional taxes attributable to the issuance or
delivery of shares of Common Stock upon conversion of the Note;
PROVIDED that the Company shall not be required to pay any federal or
state income taxes or other taxes which may be payable in respect of
any transfer involved in the issuance or delivery of any certificate
for such shares in a name other than that of the holder of the Notes in
respect of which such shares are being issued.
5.1.11 CONSOLIDATION, MERGER, SALE, LEASE OR CONVEYANCE. In
case of any consolidation with or merger of the Company with or into
another corporation or other entity, or in case of any sale, lease or
conveyance to another corporation or other entity of the assets of the
Company as an entirety or substantially as an entirety, the Note shall
after the date of such consolidation, merger, sale, lease or conveyance
be convertible into the number of shares of stock or other securities
or property (including cash) to which the Common Stock issuable (at the
time of such consolidation, merger, sale, lease or conveyance, as if
the Note was then optionally convertible or mandatorily convertible, as
the case may be) upon conversion of the Note would have been entitled
upon such consolidation, merger, sale, lease or conveyance; and in any
such case, if necessary, the provisions set forth herein with respect
to the rights and interests thereafter of the holders of the Note
(including without limitation the definition of Current Market Price)
shall be appropriately adjusted so as to be applicable, as nearly as
may reasonably be, to any shares of stock or other securities or
property thereafter deliverable on the conversion of the Note.
5.2 LIMITATION ON CONVERSION. So long as the Company satisfies the
continued listing requirements of the Nasdaq National Market, the conversion
rights set forth above in Section 5.1 and the right to exercise the Warrants as
set forth in the Warrant 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 5.2 shall become null and void upon
the 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.
ARTICLE VI
EVENTS OF DEFAULT
6.1 EVENTS OF DEFAULT DEFINED; ACCELERATION OF MATURITY. If any one or
more of the following events (herein called "EVENTS OF DEFAULT") shall have
occurred:
(a) all or any part of the principal of the Note is not paid
when and as the same shall become due and payable, whether at the
maturity thereof, by acceleration, or otherwise;
(b) all or any part of the interest on the Note is not paid
within three days of the date when the same shall become due and
payable;
(c) all or any part of any other amount owing to Purchaser
pursuant to the terms of this Agreement or the Note is not paid within
three days of the date when such other amount is due and payable;
(d) default shall occur in the observance or performance of
any covenant contained in Article IV of this Agreement;
(e) default shall occur in the observance or performance of
any of the other covenants or agreements of the Sellers contained in
this Agreement, any other Operative Document or any other agreement
evidencing Indebtedness by the Sellers or any of their Subsidiaries,
which is not remedied within ten days after notice thereof to the
Company;
(f) a receiver, conservator, custodian, liquidator or trustee
of any Seller or any of its Subsidiaries or of all or any of the assets
of any of them, is appointed by court order and such order remains in
effect for more than 30 days; or an order for relief is entered under
the federal or any foreign bankruptcy laws with respect to any Seller
or any of its Subsidiaries; or any of the material assets of any of
them is sequestered by court order and such order remains in effect for
more than 30 days; or a petition is filed against any Seller or any of
its Subsidiaries under the bankruptcy, reorganization, moratorium,
arrangement, insolvency, readjustment of debt, dissolution,
liquidation, or other similar law of any applicable Governmental
Authority, whether now or hereafter in effect, and is not dismissed
within 60 days after such filing;
(g) any Seller or any of its Subsidiaries files a petition in
voluntary bankruptcy or seeking relief under any provision of any
bankruptcy, reorganization, moratorium, arrangement, insolvency,
readjustment of debt, dissolution, liquidation, or other similar law of
any applicable Governmental Authority, whether now or hereafter in
effect, or consents to the filing of any petition against it under any
such law;
(h) any Seller or any of its Subsidiaries makes a general
assignment for the benefit of its creditors, or admits in writing its
inability to pay its debts generally as they become due, or consents to
the appointment of a receiver, conservator, custodian, liquidator or
trustee of any Seller or any of its Subsidiaries, or of all or any part
of the assets of any of them;
(i) final judgment for the payment of money in excess of
$100,000 shall be rendered by a court of record against any Seller or
any of its Subsidiaries or such Seller or such Subsidiary shall not (i)
discharge the same or provide for its discharge in accordance with its
terms or (ii) procure a stay of execution thereof within 15 days from
the date of entry thereof and within said period of 15 days, or such
longer period during which execution of such judgment shall have been
stayed, appeal therefrom and cause the execution thereof to be stayed
during such appeal including, without limitation, by providing adequate
bond for such judgment;
(j) any representation, warranty, or certification made by any
Seller or any of its Subsidiaries, or any of their officers in this
Agreement or any other Operative Document or in any certificate,
report, Financial Statement, or other instrument delivered under or
pursuant to any provision hereof or thereof shall prove to have been
false or incorrect in any material respect on the date or dates as of
which they were made;
(k) if (i) any Plan shall fail to satisfy the minimum funding
standards of ERISA or the Code for any Plan year or part thereof or a
waiver of such standards or extension of any amortization period is
sought or granted under Section 4.12 of the Code, (ii) a notice of
intent to terminate any Plan shall have been or is reasonably expected
to be filed with the PBGC or the PBGC shall have instituted proceedings
under ERISA Section 4042 to terminate or appoint a trustee to
administer any Plan or the PBGC shall have notified the Company or any
ERISA Affiliate that a Plan may become a subject of any such
proceedings, (iii) the aggregate "amount of unfunded benefit
liabilities" (within the meaning of Section 4001(a)(18) of ERISA) under
all Plans determined in accordance with Title IV of ERISA, shall exceed
$500,000, (iv) the Company or any ERISA Affiliate shall have incurred
or is reasonably expected to incur any liability to Title I or IV of
ERISA or the penalty or excise tax provisions of the Code relating to
employee benefit plans, (v) the Company or any ERISA Affiliate
withdraws from any Multiemployer Plan, or (vi) the Company or any
Subsidiary establishes or amends any employee welfare benefit plan that
provides post-employment welfare benefits in a manner that would
increase the liability of the Company or any subsidiary thereunder; and
any such event or events described in clauses (i) through (vi) above
either individually or in the aggregate, could reasonably be expected
to have a Material Adverse Effect; or
(l) the occurrence of an "Event of Default" as defined in the
Furst Agreement;
then, when any Event of Default described in clause (a), (b), (c), (d), (e),
(i), (j), (k), or (l) above has occurred and shall be continuing, the principal
of the Note and the interest accrued thereon and all other amounts due hereunder
(the "other payments") shall, upon written notice from Purchaser, forthwith
become and be due and payable, if not already due and payable, without
presentment, further demand or other notice of any kind. When any Event of
Default described in clause (f), (g) or (h) above has occurred, then the
principal of the Note, the interest accrued thereon, and the other payments
shall immediately become due and payable, upon the occurrence thereof, without
presentment, demand, or notice of any kind. If any principal, installment of
interest, or other payment is not paid in full on the due date thereof whether
by maturity, or acceleration or any Event of Default has occurred and is
continuing, then the outstanding principal balance of the Note, any overdue
installment of interest (to the extent permitted by applicable law), including
interest accruing after the commencement of any proceeding under any bankruptcy
or insolvency law, and all other payments will bear additional interest from the
due date of such payment, or from and after an Event of Default, at a rate equal
to the lesser of (i) the Highest Lawful Rate or (ii) an amount equal to the then
applicable interest rate on the Note plus 2% per annum (such applicable rate
being referred to as the "DEFAULT RATE"), compounded monthly, until the payment
is received or the Event of Default is cured, if permitted, or waived. If
payment of the Note is accelerated, then the outstanding principal balance
thereof shall bear interest at the Default Rate from and after the Event of
Default. The Sellers shall pay to the holder of the Note all reasonable
out-of-pocket costs and expenses, incurred by such holder in any effort to
collect the Note and other payments, including the reasonable attorneys fees and
expenses for services rendered in connection therewith, and pay interest on such
costs and expenses to the extent not paid when demanded at the Default Rate.
6.2 SUITS FOR ENFORCEMENT. If any Event of Default specified in Section
6.1 above has occurred and is continuing, the holder of the Note may pursue any
available remedy to protect and enforce such holder's rights, including without
limitation, instituting a suit in equity or by action at law, or both, whether
for the specific performance of any covenant or agreement contained in this
Agreement or any other Operative Document, or in aid of the exercise of any
power granted in this Agreement or any other Operative Document, or to enforce
any other legal or equitable right or remedy of such holder.
6.3 INDEMNIFICATION. The Sellers agree, jointly and severally, to
indemnify, defend, and hold Purchaser harmless from, against, and in respect of
any and all claims, demands, losses, costs, expenses, obligations, liabilities,
damages, recoveries, and deficiencies, including interest, penalties and
reasonable attorneys' fees (collectively, "CLAIMS"), that Purchaser shall incur
or suffer, which arise, result from, or relate to (a) any breach of, or failure
by any Seller or any of its Subsidiaries to perform, any of its representations,
warranties, covenants, or agreements in this Agreement or any other Operative
Document or in any schedule, certificate, exhibit, or other instrument furnished
or to be furnished by any Seller or any of its Subsidiaries hereunder or
thereunder, or in the Charter of any Seller or any of its Subsidiaries or (b)
any claims of any applicable Governmental Authority or other Person arising
under any Environmental Law.
6.4 DELAYS OR OMISSIONS. No failure to exercise or delay in the
exercise of any right, power or remedy accruing to any holder of the Note upon
any breach or default of any Seller or any of its Subsidiaries under this
Agreement or any other Operative Document shall impair any such right, power, or
remedy of such holder nor shall it be construed to be a waiver of any such
breach or default, or an acquiescence therein, or of or in any similar breach or
default hereafter occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default theretofore or
thereafter occurring.
6.5 REMEDIES CUMULATIVE. All remedies, under either this Agreement or
any other Operative Document, by law or otherwise afforded to any holder of the
Note, shall be cumulative and not alternative.
ARTICLE VII
CONDITIONS PRECEDENT
7.1 CONDITIONS TO CLOSING BY PURCHASER. The obligation of Purchaser to
purchase the Note and the Warrants, as the case may be, on the Closing Date is
subject to the fulfillment to its satisfaction at or prior to the Closing Date
of each of the following conditions:
7.1.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties contained in Section 3.1 shall be true and correct when made
and shall be true and correct as of the Closing Date as if made on the
Closing Date.
7.1.2 PERFORMANCE; DEFAULTS. The Sellers shall have performed
and complied with all agreements and conditions contained in this
Agreement required to be performed or complied with by it prior to or
on the Closing Date and, after giving effect to the issue and sale of
the Note and the Warrants, no default or Event of Default shall have
occurred and be continuing.
7.1.3 LEGAL INVESTMENT. As of the Closing Date, the purchase
of the Note and the Warrants by Purchaser shall (a) be legally
permitted by all laws and regulations to which regulations of each
jurisdiction to which each Seller and Purchaser are subject, (b) not
violate any applicable Governmental Requirement, and (c) not subject to
any tax, penalty, or liability under or pursuant to any applicable
Governmental Requirement.
7.1.4 PROCEEDINGS AND DOCUMENTS. As of the Closing Date, all
corporate, if applicable, and other proceedings in connection with the
transactions contemplated hereby shall be reasonably satisfactory in
form and substance to Purchaser, and Purchaser shall have received on
or prior to the Closing Date copies of all such legal documents or
proceedings taken in connection with the consummation of the
transactions as it shall have reasonably requested.
7.1.5 QUALIFICATIONS. As of the Closing Date, all
authorizations, approvals, or permits of or filings with any
Governmental Authority that are required by law in connection with the
lawful issuance, sale, and delivery of the Note and the Warrants (as
applicable) shall have been duly obtained by each Seller and shall be
effective on and as of the Closing Date.
7.1.6 CONSENTS. On or prior to the Closing Date, each Seller
shall have received in writing consents required of third parties for
the consummation of the transactions contemplated hereby, pursuant to
any law, contract, agreement, or instrument by which such Seller is
bound or to which it is subject.
7.1.7 CERTIFICATES.
(a) Each Seller shall have delivered to Purchaser certificates
executed by their respective Chief Executive Officer, dated as of the
Closing Date, certifying that all representations and warranties of
such Seller in this Agreement are true and correct, and such other
matters as Purchaser shall have reasonably requested.
(b) Each Seller shall have delivered to Purchaser copies of
each of the following, in each case certified to be in full force and
effect on the Closing Date by the Secretary of such Seller:
(i) the certificate and articles of association of
such Seller (certified by the appropriate Governmental
Authority) and all amendments thereof, certified as true and
correct as of the Closing Date;
(ii) the by-laws of such Seller as of the Closing
Date; and
(iii) resolutions of the Board of Directors of such
Seller, the form and substance of which are satisfactory to
Purchaser, authorizing (A) the execution, delivery, and
performance of this Agreement and the other Operative
Documents and the transactions contemplated hereby and
thereby, (B) the execution, issuance, sale, delivery, and
performance of the Note, and (C) the reservation of the
Warrant Shares (as applicable).
7.1.8 GOOD STANDING CERTIFICATES. The Company shall have
delivered a certificate of status relating to each Seller from the
Secretary of State of the respective jurisdiction of incorporation
dated not more than ten days prior to the Closing Date.
7.1.9 LEGAL OPINION. The Sellers shall have delivered to
Purchaser the legal opinion of Fulbright & Jaworski L.L.P., counsel to
the Sellers, dated as of the Closing Date and substantially in the form
of Exhibit G attached hereto.
7.1.10 FEES AND EXPENSES. The Sellers shall have paid to
Purchaser the fees, costs, and expenses that the Sellers are obligated
to pay pursuant to Section 4.1.8 hereof.
7.1.11 OPERATIVE DOCUMENTS. Each Seller shall have executed
and delivered to Purchaser each of the Operative Documents to which
such Person is a party.
7.2 CONDITIONS TO CLOSING BY THE COMPANY. The obligations of the
Sellers to sell the Note and the Warrants to Purchaser are subject to the
fulfillment to its satisfaction on or prior to the Closing Date of each of the
following conditions:
7.2.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Purchaser contained in Section 3.2 shall be true and
correct when made, and shall be true and correct as of the Closing Date
as if made on the Closing Date.
7.2.2 PERFORMANCE; PAYMENT. All covenants, agreements, and
conditions contained in this Agreement to be performed or complied with
by Purchaser on or prior to the Closing Date, including the payment of
the Purchase Price as consideration for the Note and Warrants shall
have been performed or complied with.
ARTICLE VIII
MISCELLANEOUS
8.1 CONSENT TO AMENDMENTS; WAIVERS. Except as otherwise expressly
provided herein, the provisions of this Agreement may be amended or waived only
by the written agreement of the Sellers and Purchaser. Any waiver, permit,
consent, or approval of any kind or character on the part of such holder of any
provisions or conditions of this Agreement must be made in writing and shall be
effective only to the extent specifically set forth in such writing.
8.2 SURVIVAL OF TERMS; FAILURE TO CLOSE. All representations,
warranties, and covenants contained herein or made in writing by any party in
connection herewith will survive the execution and delivery of this Agreement
and any investigation made at any time by or on behalf of Purchaser.
Notwithstanding anything herein to the contrary, in the event the Closing Date
has not occurred on or before October 15, 1997 because one or more conditions
set forth in Article VII has not been satisfied, Purchaser may terminate its
obligations under this Agreement by written notice to the Sellers.
8.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, all covenants and agreements contained in this Agreement by or on behalf
of any of the parties hereto will bind and inure to the benefit of the
respective successors of the parties hereto, whether so expressed or not and the
permitted assigns of the parties hereto including, without limitation and
without need of any express assignment. This Agreement and the rights and
obligations of the Sellers shall not be assigned without the prior written
consent of Purchaser.
8.4 SEVERABILITY. Whenever possible, each provision of this Agreement
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be prohibited by or
invalid under applicable law, such provision will be ineffective only to the
extent of such prohibition or invalidity, without invalidating the remainder of
this Agreement unless the consummation of the transaction contemplated hereby is
materially and adversely affected thereby.
8.5 DESCRIPTIVE HEADINGS. The descriptive headings of this Agreement
are inserted for convenience of reference only and do not constitute a part of
and shall not be utilized in interpreting this Agreement.
8.6 GOVERNING LAW. Each Seller hereby consents and agrees that this
Agreement shall be deemed a contract and instrument made under the laws of the
State of New York and shall be construed and enforced in accordance with and
governed by the laws of the State of New York without regard to principles of
conflicts of law.
8.7 DISPUTES; EXCLUSIVE METHOD; JURISDICTION.
(A) ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO
INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THE NOTE OR THE
OTHER OPERATIVE DOCUMENTS, INCLUDING ANY CLAIM OR CONTROVERSY OF ANY KIND BASED
ON OR ARISING IN TORT, SHALL BE DETERMINED EXCLUSIVELY BY BINDING ARBITRATION IN
ACCORDANCE WITH THE U.S. FEDERAL ARBITRATION ACT (OR IF NOT APPLICABLE,
APPLICABLE STATE LAW), THE RULES OF PRACTICE AND PROCEDURE FOR THE ARBITRATION
OF COMMERCIAL DISPUTES AND THE RULES SET FORTH BELOW. IN THE EVENT OF ANY
INCONSISTENCY, THE RULES SET FORTH IN SECTION 8.7(B) BELOW SHALL CONTROL.
JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING
JURISDICTION. ANY PARTY TO THE NOTE OR THE OTHER OPERATIVE DOCUMENTS MAY BRING
AN ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF
ANY CONTROVERSY OR CLAIM TO WHICH EITHER THE NOTE OR ANY OPERATIVE DOCUMENT
APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION.
(B) THE ARBITRATION SHALL BE CONDUCTED IN HOUSTON, TEXAS AND
ADMINISTERED BY THE AMERICAN ARBITRATION ASSOCIATION. ALL ARBITRATION HEARINGS
WILL BE COMMENCE WITHIN 90 DAYS OF THE DEMAND FOR ARBITRATION. THE ARBITRATOR
SHALL, ONLY UPON A SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE COMMENCEMENT OF
SUCH HEARING FOR AN ADDITIONAL 60 DAYS. THE ARBITRATOR SHALL NOT HAVE AUTHORITY
TO AWARD PUNITIVE, CONSEQUENTIAL, OR INCIDENTAL DAMAGES.
(C) THE PROVISIONS OF THIS SECTION 8.7 SHALL SURVIVE ANY TERMINATION,
AMENDMENT, OR EXPIRATION OF THE DOCUMENTS EVIDENCING THE TRANSACTIONS. EACH
PARTY AGREES TO KEEP ALL DISPUTES AND ARBITRATION PROCEEDINGS STRICTLY
CONFIDENTIAL, EXCEPT FOR DISCLOSURES OF INFORMATION REQUIRED IN THE ORDINARY
COURSE OF BUSINESS OF THE PARTIES OR BY APPLICABLE LAW OR REGULATION.
(d) Each of the parties hereto submits itself and its property to the
personal jurisdiction of the United States District Court for the Southern
District of Texas and the courts of the State of Texas sitting in and for Harris
County in any such action or proceeding.
8.8 FINAL AGREEMENT. THIS AGREEMENT, THE NOTE, AND THE OTHER OPERATIVE
DOCUMENTS CONSTITUTE THE ENTIRE AGREEMENT BETWEEN THE SELLERS AND PURCHASER
CONCERNING THE MATTERS REFERRED TO HEREIN AND THEREIN, AND SUPERSEDE ALL PRIOR
AGREEMENTS AND UNDERSTANDINGS AMONG THE SELLERS AND PURCHASER RELATING TO THE
SUBJECT MATTER HEREOF AND THEREOF. THERE ARE NO UNWRITTEN ORAL AGREEMENTS
BETWEEN OR AMONG THE PARTIES. Any conflict or ambiguity between the terms and
provisions of this Agreement and the terms and provisions of any other Operative
Document shall be controlled by the terms and provisions hereof.
8.9 EXECUTION IN COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which when so executed and delivered shall be
deemed an original, and such counterparts together shall constitute one
instrument.
8.10 FURTHER COOPERATION. At any time and from time to time, and at its
own expense, the Sellers shall promptly execute and deliver all such documents
and instruments, and do all such acts and things, as Purchaser may reasonably
request in order to further effect the purposes of this Agreement and the other
Operative Documents.
8.11 NOTICES. All notices, requests, and other communications to any
party hereunder shall be in writing (including bank wire, telecopy, or similar
teletransmission or writing) and shall be given to such party at its address or
telecopy number set forth on the signature pages hereof or such other address or
telecopy number as such party may hereafter specify by notice to the other
parties.
8.12 NO WAIVER; REMEDIES CUMULATIVE. No failure or delay on the part of
Purchaser in exercising any right or remedy under this Agreement, the Note, or
any other Operative Document and no course of dealing between the Sellers and
Purchaser shall operate as a waiver thereof, nor shall any single or partial
exercise of any right or remedy under this Agreement, the Note, or any other
Operative Document preclude any other or further exercise thereof or the
exercise of any other right or remedy under this Agreement, the Note, or any
other Operative Document. The rights and remedies expressly provided are
cumulative and not exclusive and any rights or remedies that Purchaser would
otherwise have. No notice to or demand on the Sellers not otherwise required by
this Agreement, the Note, or any other Operative Document in any case shall
entitle the Sellers to any other or further notice or demand in similar or other
circumstances or constitute a waiver of the rights of Purchaser to any other or
further action in any circumstances without notice or demand.
8.13 EXHIBITS; SCHEDULES. The exhibits and schedules attached to this
Agreement are incorporated herein and shall be considered to be a part of this
Agreement for the purposes stated herein, except that in the event of any
conflict between any of the provisions of such exhibits or schedules and the
provisions of this Agreement, the provisions of this Agreement shall prevail.
8.14 MAXIMUM INTEREST. It is the intention of the parties hereto to
conform strictly to applicable usury laws and, anything herein to the contrary
notwithstanding, the obligations of the Sellers to Purchaser under this
Agreement and the other Operative Documents shall be subject to the limitation
that payments of interest shall not be required to the extent that receipt
thereof would be contrary to provisions of law applicable to Purchaser limiting
rates of interest which may be contracted for, charged, reserved, received, or
taken by Purchaser. Accordingly, if the transactions contemplated hereby would
be usurious under applicable law (including the Federal and state Laws of the
United States of America, or of any other jurisdiction whose laws may be
mandatorily applicable) with respect to Purchaser then, in that event,
notwithstanding anything to the contrary in this Agreement or any other
Operative Document, it is agreed as follows: (a) the provisions of this Section
8.14 shall govern and control; (b) the aggregate of all consideration which
constitutes interest under applicable law that is contracted for, charged,
received, reserved, or taken under this Agreement or any other Operative
Document, or otherwise in connection with this Agreement or the transactions
contemplated by the Operative Documents by Purchaser shall under no
circumstances exceed the maximum amount of interest allowed by applicable law
(such maximum lawful interest rate, if any, with respect to Purchaser herein
called the "HIGHEST LAWFUL RATE"), and any excess shall be credited to the
Sellers by Purchaser (or, if such consideration shall have been paid in full,
such excess refunded to the Sellers); (c) all sums paid, or agreed to be paid,
to Purchaser for the use, forbearance, and detention of any indebtedness of the
Sellers to Purchaser hereunder or under any other Operative Document shall, to
the extent permitted by applicable law, be amortized, prorated, allocated, and
spread throughout the full term of any such indebtedness until payment in full
so that the actual rate of interest does not exceed the Highest Lawful Rate; and
(d) if at any time the sum of the interest and all other amounts payable
pursuant to this Agreement and the other Operative Documents that are deemed to
be interest under applicable law exceeds that amount which would have accrued at
the Highest Lawful Rate, the interest and other amounts to accrue to Purchaser
pursuant to this Agreement and the other Operative Documents shall be limited,
notwithstanding anything to the contrary in this Agreement or any other
Operative Document, to that amount which would have accrued at the Highest
Lawful Rate, but any subsequent reductions, as applicable, shall not reduce the
interest or other amounts payable to Purchaser pursuant to this Agreement and
the other Operative Documents below the Highest Lawful Rate until the total
amount of interest accrued pursuant to this Agreement and the other Operative
Documents and such other amounts deemed to be interest equals the amount that
would have accrued to Purchaser if the rate per annum set forth in the Note had
at all times been in effect, PLUS all other amounts that which would have been
received but for the effect of this Section 8.14. For purposes of Article
5069-1.04, Vernon's Texas Civil Statutes, as amended, to the extent, if any,
applicable to Purchaser, the Sellers agree that the Highest Lawful Rate shall be
the "indicated (weekly) rate ceiling" as defined in said Article; PROVIDED that
Purchaser may also rely, to the extent permitted by applicable laws, on
alternative maximum rates of interest under other laws applicable to Purchaser
if greater. Tex. Rev. Civ. Stat. Ann. Art. 5069, Ch. 15 (which regulates certain
revolving credit loan accounts and revolving tri-party accounts) shall not apply
to this Agreement or any other Operative Document.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first set forth above.
THE WILLIS GROUP LLC
By:
Name:
Title:
Address for Notice:
10235 W. Little York
Suite 417
Houston, Texas 77040
Attention:
Telecopy:
EQUALNET HOLDING CORP.
By:
Name:
Title:
Address for Notice:
EqualNet Holding Corp.
1250 Wood Branch Park Drive
Houston, Texas 77079-1212
Attention: General Counsel
Telecopy: (281)529-4686
with a copy to:
Fulbright & Jaworski L.L.P.
1301 McKinney
Suite 5100
Houston, Texas 77010
Attention: Robert F. Gray, Jr.
Telecopy: (713)651-5246
EQUALNET CORPORATION
By:
Name:
Title:
Address for Notice:
EqualNet Holding Corp.
1250 Wood Branch Park Drive
Houston, Texas 77079-1212
Attention: General Counsel
Telecopy: (281)529-4686
with a copy to:
Fulbright & Jaworski L.L.P.
1301 McKinney
Suite 5100
Houston, Texas 77010
Attention: Robert F. Gray, Jr.
Telecopy: (713)651-5246
TELESOURCE, INC.
By:
Name:
Title:
Address for Notice:
EqualNet Holding Corp.
1250 Wood Branch Park Drive
Houston, Texas 77079-1212
Attention: General Counsel
Telecopy: (281)529-4686
with a copy to:
Fulbright & Jaworski L.L.P.
1301 McKinney
Suite 5100
Houston, Texas 77010
Attention: Robert F. Gray, Jr.
Telecopy: (713)651-5246
EQUALNET WHOLESALE SERVICES, INC.
By:
Name:
Title:
Address for Notice:
EqualNet Holding Corp.
1250 Wood Branch Park Drive
Houston, Texas 77079-1212
Attention: General Counsel
Telecopy: (281)529-4686
with a copy to:
Fulbright & Jaworski L.L.P.
1301 McKinney
Suite 5100
Houston, Texas 77010
Attention: Robert F. Gray, Jr.
Telecopy: (713)651-5246
<PAGE>
SCHEDULE 3.1.8
TO
NOTE AND WARRANT PURCHASE AGREEMENT
LIABILITIES
Assessed Federal Excise Tax Penalties for 1997 $21,406.14*
*All other assessments due the Internal Revenue Service are referred to in the
financial statement.
<PAGE>
SCHEDULE 3.1.9
TO
NOTE AND WARRANT PURCHASE AGREEMENT
PENDING LITIGATION
AND MATTERS FOR WHICH FORMAL WRITTEN
DEMANDS HAVE BEEN MADE
1.Civil Action No. 95-CH-0142 filed int he Circuit Court of the Seventh Judicial
Circuit of Sangamon County, Illinois filed against EqualNet Corporation and
EqualNet Holding Corp., filed by the office of the Illinois Attorney General and
based upon an allegedly excessive number of customer complaints that long
distance service was switched to EqualNet without the customer's knowledge or
informed consent, with remedies sought under the deceptive trade
practices-consumer protection statutes of that state. EqualNet has filed an
answer denying each of the material allegations of this complaint.
2.Case Number IJ96-1153 filed in the Chancery Court of Pulansky County,
Arkansas, 1st Division, by the office of the Arkansas Attorney General and based
upon an allegedly excessive number of customer complaints that long distance
service was switched to EqualNet without the customer's knowledge or informed
consent, with remedies sought under the Arkansas Deceptive Trade Practices Act.
EqualNet has filed an answer denying each of the material allegations of this
complaint.
3.The assistant attorneys general for each of the foregoing matters have
indicated that any settlement of their cases must be done jointly, and that
other states (Arizona, Idaho, Wisconsin, Texas, Michigan, Tennessee, Kansas,
Nevada and New Jersey) have indicated that they intend to be included in any
such settlement. Fines, penalties, costs of investigations, restitution of all
or portions of customer charges, or some combination of the foregoing or other
assessments may be required of EqualNet to resolve each of the matters described
n paragraph 1 through 3, or that EqualNet will choose to enter into consent
decrees or orders without any admission of fault, as a means to resolve these
matters, rather than pursue a judicial determination as to the truth or falsity
of the allegations made against the Company. It is impossible to forecast with
any accuracy the potential exposure in these matters, but such exposure could be
a material amount. Subject to approval of its board of directors, EqualNet has
offered to resolve these matters cumulatively for the amount of $500,000 plus
certain refunds in an amount to e determined, provided such amounts could be
paid over time. The refunds are not anticipated to be a significant monetary
sanction. The potential cost of protracted litigation simultaneously in several
states was a significant factor in the Company's decision to respond with this
settlement offer. Such offer is not an admission of wrongdoing by the Company in
any manner.
4.Civil Action No. 97-C-2842 filed in the federal District Court for the
Northern District of Illinois, with process served on July 21, 1997 on EqualNet
Corporation and EqualNet Wholesale Services, Inc. (its wholly-owned subsidiary).
This action was filed by American Teletronics Long Distance, Inc. ("ATLD) and
MetroLink Communications, Inc. ("MetroLink") alleging breach of contract, fraud
and negligent misrepresentation arising out of a letter of intent EqualNet
Corporation signed with MetroLink in November, 1995 to create a joint venture
eventually known as Unified Network Services LLC, a Delaware limited liability
company ("UNS") with EqualNet Corporation, MetroLink, MediaNet, Inc. (a
MetroLink affiliate) and EqualNet Wholesale Services, Inc., as
shareholder/members. EqualNet Wholesale Services has not conducted any business
other than the purchase of a 49% ownership interest in UNS. EqualNet Corporation
owns a 1% interest in the limited liability company. MetroLink and MediaNet each
own 25% ownership interests in UNS. The suit alleges that EqualNet did not
provide "back office" support for UNS, and failed to complete the purchase of
ATLD's customer base. EqualNet has filed an answer denying the allegations made
against it, has filed a motion seeking to have EqualNet Wholesale Services, Inc.
dismissed as a defendant, and has filed a counterclaim for damages, based upon
MetroLink's failure or refusal to provide a fully functional, industry standard
network for wholesale by UNS. EqualNet further denies that any contractual
obligation ever existed for EqualNet to acquire ATLD's customer base. EqualNet
conducted its due diligence, and decided upon the conclusion of such due
diligence, that it did not want to acquire the ATLD customer base.
<PAGE>
SCHEDULE 3.1.10
EMPLOYEE RETIREMENT INCOME
SECURITY ACT OF 1974
(ERISA)
None
<PAGE>
SCHEDULE 3.1.12
DEFAULTS
1. EqualNet has defaulted in the timely payments of obligations under its
promissory notes payable to Sprint Communications LP dated November 18,
1996 and March 11, 1997.
2. EqualNet has defaulted in the timely payments of obligations to AT&T
Corp. under both its Carrier Agreement and agreement for payment of
obligations incurred prior to the effective date of the current Carrier
Agreement.
3. EqualNet has defaulted under certain provisions of its agreements with
The Furst Group, Inc.
<PAGE>
SCHEDULE 3.1.18
UNITED STATES SECURITIES AND EXCHANGE
COMMISSION FILINGS
1. Prospectus March 9, 1995
2. Form 10-K Report Fiscal Year Ended June 30, 1995
3. Form 10-Q Quarterly Report Period Ended March 31, 1995
4. Form 10-Q Quarterly Report Period Ended September 30, 1995
5. Form 8-K Report, June 6, 1995
6. Form 10-Q Quarterly Report Period Ended December 31, 1995
7. Form 10-Q Quarterly Report Period Ended March 31, 1996
8. Amendment No. 1 To Form 8-K, May 10, 1996
9. Form 10-K Report Fiscal Year Ended June 30, 1996
10. Form 10-Q Quarterly Report Period Ended September 30, 1996
11. Form 8-K Report, September 30, 1996
12. Form 10-Q Quarterly Report Period Ended December 31, 1996
13. Form 10-Q Quarterly Report Period Ended March 31, 1997
14. Form 8-K Report, July 1, 1997
15. Form 8-K Report, July 7, 1997
<PAGE>
SCHEDULE 3.1.19
TO
OUTSTANDING WARRANTS AND OPTIONS
1. Key Employee Stock Grants 36,435
2. Director Options 13,000
3. Employee Options Grant 1 (vesting July 11, 1997) 230,000
4. "Creative Employee Options 40,000*
5. Creative Communications, International Warrants 100,000
6. Furst Group Warrants 1,500,000
7. Employee Options Grant 2 (vesting July 11, 1998) 231,000
8. Lexus 167,465
<PAGE>
SCHEDULE 3.1.21
INTELLECTUAL PROPERTY
None
<PAGE>
SCHEDULE 4.3.1
SCHEDULE OF INDEBTEDNESS
1. Sprint Note dated November 18, 1996
2. Sprint Note dated March 11, 1997
3. Capital Lease (Global Services) from 1995 for equipment and
furniture
4. Miscellaneous leases (Comerica, Global Services) secured with
UCC filings
5. Letter of Credit (Comerica Bank) in lieu of premises lease
deposit
6. Obligations arising under the RFC Agreement if and to the
extent such agreement were to be construed as a secured loan
transaction rather than a factoring agreement
7. Obligations to repurchase from The Furst Group certain Common
Stock or other equity instruments of the Company in accordance
with the Letter Agreement dated October 1, 1997, between The
Furst Group and the Company.
<PAGE>
SCHEDULE 4.3.2
LIENS
1. Those liens created in the documents of Receivables Funding
Corporation signed on or about June 18, 1997.
2. Those liens created in the document of The Furst Group, Inc.
signed on or about February 3, 1997.
3. Those liens securing the obligations under the Comerica LOC.
<PAGE>
SCHEDULE 5.1.5
TO
NOTE AND WARRANT PURCHASE AGREEMENT
EXCLUSIONS FROM
DEFINITION EXCLUDED STOCK
1. Subscription for 167,465 shares of Common Stock by Lexus
Commercial Enterprises, Ltd.
2. Warrant for 100,000 shares of Common Stock to be issued to
Receivables Funding Corporation.
<PAGE>
AMENDMENT TO NOTE AND WARRANT PURCHASE AGREEMENT
AND WARRANT AGREEMENT
This Amendment to Note and Warrant Purchase Agreement and Warrant
Agreement ("Amendment") is entered into between EqualNet Holding Corp.
("EqualNet"), EqualNet Corporation, Telesource, Inc., EqualNet Wholesale
Services, Inc. and Willis Group, LLC ("TWG") effective as of February 12, 1998.
RECITALS
Each of the entities listed in the preamble is a party to a Note and
Warrant Purchase Agreement ("Note Agreement") dated October 1, 1997. In
addition, EqualNet and TWG are parties to a Warrant Agreement dated October 1,
1997, pursuant to which EqualNet issued to TWG a warrant for 200,000 shares of
EqualNet's Common Stock (the "Warrant Agreement"). Any capitalized term used but
not defined herein shall have the meaning ascribed to such term in the Note
Agreement or Warrant Agreement, as applicable.
The parties desire to amend the Warrant Agreement and Warrant issued
pursuant thereto, and the Note Agreement, in accordance with the terms of this
Amendment.
NOW, THEREFORE, in and for the mutual covenants and promises set forth
herein, EqualNet and TWG agree as follows:
1. Each of the Warrant Agreement and Warrant is generally amended to
include a covenant on the part of EqualNet that it will use its best efforts to
cause the number of shares of EqualNet Common Stock authorized under EqualNet's
Articles of Incorporation to be increased to permit the full exercise of the
Warrant and a limitation on the holder of the Warrant to the effect that the
obligation of EqualNet to issue shares upon the exercise of the Warrant in whole
or in part shall be conditioned upon EqualNet having a number of UNRESERVED
authorized shares of EqualNet Common Stock at such time sufficient to cover the
number of shares relating to the exercise.
2. The Note Agreement is generally amended to include a covenant on the
part of EqualNet that it will use its best efforts to cause the number of shares
of EqualNet Common Stock authorized under EqualNet's Articles of Incorporation
to be increased to permit the full conversion of the Note and a limitation on
the holder of the Note to the effect that the obligation of EqualNet to issue
shares upon the conversion of the Note in whole or in part shall be conditioned
upon EqualNet having a number of unreserved authorized shares of EqualNet Common
Stock at such time sufficient to cover the number of shares relating to the
conversion.
<PAGE>
By entering into this Amendment, TWG does not waive by implication or
otherwise any of the conditions to the consummation of any transaction between
EqualNet and any of its affiliates and TWG pursuant to any separate agreement
between such parties. This Amendment contains the entire understanding and
agreement between the parties with respect to the subject matter of this
Amendment and supersedes any prior or contemporaneous statements, understandings
or agreements with respect to such subject matter.
EQUALNET HOLDING CORP.
By:
Name: Michael L. Hlinak
Title: Senior Vice President
EQUALNET CORPORATION
By:
Name: Michael L. Hlinak
Title: Chief Operating Officer
TELESOURCE, INC.
By:
Name: Tom Humble
Title: Secretary and Authorized Agent
EQUALNET WHOLESALE SERVICES, INC.
By:
Name: Dean H. Fisher
Title: Secretary and Authorized Agent
WILLIS GROUP, LLC
By:
Name: Mark A. Willis
Title: President
-2-
EXHIBIT 10.2--SWITCH AGREEMENT
SWITCH AGREEMENT
BETWEEN
EQUALNET HOLDING CORP.,
EQ ACQUISITION SUB, INC.
AND
WILLIS GROUP, LLC
December 2, 1997
1
<PAGE>
TABLE OF CONTENTS
1. Definitions............................................................1
2. The Acquisition........................................................5
(a) Basic Transaction................................................5
(b) Acquisition Consideration........................................6
(c) The Closing......................................................6
(d) Deliveries at the Closing........................................6
3. Representations and Warranties of EqualNet and Sub.....................6
(a) Organization, Qualification, and Corporate Power.................6
(b) Authorization of Transaction.....................................7
(c) Brokers' Fees....................................................7
(d) No Violation.....................................................7
(e) Consents.........................................................7
(f) Financial Information............................................7
(g) Liabilities......................................................8
(h) Litigation.......................................................8
(i) Compliance with ERISA............................................8
(j) Taxes; Governmental Charges......................................8
(k) Defaults.........................................................9
(l) Compliance with the Law..........................................9
(m) Investment Company Act...........................................9
(n) Public Utility Holding Company Act...............................9
(o) Disclosure.......................................................9
(p) Structure; Capitalization........................................9
(q) Environmental Matters...........................................10
(r) Intellectual Property and Other Intangible Assets...............11
(s) Insurance Coverage..............................................12
4. Representations and Warranties of TWG.................................12
(a) Company Existence...............................................12
(b) Corporate Power and Authorization...............................12
(c) Binding Obligations.............................................12
(d) Brokers' Fees...................................................13
(e) Investment......................................................13
(f) Title...........................................................13
5. Pre-Closing Covenants.................................................13
(a) General.........................................................13
(b) Inspection......................................................13
(c) Notices and Consents............................................13
(d) Notice of Developments..........................................14
(e) Ordinary Course.................................................14
i
<PAGE>
(f) Changes in Employment Arrangements..............................16
(g) Severance.......................................................16
(h) Other Actions...................................................16
(i) Valid Issuance..................................................16
(j) Government Regulations..........................................16
(k) ERISA...........................................................17
(l) Corporate Existence; Maintenance of Properties..................17
(m) Insurance.......................................................17
(n) Further Assurances..............................................17
(o) Notices of Certain Events.......................................17
(p) Environmental Laws..............................................18
(q) Registration Rights.............................................18
(r) Shareholder Approval; Preparation of Proxy Statements...........18
(s) No Solicitation.................................................19
(t) Listing of Common Stock.........................................20
(u) Acquisition Loan................................................21
6. Conditions to Obligation to Close.....................................21
(a) Conditions to Obligation of TWG.................................21
(b) Conditions to Obligation of EqualNet and Sub....................22
7. Termination...........................................................23
(a) Termination of Agreement........................................23
(b) Effect of Termination...........................................24
8. Remedies for Breaches of This Agreement...............................24
(a) Survival of Representations and Warranties......................24
(b) Indemnification Provisions for Benefit of TWG...................24
(c) Indemnification Provisions for Benefit of EqualNet..............24
(d) Matters Involving Third Parties.................................24
(e) Claims for Indemnification......................................25
(f) Determination of Adverse Consequences...........................26
(g) Other Indemnification Provisions................................26
9. Miscellaneous.........................................................26
(a) Press Releases and Public Announcements.........................26
(b) No Third-Party Beneficiaries....................................26
(c) Succession and Assignment.......................................26
(d) Counterparts....................................................26
(e) Notices.........................................................27
(f) Governing Law...................................................27
(g) Amendments and Waivers..........................................27
(h) Severability....................................................28
(i) Expenses........................................................28
(j) Construction....................................................28
(k) Incorporation of Exhibits, Annexes, and Schedules...............28
ii
<PAGE>
SWITCH AGREEMENT
This Switch Agreement is entered into as of December 2, 1997, by and
between EqualNet Holding Corp., a Texas corporation ("EqualNet"), EQ Acquisition
Sub, Inc., a Delaware corporation and a wholly owned subsidiary of EqualNet
("Sub"), and Willis Group, LLC, a Texas limited liability company ("TWG").
EqualNet, Sub and TWG are referred to collectively herein as the "PARTIES."
RECITALS
This Agreement contemplates a transaction in which the Sub will purchase
the Switches (the "Acquisition").
Now, therefore, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the Parties agree as follows:
1. DEFINITIONS.
"ACCREDITED INVESTOR" has the meaning set forth in Regulation D
promulgated under the Securities Act.
"ACQUISITION LOAN" has the meaning set forth in Section 5(v).
"ADVERSE CONSEQUENCES" means all actions, suits, proceedings,
hearings, investigations, charges, complaints, claims, demands,
injunctions, judgments, orders, decrees, rulings, damages, dues,
penalties, fines, costs, amounts paid in settlement, Liabilities,
obligations, Taxes, liens, losses, expenses and fees, including court
costs and reasonable attorneys' fees and expenses.
"APPLICABLE RATE" means the corporate base rate or prime rate of
interest publicly announced from time to time by Texas Commerce Bank,
National Association, Houston, Texas plus 5.0% per annum.
"BASIS" means any past or present fact, situation, circumstance,
status, condition, activity, practice, plan, occurrence, event, incident,
action, failure to act, or transaction that forms or could form the basis
for any specified consequences.
"BUSINESS DAY" means any day that is not a Saturday, a Sunday, or a
day that is a banking holiday under United States or Texas Law.
"CAPITALIZED LEASE OBLIGATIONS" shall mean all rental obligations
which, under GAAP in effect on the day such obligation is incurred, are
required to be capitalized on the books of EqualNet or any Subsidiary, in
each case taken at the amount thereof accounted for as indebtedness (net
of interest expense) in accordance with such principles.
1
<PAGE>
"CLOSING" has the meaning set forth in Section 2(c).
"CLOSING DATE" has the meaning set forth in Section 2(c).
"COMMISSION" shall mean the United States Securities and Exchange
Commission.
"CURRENT INDEBTEDNESS" shall mean any obligation for borrowed money
(including notes payable and drafts accepted representing extensions of
credit whether or not representing obligations for borrowed money) payable
on demand or within a period of one year from the date of creation
thereof; provided, any obligation shall be treated as Funded Indebtedness,
regardless of its term, if such obligation is renewable pursuant to the
terms thereof or of a revolving credit or similar agreement effective for
more than one year after the date of the creation of such obligation, or
may be payable out of the proceeds of a similar obligation pursuant to the
terms of such obligation or of any such agreement. Any obligation secured
by a Lien on, or payable out of the proceeds of production from, property
of EqualNet or any Subsidiary shall be deemed to be Funded or Current
Indebtedness, as the case may be, of EqualNet or such Subsidiary even
though such obligation shall not be assumed by EqualNet or such
Subsidiary.
"EQUALNET COMMON SHARE" means any share of the common stock of
EqualNet, $.01 par value per share.
"ENVIRONMENTAL LAW" shall mean any judgment, decree, order, law,
license, rule, regulation or private agreement (such as covenants,
conditions, and restrictions), of any federal, state or local executive,
legislative, judicial, regulatory or administrative agency, board, or
authority designed to protect the environment, air, surface, water,
groundwater or soil, control pollution, or regulate the exploration,
manufacturing, processing, distributing, use, storage, transport or
handling of Hazardous Materials, including, without limitation, the
Comprehensive Environmental Response, Compensation, and Liability Act (42
U.S.C. ss. 9601 ET SEQ.) ("CERCLA"), the Oil Pollution Act (33 U.S.C. ss.
2701 ET SEQ.) ("OPA"), the Resource Conservation and Recovery Act (42
U.S.C. ss. 6901 ET SEQ.) ("RCRA"), and the Federal Water Pollution Control
Act (33 U.S.C. ss. 1251 ET SEQ.) ("CWA"), as such laws have been or
hereafter may be amended or supplemented, and any and all analogous
present and future federal, state, and local laws in jurisdictions where
EqualNet and its Subsidiaries do business.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time. Section references to ERISA are to
ERISA as in effect at the date of this Agreement and any subsequent
provisions of ERISA amendatory thereof, supplemental thereto or
substituted therefor.
"ERISA AFFILIATE" shall mean each trade or business (whether or not
incorporated) which together with EqualNet or a Subsidiary of EqualNet
would be deemed to be a "single employer" within the meaning of Section
4001 of ERISA immediately following the acquisition.
2
<PAGE>
"FUNDED INDEBTEDNESS" shall mean and include without duplication any
obligation payable more than one year from the date of the creation
thereof (including the current portion of Funded Indebtedness), which
under generally accepted accounting principles is shown on the balance
sheet as a liability (including, without limitation, Capitalized Lease
Obligations and excluding reserves for deferred income taxes and other
reserves to the extent that such reserves do not constitute an
obligation).
"GAAP" shall mean generally accepted accounting principles
consistently applied throughout the period or periods in question.
"GOVERNMENTAL AUTHORITY" shall mean any foreign or domestic federal,
state, county, municipal, or other governmental or regulatory authority,
agency, board, body, commission, instrumentality, court, or any political
subdivision thereof.
"GOVERNMENTAL REQUIREMENT" shall mean any law, statute, code,
ordinance, order, rule, regulation, judgment, decree, injunction,
franchise, permit, certificate, license, authorization, or other direction
or requirement (including but not limited to any of the foregoing which
relate to Environmental Laws, energy regulations and occupational, safety
and health standards or controls) of any Governmental Authority.
"HAZARDOUS MATERIALS" shall mean, collectively, (i) those substances
included within the definition of or identified as "hazardous substances,"
"hazardous materials," "toxic substances," or "solid waste" in or pursuant
to, without limitation, CERCLA, OPA, RCRA, and the Occupational Health and
Safety Act, and in the regulations promulgated pursuant to said laws, all
as amended; (ii) any material, waste or substance which is or contains (A)
petroleum, including crude oil or any fraction thereof, natural gas, or
synthetic gas usable for fuel or any mixture thereof; (B) asbestos; (C)
polychlorinated biphenyls; (D) designated as a "hazardous substance"
pursuant to Section 307 or 311 of the CWA; (E) flammable explosives; or
(F) radioactive materials; and (iii) any such other substances, materials
and wastes which are or become regulated as hazardous or toxic under
applicable local, state or federal law, or which are currently classified
as hazardous or toxic under local, state or federal laws or regulations.
"INDEBTEDNESS" shall mean Funded Indebtedness and/or Current
Indebtedness.
"INDEMNIFIED PARTY" has the meaning set forth in Section 9(d).
"INDEMNIFYING PARTY" has the meaning set forth in Section 9(d).
"LIABILITY" means any liability (whether known or unknown, whether
asserted or unasserted, whether absolute or contingent, whether accrued or
unaccrued, whether liquidated or unliquidated, and whether due or to
become due).
"MATERIAL ADVERSE EFFECT" or "MATERIAL ADVERSE CHANGE" means any
material and adverse effect on, or change to, (i) the assets, liabilities,
financial condition, business, or operations of EqualNet and its
Subsidiaries on a consolidated basis, or (ii) the ability of
3
<PAGE>
EqualNet and its Subsidiaries on a consolidated basis to carry out their
business as of September 30, 1997.
"NASDAQ" shall mean the National Association of Securities Dealers
Automated Quotations system.
"NOTE AND WARRANT PURCHASE AGREEMENT" shall mean that certain
agreement by and among TWG, EqualNet and its Subsidiaries dated as of
October 1, 1997.
"PARTY" has the meaning set forth in the preface above.
"PBGC" shall mean the Pension Benefit Guaranty Corporation
established pursuant to Section 4002 of ERISA, or any successor entity
thereto.
"PENSION PLAN" shall mean any multiemployer plan or single-employer
plan, as defined in Section 4001 of ERISA and subject to Title IV of
ERISA, which is maintained after the Acquisition for employees of
EqualNet, any of its Subsidiaries or any ERISA Affiliates.
"PERMITS" shall mean all licenses, permits, exceptions, franchises,
accreditations, privileges, rights, variances, waivers, approvals and
other authorizations (including, without limitation, those relating to
environmental matters) of, by or from Governmental Authorities necessary
for the conduct of the business of EqualNet and its Subsidiaries
immediately prior to the Closing and as proposed to be conducted by
EqualNet and its Subsidiaries after the Closing.
"PERSON" shall mean and include an individual, a partnership, a
joint venture, a corporation, a limited liability company, a trust, an
unincorporated organization and a government or any department or agency
thereof.
"RELEASE" shall mean release, spill, emission, leaking, pumping,
injection, deposit, disposal, discharge, dispersal, leaching or migration
into the environment or into or out of any property, including the
movement of Hazardous Materials through or in the air, surface water, or
groundwater.
"REMEDIAL ACTION" shall mean any action required by any federal,
state or judicial body or administration or agency acting under an
Environmental Law to (i) clean up, remove or treat Hazardous Materials in
the environment; (ii) prevent a Release or threat of Release or minimize
the further Release of Hazardous Materials so they do not migrate or
endanger or threaten to endanger public health or the environment; (iii)
perform post-remedial monitoring and care; or (iv) cure a violation of any
Environmental Law.
"REORGANIZATION AGREEMENT" means the Agreement and Plan of
Reorganization of even date herewith among EqualNet, Sub, Netco
Acquisition, LLC and Netco Acquisition Corp.
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"REPORTABLE EVENT" shall mean an event described in Section 4043(b)
of ERISA with respect to which the 30-day notice requirement has not been
waived by the PBGC.
"SECURITY INTEREST" means any mortgage, pledge, lien, encumbrance,
charge, or other security interest, other than (a) mechanic's,
materialmen's, and similar liens, (b) liens for taxes not yet due and
payable or for taxes that the taxpayer is contesting in good faith through
appropriate proceedings diligently conducted and with respect to which
adequate reserves have been set aside on the books of the taxpayer, and
(c) purchase money liens and liens securing rental payments under capital
lease arrangements.
"SHARES" means the EqualNet Common Shares to be issued by EqualNet
pursuant to Section 2.
"SINGLE-EMPLOYER PENSION PLAN" shall mean a Pension Plan which is a
"single-employer plan" as defined in Section 4001 of ERISA.
"STOCK PURCHASE AGREEMENT" means the Stock Purchase Agreement of
even date herewith between EqualNet and TWG.
"SUBSIDIARY" shall mean any corporation or similar entity a majority
of the stock of every class of which, except directors' qualifying shares,
shall, at the time as of which any determination is being made, be owned
by EqualNet, either directly or indirectly.
"SWITCHES" means the telecommunications equipment described in
Exhibit A attached hereto.
"THIRD PARTY CLAIM" has the meaning set forth in Section 9(d).
"WARRANT" has the meaning set forth in Section 2(d).
2. THE ACQUISITION.
(a) BASIC TRANSACTION. On and subject to the terms and conditions of this
Agreement, at the Closing TWG will sell to Sub and Sub will purchase from TWG
the Switches. EXCEPT FOR THE REPRESENTATIONS SET FORTH IN SECTION 4, THE
SWITCHES SHALL BE SOLD TO SUB AS-IS, WHERE-IS AND WITHOUT REPRESENTATION OR
WARRANTY BY TWG AND TWG HEREBY EXPRESSLY DISCLAIMS ALL REPRESENTATIONS AND
WARRANTIES REGARDING THE SWITCHES INCLUDING, WITHOUT LIMITATION, REGARDING THE
MERCHANTABILITY OF THE SWITCHES OR THE FITNESS OF THE SWITCHES FOR ANY
PARTICULAR PURPOSE.
(b) ACQUISITION CONSIDERATION. The consideration payable to TWG for the
sale of the Switches shall consist of the following:
(i) if the Acquisition Loan has not been obtained pursuant to
Section 5(v), $5,850,000 in cash;
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(ii) if the Acquisition Loan has been obtained, the assumption of
the Acquisition Loan and a cash amount equal to $5,850,000 less the
original principal amount of plus accrued and unpaid interest on the
Acquisition Loan;
(iii) 400,000 shares of EqualNet Common Shares; and
(iv) A warrant issued by EqualNet to TWG for 400,000 EqualNet Common
Shares exercisable at $1.50 per share, such warrant to be in the form of
Exhibit B (the "Warrant").
The purchase price for the Switches does not includes sales taxes that may
be triggered by the sale of the Switches, and any such taxes shall be paid by
Sub or EqualNet.
(c) THE CLOSING. Subject to the satisfaction of the conditions set forth
herein, the closing of the transaction contemplated by this Agreement (the
"CLOSING") shall take place on a Business Day mutually agreeable to EqualNet and
TWG within ten Business Days following the satisfaction of the conditions set
forth in Section 6(a)(iii) (the actual date on which the Closing occurs being
referred to herein as the "Closing Date").
(d) DELIVERIES AT THE CLOSING. At the Closing, (i) EqualNet and Sub will
deliver to TWG the various certificates, instruments and documents referred to
in Section 6(a), (ii) TWG will deliver to EqualNet the various certificates,
instruments and documents referred to in Section 6(b), (iii) EqualNet will
deliver to TWG the stock certificates for the Shares, the Warrant, any cash
consideration required pursuant to Section 2(b), and (if applicable) assumption
documents whereby EqualNet and Sub assume the Acquisition Loan (such documents
to be in form and content satisfactory to the lender of the Acquisition Loan and
TWG); and (iv) TWG will execute and deliver to Sub a bill of sale covering the
Switches.
3. REPRESENTATIONS AND WARRANTIES OF EQUALNET AND SUB. EqualNet and Sub
represent and warrant to TWG that the statements contained in this Section 3 are
correct and complete as of the date of this Agreement and will be correct and
complete as of the Closing Date (as though made throughout this Section 3),
except as set forth in the disclosure schedule delivered by EqualNet to TWG on
the date hereof and initialed by authorized representatives of EqualNet, Sub and
TWG (the "Disclosure Schedule").
(a) ORGANIZATION, QUALIFICATION, AND CORPORATE POWER. EqualNet and Sub are
corporations duly organized, validly existing, and in good standing under the
laws of the states of Texas and Delaware, respectively. Each of EqualNet and Sub
has the requisite corporate power and authority and all licenses, permit and
authorizations necessary to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it except where the failure to
do so would not have a Material Adverse Effect.
(b) AUTHORIZATION OF TRANSACTION. The boards of directors of EqualNet and
Sub have duly approved this Agreement and the transactions contemplated hereby,
and each of EqualNet and the Sub has requisite corporate power and authority to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of EqualNet
and Sub, enforceable in accordance with its terms and conditions except to the
extent
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that enforceability may be limited by bankruptcy, insolvency and other similar
laws affecting the enforcement of creditors' rights generally and except for the
application of general principles of equity. Except as disclosed in Schedule
3(b) of the Disclosure Schedule, neither EqualNet nor the Sub needs to give any
notice to, make any filing with, or obtain any authorization, consent or
approval of any Governmental Authority or any other Person in order to
consummate the transactions contemplated by this Agreement.
(c) BROKERS' FEES. Neither EqualNet nor Sub has any Liability or
obligation to pay any fees or commissions to any broker, finder, or agent with
respect to the transactions contemplated by this Agreement for which TWG could
become liable or obligated, and neither EqualNet nor Sub has any Liability or
obligation to pay any fees or commissions to any broker, finder, or agent with
respect to the transactions contemplated by this Agreement.
(d) NO VIOLATION. Except as disclosed in Schedule 3(d) of the Disclosure
Schedule, neither the execution and delivery of this Agreement, the consummation
of the transactions provided for herein or contemplated hereby nor the
fulfillment by EqualNet or Sub of the terms hereof will (i) violate any
provision of the Articles of Incorporation or the by-laws of EqualNet or the
Certificate of Incorporation of bylaws of Sub, (ii) result in a default, give
rise to any right of termination, cancellation, acceleration or imposition of
any Indebtedness or Security Interest, or require any consent or approval (other
than any consent or approval that has previously been obtained), under any of
the terms, conditions or provisions of any of the Permits or any note, bond,
mortgage, indenture, loan, distribution agreement, license, agreement, lease or
instrument or obligation to which EqualNet or Sub is a party or by which
EqualNet or Sub may be bound (except where the failure to obtain such consent or
approval will not have a Material Adverse Effect), or (iii) violate any law,
judgment, order, writ, injunction, decree, statute, rule, or regulation of any
Governmental Authority applicable to EqualNet or Sub (except where such
violation will not have a Material Adverse Effect).
(e) CONSENTS. Except as disclosed in Section 3(e) of the Disclosure
Schedule, all consents, approvals, qualifications, orders, or authorizations of,
or filings with, any Governmental Authority, and all consents under any material
contracts, agreements, or instruments by which EqualNet or Sub is bound or to
which it is subject, which are required in connection with EqualNet's or Sub's
valid execution, delivery, or performance of this Agreement and the offer, sale
and delivery of the Shares have been obtained or made.
(f) FINANCIAL INFORMATION.
(i) The audited consolidated balance sheet of EqualNet and its
Subsidiaries as at June 30, 1997, and the related consolidated statements
of operations, shareholders' equity and cash flows for the 12-month period
then ended, including in each case the related schedules and notes,
reported on by Ernst & Young LLP, are complete and correct and fairly
present in all material respects the consolidated financial position of
EqualNet and its Subsidiaries as at the date thereof and the consolidated
results of operations and changes in cash flows for such period, in
accordance with GAAP.
(ii) The unaudited consolidated balance sheet of EqualNet and its
Subsidiaries as at September 30, 1997, and the related unaudited
consolidated statements of operations,
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shareholders' equity and cash flows for the three-month period then ended,
as included in EqualNet's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1997, true copies of which have been previously
delivered to TWG, are complete and correct and fairly present in all
material respects the consolidated financial position of EqualNet and its
Subsidiaries as at the date thereof and the consolidated results of
operations and changes in cash flows for such period in conformity with
GAAP, subject only to normal year-end audit adjustments.
(iii) Since September 30, 1997, there has been no Material Adverse
Effect.
(g) LIABILITIES. Except for liabilities incurred in the ordinary course of
business, none of EqualNet or any of its Subsidiaries has any material
(individually or in the aggregate) liabilities, direct or contingent (including
but not limited to liability with respect to any Plan) except as disclosed or
referred to in Section 3(g) of the Disclosure Schedule or in the financial
statements referred to in Section 3(f). Neither EqualNet nor any of its
Subsidiaries has any Funded Indebtedness other than Indebtedness disclosed in
Section 3(g) of the Disclosure Schedule.
(h) LITIGATION. Except as disclosed in Section 3(h) of the Disclosure
Schedule or as described in any report filed by EqualNet with the Commission and
delivered to TWG, there is no action, suit, or proceeding, or any governmental
investigation or any arbitration, in each case pending or, to the knowledge of
EqualNet, threatened against EqualNet or any of its Subsidiaries or any material
property of any thereof before any court or arbitrator or any governmental or
administrative body, agency or official (i) which challenges the validity of
this Agreement; or (ii) which, if adversely determined, would have a Material
Adverse Effect.
(i) COMPLIANCE WITH ERISA. Each Plan is in substantial compliance with
ERISA, no Plan has an accumulated or waived funding deficiency within the
meaning of Section 412 or Section 418(B) of the Code, no proceedings have been
instituted to terminate any Plan, and except as disclosed in Section 3(i) of the
Disclosure Schedule, none of EqualNet or any of its Subsidiaries nor any ERISA
Affiliate has incurred any material liability to or on account of a Plan under
ERISA, and except as disclosed in Section 3(i) of the Disclosure Schedule, no
condition exists which presents a material risk to EqualNet or any of its
Subsidiaries of incurring such a liability.
(j) TAXES; GOVERNMENTAL CHARGES. Each of EqualNet and its Subsidiaries has
filed all tax returns and reports required to be filed and has paid all taxes,
assessments, fees, and other governmental charges levied upon any of them or
upon any of their respective properties or income which are due and payable,
including interest and penalties, or has provided adequate reserves for the
payment thereof, except where the failure to so file, pay, or reserve would not
have a Material Adverse Effect.
(k) DEFAULTS. Except as disclosed in Section 3(k) of the Disclosure
Schedule, none of EqualNet or any of its Subsidiaries is in default, nor has any
event or circumstance occurred which, but for the passage of time or the giving
of notice, or both, would constitute a default (in any respect which may have a
Material Adverse Effect) under any loan or credit agreement, indenture,
mortgage, deed of trust, security agreement, or other instrument or agreement
evidencing or pertaining to any Indebtedness of EqualNet or any Subsidiary, or
under any material agreement or instrument to which
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EqualNet or any Subsidiary is a party or by which EqualNet or any Subsidiary is
bound. No default hereunder has occurred and is continuing.
(l) COMPLIANCE WITH THE LAW. None of EqualNet or any of its Subsidiaries
(i) is in violation of any Governmental Requirement or (ii) has failed to obtain
any license, permit, franchise or other governmental authorization necessary to
the ownership of any of their respective properties or the conduct of their
respective business, which violation or failure would have (in the event that
such a violation or failure were asserted by any Person through appropriate
action) a Material Adverse Effect.
(m) INVESTMENT COMPANY ACT. None of EqualNet or any of its Subsidiaries is
an "investment company" or a company "controlled" by an "investment company,"
within the meaning of the Investment Company Act of 1940, as amended.
(n) PUBLIC UTILITY HOLDING COMPANY ACT. None of EqualNet or any of its
Subsidiaries is a "holding company," or a "subsidiary company" of a "holding
company," or an "affiliate" of a "holding company" or of a "subsidiary company"
of a "holding company," or a "public utility" within the meaning of the Public
Utility Holding Company Act of 1935, as amended.
(o) DISCLOSURE. EqualNet's filings made pursuant to the Securities
Exchange Act of 1934, as amended and listed on Section 3(o) of the Disclosure
Schedule hereto as of their respective dates, did not contain any untrue
statement of a material fact and did not omit to state any material fact
necessary in order to make the statements contained therein not misleading in
the light of the circumstances under which they were made.
(p) STRUCTURE; CAPITALIZATION.
(i) Section 3(p) of the Disclosure Schedule contains (except as
noted therein) a complete and correct list of EqualNet's Subsidiaries,
showing, as to each Subsidiary, the correct name thereof, the jurisdiction
of its organization, and the percentage of shares of each class of its
capital stock or similar equity interests outstanding owned by EqualNet
and each other Subsidiary.
(ii) All of the outstanding shares of capital stock or similar
equity interests of each Subsidiary shown in Section 3(p) of the
Disclosure Schedule as being owned by EqualNet and its Subsidiaries have
been validly issued, are fully paid and nonassessable, and are owned by
EqualNet or such other Subsidiaries free and clear of any Security
Interest (except as otherwise disclosed in Section 3(p) of the Disclosure
Schedule).
(iii) No Subsidiary of EqualNet is a party to, or otherwise subject
to any legal restriction of any agreement (other than this Agreement and
customary limitations imposed by corporate law statutes) restricting the
ability of such Subsidiary to pay dividends out of profits or make any
other similar distributions of profits to EqualNet or any of its
Subsidiaries that owns outstanding shares of capital stock or similar
equity interests of such Subsidiary.
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(iv) As of the Closing Date and after giving effect to the
transactions contemplated in this Agreement, the Stock Purchase Agreement
and the Reorganization Agreement (i) EqualNet's authorized capital stock
will consist of 55,000,000 shares, of which 50,000,000 will be designated
EqualNet Common Shares and 5,000,000 shares are designated as preferred
stock (2,000 of which will be designated as Series A Convertible Preferred
Stock, $.01 par value per share); (ii) 14,269,357 of EqualNet Common
Shares, issued and outstanding and 5,450,677 shares are or will be
reserved for issuance in connection with EqualNet's outstanding warrants
and stock options all of which, when issued in accordance with the terms
of such warrants and stock options, will be validly issued, fully paid,
and non-assessable; (iii) no shares are owned or held by or for the
account of EqualNet or any of its Subsidiaries (except as disclosed in the
financial statements described in Section 3(f)); (iv) except as disclosed
on Section 3(p) of the Disclosure Schedule, neither EqualNet nor any of
its Subsidiaries has outstanding any stock or other securities convertible
into or exchangeable for any shares of capital stock, any rights to
subscribe for or to purchase or any options for the purchase of, or any
agreements providing for the issuance (contingent or otherwise) of, or any
calls, commitments or claims of any other character relating to the
issuance of, any capital stock, or any stock or securities convertible
into or exchangeable for any capital stock which have not been waived
(other than as contemplated by this Agreement); and (v) except as
disclosed in Section 3(p) of the Disclosure Schedule, neither EqualNet nor
any of its Subsidiaries is subject to any obligation (contingent or
otherwise) to repurchase or otherwise acquire or retire any shares of
capital stock.
(q) ENVIRONMENTAL MATTERS.
(i) Neither any property of any of EqualNet or any of its
Subsidiaries nor the operations conducted thereon violate any order of any
court or Governmental Authority or Environmental Laws which violations
could reasonably be expected to result in liability in excess of $250,000
or which could reasonably be expected to result in obligations in excess
of $250,000 for required Remedial Action, assuming disclosure to the
applicable Governmental Authority of all relevant facts, conditions and
circumstances, if any, pertaining to the relevant property.
(ii) Without limitation of clause (i) above, no property of any of
EqualNet or any of its Subsidiaries nor the operations currently conducted
thereon or by any prior owner or operator of such property or operation,
are in violation of or subject to any existing, pending or, to the
knowledge of EqualNet, threatened action, suit, investigation, inquiry or
proceeding by or before any court or Governmental Authority or to any
obligations for required Remedial Action under Environmental Laws which
could reasonably be expected to result in liability in excess of $250,000,
or which could reasonably be expected to result in obligations for
required Remedial Action in excess of $250,000 assuming disclosure to the
applicable Governmental Authority of all relevant facts, conditions and
circumstances, if any, pertaining to the relevant property.
(iii) All notices, permits, licenses or similar authorizations, if
any, required to be obtained or filed in connection with the operation or
use of any and all property of EqualNet and its Subsidiaries, including
but not limited to past or present treatment, storage, disposal
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or release of Hazardous Materials into the environment, have been duly
obtained or filed, except where the failure to so obtain or file would not
have a Material Adverse Effect.
(r) INTELLECTUAL PROPERTY AND OTHER INTANGIBLE ASSETS.
(i) EqualNet and its Subsidiaries (i) own or have the right to use,
free and clear of all liens, claims, and restrictions, all patents,
trademarks, service marks, trade names, and copyrights, and all
applications, licenses, and rights with respect to the foregoing, and all
trade secrets, including know-how, inventions, designs, processes, works
of authorship, computer programs, and technical data and information
(collectively, "Intellectual Property") used and sufficient for use in the
conduct of its business as now conducted and/or as presently proposed to
be conducted (including, without limitation, the development, manufacture,
operation, and sale of all products and services sold or proposed to be
sold by EqualNet and its Subsidiaries during the next 24 months following
the date of this Agreement) without infringing upon or violating any
right, lien, or claim of others, including, without limitation, former
employees and former employers of its past and present employees, and (ii)
except as described in Section 3(r) of the Disclosure Schedule, is not
obligated or under any liability whatsoever to make any payments by way of
royalties, fees, or otherwise to any owner or licensee of, or other
claimant to, any patent, trademark, service mark, trade name, copyright,
or other intangible asset, with respect to the use thereof or in
connection with the conduct of its business or otherwise.
(ii) Any and all Intellectual Property of any kind, relating to the
business of EqualNet and its Subsidiaries currently being developed, or
developed in the future, by any employee of EqualNet and its Subsidiaries
while in the employ of EqualNet and its Subsidiaries shall be the property
solely of EqualNet and its Subsidiaries. EqualNet and its Subsidiaries
have taken security measures to protect the secrecy, confidentiality, and
value of all Intellectual Property, which measures are reasonable and
customary in the industry in which EqualNet and its Subsidiaries operate.
EqualNet and its Subsidiaries' employees and other persons who, either
alone or in concert with others, developed, invented, discovered, derived,
programmed, or designed the Intellectual Property (the "Technical
Employees"), or who have knowledge of or access to information about the
Intellectual Property, have entered into a written agreement with EqualNet
or its Subsidiaries, in form and substance satisfactory to EqualNet's
management (the "Proprietary Information Agreement") regarding ownership
and treatment of the Intellectual Property.
(iii) Except as described in Section 3(r) of the Disclosure
Schedule, none of EqualNet or its Subsidiaries has received any
communications alleging that EqualNet or such Subsidiary has violated, or
by conducting its business as proposed would violate, any of the patents,
trademarks, service marks, trade names, copyrights, or trade secrets or
other proprietary rights of any other Person or entity. None of EqualNet's
and its Subsidiaries' employees is obligated under any contract (including
licenses, covenants, or commitments of any nature) or other agreement, or
subject to any judgment, decree, or order of any court or administrative
agency, that would interfere with the use of such employee's best efforts
to promote the interests of EqualNet or its Subsidiaries or that would
conflict with EqualNet's or its Subsidiaries' business as presently
conducted and as proposed to be conducted. Neither
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the execution nor delivery of this Agreement, nor the carrying on of
EqualNet's or its Subsidiaries' business by the employees of EqualNet and
its Subsidiaries, nor the conduct of EqualNet's or its Subsidiaries'
business as proposed to be conducted, will conflict with or result in a
breach of the terms, conditions, or provisions of, or constitute a default
under, any contract, covenant, or instrument under which any of such
employees is now obligated. It is not, and will not become, necessary to
utilize any inventions of any of EqualNet's or its Subsidiaries' employees
(or people EqualNet and its Subsidiaries currently intends to hire) made
prior to their employment by EqualNet and its Subsidiaries other than
those that have been assigned to EqualNet and its Subsidiaries pursuant to
the Proprietary Information Agreement signed by such employee.
(s) INSURANCE COVERAGE. The properties of EqualNet and its Subsidiaries
are insured in amounts deemed adequate by EqualNet's management against risks
usually insured against by Persons operating businesses similar to those of
EqualNet and its Subsidiaries in the localities where such properties are
located.
4. REPRESENTATIONS AND WARRANTIES OF TWG.
TWG represents and warrants to EqualNet that the statements contained in
this Section 4 are correct and complete as of the date of this Agreement and
will be correct and complete as of the Closing Date (as though made then and as
though the Closing Date was substituted for the date of this Agreement
throughout this Section 4).
(a) COMPANY EXISTENCE. TWG is a limited liability company duly organized,
legally existing, and in good standing under the laws of the State of Texas. TWG
is duly qualified as a limited liability company (or other legal entity) in all
jurisdictions in which the nature of its business activities or its ownership or
leasing of property makes such qualification necessary, except where the failure
to so qualify will not have a Material Adverse Effect.
(b) CORPORATE POWER AND AUTHORIZATION. TWG has the requisite corporate
power and authority to execute, deliver and perform its obligations under this
Agreement and to consummate the transactions contemplated hereby. All action on
TWG's part requisite for the due execution, delivery, and performance of this
Agreement has been duly and effectively taken.
(c) BINDING OBLIGATIONS. This Agreement is enforceable in accordance with
its terms (except that enforcement may be subject to (i) any applicable
bankruptcy, insolvency or similar laws generally affecting the enforcement of
creditors' rights and (ii) general principles in equity regardless of whether
such enforcement is sought in a proceeding in equity or at law).
(d) BROKERS' FEES. TWG has no Liability or obligation to pay any fees or
commissions to any broker, finder, or agent with respect to the transactions
contemplated by this Agreement for which EqualNet or Sub could become liable or
obligated, and TWG has no any Liability or obligation to pay any fees or
commissions to any broker, finder, or agent with respect to the transactions
contemplated by this Agreement.
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(e) INVESTMENT. TWG (i) understands that the Shares when issued at the
Closing and the shares issued in connection with an exercise of the Warrant will
not be registered under the Securities Act, or under any state securities laws,
and are being offered and sold in reliance upon federal and state exemptions for
transactions not involving any public offering, (ii) is acquiring the Shares and
Warrant when issued at the Closing solely for its own account for investment
purposes and not with a view to the distribution thereof, (iii) is a
sophisticated investor with knowledge and experience in business and financial
matters, (iv) has received certain information concerning EqualNet and has had
the opportunity to obtain additional information as desired in order to evaluate
the merits and the risks inherent in holding the Shares and the Warrant, (v) is
able to bear the economic risk and lack of liquidity inherent in holding the
Shares and the Warrant, and (vi) is an Accredited Investor.
(f) TITLE. TWG owns the Switches free and clear of any Security Interest
other than any Security Interest (if any) that encumbered the Switches at the
time the same were sold to TWG pursuant to the instrument attached as Exhibit A.
5. PRE-CLOSING COVENANTS.
The Parties agree as follows with respect to the period between the
execution of this Agreement (or such earlier time as may be indicated) and the
earlier to occur of the Closing or the termination of this Agreement pursuant to
Section 7:
(a) GENERAL. Each of the Parties will use commercially reasonable best
efforts to take all actions and to do all things necessary, proper or advisable
in order to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions set
forth in Section 6).
(b) INSPECTION. EqualNet and TWG each agree to permit the other, and its
officers, directors, employees, accountants, counsel and other authorized
representatives, during normal business hours, to inspect its records and to
consult with its officers, employees, attorneys, and agents for the purpose of
determining the accuracy of the representations and warranties hereinabove made
and the compliance with covenants contained in this Agreement. EqualNet and TWG
each agrees that it and its officers and representatives shall hold all data and
information obtained with respect to the other party hereto in confidence and
each further agrees that it will not use such data or information or disclose
the same to others, except to the extent such data or information either are, or
become, published or a matter of public knowledge.
(c) NOTICES AND CONSENTS. To the extent, if any, noted in Section 3(c) of
the Disclosure Schedule as being required, EqualNet will give any notices to
third parties, and will use and cause EqualNet to use all reasonable efforts to
obtain the required consent of its shareholders and any third-parties.
(d) NOTICE OF DEVELOPMENTS. Each Party will give prompt written notice to
the other of any material adverse development causing a breach of or
constituting an intervening event with respect to any of its own representations
and warranties in Sections 3 and 4. No disclosure by any Party pursuant to this
Section 5(d), however, shall be deemed to amend or supplement the Disclosure
Schedule or to prevent or cure any misrepresentation, breach of warranty, or
breach of covenant.
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(e) ORDINARY COURSE. Except for transactions to which TWG is a party or as
otherwise specifically contemplated by the terms of this Agreement, EqualNet
shall and shall cause its Subsidiaries to carry on their respective businesses
in the usual, regular and ordinary course in substantially the same manner as
heretofore conducted and, to the extent consistent therewith, use all reasonable
efforts to preserve intact their current officers and employees and preserve
their relationships with customers, suppliers, licensors, licensees,
distributors and others having business dealings with them, in each case
consistent with past practice, to the end that their goodwill and ongoing
businesses shall be unimpaired to the fullest extent possible at the Closing
Date. Without limiting the generality of the foregoing, and except as otherwise
expressly contemplated by this Agreement, EqualNet shall not, and shall not
permit any of its Subsidiaries to:
(i) (A) declare, set aside or pay any dividends on, or make any
other distributions in respect of, any of its capital stock, other than
dividends and distributions by any direct or indirect wholly owned
Subsidiary of EqualNet to EqualNet or to another direct or indirect wholly
owned Subsidiary of EqualNet, (B) split, combine or reclassify any of its
capital stock or issue or authorize the issuance of any other securities
in respect of, in lieu of or in substitution for shares of its capital
stock or (C) purchase, redeem or otherwise acquire any shares of capital
stock of EqualNet or any of its Subsidiaries or any other securities
thereof or any rights, warrants or options to acquire any such shares or
other securities other than in connection with the exercise of outstanding
stock options and satisfaction of withholding obligations under
outstanding stock options and restricted stock;
(ii) issue, deliver, sell, pledge or otherwise encumber any shares
of its capital stock, any other voting securities or any securities
convertible into, or any rights, warrants or options to acquire, any such
shares, voting securities or convertible securities other than, in the
case of EqualNet, the issuance of EqualNet Common Shares upon the exercise
of stock options outstanding on the date of this Agreement in accordance
with their current terms;
(iii) amend its Articles of Incorporation, By-laws or other
comparable charter or organizational document;
(iv) acquire or agree to acquire (A) by merging or consolidating
with, or by purchasing a substantial portion of the stock or assets of, or
by any other manner, any business or any corporation, partnership,
association, joint venture, limited liability company or other entity or
division thereof or (B) any assets that, in each case, would be material,
individually or in the aggregate, to EqualNet and its Subsidiaries taken
as a whole, except purchases in the ordinary course of business consistent
with past practice;
(v) sell, lease, mortgage, pledge, grant a Security Interest in or
otherwise encumber or dispose of any of its properties or assets, except
(A) sales or leases in the ordinary course of business consistent with
past practice and (B) other immaterial transactions not in excess of
$250,000 in the aggregate;
(vi) (A) incur indebtedness for borrowed money or guarantee any such
indebtedness of another Person, issue or sell any debt securities or
warrants or other rights to acquire any debt securities of EqualNet or any
of its Subsidiaries, guarantee any debt
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securities of another Person, enter into any "keep well" or other
agreement to maintain any financial statement condition of another Person
or enter into any arrangement having the economic effect of any of the
foregoing, except for working capital borrowings under currently existing
revolving credit facilities incurred in the ordinary course of business,
or (B) make any loans, advances or capital contributions to, or
investments in, any other Person that would be material, individually or
in the aggregate, to EqualNet and its Subsidiaries taken as a whole, other
than by EqualNet to any direct or indirect wholly owned Subsidiary of
EqualNet;
(vii) make or incur any new capital expenditure, which, singly or in
the aggregate with all other capital expenditures, would exceed $100,000;
(viii) make any material election relating to Taxes or settle or
compromise any material tax liability;
(ix) pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction, in the
ordinary course of business consistent with past practice or in accordance
with their terms, of liabilities reflected or reserved against in, or
contemplated by, the most recent consolidated financial statements (or the
notes thereto) of EqualNet included in the Commission Documents or
incurred in the ordinary course of business consistent with past practice;
(x) waive the benefits of, or agree to modify in any manner, any
confidentiality, standstill or similar agreement to which EqualNet or any
of its Subsidiaries is a party;
(xi) adopt a plan of complete or partial liquidation or resolutions
providing for or authorizing such a liquidation or a dissolution, merger,
consolidation, restructuring, recapitalization or reorganization;
(xii) enter into any new collective bargaining agreement;
(xiii) change any material accounting principle used by it, except
as required by regulations promulgated by the Commission;
(xiv) settle or compromise any litigation (whether or not commenced
prior to the date of this Agreement) other than settlements or
compromises: (A) of litigation where the amount paid in settlement or
compromise does not exceed $100,000, or (B) in consultation and
cooperation with TWG, and, with respect to any such settlement, with the
prior written consent of TWG, which consent shall not be unreasonably
withheld;
(xv) except for those contracts and agreements entered into in the
ordinary course of business or with the prior written consent of TWG,
which consent shall not be unreasonably withheld, enter into any joint
venture or partnership contract or agreement; or
(xvi) authorize any of, or commit or agree to take any of, the
foregoing actions.
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(f) CHANGES IN EMPLOYMENT ARRANGEMENTS. Neither EqualNet nor any of its
Subsidiaries shall adopt or amend (except as may be required by law) any bonus,
profit sharing, compensation, stock option, pension, retirement, deferred
compensation, employment or other employee benefit plan, agreement, trust, fund
or other arrangement for the benefit or welfare of any employee, director or
former director or employee, increase the compensation or fringe benefits of any
officer of EqualNet or any of its Subsidiaries, or, except as provided in an
existing benefit plan or in the ordinary course of business consistent with past
practice, increase the compensation or fringe benefits of any employee or former
employee or pay any benefit not required by any existing plan, arrangement or
agreement.
(g) SEVERANCE. Neither EqualNet nor any of its Subsidiaries shall grant
any new or modified severance or termination arrangement or increase or
accelerate any benefits payable under its severance or termination pay policies
in effect on the date hereof.
(h) OTHER ACTIONS. EqualNet shall not, and shall not permit any of its
Subsidiaries to, take any action that would, or that could reasonably be
expected to, result (i) in any of the representations and warranties of EqualNet
set forth in this Agreement becoming untrue or (ii) in any of the covenants
contained in this Agreement becoming unperformable. Pending the Closing,
EqualNet will promptly advise TWG of any action or event of which it becomes
aware which has the effect of making incorrect any of such representations or
warranties or which has the effect of rendering unperformable any of such
covenants.
(i) VALID ISSUANCE. EqualNet covenants that the EqualNet Common Shares to
be issued by EqualNet pursuant to Section 2(b) and by EqualNet pursuant to an
exercise of the Warrant will, upon issuance and upon delivery of certificates
representing such shares, be validly issued, fully paid and nonassessable and
free from all taxes, liens and charges with respect to the issuance thereof.
(j) GOVERNMENT REGULATIONS. EqualNet covenants that it will comply, and
will cause each of its Subsidiaries to comply, with all applicable governmental
restrictions and regulations, the failure to comply with which would have a
material adverse effect on the business or financial condition of EqualNet and
its Subsidiaries taken as a whole, and obtain and maintain in good standing all
licenses, permits and approvals from any and all governments, governmental
commissions, boards or agencies of jurisdictions in which it or any of its
Subsidiaries carries on business required in respect of the operations of
EqualNet or any of its Subsidiaries, the failure to comply with which would have
a Material Adverse Effect.
(k) ERISA. Promptly (and in any event within 30 days) after EqualNet or
any of its Subsidiaries knows or has reason to know that a Reportable Event with
respect to any Pension Plan has occurred, that any Pension Plan is or may be
terminated, reorganized, partitioned or declared insolvent under Title IV of
ERISA or that EqualNet or any of its Subsidiaries will or may incur any
liability to or on account of a Pension Plan under Sections 4062, 4063, 4064,
4201 or 4204 of ERISA, EqualNet will deliver to TWG a certificate of the chief
financial officer of EqualNet setting forth information as to such occurrence
and what action, if any, EqualNet is required or proposes to take with respect
thereto, together with any notices concerning such occurrences which are (a)
required to be filed by EqualNet or the plan administrator of any such Pension
Plan controlled by EqualNet or its Subsidiaries, with the PBGC or (b) received
by EqualNet or its Subsidiaries from any
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plan administrator of a multiemployer or other Pension Plan not under their
control. EqualNet shall furnish to TWG a copy of each annual report (Form 5500
Series) of any Pension Plan received or prepared by EqualNet or any of its
Subsidiaries. Each annual report and any notice required to be delivered
hereunder shall be delivered no later than 10 days after the later of the date
such report or notice is filed with the Internal Revenue Service or the PBGC or
the date such report or notice is received by EqualNet or any of its
Subsidiaries, as the case may be.
(l) CORPORATE EXISTENCE; MAINTENANCE OF PROPERTIES. EqualNet covenants
that it (i) will do or cause to be done all things reasonably necessary to
preserve and keep in full force and effect the corporate existence and material
rights of EqualNet and all of its Subsidiaries, (ii) will cause its properties
and the properties of its Subsidiaries used or useful in the conduct of their
respective businesses to be maintained and kept in good condition, repair and
working order and will use commercially reasonable efforts to cause to be made
all necessary repairs, renewals, replacements, betterments and improvements
thereto, and (iii) will, and will cause each of its Subsidiaries to, qualify and
remain qualified to conduct business in each jurisdiction where the nature of
the business or the ownership of property by EqualNet or such Subsidiary may
require such qualification and where the failure to so qualify would have a
Material Adverse Effect.
(m) INSURANCE. EqualNet covenants that it will maintain, and will cause
each of its Subsidiaries to maintain, with financially sound and reputable
insurance companies, funds or underwriters, insurance for EqualNet and its
Subsidiaries of the kinds, covering the risks and in the relative proportionate
amounts usually carried by companies conducting business activities similar to
those of EqualNet and its Subsidiaries.
(n) FURTHER ASSURANCES. EqualNet covenants that it shall cooperate with
TWG and execute such further instruments and documents as TWG shall reasonably
request to carry out to the satisfaction of TWG the transactions contemplated by
this Agreement.
(o) NOTICES OF CERTAIN EVENTS. EqualNet shall promptly give notice to TWG
(i) of any default or event of default that has not been cured within any
applicable grace period under any (y) Indebtedness of EqualNet or any of its
Subsidiaries, or (z) contractual obligation of EqualNet or any of its
Subsidiaries or (ii) of any pending or threatened litigation, investigation or
proceeding to which EqualNet or any of its Subsidiaries is or is threatened to
be a party and of which EqualNet has been given notice; provided that any such
default as specified in clause (z) above, litigation, investigation or
proceeding would have a Material Adverse Effect. Any notice delivered pursuant
to this Section 5(o) shall be accompanied by an officer's certificate specifying
the details of the occurrence referred to therein and stating what action
EqualNet proposes to take with respect thereto.
(p) ENVIRONMENTAL LAWS. EqualNet and its Subsidiaries shall comply with
all applicable Environmental Laws the failure to comply with which would have a
Material Adverse Effect. If EqualNet or any Subsidiary shall receive written
notice that there exists a violation of Environmental Law with respect to its
operations or any real property owned, formerly owned, used, or leased thereby,
which violation could have a Material Adverse Effect, EqualNet shall immediately
notify in writing TWG. Furthermore, if EqualNet or any Subsidiary shall receive
written notice that there exists a violation of Environmental Law with respect
to its operations or any real property owned, formerly owned, used or leased
thereby, which violation could have a Material Adverse Effect,
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EqualNet shall within the time period permitted by the applicable governmental
authority (unless otherwise contested by EqualNet in good faith) remove or
remedy such violation in accordance with all applicable Environmental Laws
unless the Board of Directors of EqualNet makes a good faith determination that
it would be in the best interest of EqualNet to delay the remedy of such
violation, so long as no Material Adverse Effect is suffered by EqualNet or its
Subsidiaries during such delay.
(q) REGISTRATION RIGHTS. EqualNet hereby grants to TWG the same rights to
cause EqualNet to register the EqualNet Common Shares to be issued pursuant to
Section 2(b) and pursuant to an exercise of the Warrant under state and federal
securities laws and all such other rights as set forth in Section 4.1.11 of the
Note and Warrant Purchase Agreement at any time from and after the Closing Date;
provided, such registration rights shall be effective immediately upon the
Closing Date notwithstanding whether or not the Note or Warrants under the Note
and Warrant Purchase Agreement have been converted or exercised, as the case may
be.
(r) SHAREHOLDER APPROVAL; PREPARATION OF PROXY STATEMENTS.
(i) EqualNet shall, as soon as practicable following the execution
and delivery of this Agreement duly call, give notice of, convene and hold
a meeting of EqualNet's shareholders (the "Shareholders Meeting") for the
following purposes: (i) approving this Agreement, the issuance of the
Shares and the transactions contemplated hereby, (ii) ratifying the Note
and Warrant Purchase Agreement and the transactions contemplated thereby,
(iii) approving the Stock Purchase Agreement and the issuance of EqualNet
Common Shares thereunder, (iv) approving Reorganization Agreement, (v)
approving the increase in authorized shares of EqualNet Common Shares to
55,000,000 and (vi) approving the other related transactions. EqualNet
will, through its officers and its Board of Directors, unanimously
recommend to its shareholders the approval and adoption of the foregoing
transactions.
(ii) Promptly following the date of this Agreement, EqualNet shall
prepare and file with the Commission a proxy statement relating to the
Shareholders Meeting (such proxy statement as amended or supplemented from
time to time, the "Proxy Statement"). TWG shall have the right to review
and approve the Proxy Statement prior to EqualNet filing the Proxy
Statement with the Commission. EqualNet will use all commercially
reasonable efforts to cause the Proxy Statement to be mailed to EqualNet's
shareholders as promptly as practicable. EqualNet will notify TWG promptly
of the receipt of any written or oral comments from the Commission or its
staff and of any request by the Commission or its staff for amendments or
supplements to the Proxy Statement or for additional information and will
supply TWG with copies of all correspondence between EqualNet or any of
its representatives, on the one hand, and the Commission or its staff, on
the other hand, with respect to the Proxy Statement.
(iii) EqualNet agrees to cause all shares of capital stock, if any,
owned by it or any other Subsidiary or its officers and directors to be
voted in favor of the approval and adoption of this Agreement, the Note
and Warrant Purchase Agreement, the Stock Purchase Agreement, the
Reorganization Agreement and the other related transactions.
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(iv) EqualNet will cause its transfer agent to make stock transfer
records relating to EqualNet available to the extent reasonably necessary
to effectuate the intent of this Agreement.
(s) NO SOLICITATION. (i) EqualNet shall not, nor shall it permit any of
its Subsidiaries to, nor shall it authorize or permit any officer, director or
employee of EqualNet or any investment banker, attorney or other advisor, agent
or representative of EqualNet or any of its Subsidiaries to, directly or
indirectly, (1) solicit, initiate or encourage the submission of any takeover
proposal, (2) enter into any agreement (other than confidentiality and
standstill agreements in accordance with the immediately following proviso) with
respect to any takeover proposal, or (3) participate in any discussions or
negotiations regarding, or furnish to any Person any information with respect
to, or take any other action to facilitate any inquiries or the making of any
proposal that constitutes, or may be reasonably be expected to lead to, any
takeover proposal; provided, in the case of this clause (3), that prior to the
vote of shareholders of EqualNet for approval of the matters referred to in
Section 5(s) (and not thereafter if such matters are approved thereby) to the
extent required by the fiduciary obligations of the Board of Directors of
EqualNet, determined in good faith by a majority of the disinterested members
thereof based on the advice of outside counsel, EqualNet, in response to an
unsolicited superior proposal and a request for information pursuant thereto,
may furnish information to any person or "group" within the meaning of Section
13(d)(3) of the Exchange Act pursuant to a confidentiality agreement. Without
limiting the foregoing, it is understood that any violation of the restrictions
set forth in the preceding sentence by any officer, director or employee of
EqualNet or any of its Subsidiaries or any investment banker, attorney or other
advisor, agent or representative of EqualNet, whether or not such Person is
purporting to act on behalf of EqualNet or otherwise, shall be deemed to be a
material breach of this Agreement by EqualNet. For purposes of this Section
5(t), "takeover proposal" means (x) any proposal, other than a proposal by TWG
or any of its Affiliates, for a merger or other business combination involving
EqualNet, (y) any proposal or offer, other than a proposal or offer by TWG or
any of its Affiliates, to acquire from EqualNet or any of its Affiliates in any
manner, directly or indirectly, an equity interest in EqualNet or any
Subsidiary, any voting securities of EqualNet or any Subsidiary or a material
amount of the assets of EqualNet and its Subsidiaries, taken as a whole, or (z)
any proposal or offer, other than a proposal or offer by TWG or any of its
Affiliates, to acquire from the shareholders of EqualNet by tender offer,
exchange offer or otherwise more than 20% of the outstanding shares of Common
Shares.
(ii) Neither the Board of Directors of EqualNet nor any committee
thereof shall, except in connection with the termination of this Agreement
pursuant to Section 7, (1) withdraw or modify, or propose to withdraw or modify,
in a manner adverse to TWG the approval or recommendation by the Board of
Directors of EqualNet or any such committee thereof of this Agreement or take
any action having such effect; provided, a statement by the Board of Directors
of EqualNet to its shareholders as contemplated by Rule 14e-2(a) of the Exchange
Act following TWG's receipt of a Notice of Superior Proposal (defined below)
shall not be deemed to constitute a withdrawal or modification of its
recommendation of this Agreement, or (2) approve or recommend, or propose to
approve or recommend, any takeover proposal. Notwithstanding the foregoing, in
the event that the Board of Directors of EqualNet receives a takeover proposal
that, in the exercise of its fiduciary obligations (as determined in good faith
by a majority of the disinterested members thereof based on the advice of
outside counsel), it determines to be a superior proposal, the Board of
Directors of EqualNet may withdraw or modify its approval or recommendation of
this
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Agreement and may (subject to the following sentence) terminate this Agreement,
in each case at any time after midnight on the fifth Business Day following
TWG's receipt of written notice (a "Notice of Superior Proposal") advising TWG
that the Board of Directors of EqualNet has received a takeover proposal that it
has determined to be a superior proposal, specifying the material terms and
conditions of such superior proposal (including the proposed financing for such
proposal and a copy of any documents conveying such proposal) and identifying
the Person making such superior proposal. EqualNet may terminate this Agreement
pursuant to the preceding sentence only if the shareholders of EqualNet have not
yet voted upon the matters set forth in Section 5(s). Any of the foregoing to
the contrary notwithstanding, EqualNet may engage in discussions with any Person
or group that has made an unsolicited takeover proposal for the limited purpose
of determining whether such proposal is a superior proposal. Nothing contained
herein shall prohibit EqualNet from taking and disclosing to its shareholders a
position contemplated by Rule 14e-2(a) following TWG's receipt of a Notice of
Superior Proposal.
(iii) For purposes of this Section 5(t), a "superior proposal" means
any BONA FIDE takeover proposal to acquire, directly or indirectly, for
consideration consisting of cash, securities or a combination thereof, all of
the EqualNet Common Shares then outstanding or all or substantially all of the
assets of EqualNet and its Subsidiaries, and otherwise on terms that a majority
of the disinterested members of the Board of Directors of EqualNet determines in
its good faith reasonable judgment (based on the advice of a financial advisor
of nationally recognized reputation, a copy of which shall be provided to TWG)
to be more favorable to EqualNet's shareholders than the transactions
contemplated by this Agreement, the Stock Purchase Agreement and the
Reorganization Agreement.
(iv) In addition to the obligations of EqualNet set forth in clause
(ii) above, EqualNet shall promptly advise TWG orally and in writing of any
takeover proposal or any inquiry with respect to or which could lead to any
takeover proposal, the material terms and conditions of such inquiry or takeover
proposal (including the financing for such proposal and a copy of such documents
conveying such proposal), and the identity of the Person making any such
takeover proposal or inquiry.
(t) LISTING OF COMMON STOCK. EqualNet warrants and agrees for the benefit
of the TWG that it will use commercially reasonable efforts to cause the
EqualNet Common Shares to be issued pursuant to Section 2 and pursuant to the
Warrant to be approved for listing, subject to official notice of issuance, on
the NASDAQ National Market as of the Closing Date.
(u) ACQUISITION LOAN. TWG may elect to obtain financing for the Switches
from a bank or other third party lender, such financing to be in a principal
amount not to exceed the $5,850,000 purchase price paid by TWG for the Switches.
Any such financing shall be secured by a first priority lien and security
interest on the Switches and otherwise on terms satisfactory to TWG and EqualNet
(the "Acquisition Loan"). If a guarantee is required to obtain such loan, then
such guarantee shall be satisfactory to TWG in its sole discretion. Among other
conditions that may be applicable, any such guarantee provided by or arranged
for by TWG shall be conditioned upon EqualNet agreeing to pay TWG a guarantee
fee on the outstanding balance of the Acquisition Loan. The loan documents shall
provide that if the closing of the transaction contemplated by this Agreement
occurs,
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then the Sub and EqualNet shall assume (or otherwise become liable on) the
Acquisition Loan and TWG shall be released from any liability on the Acquisition
Loan effective as of such closing.
6. CONDITIONS TO OBLIGATION TO CLOSE.
(a) CONDITIONS TO OBLIGATION OF TWG. The obligation of TWG to consummate
the transactions to be performed by it in connection with the Closing is subject
to satisfaction of the following conditions:
(i) The representations and warranties set forth in Section 3 shall
be true and correct in all material respects at and as of the Closing
Date.
(ii) EqualNet and Sub shall have performed and complied with all of
their respective covenants hereunder in all material respects through the
Closing.
(iii) EqualNet shall have procured all of the consents of third
parties required in connection with the consummation of the transactions
contemplated by this Agreement, and EqualNet shall have procured the
approval of its shareholders at the Shareholders Meeting for the matters
set forth in Section 5(r).
(iv) The closing under that certain Stock Purchase Agreement dated
November 21, 1997, between EqualNet and TWG and under the Reorganization
Agreement shall have occurred or be occurring simultaneous with the
Closing hereunder.
(v) The issuance of the EqualNet Common Shares and Warrant under
this Agreement shall have complied with all applicable requirements of
federal and state securities laws.
(vi) Subsequent to the date hereof, no legislation, order, rule,
ruling or regulation shall have been enacted or made by or on behalf of
any governmental body, department or agency of the United States, nor
shall any legislation have been introduced and favorably reported for
passage to either House of Congress by any committee of either such House
to which such legislation has been referred for consideration, nor shall
any decision of any court of competent jurisdiction within the United
States have been rendered which would materially and adversely affect an
investment in the EqualNet Common Shares. There shall be no action, suit,
investigation or proceeding pending, or to EqualNet's knowledge,
threatened, against or affecting EqualNet or any of its Subsidiaries, or
any of their respective properties or rights, or any of their affiliates,
associates, officers or directors, before any court, arbitrator or
administrative or governmental body which (i) seeks to restrain, enjoin,
prevent the consummation of or otherwise adversely affect the transactions
contemplated by this Agreement or (ii) questions the validity or legality
of any such transaction or seeks to recover damages or to obtain other
relief in connection with any such transaction, and to EqualNet's
knowledge there shall be no valid basis for any such action, proceeding or
investigation.
(vii) EqualNet shall have duly received all authorizations,
consents, approvals, licenses, franchises, permits and certificates by or
of all federal, state and local governmental
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authorities, by any third parties pursuant to the terms of any agreement
to which EqualNet is a party or by the National Association of Securities
Dealers, Inc. or any other body or agency with jurisdiction, by contract
or otherwise, over EqualNet, necessary for the issuance of the Shares and
the Warrant by EqualNet and the consummation of the transactions
contemplated hereby, and all thereof shall be in full force and effect at
the time of the Closing.
(viii)There shall not have occurred any Material Adverse Change with
respect to EqualNet and its Subsidiaries since the date hereof.
(ix) EqualNet shall have delivered to TWG a certificate to the
effect that each of the conditions specified above in Section 6(a)(i)-(ix)
is satisfied in all respects.
(x) TWG shall have received from Fulbright & Jaworski, L.L.P.,
counsel to EqualNet and Sub, an opinion in form and substance as set forth
in Exhibit C attached hereto, addressed to TWG and dated as of Closing
Date.
(xi) EqualNet shall have delivered to TWG the original stock
certificates specified in Section 2(b) representing the Shares and the
original Warrant.
(xii) The EqualNet Common Shares issued pursuant to Section 2 and to
be issued pursuant to the Warrant shall have been approved for listing,
subject to official notice, on the NASDAQ National Market as of the
Closing Date.
All actions to be taken by EqualNet in connection with consummation of the
transactions contemplated hereby and all certificates, opinions, instruments,
and other documents required to effect the transactions contemplated hereby will
be reasonably satisfactory in form and substance to TWG. TWG may waive any
condition specified in this Section 6(a) if it executes a writing so stating at
or prior to the Closing.
(b) CONDITIONS TO OBLIGATION OF EQUALNET AND SUB. The obligations of
EqualNet and Sub to consummate the transactions to be performed by it in
connection with the Closing are subject to satisfaction of the following
conditions:
(i) The representations and warranties set forth in Section 4 shall
be true and correct in all material respects at and as of the Closing
Date.
(ii) TWG shall have performed and complied with all of its covenants
hereunder in all material respects through the Closing.
(iii) EqualNet shall have obtained the approval of its shareholders
at the Shareholders Meeting for the matters set forth in Section 5(s).
(iv) There shall be no action, suit, investigation or proceeding
pending, or to EqualNet's knowledge, threatened, against or affecting
EqualNet or any of its Subsidiaries, or any of their respective properties
or rights, or any of their affiliates, associates, officers or directors,
before any court, arbitrator or administrative or governmental body which
(i) seeks
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to restrain, enjoin, prevent the consummation of or otherwise adversely
affect the transactions contemplated by this Agreement or (ii) questions
the validity or legality of any such transaction or seeks to recover
damages or to obtain other relief in connection with any such transaction.
(v) TWG shall have delivered to EqualNet a certificate to the effect
that each of the conditions specified above in Section 6(b)(i)-(ii) is
satisfied in all respects.
(vi) EqualNet shall have received from Vinson & Elkins L.L.P.,
counsel to TWG, an opinion in form and substance as set forth in Exhibit D
attached hereto, addressed to EqualNet and dated as of the Closing Date.
All actions to be taken by TWG in connection with consummation of the
transactions contemplated hereby and all certificates, opinions, instruments,
and other documents required to effect the transactions contemplated hereby will
be reasonably satisfactory in form and substance to EqualNet. EqualNet may waive
any condition specified in this Section 6(b) if it executes a writing so stating
at or prior to the Closing.
7. TERMINATION.
(a) TERMINATION OF AGREEMENT. This Agreement may be terminated only as
provided below:
(i) EqualNet, Sub and TWG may terminate this Agreement by mutual
written consent at any time prior to the Closing;
(ii) Either EqualNet, Sub and TWG may terminate this Agreement by
giving written notice to the other parties prior to the Closing if the
shareholders of EqualNet fail to give any required approval of this
Agreement and the transactions contemplated hereby upon a vote at the
Shareholders meeting or at any adjournment thereof;
(iii) TWG may terminate this Agreement by giving written notice to
EqualNet and Sub at any time prior to the Closing (A) in the event
EqualNet or Sub has breached any representation, warranty or covenant on
their part contained in this Agreement in any material respect, TWG
notified EqualNet or Sub of the breach or occurrence, and the breach or
occurrence has continued without cure for a period until the earlier of 15
days after the notice of breach or the scheduled Closing Date or (B) if
the Closing shall not have occurred on or before February 1, 1998, by
reason of the failure of any condition precedent under Section 6(a)
(unless the failure results primarily from TWG breaching any
representation, warranty or covenant on its part contained in this
Agreement); and
(iv) EqualNet and Sub may terminate this Agreement by giving written
notice to TWG at any time prior to the Closing (A) in the event TWG has
breached any representation, warranty or covenant on its part contained in
this Agreement in any material respect, EqualNet has notified TWG of the
breach, and the breach has continued without cure for a period until the
earlier of 15 days after the notice of breach or the scheduled Closing
Date or
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(B) if the Closing shall not have occurred on or before February 1, 1998,
by reason of the failure of any condition precedent under Section 6(b)
(unless the failure results primarily from EqualNet or Sub breaching any
representation, warranty or covenant on his part contained in this
Agreement).
(b) EFFECT OF TERMINATION. If this Agreement is terminated pursuant to
Section 7(a), all rights and obligations of the Parties hereunder shall
terminate without any Liability of any Party to any other Party (except for any
Liability of any Party for any breach of a covenant or for any knowing and
willful breach of any representation or warranty).
8. REMEDIES FOR BREACHES OF THIS AGREEMENT.
(a) SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All of the representations
and warranties of the Parties contained in Sections 3 and 4 shall survive the
Closing hereunder.
(b) INDEMNIFICATION PROVISIONS FOR BENEFIT OF TWG. If any representation
or warranty set forth in Section 3 or any covenant or agreement set forth herein
made by EqualNet or Sub is breached, then EqualNet agrees to indemnify TWG from
and against any Adverse Consequences that TWG may suffer through and after the
date of the claim for indemnification to the extent resulting from, arising out
of, relating to, or caused by such breach. In addition, Sub assumes and Equal
and Sub agree to indemnify TWG from and against any and all sales taxes due in
connection with the sale and transfer of the Switches from TWG to the Sub.
(c) INDEMNIFICATION PROVISIONS FOR BENEFIT OF EQUALNET. If TWG breaches
any of its representations and warranties in Section 4 or any covenant or
agreement set forth herein made by TWG, then TWG agree to indemnify EqualNet
from and against any Adverse Consequences EqualNet may suffer through and after
the date of the claim for indemnification to the extent resulting from, arising
out of, relating to, or caused by such breach.
(d) MATTERS INVOLVING THIRD PARTIES.
(i) If any third party shall notify any Party (the "Indemnified
Party") with respect to any matter (a "Third Party Claim") that may give
rise to a claim for indemnification against any other Party (the
"Indemnifying Party") under this Section 8, then the Indemnified Party
shall promptly notify the Indemnifying Party thereof in writing; provided,
no delay on the part of the Indemnified Party in notifying the
Indemnifying Party shall relieve the Indemnifying Party from any
obligation hereunder unless (and then solely to the extent) the
Indemnifying Party thereby is prejudiced.
(ii) The Indemnifying Party will have the right to defend the
Indemnified Party against the Third Party Claim with counsel of the
former's choice reasonably satisfactory to the Indemnified Party so long
as (1) the Indemnifying Party notifies the Indemnified Party in writing
within 15 days after the Indemnified Party has give notice of the Third
Party Claim that the Indemnifying Party will indemnify the Indemnified
Party from and against the entirety of any Adverse Consequences the
Indemnified Party may suffer resulting from, arising out of, relating to,
in the nature of, or caused by the Third Party Claim, (2) the Indemnifying
Party
24
<PAGE>
provides the Indemnified Party with evidence reasonably acceptable to the
Indemnified Party that the Indemnifying Party will have the financial
resources to defend against the Third Party Claim and fulfill its
indemnification obligations hereunder, (3) the Third Party Claim involves
only money damages and does not seek an injunction or other equitable
relief, (4) settlement of, or an adverse judgment with respect to, the
Third Party Claim is not in the good faith judgment of the Indemnified
Party, likely to establish a precedential custom or practice materially
adverse to the continuing business interests of the Indemnified Party, and
(5) the Indemnifying Party conducts the defense of the Third Party Claim
actively and diligently.
(iii) So long as the Indemnifying Party is conducting the defense of
the Third Party Claim in accordance with Section 8(d)(ii), (1) the
Indemnified Party may retain separate co-counsel at its sole cost and
expense and participate in the defense of the Third Party Claim, (2) the
Indemnified Party will not consent to the entry of any judgment or enter
into any settlement with respect to the Third Party Claim without the
prior written consent of the Indemnifying Party (not to be withheld
unreasonably), and (3) the Indemnifying Party will not consent to the
entry of any judgment or enter into any settlement with respect to the
Third Party Claim without the prior written consent of the Indemnified
Party (not to be withheld unreasonably).
(iv) In the event any of the conditions in Section 8(d)(ii) is or
becomes unsatisfied, however, (1) the Indemnified Party may defend
against, and consent to the entry of any judgment or enter into any
settlement with respect to, the Third Party Claim in any manner it
reasonably may deem appropriate (and the Indemnified Party need not
consult with, or obtain any consent from, the Indemnifying Party in
connection therewith), (2) the Indemnifying Party will reimburse the
Indemnified Party promptly and periodically for the costs of defending
against the Third Party Claim (including reasonable attorneys' fees and
expenses), and (3) the Indemnifying Party will remain responsible for any
Adverse Consequences the Indemnified Party may suffer resulting from,
arising out of, relating to, in the nature of, or caused by the Third
Party Claim to the fullest extent provided in this Section 8.
(e) CLAIMS FOR INDEMNIFICATION.
(i) Whenever any claim shall arise for indemnification under Section
8(b) or 8(c), the Indemnified Party shall describe such claim in a written
notice ("Notice of Claim") to the Indemnifying Party (and for purposes of
this Section 9(e), a notice given pursuant to Section 9(d) shall
constitute a "Notice of Claim") and, when known, specify the facts
constituting the basis for such claim and the amount or an estimate of the
amount of such claim.
(ii) Following the receipt by the Indemnifying Party of each Notice
of Claim, the Indemnifying Party may give the Indemnified Party written
notice ("Notice of Objection") (1) attaching a copy of such Notice of
Claim, (2) stating that, in the opinion of the Indemnifying Party, the
claim described in such Notice of Claim is invalid (either in whole or in
specified part), (3) giving the reasons for the alleged invalidity, and
(4) stating that, based on such alleged invalidity, the Indemnifying Party
objects to the payment of any portion of the amount claimed pursuant to
such Notice of Claim. If a Notice of Objection alleges that
25
<PAGE>
a Notice of Claim is only partially invalid, the Indemnifying Party within
30 days of the receipt of such Notice of Claim, agrees to deliver to the
Indemnified Party that portion of the amount claimed pursuant to such
Notice of Claim as to which no objection is made.
(f) DETERMINATION OF ADVERSE CONSEQUENCES. There shall be taken into
account the time cost of money (using the Applicable Rate as the discount rate)
and appropriate adjustments shall be made for tax consequences and insurance in
determining Adverse Consequences for purposes of this Section 8.
(g) OTHER INDEMNIFICATION PROVISIONS. The foregoing indemnification
provisions are in addition to, and not in derogation of, any statutory,
equitable, or common law remedy any Party may have for breach of this Agreement.
9. MISCELLANEOUS.
(a) PRESS RELEASES AND PUBLIC ANNOUNCEMENTS. No Party shall issue any
press release or make any public announcement relating to the subject matter of
this Agreement prior to the Closing without the prior written approval of TWG
and EqualNet; provided, either Party may make any public disclosure it believes
in good faith is required by applicable law or the requirements of NASDAQ.
(b) NO THIRD-PARTY BENEFICIARIES. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
(c) SUCCESSION AND ASSIGNMENT. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns. No Party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of other Parties.
(d) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
(e) NOTICES. All notices, requests, demands, claims, and other
communications hereunder shall be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be sent by (i) personal delivery
(including courier service), (ii) telecopier during normal business hours to the
number indicated, or (iii) registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended recipient as set forth
below (any communication shall be deemed given upon receipt):
26
<PAGE>
IF TO EQUALNET OR SUB:
1250 Wood Branch Park Drive
Houston, TX 77079-1212
Attention: General Counsel
Telecopier No.: 281-529-4686
WITH A COPY TO:
Fulbright & Jaworski L.L.P.
1301 McKinney, Suite 5100
Houston, Texas 77010
Attention: Robert F. Gray, Jr.
Telecopier No.: 713-651-5246
IF TO TWG:
5005 Woodway, Suite 350
Houston, Texas 77056
Attention: Mark Willis and Jim Harris
Telecopier No.: 713-626-8333
WITH A COPY TO:
Vinson & Elkins L.L.P.
1001 Fannin, Suite 2300
Houston, Texas 77002-6760
Attention: Rell Tipton
Telecopier No.: 713-615-5553
Any Party may change its telecopier number or its address to which notices,
requests, demands, claims, and other communications hereunder are to be
delivered by giving the other Party notice in the manner herein set forth.
(f) GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas.
(g) AMENDMENTS AND WAIVERS. No amendments of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by the
Parties. No waiver by any Party of any default, misrepresentation, or breach of
warranty or covenant hereunder, whether intentional or not, shall be deemed to
extend to any prior or subsequent default, misrepresentation, or breach of
warranty or covenant hereunder or affect in any way any rights arising by virtue
of any prior or subsequent such occurrence.
(h) SEVERABILITY. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms
27
<PAGE>
and provisions hereof or the validity or enforceability of the offending term or
provision in any other situation or in any other jurisdiction.
(i) EXPENSES. Each of the Parties will bear its own costs and expenses
(including legal fees and expenses) incurred in connection with this Agreement
and the transactions contemplated hereby.
(j) CONSTRUCTION. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties, and no presumption or burden of proof shall arise
favoring or disfavoring either Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance.
(k) INCORPORATION OF EXHIBITS, ANNEXES, AND SCHEDULES. The Exhibits,
Annexes, and Schedules identified in this Agreement are incorporated herein by
reference and made a part hereof.
28
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
EQUALNET HOLDING CORP.
By: /s/ ZANE RUSSELL
Name: ZANE RUSSELL
Title: CEO
EQ ACQUISITION SUB, INC.
By: /s/ MICHAEL HLINAK
Name: MICHAEL HLINAK
Title: COO
WILLIS GROUP, LLC
By: /s/ MARK WILLIS
Name: MARK WILLIS
Title: PRES.
[signature page to Switch Agreement]
29
<PAGE>
AMENDMENT TO
SWITCH AGREEMENT
This Amendment to that certain Switch Agreement (the "Agreement") dated
December 2, 1997 by and among EqualNet Holding Corp., EQ Acquisition Sub, Inc.
and Willis Group, LLC, is entered into as of December 19, 1997 for the following
purposes:
Whereas, subparagraphs 7.(a)(iii) and 7.(a)(iv) of the Agreement allow
each party certain rights to terminate the Agreement of the conditions for
closing of the transactions contemplated in such agreement are not completed by
February 1, 1998; and
Whereas the parties hereto desire to change such date,
Whereas the parties hereto agree as follows: the date "February 1, 1998"
contained in subparagraphs 7.(a)(iii) and 7.(a)(iv) of the Agreement is hereby
changed and amended in each instance to "March 31, 1998".
No other change, amendment or modification of the Agreement is hereby
made. This Amendment is signed effective December 19, 1997. This Amendment may
be executed in multiple counterpart originals, all of which taken together shall
constitute one document. A facsimilie signature of any of the undersigned shall
have the same force and effect as an original signature.
EqualNet Holding Corp. EQ Acquisitions Sub, Inc.
By:/s/ MICHAEL L. HLINAK By:/s/ MICHAEL HLINAK
Michael L. Hlinak, C.O.O. Michael Hlinak, President
Willis Group, LLC
By:/s/ MARK WILLIS
Mark Willis, President
<PAGE>
AMENDMENT TO SWITCH AGREEMENT
This Amendment to Switch Agreement ("Amendment") is entered into
between EQUALNET HOLDING CORP. ("EqualNet"), EQ ACQUISITION SUB, INC.
("Sub"), and WILLIS GROUP, LLC ("TWG") effective as of February 12, 1998.
RECITALS
Each of the entities described in the preamble are parties to a Switch
Agreement dated December 2, 1997 (the "Agreement"). The parties desire to amend
the Agreement in accordance with the terms of this Amendment. Any capitalized
term used but not defined herein shall have the meaning ascribed to such term in
the Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein, the Parties agree as follows:
1. Section 2(b) of the Agreement is amended as follows:
(a) Deletion of the word "and" at the end of clause (iii)
thereof;
(b) Insertion of the following as a new clause (iv):
(iv) subject to the terms of Section 2(e), 1,000,000 of
EqualNet Common Shares; and,
(c) Renumbering the existing clause (iv) to "(v)" and amending
such clause by replacing the reference therein to "$1.50
per share" with "$1.00 per share".
2. Section 2 of the Agreement is amended by adding the following as
subsection (e):
<PAGE>
(E) AUTHORIZED SHARES. (i) If the Closing occurs and as of the
Closing Date the number of EqualNet Common Shares authorized under
EqualNet's Articles of Incorporation is not sufficient to permit the
issuance of all or any part of the 1,000,000 shares referred to in Section
2(b)(iv) (the "Unauthorized Shares"), then at the Closing in lieu of
issuing such Unauthorized Shares EqualNet shall execute and deliver to TWG
a warrant the ("Unauthorized Shares Warrant") for the number of shares
constituting the Unauthorized Shares, such warrant to have a term of ten
years, to have an exercise price of $0.01 per share, and to be otherwise
substantially similar to the form of Warrant attached as Exhibit B;
provided, the Unauthorized Share Warrant shall contain a covenant on the
part of EqualNet that it will use its best efforts to cause the unreserved
authorized number of EqualNet Common Shares to be increased to permit the
full exercise of the Unauthorized Share Warrant and a limitation on the
holder of the Unauthorized Share Warrant to the effect that the obligation
of EqualNet to issue shares upon an exercise of
<PAGE>
the Unauthorized Share Warrant in whole or in part shall be conditioned
upon EqualNet having a number of unreserved authorized EqualNet Common
Shares at such time sufficient to cover the number of shares relating to
the exercise.
(ii) If by May 31, 1998, the number of EqualNet Common Shares
authorized under EqualNet's Articles of Incorporation has not been
increased to permit a full exercise of the Unauthorized Share Warrant,
then TWG shall have the right and option to repurchase the Switches from
Sub for $5,850,000 in cash by giving written notice of such exercise to
EqualNet and Sub. If such notice is given, then EqualNet and Sub agree
that Sub will convey good title to the Switches to TWG free and clear of
any liens or security interests (other than liens and security interests,
if any, that may encumber the Switches immediately prior to the Closing),
and contemporaneous with such conveyance TWG (x) shall return the
Unauthorized Share Warrant to EqualNet which shall be cancelled and (y)
TWG shall return any shares issued to TWG pursuant to Section 2(b)(iv). In
connection with any such repurchase, TWG shall retain the EqualNet Common
Shares issued to it pursuant to Section 2(b)(iii). During the period from
the Closing Date until the aforementioned May 31, 1998 date, EqualNet and
Sub agree that Sub shall not convey or encumber the Switches, or grant any
options or rights to purchase the Switches, except for liens and security
interests securing any financing used by Sub to acquire the Switches.
(iii) TWG agrees to affirmatively vote all EqualNet Common
Shares issued to TWG pursuant to this Agreement or any other agreement for
such increase in the authorized number of EqualNet Common Shares.
3. Section 5(u) of the Agreement is amended by adding the following
paragraph at the end of such Section:
If the Closing occurs and if necessary for EqualNet to obtain
financing for the acquisition of the Switches, TWG will guarantee
not more than 40% of the principal amount of such financing. No such
guaranty shall impose any obligation or liability on the part of any
member of TWG and TWG shall not be required to pledge any collateral
or provide any other credit enhancement with respect to such
guaranty. The terms of any such guaranty shall be satisfactory to
TWG. If the Closing occurs and TWG gives such guaranty, as
consideration for such guaranty EqualNet shall issue to TWG at the
Closing a warrant (the "Guaranty Warrant") for 500,000 EqualNet
Common Shares exercisable at $1.00 per share, such warrant to have a
term of ten years and to be otherwise substantially similar to the
form of warrant attached as Exhibit B; provided, if at the Closing
the number of EqualNet Common Shares that are authorized under
EqualNet's Articles of Incorporation is not sufficient to permit a
full exercise of the Guaranty Warrant, then the Guaranty Warrant
shall contain a covenant on the part of EqualNet that it will use
its best efforts to cause
2
<PAGE>
such unreserved authorized number of shares to be increased to
permit the full exercise of the Guaranty Warrant and a limitation on
the holder of the Guaranty Warrant to the effect that the obligation
of EqualNet to issue shares upon an exercise of the Guaranty Warrant
in whole or in part shall be conditioned upon EqualNet having a
number of unreserved authorized EqualNet Common Shares at such time
sufficient to cover the number of shares relating to the exercise.
4. If the Closing occurs and as of the Closing Date the number of EqualNet
Common Shares authorized under EqualNet's Articles of Incorporation is not
sufficient to permit the issuance of all or any part of the EqualNet Common
Shares covered by the Warrant attached as Exhibit B to the Agreement, then as of
the Closing such Warrant shall be amended to include a covenant on the part of
EqualNet that it will use its best efforts to cause such unreserved authorized
number of shares to be increased to permit the full exercise of the Warrant and
a limitation on the holder of the Warrant to the effect that the obligation of
EqualNet to issue shares upon an exercise of the Warrant in whole or in part
shall be conditioned upon EqualNet having a number of unreserved authorized
EqualNet Common Shares at such time sufficient to cover the number of shares
relating to the exercise.
By entering into this Amendment, TWG does not waive by implication or
otherwise any of the conditions set forth in Section 6.1(a) of the Agreement.
This Amendment contains the entire understanding and agreement between the
Parties with respect to the subject matter of this Amendment and supersedes any
prior or contemporaneous statements, understandings or agreements with respect
to such subject matter.
EQUALNET HOLDING CORP.
By: /s/ MICHAEL L. HLINAK
Name: Michael L. Hlinak
Title: Senior Vice President
EQ ACQUISITION SUB, INC.
By: /s/ MICHAEL L. HLINAK
Name: Michael L. Hlinak
Title: President
WILLIS GROUP, LLC
By: /s/ MARK A. WILLIS
Name: Mark A. Willis
Title: President
3
EXHIBIT 10.3--MERGER AGREEMENT
AGREEMENT OF MERGER AND PLAN OF REORGANIZATION
BETWEEN
EQUALNET HOLDING CORP.,
EQ ACQUISITION SUB, INC.
NETCO ACQUISITION, LLC
AND
NETCO ACQUISITION CORP.
December 2, 1997
<PAGE>
TABLE OF CONTENTS
1. Definitions......................................................1
2. The Merger.......................................................6
(a) Basic Transaction..........................................6
(b) Conversion of Shares.......................................6
(c) Consummation of the Merger.................................6
(d) Certificate of Incorporation; Bylaws.......................7
(e) Directors and Officers.....................................7
(f) Exchange of Securities.....................................7
(g) Exchange of Certificates...................................7
(h) Terms of the Preferred Stock..............................8
(i) Tax Effect of Transaction..................................8
(j) The Closing................................................8
(k) Deliveries at the Closing..................................8
3. Representations and Warranties of EqualNet and Sub...............9
(a) Organization, Qualification, and Corporate Power...........9
(b) Authorization of Transaction...............................9
(c) Brokers' Fees..............................................9
(d) No Violation...............................................9
(e) Consents..................................................10
(f) Financial Information.....................................10
(g) Liabilities...............................................10
(h) Litigation................................................10
(i) Compliance with ERISA.....................................11
(j) Taxes; Governmental Charges...............................11
(k) Defaults..................................................11
(l) Compliance with the Law...................................11
(m) Investment Company Act....................................11
(n) Public Utility Holding Company Act........................11
(o) Disclosure................................................11
(p) Structure; Capitalization.................................12
(q) Environmental Matters.....................................13
(r) Intellectual Property and Other Intangible Assets.........13
(s) Insurance Coverage........................................14
4. Representations and Warranties of Netco Acquisition.............14
(a) Corporate Existence.......................................15
(b) Corporate Power and Authorization.........................15
(c) Brokers' Fees. ..........................................15
(d) No Violation. ...........................................15
(e) Consents..................................................15
(f) Financial Information. ..................................16
(g) Compliance with the Law. ................................16
(h) Investment Company Act. .................................16
(i) Public Utility Holding Company Act........................16
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<PAGE>
(j) Investment................................................16
(k) Title.....................................................17
5. Pre-Closing Covenants...........................................17
(a) General...................................................17
(b) Inspection................................................18
(c) Notices and Consents......................................18
(d) Notice of Developments....................................18
(e) Ordinary Course...........................................18
(f) Changes in Employment Arrangements........................20
(g) Severance.................................................20
(h) Other Actions.............................................20
(i) Valid Issuance............................................21
(j) Government Regulations....................................21
(k) ERISA.....................................................21
(l) Corporate Existence; Maintenance of Properties............21
(m) Insurance.................................................22
(n) Further Assurances........................................22
(o) Notices of Certain Events.................................22
(p) Board Nominees............................................22
(q) Environmental Laws........................................22
(r) Registration Rights.......................................23
(s) Shareholder Approval; Preparation of Proxy Statements.....23
(t) No Solicitation...........................................23
(u) Listing of Common Stock...................................25
(v) Netco Matters.............................................25
6. Conditions to Obligation to Close...............................26
(a) Conditions to Obligation of Netco Acquisition and Netco...26
(b) Conditions to Obligation of EqualNet......................27
7. Termination.....................................................28
(a) Termination of Agreement..................................28
(b) Effect of Termination.....................................29
8. Remedies for Breaches of This Agreement.........................29
(a) Survival of Representations and Warranties................29
(b) Indemnification Provisions for Benefit of Netco
Acquisition, its members and ADV..........................29
(c) Indemnification Provisions for Benefit of EqualNet........30
(d) Matters Involving Third Parties...........................30
(e) Claims for Indemnification................................31
(f) Determination of Adverse Consequences.....................31
(g) Other Indemnification Provisions..........................31
9. Miscellaneous...................................................32
(a) Press Releases and Public Announcements...................32
(b) No Third-Party Beneficiaries..............................32
(c) Succession and Assignment.................................32
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<PAGE>
(d) Counterparts..............................................32
(e) Notices...................................................32
(f) Governing Law.............................................33
(g) Amendments and Waivers....................................33
(h) Severability..............................................33
(i) Expenses..................................................33
(j) Construction..............................................34
(k) Incorporation of Exhibits, Annexes, and Schedules.........34
(l) Warrant...................................................34
(m) Certain Shareholders......................................34
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<PAGE>
AGREEMENT OF MERGER AND PLAN OF REORGANIZATION
This Agreement of Merger and Plan of Reorganization is entered into as of
December 2, 1997, by and between EqualNet Holding Corp., a Texas corporation
("EqualNet"), EQ Acquisition Sub, Inc., a Delaware corporation and a wholly
owned subsidiary of EqualNet ("Sub"), Netco Acquisition, LLC, a Delaware limited
liability company ("Netco Acquisition"), and Netco Acquisition Corp., a Delaware
corporation and a wholly owned subsidiary of Netco Acquisition ("Netco").
EqualNet, Sub, Netco Acquisition and Netco are each referred to herein as a
"Party" and collectively as the "PARTIES."
RECITALS
This Agreement contemplates a transaction in which Sub will merge with and
into Netco, with Netco being the surviving corporation (the "Merger").
Now, therefore, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the Parties agree as follows:
1. DEFINITIONS.
"ACCREDITED INVESTOR" has the meaning set forth in Regulation D
promulgated under the Securities Act.
"ADDITIONAL WORKING CAPITAL LOANS" has the meaning assigned to such
term in the Limited Liability Company Agreement referenced in the
definition of "Working Capital Loans".
"ADV" means Advantage Fund, Ltd., a British Virgin Islands Company.
"ADVERSE CONSEQUENCES" means all actions, suits, proceedings,
hearings, investigations, charges, complaints, claims, demands,
injunctions, judgments, orders, decrees, rulings, damages, dues,
penalties, fines, costs, amounts paid in settlement, Liabilities,
obligations, taxes, liens, losses, expenses and fees, including court
costs and reasonable attorneys' fees and expenses.
"APPLICABLE RATE" means the corporate base rate or prime rate of
interest publicly announced from time to time by Texas Commerce Bank,
National Association, Houston, Texas plus 5.0% per annum.
"ASSIGNMENT" means the Assignment and Bill of Sale dated effective
as of September 24, 1997, by and among Randy Williams, Trustee of the
Estate of Total National Communications, Inc. and TWG.
"BUSINESS DAY" means any day that is not a Saturday, a Sunday, or a
day that is a banking holiday under United States or Texas Law.
-1-
<PAGE>
"CAPITALIZED LEASE OBLIGATIONS" means all rental obligations which,
under GAAP in effect on the day such obligation is incurred, are required
to be capitalized on the books of EqualNet or any Subsidiary, in each case
taken at the amount thereof accounted for as indebtedness (net of interest
expense) in accordance with such principles.
"CLOSING" has the meaning set forth in Section 2(f).
"CLOSING DATE" has the meaning set forth in Section 2(f).
"COMMISSION" shall mean the United States Securities and Exchange
Commission.
"CURRENT INDEBTEDNESS" means any obligation for borrowed money
(including notes payable and drafts accepted representing extensions of
credit whether or not representing obligations for borrowed money) payable
on demand or within a period of one year from the date of creation
thereof; provided, any obligation shall be treated as Funded Indebtedness,
regardless of its term, if such obligation is renewable pursuant to the
terms thereof or of a revolving credit or similar agreement effective for
more than one year after the date of the creation of such obligation, or
may be payable out of the proceeds of a similar obligation pursuant to the
terms of such obligation or of any such agreement. Any obligation secured
by a Lien on, or payable out of the proceeds of production from, property
of EqualNet or any Subsidiary shall be deemed to be Funded or Current
Indebtedness, as the case may be, of EqualNet or such Subsidiary even
though such obligation shall not be assumed by EqualNet or such
Subsidiary.
"DGL" means the General Corporation Law of the State of
Delaware.
"EQUALNET COMMON SHARE" means any share of the common stock of
EqualNet, $.01 par value per share.
"EQUALNET PREFERRED SHARES" means 2,000 shares of EqualNet Preferred
Stock.
"EQUALNET PREFERRED STOCK" means the Series A Convertible Preferred
Stock, $.01 par value per share, $1,000 stated value per share, of
EqualNet referenced in Section 2(d).
"ENVIRONMENTAL LAW" means any judgment, decree, order, law, license,
rule, regulation or private agreement (such as covenants, conditions, and
restrictions), of any federal, state or local executive, legislative,
judicial, regulatory or administrative agency, board, or authority
designed to protect the environment, air, surface, water, groundwater or
soil, control pollution, or regulate the exploration, manufacturing,
processing, distributing, use, storage, transport or handling of Hazardous
Materials, including, without limitation, the Comprehensive Environmental
Response, Compensation, and Liability Act (42 U.S.C. ss. 9601 ET SEQ.)
("CERCLA"), the Oil Pollution Act (33 U.S.C. ss. 2701 ET
-2-
<PAGE>
SEQ.) ("OPA"), the Resource Conservation and Recovery Act (42 U.S.C. ss.
6901 ET SEQ.) ("RCRA"), and the Federal Water Pollution Control Act (33
U.S.C. ss. 1251 ET SEQ.) ("CWA"), as such laws have been or hereafter may
be amended or supplemented, and any and all analogous present and future
federal, state, and local laws in jurisdictions where EqualNet and its
Subsidiaries do business.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended from time to time. Section references to ERISA are to ERISA as
in effect at the date of this Agreement and any subsequent provisions of
ERISA amendatory thereof, supplemental thereto or substituted therefor.
"ERISA AFFILIATE" means each trade or business (whether or not
incorporated) which together with EqualNet or a Subsidiary of EqualNet
would be deemed to be a "single employer" within the meaning of Section
4001 of ERISA immediately following the acquisition.
"FUNDED INDEBTEDNESS" means and include without duplication any
obligation payable more than one year from the date of the creation
thereof (including the current portion of Funded Indebtedness), which
under GAAP is shown on the balance sheet as a liability (including,
without limitation, Capitalized Lease Obligations and excluding reserves
for deferred income taxes and other reserves to the extent that such
reserves do not constitute an obligation).
"GAAP" means generally accepted accounting principles consistently
applied throughout the period or periods in question.
"GOVERNMENTAL AUTHORITY" shall mean any foreign or domestic federal,
state, county, municipal, or other governmental or regulatory authority,
agency, board, body, commission, instrumentality, court, or any political
subdivision thereof.
"GOVERNMENTAL REQUIREMENT" means any law, statute, code, ordinance,
order, rule, regulation, judgment, decree, injunction, franchise, permit,
certificate, license, authorization, or other direction or requirement
(including but not limited to any of the foregoing which relate to
Environmental Laws, energy regulations and occupational, safety and health
standards or controls) of any Governmental Authority.
"HAZARDOUS MATERIALS" means, collectively, (i) those substances
included within the definition of or identified as "hazardous substances,"
"hazardous materials," "toxic substances," or "solid waste" in or pursuant
to, without limitation, CERCLA, OPA, RCRA, and the Occupational Health and
Safety Act, and in the regulations promulgated pursuant to said laws, all
as amended; (ii) any material, waste or substance which is or contains (A)
petroleum, including crude oil or any fraction thereof, natural gas, or
synthetic gas usable for fuel or any mixture thereof; (B) asbestos; (C)
polychlorinated biphenyls; (D) designated as a "hazardous substance"
pursuant to Section 307 or 311 of the CWA; (E) flammable explosives; or
(F) radioactive materials; and (iii) any such other
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substances, materials and wastes which are or become regulated as
hazardous or toxic under applicable local, state or federal law, or which
are currently classified as hazardous or toxic under local, state or
federal laws or regulations.
"INDEBTEDNESS" means Funded Indebtedness and/or Current
Indebtedness.
"INDEMNIFIED PARTY" has the meaning set forth in Section 8(d).
"INDEMNIFYING PARTY" has the meaning set forth in Section 8(d).
"LIABILITY" means any liability (whether known or unknown, whether
asserted or unasserted, whether absolute or contingent, whether accrued or
unaccrued, whether liquidated or unliquidated, and whether due or to
become due).
"MATERIAL ADVERSE EFFECT" or "MATERIAL ADVERSE CHANGE" means any
material and adverse effect on, or change to, (i) the assets, liabilities,
financial condition, business, or operations of EqualNet and its
Subsidiaries on a consolidated basis, or (ii) the ability of EqualNet and
its Subsidiaries on a consolidated basis to carry out their business as at
the date of this Agreement.
"MCM" means MCM Partners, a Washington limited partnership.
"NASDAQ" means The Nasdaq Stock Market, Inc.
"NETCO" means Netco Acquisition Corp., a Delaware corporation.
"NETCO ACQUISITION" means Netco Acquisition, LLC, a Delaware limited
liability company.
"NETCO ASSETS" means those assets described on Exhibit A.
"NETCO MATERIAL ADVERSE EFFECT" means any material and adverse
effect on, or change to, the assets, liabilities or financial condition of
Netco.
"NOTE AND WARRANT PURCHASE AGREEMENT" means that certain note and
warrant purchase agreement by and among TWG, EqualNet and its Subsidiaries
dated as of October 1, 1997.
"PARTY" has the meaning set forth in the preface above.
"PBGC" means the Pension Benefit Guaranty Corporation established
pursuant to Section 4002 of ERISA, or any successor entity thereto.
"PENSION PLAN" means any multiemployer plan or single-employer plan,
as defined in Section 4001 of ERISA and subject to Title IV of ERISA,
which is maintained after the Acquisition for employees of EqualNet, any
of its Subsidiaries or any ERISA Affiliates.
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"PERMITS" means all licenses, permits, exceptions, franchises,
accreditations, privileges, rights, variances, waivers, approvals and
other authorizations (including, without limitation, those relating to
environmental matters) of, by or from Governmental Authorities necessary
for the conduct of the business of EqualNet and its Subsidiaries
immediately prior to the Closing and as proposed to be conducted by
EqualNet and its Subsidiaries after the Closing.
"PERSON" means and include an individual, a partnership, a joint
venture, a corporation, a limited liability company, a trust, an
unincorporated organization and a government or any department or agency
thereof.
"REGISTRATION AGREEMENT" means the Registration Rights Agreement in
the form of Exhibit A.
"RELEASE" means release, spill, emission, leaking, pumping,
injection, deposit, disposal, discharge, dispersal, leaching or migration
into the environment or into or out of any property, including the
movement of Hazardous Materials through or in the air, surface water, or
groundwater.
"REMEDIAL ACTION" means any action required by any federal, state or
judicial body or administration or agency acting under an Environmental
Law to (i) clean up, remove or treat Hazardous Materials in the
environment; (ii) prevent a Release or threat of Release or minimize the
further Release of Hazardous Materials so they do not migrate or endanger
or threaten to endanger public health or the environment; (iii) perform
post-remedial monitoring and care; or (iv) cure a violation of any
Environmental Law.
"REPORTABLE EVENT" means an event described in Section 4043(b) of
ERISA with respect to which the 30-day notice requirement has not been
waived by the PBGC.
"SECURITY INTEREST" means any mortgage, pledge, lien, encumbrance,
charge, or other security interest, other than (a) mechanic's,
materialmen's, and similar liens, (b) liens for taxes not yet due and
payable or for taxes that the taxpayer is contesting in good faith through
appropriate proceedings diligently conducted and with respect to which
adequate reserves have been set aside on the books of the taxpayer, and
(c) purchase money liens and liens securing rental payments under capital
lease arrangements.
"SHARES" means the EqualNet Common Shares and EqualNet Preferred
Shares.
"SINGLE-EMPLOYER PENSION PLAN" means a Pension Plan which is a
"single-employer plan" as defined in Section 4001 of ERISA.
"STOCK PURCHASE AGREEMENT" means the Stock Purchase Agreement dated
of even date herewith between EqualNet and TWG.
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"SUBSIDIARY" means any corporation or similar entity a majority of
the stock of every class of which, except directors' qualifying shares,
shall, at the time as of which any determination is being made, be owned
by EqualNet, either directly or indirectly.
"THIRD PARTY CLAIM" has the meaning set forth in Section 8(d).
"TWG" means Willis Group, LLC, a Texas limited liability company.
"WORKING CAPITAL LOANS" has the meaning attributed to such term in
Article 4 of the Limited Liability Company Agreement of Netco Acquisition,
LLC dated as of October 1, 1997.
2. THE MERGER.
(a) BASIC TRANSACTION. On and subject to the terms and conditions of this
Agreement, at the Closing Sub will be merged with and into Netco with Netco
being the surviving corporation (the "Merger"). As a result of the Merger, the
separate corporate existence of Sub shall cease and Netco shall continue as the
surviving corporation (sometimes referred to herein as the "Surviving
Corporation"), and all the properties, rights, privileges, powers and franchises
of Netco and Sub shall vest in the Surviving Corporation, without any transfer
or assignment having occurred, and all debts, liabilities and duties of Netco
and Sub shall attach to the Surviving Corporation, all in accordance with the
DGCL.
(b) CONVERSION OF SHARES. Upon consummation of the Merger, all of the
outstanding shares of Netco shall be transferred to EqualNet in exchange for:
(i) 2,081,633 shares of EqualNet Common Shares;
(ii) the number of EqualNet Common Shares equal to (A) the sum of
the outstanding principal and accrued interest on all Working Capital
Loans and the Additional Working Capital Loan, if any, existing as of the
Closing Date divided by (B) $1.00; and
(iii) the EqualNet Preferred Shares.
(c) CONSUMMATION OF THE MERGER. As soon as practicable on or after the
Closing, the parties will cause the Merger to be consummated by filing with the
Secretary of State of Delaware a certificate of merger or other documents in
such form as required by, and executed in accordance with, the relevant
provisions of the DGCL. The "Effective Time" of the Merger as that term is used
in this Agreement shall mean such time as the certificate of merger is duly
filed with the Secretary of State of Delaware. The Merger shall have the effects
set forth in the applicable provisions of the DGCL.
(d) CERTIFICATE OF INCORPORATION; BYLAWS. The Certificate of Incorporation
and bylaws of Sub, as in effect immediately prior to the Effective Time, shall
be the Certificate of Incorporation and bylaws of the Surviving Corporation and
thereafter
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shall continue to be its Certificate of Incorporation and bylaws until amended
as provided therein and under the DGCL.
(e) DIRECTORS AND OFFICERS. The directors of Sub immediately prior to the
Effective Time shall be the directors of the Surviving Corporation at and after
the Effective Time, each to hold office in accordance with the Certificate of
Incorporation and bylaws of the Surviving Corporation, and the officers of Sub
immediately prior to the Effective Time shall be the officers of the Surviving
Corporation at and after the Effective Time, in each case until their respective
successors are duly elected or appointed and qualified.
(f) EXCHANGE OF SECURITIES. Subject to the terms and conditions of this
Agreement, at the Effective Time, by virtue of the Merger and without any action
on the part of Netco or Sub, all of the shares of Netco capital stock issued and
outstanding immediately prior to the Effective Time shall be transferred by
Netco Acquisition to EqualNet in exchange for the EqualNet Common Shares and the
EqualNet Preferred Shares.
(g) EXCHANGE OF CERTIFICATES.
(i) As soon as practicable after the Effective Time, Netco
Acquisition, as the holder of the Netco capital stock certificate, shall be
entitled upon surrender thereof to EqualNet or its transfer agent to receive in
exchange therefor (i) a certificate or certificates representing the shares
comprising the EqualNet Common Shares into which the shares of Netco capital
stock so surrendered shall have been converted as aforesaid, in such
denominations and registered in such names as such holder may request, and (ii)
a certificate or certificates representing the 2,000 shares comprising the
EqualNet Preferred Shares into which the shares of Netco capital stock so
surrendered shall have been exchanged as aforesaid, in such denominations and
registered in such names as such holder may request. Unless and until such
certificate shall be so surrendered and exchanged, no dividends or other
distributions payable to the holders of EqualNet Common Shares or EqualNet
Preferred Shares, as of any time on or after the Effective Time, shall be paid
on any certificate representing any of the Shares; provided, upon any such
surrender and exchange of such certificate, there shall be paid to the record
holders of the certificates issued and exchanged therefor the amount, without
interest thereon, of dividends and other distributions, if any, that theretofore
were declared and became payable after the Effective Time with respect to the
number of shares of EqualNet Common Shares or EqualNet Preferred Shares issued
to such holder.
(ii) All EqualNet Common Shares and EqualNet Preferred Shares issued
upon the surrender for exchange of the certificate for shares of Netco capital
stock in accordance with the terms hereof shall be deemed to have been issued in
full satisfaction of all rights pertaining to such shares. At and after the
Effective Time, except for the transfer there shall be no further registration
of transfers on the stock transfer books of the Surviving Corporation of the
shares of Netco capital stock that were outstanding immediately prior to the
Effective Time. If, after the Effective Time, certificates which prior to the
Effective Time represented shares of Netco capital stock
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are presented to the Surviving Corporation for any reason, they shall be
canceled and exchanged as provided in this Section 2(g).
(iii) If any certificate for any of the EqualNet Common Shares or
EqualNet Preferred Shares is to be issued in a name other than that in which the
certificate surrendered in exchange therefor is registered, it shall be a
condition of the issuance thereof that the certificate so surrendered shall be
properly endorsed and otherwise in proper form for transfer and that the person
requesting such exchange shall have paid to EqualNet or its transfer agent any
transfer or other taxes required by reason of the issuance of a certificate for
any of the EqualNet Common Shares or EqualNet Preferred Shares in any name other
than that of the registered holder of the certificate surrendered, or
established to the satisfaction of EqualNet or its transfer agent that such tax
has been paid or is not payable. Netco Acquisition shall designate at the
Closing that number of the EqualNet Common Shares to be registered in each of
TWG's and ADV's name and all of the EqualNet Preferred Shares to be registered
in the name of MCM.
(iv) None of EqualNet, Sub, Netco, the Surviving Corporation or
their transfer agents shall be liable to a holder of any shares of Netco capital
stock for any amount properly paid to a public official pursuant to applicable
property, escheat or similar laws.
(h) TERMS OF THE PREFERRED STOCK. The rights, preferences, terms and
provisions of the EqualNet Preferred Stock shall be as provided in the Statement
of Resolution Establishing the Series A Convertible Preferred Stock, a copy of
which is attached hereto as Exhibit B (the "Series A Statement of Resolution").
(i) TAX EFFECT OF TRANSACTION. It is the intention of the parties that the
transaction contemplated by this Agreement constitute a reorganization within
the meaning of Sections 368(a) of the Code. The parties agree to file all of
their respective tax returns and reports in a manner consistent with such
intention, and to not take any filing position inconsistent with such intention
unless compelled to do so by court order or administrative decree; provided,
each party shall be permitted to disclose all information required pursuant to
Treas. Reg.ss. 1.368(a). Each party agrees to furnish such information and take
such action as may be reasonably requested of the other party in connection with
the foregoing (which action shall not include any change in the commercial terms
of this Agreement and the other transactions incident thereto). In no event,
however, shall EqualNet be required to incur any out-of-pocket expenses in
defending such position or providing such information or taking such action, nor
shall the foregoing constitute a warranty or guaranty that the transactions
contemplated by this Agreement will, in fact, constitute such a reorganization.
(j) THE CLOSING. Subject to the satisfaction of the conditions set forth
herein, the closing of the transaction contemplated by this Agreement (the
"Closing") shall take place on a Business Day mutually agreeable to EqualNet and
Netco Acquisition within ten Business Days following the satisfaction of the
conditions set forth in Section 6(a)(iii) (the "Closing Date").
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(k) DELIVERIES AT THE CLOSING. At the Closing, (i) EqualNet and Sub will
deliver to Netco Acquisition and Netco the various certificates, instruments and
documents referred to in Section 6(a), (ii) Netco Acquisition and Netco will
deliver to EqualNet and Sub the various certificates, instruments and documents
referred to in Section 6(b), and (iii) EqualNet will deliver to Netco
Acquisition the stock certificates for the Shares registered in the name of the
members or creditor of Netco Acquisition as designated by Netco Acquisition
pursuant to Section 2(g).
3. REPRESENTATIONS AND WARRANTIES OF EQUALNET AND SUB. EqualNet and Sub
represent and warrant to Netco Acquisition as of the date of this Agreement and
as of the Closing Date (as though made throughout this Section 3), except as set
forth in the disclosure schedule delivered by EqualNet to Netco Acquisition on
the date hereof and initialed by authorized representatives of EqualNet, Sub and
Netco Acquisition (the "Disclosure Schedule"). The representations and
warranties of EqualNet and Sub set forth in this Section 3 shall inure to the
benefit of and may be relied upon by each member or creditor of Netco
Acquisition that becomes the holder of any of the Shares (such members or
creditor being The Willis Group, LLC, MCM Partners and Advantage Fund, Ltd.).
(a) ORGANIZATION, QUALIFICATION, AND CORPORATE POWER. EqualNet and Sub are
corporations duly organized, validly existing, and in good standing under the
laws of the states of Texas and Delaware, respectively. Each of EqualNet and Sub
has the requisite corporate power and authority and all licenses, permits,
qualifications and authorizations necessary to carry on the businesses in which
it is engaged and to own and use the properties owned and used by it except
where the failure to do so would not have a Material Adverse Effect.
(b) AUTHORIZATION OF TRANSACTION. The boards of directors of EqualNet and
Sub have duly approved this Agreement and the transactions contemplated hereby,
and each of EqualNet and the Sub has requisite corporate power and authority to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of EqualNet
and Sub, enforceable in accordance with its terms and conditions except to the
extent that enforceability may be limited by bankruptcy, insolvency and other
similar laws affecting the enforcement of creditors' rights generally and except
for the application of general principles of equity. Except as disclosed in
Schedule 3(b) of the Disclosure Schedule, neither EqualNet nor the Sub needs to
give any notice to, make any filing with, or obtain any authorization, consent
or approval of any Governmental Authority or any other Person in order to
consummate the transactions contemplated by this Agreement.
(c) BROKERS' FEES. Neither EqualNet nor Sub has any Liability or
obligation to pay any fees or commissions to any broker, finder, or agent with
respect to the transactions contemplated by this Agreement for which Netco
Acquisition or Netco could become liable or obligated, and neither EqualNet nor
Sub has any Liability or obligation to pay any fees or commissions to any
broker, finder, or agent with respect to the transactions contemplated by this
Agreement.
(d) NO VIOLATION. Except as disclosed in Schedule 3(d) of the Disclosure
Schedule, neither the execution and delivery of this Agreement, the consummation
of
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the transactions provided for herein or contemplated hereby nor the fulfillment
by EqualNet or Sub of the terms hereof will (i) violate any provision of the
Articles of Incorporation or the by-laws of EqualNet or the Certificate of
Incorporation of bylaws of Sub, (ii) result in a default, give rise to any right
of termination, cancellation, acceleration or imposition of any Indebtedness or
Security Interest, or require any consent or approval (other than any consent or
approval that has previously been obtained), under any of the terms, conditions
or provisions of any of the Permits or any note, bond, mortgage, indenture,
loan, distribution agreement, license, agreement, lease or instrument or
obligation to which EqualNet or Sub is a party or by which EqualNet or Sub may
be bound (except where the failure to obtain such consent or approval will not
have a Material Adverse Effect), or (iii) violate any law, judgment, order,
writ, injunction, decree, statute, rule, or regulation of any Governmental
Authority applicable to EqualNet or Sub (except where such violation will not
have a Material Adverse Effect).
(e) CONSENTS. Except as disclosed in Section 3(e) of the Disclosure
Schedule, all consents, approvals, qualifications, orders, or authorizations of,
or filings with, any Governmental Authority, and all consents under any material
contracts, agreements, or instruments by which EqualNet or Sub is bound or to
which it is subject, which are required in connection with EqualNet's or Sub's
valid execution, delivery, or performance of this Agreement and the offer, sale
and delivery of the Shares have been obtained or made.
(f) FINANCIAL INFORMATION.
(i) The audited consolidated balance sheet of EqualNet and its
Subsidiaries as at June 30, 1997, and the related consolidated statements
of operations, shareholders' equity and cash flows for the 12-month period
then ended, including in each case the related schedules and notes,
reported on by Ernst & Young LLP, are complete and correct and fairly
present in all material respects the consolidated financial position of
EqualNet and its Subsidiaries as at the date thereof and the consolidated
results of operations and changes in cash flows for such period, in
accordance with GAAP.
(ii) The unaudited consolidated balance sheet of EqualNet and its
Subsidiaries as at September 30, 1997, and the related unaudited
consolidated statements of operations, shareholders' equity and cash flows
for the three-month period then ended, as included in EqualNet's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1997,
true copies of which have been previously delivered to Netco Acquisition,
are complete and correct and fairly present in all material respects the
consolidated financial position of EqualNet and its Subsidiaries as at the
date thereof and the consolidated results of operations and changes in
cash flows for such period in conformity with GAAP, subject only to normal
year-end audit adjustments.
(iii) Since September 30, 1997, there has been no Material Adverse
Effect.
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(g) LIABILITIES. Except for liabilities incurred in the ordinary course of
business, none of EqualNet or any of its Subsidiaries has any material
(individually or in the aggregate) liabilities, direct or contingent (including
but not limited to liability with respect to any Plan) except as disclosed or
referred to in Section 3(g) of the Disclosure Schedule or in the financial
statements referred to in Section 3(f). Neither EqualNet nor any of its
Subsidiaries has any Funded Indebtedness other than Indebtedness disclosed in
Section 3(g) of the Disclosure Schedule.
(h) LITIGATION. Except as disclosed in Section 3(h) of the Disclosure
Schedule or as described in any report filed by EqualNet with the Commission and
delivered to Netco, there is no action, suit, or proceeding, or any governmental
investigation or any arbitration, in each case pending or, to the knowledge of
EqualNet, threatened against EqualNet or any of its Subsidiaries or any material
property of any thereof before any court or arbitrator or any governmental or
administrative body, agency or official (i) which challenges the validity of
this Agreement; or (ii) which, if adversely determined, would have a Material
Adverse Effect.
(i) COMPLIANCE WITH ERISA. Each Plan is in substantial compliance with
ERISA, no Plan has an accumulated or waived funding deficiency within the
meaning of Section 412 or Section 418(B) of the Code, no proceedings have been
instituted to terminate any Plan, and except as disclosed in Section 3(i) of the
Disclosure Schedule, none of EqualNet or any of its Subsidiaries nor any ERISA
Affiliate has incurred any material liability to or on account of a Plan under
ERISA, and except as disclosed in Section 3(i) of the Disclosure Schedule, no
condition exists which presents a material risk to EqualNet or any of its
Subsidiaries of incurring such a liability.
(j) TAXES; GOVERNMENTAL CHARGES. Each of EqualNet and its Subsidiaries has
filed all tax returns and reports required to be filed and has paid all taxes,
assessments, fees, and other governmental charges levied upon any of them or
upon any of their respective properties or income which are due and payable,
including interest and penalties, or has provided adequate reserves for the
payment thereof, except where the failure to so file, pay, or reserve would not
have a Material Adverse Effect.
(k) DEFAULTS. Except as disclosed in Section 3(k) of the Disclosure
Schedule, none of EqualNet or any of its Subsidiaries is in default, nor has any
event or circumstance occurred which, but for the passage of time or the giving
of notice, or both, would constitute a default (in any respect which may have a
Material Adverse Effect) under any loan or credit agreement, indenture,
mortgage, deed of trust, security agreement, or other instrument or agreement
evidencing or pertaining to any Indebtedness of EqualNet or any Subsidiary, or
under any material agreement or instrument to which EqualNet or any Subsidiary
is a party or by which EqualNet or any Subsidiary is bound. No default hereunder
has occurred and is continuing.
(l) COMPLIANCE WITH THE LAW. None of EqualNet or any of its Subsidiaries
(i) is in violation of any Governmental Requirement or (ii) has failed to obtain
any license, permit, franchise or other governmental authorization necessary to
the ownership of any of their respective properties or the conduct of their
respective business, which violation or failure would have (in the event that
such a violation or
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failure were asserted by any Person through appropriate action) a Material
Adverse Effect.
(m) INVESTMENT COMPANY ACT. None of EqualNet or any of its Subsidiaries is
an "investment company" or a company "controlled" by an "investment company,"
within the meaning of the Investment Company Act of 1940, as amended.
(n) PUBLIC UTILITY HOLDING COMPANY ACT. None of EqualNet or any of its
Subsidiaries is a "holding company," or a "subsidiary company" of a "holding
company," or an "affiliate" of a "holding company" or of a "subsidiary company"
of a "holding company," or a "public utility" within the meaning of the Public
Utility Holding Company Act of 1935, as amended.
(o) DISCLOSURE. EqualNet's filings made pursuant to the Securities
Exchange Act of 1934, as amended and listed on Section 3(o) of the Disclosure
Schedule hereto as of their respective dates, did not contain any untrue
statement of a material fact and did not omit to state any material fact
necessary in order to make the statements contained therein not misleading in
the light of the circumstances under which they were made.
(p) STRUCTURE; CAPITALIZATION.
(i) Section 3(p) of the Disclosure Schedule contains (except as
noted therein) a complete and correct list of EqualNet's Subsidiaries,
showing, as to each Subsidiary, the correct name thereof, the jurisdiction
of its organization, and the percentage of shares of each class of its
capital stock or similar equity interests outstanding owned by EqualNet
and each other Subsidiary.
(ii) All of the outstanding shares of capital stock or similar
equity interests of each Subsidiary shown in Section 3(p) of the
Disclosure Schedule as being owned by EqualNet and its Subsidiaries have
been validly issued, are fully paid and nonassessable, and are owned by
EqualNet or such other Subsidiaries free and clear of any Security
Interest (except as otherwise disclosed in Section 3(p) of the Disclosure
Schedule).
(iii) No Subsidiary of EqualNet is a party to, or otherwise subject
to any legal restriction of any agreement (other than this Agreement and
customary limitations imposed by corporate law statutes) restricting the
ability of such Subsidiary to pay dividends out of profits or make any
other similar distributions of profits to EqualNet or any of its
Subsidiaries that owns outstanding shares of capital stock or similar
equity interests of such Subsidiary.
(iv) As of the Closing Date and after giving effect to the
transactions contemplated in this Agreement, the Stock Purchase Agreement
and the Switch Agreement (i) EqualNet's authorized capital stock will
consist of 55,000,000 shares, of which 50,000,000 will be designated
EqualNet Common Shares and 5,000,000 shares are designated as preferred
stock (2,000 of which will be designated as Series A Convertible Preferred
Stock, $.01 par value per share); (ii) 14,269,357 of EqualNet Common
Shares, issued and outstanding and
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5,450,677 shares are or will be reserved for issuance in connection with
EqualNet's outstanding warrants and stock options all of which, when
issued in accordance with the terms of such warrants and stock options,
will be validly issued, fully paid, and non-assessable; (iii) no shares
are owned or held by or for the account of EqualNet or any of its
Subsidiaries (except as disclosed in the financial statements described in
Section 3(f)); (iv) except as disclosed on Section 3(p) of the Disclosure
Schedule", neither EqualNet nor any of its Subsidiaries has outstanding
any stock or other securities convertible into or exchangeable for any
shares of capital stock, any rights to subscribe for or to purchase or any
options for the purchase of, or any agreements providing for the issuance
(contingent or otherwise) of, or any calls, commitments or claims of any
other character relating to the issuance of, any capital stock, or any
stock or securities convertible into or exchangeable for any capital stock
which have not been waived (other than as contemplated by this Agreement);
and (v) except as disclosed in Section 3(p) of the Disclosure Schedule",
neither EqualNet nor any of its Subsidiaries is subject to any obligation
(contingent or otherwise) to repurchase or otherwise acquire or retire any
shares of capital stock.
(q) ENVIRONMENTAL MATTERS.
(i) Neither any property of any of EqualNet or any of its
Subsidiaries nor the operations conducted thereon violate any order of any
court or Governmental Authority or Environmental Laws which violations
could reasonably be expected to result in liability in excess of $250,000
or which could reasonably be expected to result in obligations in excess
of $250,000 for required Remedial Action, assuming disclosure to the
applicable Governmental Authority of all relevant facts, conditions and
circumstances, if any, pertaining to the relevant property.
(ii) Without limitation of clause (i) above, no property of any of
EqualNet or any of its Subsidiaries nor the operations currently conducted
thereon or by any prior owner or operator of such property or operation,
are in violation of or subject to any existing, pending or, to the
knowledge of EqualNet, threatened action, suit, investigation, inquiry or
proceeding by or before any court or Governmental Authority or to any
obligations for required Remedial Action under Environmental Laws which
could reasonably be expected to result in liability in excess of $250,000,
or which could reasonably be expected to result in obligations for
required Remedial Action in excess of $250,000 assuming disclosure to the
applicable Governmental Authority of all relevant facts, conditions and
circumstances, if any, pertaining to the relevant property.
(iii) All notices, permits, licenses or similar authorizations, if
any, required to be obtained or filed in connection with the operation or
use of any and all property of EqualNet and its Subsidiaries, including
but not limited to past or present treatment, storage, disposal or release
of Hazardous Materials into the environment, have been duly obtained or
filed, except where the failure to so obtain or file would not have a
Material Adverse Effect.
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(r) INTELLECTUAL PROPERTY AND OTHER INTANGIBLE ASSETS.
(i) EqualNet and its Subsidiaries (i) own or have the right to use,
free and clear of all liens, claims, and restrictions, all patents,
trademarks, service marks, trade names, and copyrights, and all
applications, licenses, and rights with respect to the foregoing, and all
trade secrets, including know-how, inventions, designs, processes, works
of authorship, computer programs, and technical data and information
(collectively, "Intellectual Property") used and sufficient for use in the
conduct of its business as now conducted and/or as presently proposed to
be conducted (including, without limitation, the development, manufacture,
operation, and sale of all products and services sold or proposed to be
sold by EqualNet and its Subsidiaries during the next 24 months following
the date of this Agreement) without infringing upon or violating any
right, lien, or claim of others, including, without limitation, former
employees and former employers of its past and present employees, and (ii)
except as described in Section 3(r) of the Disclosure Schedule", is not
obligated or under any liability whatsoever to make any payments by way of
royalties, fees, or otherwise to any owner or licensee of, or other
claimant to, any patent, trademark, service mark, trade name, copyright,
or other intangible asset, with respect to the use thereof or in
connection with the conduct of its business or otherwise.
(ii) Any and all Intellectual Property of any kind, relating to the
business of EqualNet and its Subsidiaries currently being developed, or
developed in the future, by any employee of EqualNet and its Subsidiaries
while in the employ of EqualNet and its Subsidiaries shall be the property
solely of EqualNet and its Subsidiaries. EqualNet and its Subsidiaries
have taken security measures to protect the secrecy, confidentiality, and
value of all Intellectual Property, which measures are reasonable and
customary in the industry in which EqualNet and its Subsidiaries operate.
EqualNet and its Subsidiaries' employees and other persons who, either
alone or in concert with others, developed, invented, discovered, derived,
programmed, or designed the Intellectual Property (the "Technical
Employees"), or who have knowledge of or access to information about the
Intellectual Property, have entered into a written agreement with EqualNet
or its Subsidiaries, in form and substance satisfactory to EqualNet's
management (the "Proprietary Information Agreement") regarding ownership
and treatment of the Intellectual Property.
(iii) Except as described in Section 3(r) of the Disclosure
Schedule, none of EqualNet or its Subsidiaries has received any
communications alleging that EqualNet or such Subsidiary has violated, or
by conducting its business as proposed would violate, any of the patents,
trademarks, service marks, trade names, copyrights, or trade secrets or
other proprietary rights of any other Person or entity. None of EqualNet's
and its Subsidiaries' employees is obligated under any contract (including
licenses, covenants, or commitments of any nature) or other agreement, or
subject to any judgment, decree, or order of any court or administrative
agency, that would interfere with the use of such employee's best efforts
to promote the interests of EqualNet or its Subsidiaries or that would
conflict with EqualNet's or its Subsidiaries' business as presently
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conducted and as proposed to be conducted. Neither the execution nor
delivery of this Agreement, nor the carrying on of EqualNet's or its
Subsidiaries' business by the employees of EqualNet and its Subsidiaries,
nor the conduct of EqualNet's or its Subsidiaries' business as proposed to
be conducted, will conflict with or result in a breach of the terms,
conditions, or provisions of, or constitute a default under, any contract,
covenant, or instrument under which any of such employees is now
obligated. It is not, and will not become, necessary to utilize any
inventions of any of EqualNet's or its Subsidiaries' employees (or people
EqualNet and its Subsidiaries currently intends to hire) made prior to
their employment by EqualNet and its Subsidiaries other than those that
have been assigned to EqualNet and its Subsidiaries pursuant to the
Proprietary Information Agreement signed by such employee.
(s) INSURANCE COVERAGE. The properties of EqualNet and its Subsidiaries
are insured in amounts deemed adequate by EqualNet's management against risks
usually insured against by Persons operating businesses similar to those of
EqualNet and its Subsidiaries in the localities where such properties are
located.
4. REPRESENTATIONS AND WARRANTIES OF NETCO ACQUISITION.
Netco Acquisition represents and warrants to EqualNet that the statements
contained in this Section 4 are correct and complete as of the date of this
Agreement and will be correct and complete as of the Closing Date (as though
made then and as though the Closing Date was substituted for the date of this
Agreement throughout this Section 4).
(a) CORPORATE EXISTENCE. Netco is a corporation duly organized, validly
existing, and in good standing under the laws of the State of Delaware. Netco
Acquisition is a limited liability company duly organized, legally existing, and
in good standing under the laws of the State of Delaware. Netco Acquisition is
duly authorized to conduct business and is in good standing under the laws of
each jurisdiction in which the nature of its business activities or its
ownership or leasing of property makes such qualification necessary.
(b) CORPORATE POWER AND AUTHORIZATION. Netco's board of directors and
stockholders have duly approved this Agreement and the transactions contemplated
hereby. Netco Acquisition's members have duly approved this Agreement and the
transactions contemplated hereby. Netco has the requisite corporate power and
authority to execute, deliver and perform its obligations under this Agreement
and to consummate the transactions contemplated hereby. Netco Acquisition has
the requisite limited liability company power and authority to execute, deliver
and perform its obligations under this Agreement and to consummate the
transactions contemplated hereby. All action on Netco's and Netco Acquisition's
part requisite for the due execution, delivery, and performance of this
Agreement has been duly and effectively taken. This Agreement constitutes the
valid and legally binding obligation of Netco Acquisition and Netco, enforceable
in accordance with its terms and conditions except to the extent that
enforceability may be limited by bankruptcy, insolvency and other similar laws
affecting the enforcement of creditor's rights generally and except for the
application of general principles of equity. Neither Netco Acquisition nor Netco
needs
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to give any notice to, make any filing with, or obtain any authorization,
consent or approval of any Governmental Authority or any other Person in order
to consummate the transactions contemplated by this Agreement.
(c) BROKERS' FEES. Neither Netco nor Netco Acquisition has any Liability
or obligation to pay any fees or commissions to any broker, finder, or agent
with respect to the transactions contemplated by this Agreement for which
EqualNet or Sub could become liable or obligated, and neither Netco nor Netco
Acquisition has any Liability or obligation to pay any fees or commissions to
any broker, finder, or agent with respect to the transactions contemplated by
this Agreement.
(d) NO VIOLATION. Neither the execution and delivery of this Agreement,
the consummation of the transactions provided for herein or contemplated hereby
nor the fulfillment by Netco or Netco Acquisition of the terms hereof will (i)
violate any provision of the Certificate of Incorporation or bylaws of Netco or
the Certificate of Formation or Limited Liability Company Agreement of Netco
Acquisition, (ii) result in a default, give rise to any right of termination,
cancellation, acceleration or imposition of any Indebtedness or Security
Interest, or (iii) violate any law, judgment, order, writ, injunction, decree,
statute, rule or regulation of any Governmental Authority applicable to Netco
Acquisition or Netco (except where the failure to obtain such consent or
approval will not have a Netco Material Adverse Effect and except such consents,
approvals, permits and licenses as are required to effectively transfer or
required to use or operate the Netco Assets).
(e) CONSENTS. All consents, approvals, qualifications, orders or
authorizations of, or filings with, any Governmental Authority, and all consents
under any material contracts, agreements or instruments by which Netco
Acquisition or Netco is bound or to which either is subject, which are required
in connection with Netco Acquisition and Netco's valid execution, delivery or
performance of this Agreement and the consummation of the transactions
contemplated hereby have been obtained or made, except such consents, approvals,
permits and licenses as are required to effectively transfer or operate the
Netco Assets.
(f) FINANCIAL INFORMATION. Netco holds the Netco Assets. Netco has no
indebtedness for borrowed monies or other Liabilities other than Liabilities
(excluding indebtedness for borrowed monies) described in Schedule 4(f).
(g) COMPLIANCE WITH THE LAW. Neither Netco Acquisition nor Netco (i) is in
violation of any Governmental Requirement, except such consents, approvals,
permits and licenses as are required to effectively transfer or required to use
or operate the Netco Assets or (ii) has failed to obtain any license, permit,
franchise or other governmental authorization necessary to the ownership of any
of their respective properties or the conduct of their respective business,
which violation or failure would have (in the event that such violation or
failure were asserted by any Person through appropriate action) a Netco Material
Adverse Effect; provided, Netco Acquisition makes no representation regarding
whether any violation of any Governmental Requirement has occurred with respect
to the ownership, use or the operation of the Netco Assets by Netco or any other
entity or whether any license, permit, franchise or other governmental
authorization is required for the ownership or operation of the Netco
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Assets (none of which have been obtained nor are intended to be obtained prior
to the Closing by Netco or Netco Acquisition).
(h) INVESTMENT COMPANY ACT. Neither Netco Acquisition nor Netco is an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940, as amended.
(i) PUBLIC UTILITY HOLDING COMPANY ACT. Neither Netco Acquisition nor
Netco is a "holding company" or a "subsidiary company" of a "holding company" or
an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding
company" within the meaning of the Public Utility Holding Company Act of 1935,
as amended.
(j) INVESTMENT. As referenced on the signature pages to this Agreement,
TWG, MCM and ADV are joining in this Agreement solely for the purpose of making
the representations, covenants and agreements set forth in this Section 4(j) and
the additional agreements set forth on such signature pages.
(i) The Shares are being acquired by each of Netco Acquisition, TWG,
MCM and ADV for its own account and not with a view to the public resale
or distribution of all or any part thereof in any transaction which would
constitute a "distribution" within the meaning of the Securities Act.
(ii) Each of Netco Acquisition, TWG, MCM and ADV acknowledges that
the Shares have not been registered under the Securities Act.
(iii) Each of Netco Acquisition, TWG, MCM and ADV is an "accredited
investor" within the meaning of Rule 501 under Regulation D promulgated
under the Securities Act, is experienced in evaluating investments in
companies such as EqualNet, has such knowledge and experience in financial
and business matters as to be capable of evaluating the merits and risks
of its investment and has the ability to bear the entire economic risk of
its investment. Each of Netco Acquisition, TWG, MCM and ADV has made its
own evaluation of its investment in the Shares, based upon such
information as is available to it and without reliance upon EqualNet or
any other person or entity, and each of Netco Acquisition, TWG, MCM and
ADV agrees that neither EqualNet nor any other person or entity has any
obligation to furnish any additional information to Netco Acquisition
except as expressly set forth herein.
(d) Each of Netco Acquisition, TWG, MCM and ADV acknowledges that
the Shares may not be sold, transferred, pledged, hypothecated, or
otherwise disposed of without registration under the Securities Act or an
exemption therefrom, and that in the absence of an effective registration
statement covering the Shares or an available exemption from registration
under the Securities Act, the Shares must be held indefinitely.
(e) Each of Netco Acquisition, TWG, MCM and ADV agrees that the
Shares shall bear legends in substantially the following form:
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"THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT
AND MAY NOT BE SOLD OR OFFERED FOR SALE OR OTHERWISE TRANSFERRED,
EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT, OR (ii) AN APPLICABLE EXEMPTION FROM REGISTRATION
UNDER THE SECURITIES ACT. ANY SALE PURSUANT TO CLAUSE (ii) OF THE
PRECEDING SENTENCE MUST BE ACCOMPANIED BY AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO THE COMPANY TO THE EFFECT THAT SUCH
EXEMPTION FROM REGISTRATION IS AVAILABLE IN CONNECTION WITH SUCH
SALE."
(k) TITLE. Netco owns the Netco Assets free and clear of any Security
Interest except for any Security Interest in favor of or created by EqualNet or
any Affiliate of EqualNet and any prior assignment, transfer or lease of any of
the Netco Assets to or by EqualNet or any Affiliate to EqualNet.
5. PRE-CLOSING COVENANTS.
The Parties agree as follows with respect to the period between the
execution of this Agreement (or such earlier time as may be indicated) and the
earlier to occur of the Closing or the termination of this Agreement pursuant to
Section 7:
(a) GENERAL. Each of the Parties will use commercially reasonable efforts
to take all actions and to do all things necessary, proper or advisable in order
to consummate and make effective the transactions contemplated by this Agreement
(including satisfaction, but not waiver, of the closing conditions set forth in
Section 6).
(b) INSPECTION. EqualNet and Netco Acquisition each agree to permit the
other, and its officers, directors, employees, accountants, counsel and other
authorized representatives, during normal business hours, to inspect its records
and to consult with its officers, employees, attorneys, and agents for the
purpose of determining the accuracy of the representations and warranties
hereinabove made and the compliance with covenants contained in this Agreement;
provided, however, that any non-public information obtained regarding EqualNet
shall be protected and treated as strictly confidential. EqualNet and Netco
Acquisition each agrees that it and its officers and representatives shall hold
all data and information obtained with respect to the other party hereto in
confidence and each further agrees that it will not use such data or information
or disclose the same to others, except to the extent such data or information
either are, or become, published or a matter of public knowledge.
(c) NOTICES AND CONSENTS. To the extent, if any, noted in Section 3(c) of
the Disclosure Schedule as being required, EqualNet will give any notices to
third parties, and will use and cause EqualNet to use all reasonable efforts to
obtain the required consent of its shareholders and any third-parties.
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(d) NOTICE OF DEVELOPMENTS. Each Party will give prompt written notice to
the other of any material adverse development causing a breach of or
constituting an intervening event with respect to any of its own representations
and warranties in Sections 3 and 4. No disclosure by any Party pursuant to this
Section 5(c), however, shall be deemed to amend or supplement the Disclosure
Schedule or to prevent or cure any misrepresentation, breach of warranty, or
breach of covenant.
(e) ORDINARY COURSE. Except as set forth in Schedule 5(e) hereof and
except for transactions to which Netco Acquisition and Netco or their affiliates
are a party or as otherwise specifically contemplated by the terms of this
Agreement, EqualNet shall and shall cause its Subsidiaries to carry on their
respective businesses in the usual, regular and ordinary course in substantially
the same manner as heretofore conducted and, to the extent consistent therewith,
use commercially reasonable efforts to preserve intact their current officers
and employees and preserve their relationships with customers, suppliers,
licensors, licensees, distributors and others having business dealings with
them, in each case consistent with past practice, to the end that their goodwill
and ongoing businesses shall be unimpaired to the fullest extent possible at the
Closing Date. Without limiting the generality of the foregoing, and except as
otherwise expressly contemplated by this Agreement and the Schedules hereto,
EqualNet shall not, and shall not permit any of its Subsidiaries to:
(i) (A) declare, set aside or pay any dividends on, or make any
other distributions in respect of, any of its capital stock, other than
dividends and distributions by any direct or indirect wholly owned
Subsidiary of EqualNet to EqualNet or to another direct or indirect wholly
owned Subsidiary of EqualNet, (B) split, combine or reclassify any of its
capital stock or issue or authorize the issuance of any other securities
in respect of, in lieu of or in substitution for shares of its capital
stock or (C) purchase, redeem or otherwise acquire any shares of capital
stock of EqualNet or any of its Subsidiaries or any other securities
thereof or any rights, warrants or options to acquire any such shares or
other securities other than in connection with the exercise of outstanding
stock options and warrants and satisfaction of withholding obligations
under outstanding stock options and restricted stock;
(ii) issue, deliver, sell, pledge or otherwise encumber any shares
of its capital stock, any other voting securities or any securities
convertible into, or any rights, warrants or options to acquire, any such
shares, voting securities or convertible securities other than, in the
case of EqualNet, the issuance of shares of Common Stock upon the exercise
of stock options and warrants outstanding on the date of this Agreement in
accordance with their current terms;
(iii) amend its Articles of Incorporation, By-laws or other
comparable charter or organizational document other than as contemplated
in the Stock Purchase Agreement;
(iv) acquire or agree to acquire (A) by merging or consolidating
with, or by purchasing a substantial portion of the stock or assets of, or
by any other manner, any business or any corporation, partnership,
association, joint venture, limited liability company or other entity or
division thereof or (B) any assets
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that, in each case, would be material, individually or in the aggregate,
to EqualNet and its Subsidiaries taken as a whole, except purchases in the
ordinary course of business consistent with past practice;
(v) sell, lease, mortgage, pledge, grant a Security Interest in or
otherwise encumber or dispose of any of its properties or assets, except
(A) sales or leases in the ordinary course of business consistent with
past practice and (B) other immaterial transactions not in excess of
$250,000 in the aggregate;
(vi) (A) incur indebtedness for borrowed money or guarantee any such
indebtedness of another Person, issue or sell any debt securities or
warrants or other rights to acquire any debt securities of EqualNet or any
of its Subsidiaries, guarantee any debt securities of another Person,
enter into any "keep well" or other agreement to maintain any financial
statement condition of another Person or enter into any arrangement having
the economic effect of any of the foregoing, except for working capital
borrowings under currently existing revolving credit facilities incurred
in the ordinary course of business, or (B) make any loans, advances or
capital contributions to, or investments in, any other Person that would
be material, individually or in the aggregate, to EqualNet and its
Subsidiaries taken as a whole, other than by EqualNet to any direct or
indirect wholly owned Subsidiary of EqualNet;
(vii) make or incur any new capital expenditure, which, singly or in
the aggregate with all other capital expenditures, would exceed $250,000;
(viii) make any material election relating to Taxes or settle or
compromise any material tax liability;
(ix) pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction, in the
ordinary course of business consistent with past practice or in accordance
with their terms, of liabilities reflected or reserved against in, or
contemplated by, the most recent consolidated financial statements (or the
notes thereto) of EqualNet included in the Commission Documents or
incurred in the ordinary course of business consistent with past practice;
(x) waive the benefits of, or agree to modify in any manner, any
confidentiality, standstill or similar agreement to which EqualNet or any
of its Subsidiaries is a party;
(xi) adopt a plan of complete or partial liquidation or resolutions
providing for or authorizing such a liquidation or a dissolution, merger,
consolidation, restructuring, recapitalization or reorganization;
(xii) enter into any new collective bargaining agreement;
(xiii) change any material accounting principle used by it, except
as required by regulations promulgated by the Commission or as mandated by
the
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American Institute of Certified Public Accountants or similar accounting
boards or bodies;
(xiv) settle or compromise any litigation (whether or not commenced
prior to the date of this Agreement) other than settlements or
compromises: (A) of litigation where the amount paid in settlement or
compromise does not exceed $100,000, or (B) in consultation and
cooperation with Netco, and, with respect to any such settlement, with the
prior written consent of Netco Acquisition, which consent shall not be
unreasonably withheld;
(xv) except for those contracts and agreements entered into in the
ordinary course of business or with the prior written consent of Netco
Acquisition, which consent shall not be unreasonably withheld or delayed,
enter into any joint venture or partnership contract or agreement; or
(xvi) authorize any of, or commit or agree to take any of, the
foregoing actions.
(f) CHANGES IN EMPLOYMENT ARRANGEMENTS. Neither EqualNet nor any of its
Subsidiaries shall adopt or amend (except as may be required by law) any bonus,
profit sharing, compensation, stock option, pension, retirement, deferred
compensation, employment or other employee benefit plan, agreement, trust, fund
or other arrangement for the benefit or welfare of any employee, director or
former director or employee, increase the compensation or fringe benefits of any
officer of EqualNet or any of its Subsidiaries, or, except as provided in an
existing benefit plan or in the ordinary course of business consistent with past
practice, increase the compensation or fringe benefits of any employee or former
employee or pay any benefit not required by any existing plan, arrangement or
agreement.
(g) SEVERANCE. Neither EqualNet nor any of its Subsidiaries shall grant
any new or modified severance or termination arrangement or increase or
accelerate any benefits payable under its severance or termination pay policies
in effect on the date hereof.
(h) OTHER ACTIONS. EqualNet shall not, and shall not permit any of its
Subsidiaries to, take any action that would, or that could reasonably be
expected to, result (i) in any of the representations and warranties of EqualNet
set forth in this Agreement becoming untrue or (ii) in any of the covenants
contained in this Agreement becoming unperformable. Pending the Closing,
EqualNet will promptly advise Netco Acquisition and Netco of any action or event
of which it becomes aware which has the effect of making incorrect any of such
representations or warranties or which has the effect of rendering unperformable
any of such covenants.
(i) VALID ISSUANCE. EqualNet covenants that the Shares to be issued by
EqualNet pursuant to Section 2(b) will, upon the effectiveness of the Merger in
accordance with the terms hereof and upon delivery of certificates representing
such Shares, be validly issued, fully paid and nonassessable and free from all
taxes, liens and charges with respect to the issuance thereof.
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(j) GOVERNMENT REGULATIONS. EqualNet covenants that it will comply, and
will cause each of its Subsidiaries to comply, with all applicable governmental
restrictions and regulations, the failure to comply with which would have a
material adverse effect on the business or financial condition of EqualNet and
its Subsidiaries taken as a whole, and obtain and maintain in good standing all
licenses, permits and approvals from any and all governments, governmental
commissions, boards or agencies of jurisdictions in which it or any of its
Subsidiaries carries on business required in respect of the operations of
EqualNet or any of its Subsidiaries, the failure to comply with which would have
a Material Adverse Effect.
(k) ERISA. Promptly (and in any event within 30 days) after EqualNet or
any of its Subsidiaries knows or has reason to know that a Reportable Event with
respect to any Pension Plan has occurred, that any Pension Plan is or may be
terminated, reorganized, partitioned or declared insolvent under Title IV of
ERISA or that EqualNet or any of its Subsidiaries will or may incur any
liability to or on account of a Pension Plan under Sections 4062, 4063, 4064,
4201 or 4204 of ERISA, EqualNet will deliver to Netco Acquisition and Netco a
certificate of the chief financial officer of EqualNet setting forth information
as to such occurrence and what action, if any, EqualNet is required or proposes
to take with respect thereto, together with any notices concerning such
occurrences which are (a) required to be filed by EqualNet or the plan
administrator of any such Pension Plan controlled by EqualNet or its
Subsidiaries, with the PBGC or (b) received by EqualNet or its Subsidiaries from
any plan administrator of a multiemployer or other Pension Plan not under their
control. EqualNet shall furnish to Netco Acquisition and Netco a copy of each
annual report (Form 5500 Series) of any Pension Plan received or prepared by
EqualNet or any of its Subsidiaries. Each annual report and any notice required
to be delivered hereunder shall be delivered no later than 10 days after the
later of the date such report or notice is filed with the Internal Revenue
Service or the PBGC or the date such report or notice is received by EqualNet or
any of its Subsidiaries, as the case may be.
(l) CORPORATE EXISTENCE; MAINTENANCE OF PROPERTIES. EqualNet covenants
that it (i) will do or cause to be done all things reasonably necessary to
preserve and keep in full force and effect the corporate existence and material
rights of EqualNet and all of its Subsidiaries, (ii) will cause its properties
and the properties of its Subsidiaries used or useful in the conduct of their
respective businesses to be maintained and kept in good condition, repair and
working order and will use commercially reasonable efforts to cause to be made
all necessary repairs, renewals, replacements, betterments and improvements
thereto, and (iii) will, and will cause each of its Subsidiaries to, qualify and
remain qualified to conduct business in each jurisdiction where the nature of
the business or the ownership of property by EqualNet or such Subsidiary may
require such qualification and where the failure to so qualify would have a
Material Adverse Effect.
(m) INSURANCE. EqualNet covenants that it will maintain, and will cause
each of its Subsidiaries to maintain, with financially sound and reputable
insurance companies, funds or underwriters, insurance for EqualNet and its
Subsidiaries of the kinds, covering the risks and in the relative proportionate
amounts usually carried by companies conducting business activities similar to
those of EqualNet and its Subsidiaries.
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(n) FURTHER ASSURANCES. EqualNet covenants that it shall cooperate with
Netco Acquisition and Netco and execute such further instruments and documents
as Netco Acquisition and Netco shall reasonably request to carry out to the
satisfaction of Netco Acquisition and Netco the transactions contemplated by
this Agreement.
(o) NOTICES OF CERTAIN EVENTS. EqualNet shall promptly give notice to
Netco Acquisition and Netco (i) of any default or event of default that has not
been cured within any applicable grace period under any (y) Indebtedness of
EqualNet or any of its Subsidiaries, or (z) contractual obligation of EqualNet
or any of its Subsidiaries or (ii) of any pending or threatened litigation,
investigation or proceeding to which EqualNet or any of its Subsidiaries is or
is threatened to be a party and of which EqualNet has been given notice;
provided that any such default as specified in clause (z) above, litigation,
investigation or proceeding would have a Material Adverse Effect. Any notice
delivered pursuant to this Section 5(o) shall be accompanied by an officer's
certificate specifying the details of the occurrence referred to therein and
stating what action EqualNet proposes to take with respect thereto.
(p) BOARD NOMINEES. Effective as of the Closing, in addition to the
covenant in Section 5.J of the Stock Purchase Agreement, the directors of
EqualNet shall elect one new director who shall have been nominated by MCM
Partners, a Washington limited partnership, subject to the directors of EqualNet
approving the individual so nominated by MCM Partners, and if such approval is
not given, then MCM Partners shall have the right to nominate additional
individuals to serve as such director until such approval is obtained.
EqualNet's board of directors shall not unreasonably withhold or delay the
approval of the individual(s) so nominated by MCM Partners. Such director shall
serve a term expiring at the next shareholders meeting of EqualNet applicable to
the class to which such director is elected.
(q) ENVIRONMENTAL LAWS. EqualNet and its Subsidiaries shall comply with
all applicable Environmental Laws the failure to comply with which would have a
Material Adverse Effect. If EqualNet or any Subsidiary shall receive written
notice that there exists a violation of Environmental Law with respect to its
operations or any real property owned, formerly owned, used, or leased thereby,
which violation could have a Material Adverse Effect, EqualNet shall immediately
notify in writing Netco Acquisition and Netco. Furthermore, if EqualNet or any
Subsidiary shall receive written notice that there exists a violation of
Environmental Law with respect to its operations or any real property owned,
formerly owned, used or leased thereby, which violation could have a Material
Adverse Effect, EqualNet shall within the time period permitted by the
applicable governmental authority (unless otherwise contested by EqualNet in
good faith) remove or remedy such violation in accordance with all applicable
Environmental Laws unless the Board of Directors of EqualNet makes a good faith
determination that it would be in the best interest of EqualNet to delay the
remedy of such violation, so long as no Material Adverse Effect is suffered by
EqualNet or its Subsidiaries during such delay.
(r) REGISTRATION RIGHTS. At the Closing EqualNet will grant to MCM and ADV
certain registration rights pursuant to the Registration Agreement.
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(s) SHAREHOLDER APPROVAL; PREPARATION OF PROXY STATEMENTS.
(i) EqualNet shall, as soon as practicable following the execution
and delivery of this Agreement duly call, give notice of, convene and hold
a meeting of EqualNet's shareholders (the "Shareholders Meeting") for the
following purposes: (i) approving this Agreement, the issuance of the
Shares and the transactions contemplated hereby, (ii) ratifying the Note
and Warrant Purchase Agreement and the transactions contemplated thereby,
(iii) approving the Stock Purchase Agreement and the issuance of EqualNet
Common Shares thereunder, (iv) approving the Switch Agreement, (v)
approving an amendment to the Company's Articles of Incorporation to
increase the aggregate number of authorized EqualNet Common Shares to
55,000,000, and (vi) approving the other related transactions. EqualNet
will, through its officers and its Board of Directors, unanimously
recommend to its shareholders the approval and adoption of the foregoing
transactions.
(ii) Promptly following the date of this Agreement, EqualNet shall
prepare and file with the Commission a proxy statement relating to the
Shareholders Meeting (such proxy statement as amended or supplemented from
time to time, the "Proxy Statement"). Netco Acquisition and Netco shall
have the right to review and approve the Proxy Statement prior to EqualNet
filing the Proxy Statement with the Commission, which approval shall not
be unreasonably withheld. EqualNet will use commercially reasonable
efforts to cause the Proxy Statement to be mailed to EqualNet's
shareholders as promptly as practicable. EqualNet will notify Netco
Acquisition and Netco promptly of the receipt of any written or oral
comments from the Commission or its staff and of any request by the
Commission or its staff for amendments or supplements to the Proxy
Statement or for additional information and will supply Netco Acquisition
and Netco with copies of all correspondence between EqualNet or any of its
representatives, on the one hand, and the Commission or its staff, on the
other hand, with respect to the Proxy Statement.
(iii) EqualNet will cause its transfer agent to make stock transfer
records relating to EqualNet available to the extent reasonably necessary
to effectuate the intent of this Agreement.
(t) NO SOLICITATION. (i) EqualNet shall not, nor shall it permit any of
its Subsidiaries to, nor shall it authorize or permit any officer, director or
employee of EqualNet or any investment banker, attorney or other advisor, agent
or representative of EqualNet or any of its Subsidiaries to, directly or
indirectly, (1) solicit, initiate or encourage the submission of any takeover
proposal, (2) enter into any agreement (other than confidentiality and
standstill agreements in accordance with the immediately following proviso) with
respect to any takeover proposal, or (3) participate in any discussions or
negotiations regarding, or furnish to any Person any information with respect
to, or take any other action to facilitate any inquiries or the making of any
proposal that constitutes, or may be reasonably be expected to lead to, any
takeover proposal; provided, in the case of this clause (3), that prior to the
vote of shareholders of EqualNet for approval of the matters referred to in
Section 5(s) (and not thereafter if such matters are approved thereby) to the
extent required by the fiduciary obligations
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of the Board of Directors of EqualNet, determined in good faith by a majority of
the disinterested members thereof based on the advice of outside counsel,
EqualNet, in response to an unsolicited superior proposal and a request for
information pursuant thereto, may furnish information to any person or "group"
within the meaning of Section 13(d)(3) of the Exchange Act pursuant to a
confidentiality agreement. Without limiting the foregoing, it is understood that
any violation of the restrictions set forth in the preceding sentence by any
officer, director or employee of EqualNet or any of its Subsidiaries or any
investment banker, attorney or other advisor, agent or representative of
EqualNet, whether or not such Person is purporting to act on behalf of EqualNet
or otherwise, shall be deemed to be a material breach of this Agreement by
EqualNet. For purposes of this Section 5(t), "takeover proposal" means (x) any
proposal, other than a proposal by TWG or any of its Affiliates, for a merger or
other business combination involving EqualNet, (y) any proposal or offer, other
than a proposal or offer by TWG or any of its Affiliates, to acquire from
EqualNet or any of its Affiliates in any manner, directly or indirectly, an
equity interest in EqualNet or any Subsidiary, any voting securities of EqualNet
or any Subsidiary or a material amount of the assets of EqualNet and its
Subsidiaries, taken as a whole, or (z) any proposal or offer, other than a
proposal or offer by TWG or any of its Affiliates, to acquire from the
shareholders of EqualNet by tender offer, exchange offer or otherwise more than
20% of the outstanding shares of Common Shares.
(ii) Neither the Board of Directors of EqualNet nor any committee
thereof shall, except in connection with the termination of this Agreement
pursuant to Section 7, (1) withdraw or modify, or propose to withdraw or modify,
in a manner adverse to Netco Acquisition or Netco the approval or recommendation
by the Board of Directors of EqualNet or any such committee thereof of this
Agreement or take any action having such effect; provided, a statement by the
Board of Directors of EqualNet to its shareholders as contemplated by Rule
14e-2(a) of the Exchange Act following Netco Acquisition's and Netco's receipt
of a Notice of Superior Proposal (defined below) shall not be deemed to
constitute a withdrawal or modification of its recommendation of this Agreement,
or (2) approve or recommend, or propose to approve or recommend, any takeover
proposal. Notwithstanding the foregoing, in the event that the Board of
Directors of EqualNet receives a takeover proposal that, in the exercise of its
fiduciary obligations (as determined in good faith by a majority of the
disinterested members thereof based on the advice of outside counsel), it
determines to be a superior proposal, the Board of Directors of EqualNet may
withdraw or modify its approval or recommendation of this Agreement and may
(subject to the following sentence) terminate this Agreement, in each case at
any time after midnight on the fifth Business Day following Netco Acquisition's
and Netco's receipt of written notice (a "Notice of Superior Proposal") advising
Netco Acquisition and Netco that the Board of Directors of EqualNet has received
a takeover proposal that it has determined to be a superior proposal, specifying
the material terms and conditions of such superior proposal (including the
proposed financing for such proposal and a copy of any documents conveying such
proposal) and identifying the Person making such superior proposal. EqualNet may
terminate this Agreement pursuant to the preceding sentence only if the
shareholders of EqualNet have not yet voted upon the matters set forth in
Section 5(s). Any of the foregoing to the contrary notwithstanding, EqualNet may
engage in discussions with any Person or group that has made an unsolicited
takeover proposal for the limited purpose of determining whether such proposal
is a superior
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proposal. Nothing contained herein shall prohibit EqualNet from taking and
disclosing to its shareholders a position contemplated by Rule 14e-2(a)
following Netco Acquisition and Netco's receipt of a Notice of Superior
Proposal.
(iii) For purposes of this Section 5(t), a "superior proposal" means
any BONA FIDE takeover proposal to acquire, directly or indirectly, for
consideration consisting of cash, securities or a combination thereof, all of
the EqualNet Common Shares then outstanding or all or substantially all of the
assets of EqualNet and its Subsidiaries, and otherwise on terms that a majority
of the disinterested members of the Board of Directors of EqualNet determines in
its good faith reasonable judgment (based on the advice of a financial advisor
of nationally recognized reputation, a copy of which shall be provided to Netco
Acquisition and Netco) to be more favorable to EqualNet's shareholders than the
transactions contemplated by this Agreement, the Stock Purchase Agreement and
the Switch Agreement.
(iv) In addition to the obligations of EqualNet set forth in clause
(ii) above, EqualNet shall promptly advise Netco Acquisition and Netco orally
and in writing of any takeover proposal or any inquiry with respect to or which
could lead to any takeover proposal, the material terms and conditions of such
inquiry or takeover proposal (including the financing for such proposal and a
copy of such documents conveying such proposal), and the identity of the Person
making any such takeover proposal or inquiry.
(u) LISTING OF COMMON STOCK. EqualNet warrants to and agrees with Netco
Acquisition that it will use commercially reasonable efforts to cause the
EqualNet Common Shares to be issued pursuant to the Merger or upon conversion of
the EqualNet Preferred Shares to be approved for listing, subject to official
notice of issuance, on the NASDAQ National Market as of the Closing Date.
(v) NETCO MATTERS. Netco Acquisition shall not permit Netco to:
(i) amend its Certificate of Incorporation or bylaws;
(ii) declare, set aside or pay any dividends on, or make any other
distributions in respect of any of Netco's capital stock, or split, combine or
reclassify any of Netco's capital stock or issue or authorize the issuance of
any other securities in respect of, in lieu of or in substitution for Netco's
capital stock;
(iii) issue, sell, pledge or otherwise encumber any shares of
Netco's capital stock;
(iv) Netco shall not acquire any assets other than the Netco Assets;
(v) Netco shall not incur any Liabilities other than in connection
with the transfer, operation or use of the Netco Assets;
(vi) Netco shall not sell, lease, mortgage, pledge, grant a Security
Interest in or otherwise encumber or dispose of any of the Netco Assets, other
than any lease or assignment of the Netco Assets to EqualNet or any Affiliate of
EqualNet;
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(vii) Netco shall not incur any indebtedness for borrowed money or
guarantee any indebtedness of another Person;
(viii) Netco shall not make or incur any capital expenditure other
than in connection with the maintenance, operation or use of the Netco Assets;
(ix) Netco shall not adopt a plan of complete or partial liquidation
or take any other action that would prevent it from consummating the
transactions contemplated by this Agreement; and
(x) Netco shall not engage any employees.
6. CONDITIONS TO OBLIGATION TO CLOSE.
(a) CONDITIONS TO OBLIGATION OF NETCO ACQUISITION AND NETCO. The
obligation of Netco Acquisition and Netco to consummate the transactions to be
performed by them in connection with the Closing is subject to satisfaction of
the following conditions:
(i) The representations and warranties set forth in Section 3 shall
be true and correct in all material respects at and as of the Closing
Date.
(ii) EqualNet and Sub shall have performed and complied with all of
their respective covenants hereunder in all material respects through the
Closing.
(iii) EqualNet shall have procured all of the consents of third
parties required in connection with the consummation of the transactions
contemplated by this Agreement, and EqualNet shall have procured the
approval of its shareholders at the Shareholders Meeting for the matters
set forth in Section 5(r).
(iv) The closing under that certain Stock Purchase Agreement dated
November 21, 1997, between EqualNet and TWG, and the closing under that
certain Switch Agreement dated November 21, 1997, between TWG, EqualNet
and Sub, shall have occurred or be occurring simultaneous with the Closing
hereunder.
(v) The offering and sale of the Shares under this Agreement shall
have complied with all applicable requirements of federal and state
securities laws.
(vi) Subsequent to the date hereof, no legislation, order, rule,
ruling or regulation shall have been enacted or made by or on behalf of
any governmental body, department or agency of the United States, nor
shall any legislation have been introduced and favorably reported for
passage to either House of Congress by any committee of either such House
to which such legislation has been referred for consideration, nor shall
any decision of any court of competent jurisdiction within the United
States have been rendered which would materially
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and adversely affect an investment in the Shares. There shall be no
action, suit, investigation or proceeding pending, or to EqualNet's or
Netco Acquisition's knowledge, threatened, against or affecting EqualNet
or any of its Subsidiaries or Netco Acquisition or any of its members, or
any of their respective properties or rights, or any of their affiliates,
associates, officers or directors, before any court, arbitrator or
administrative or governmental body which (i) seeks to restrain, enjoin,
prevent the consummation of or otherwise adversely affect the transactions
contemplated by this Agreement or (ii) questions the validity or legality
of any such transaction or seeks to recover damages or to obtain other
relief in connection with any such transaction, and to EqualNet's or Netco
Acquisition's knowledge there shall be no valid basis for any such action,
proceeding or investigation.
(vii) EqualNet shall have duly received all authorizations,
consents, approvals, licenses, franchises, permits and certificates by or
of all federal, state and local governmental authorities, by any third
parties pursuant to the terms of any agreement to which EqualNet is a
party or by the National Association of Securities Dealers, Inc. or any
other body or agency with jurisdiction, by contract or otherwise, over
EqualNet, necessary for the issuance of the Shares by EqualNet and the
consummation of the transactions contemplated hereby, and all thereof
shall be in full force and effect at the time of the Closing.
(viii) The nominee designated by MCM Partners pursuant to Section
5(p) shall have been appointed to EqualNet's Board of Directors effective
upon the Closing.
(ix) There shall not have occurred any Material Adverse Change with
respect to EqualNet and its Subsidiaries since the date hereof.
(x) EqualNet shall have delivered to Netco Acquisition and Netco a
certificate to the effect that each of the conditions specified above in
Section 6(a)(i)-(ix) is satisfied in all respects.
(xi) Netco Acquisition and Netco shall have received from Fulbright
& Jaworski, L.L.P., counsel to EqualNet and Sub, an opinion in form and
substance as set forth in Exhibit C attached hereto, addressed to Netco
Acquisition, and dated as of Closing Date.
(xii) MCM and ADV shall have been delivered the Registration
Agreement executed by EqualNet.
(xiii) The EqualNet Common Shares issued pursuant to the Merger or
upon the conversion of the EqualNet Preferred Shares shall have been
approved for listing, subject to official notice of issuance, on the
NASDAQ National Market as of the Closing Date.
All actions to be taken by EqualNet in connection with consummation of the
transactions contemplated hereby and all certificates, opinions, instruments,
and other documents required to effect the transactions contemplated hereby will
be reasonably
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satisfactory in form and substance to Netco Acquisition and Netco. Netco
Acquisition and Netco may waive any condition specified in this Section 6(a) if
it executes a writing so stating at or prior to the Closing.
(b) CONDITIONS TO OBLIGATION OF EQUALNET. The obligations of EqualNet and
Sub to consummate the transactions to be performed by it in connection with the
Closing are subject to satisfaction of the following conditions:
(i) The representations and warranties set forth in Section 4 shall
be true and correct in all material respects at and as of the Closing
Date.
(ii) Netco Acquisition and Netco shall have performed and complied
with all of its covenants hereunder in all material respects through the
Closing.
(iii) EqualNet shall have obtained the approval of its shareholders
at the Shareholders Meeting for the matters set forth in Section 5(s).
(iv) The closing under that certain Stock Purchase Agreement dated
November 21, 1997, between EqualNet and TWG, and the closing under that
certain Switch Agreement dated November 21, 1997, between EQ Acquisition
Sub, Inc., EqualNet, TWG and Sub, shall have occurred or be occurring
simultaneous with the Closing hereunder.
(v) There shall be no action, suit, investigation or proceeding
pending, or to EqualNet's or Netco Acquisition's knowledge, threatened,
against or affecting EqualNet or any of its Subsidiaries or Netco
Acquisition or any of its members, or any of their respective properties
or rights, or any of their affiliates, associates, officers or directors,
before any court, arbitrator or administrative or governmental body which
(i) seeks to restrain, enjoin, prevent the consummation of or otherwise
adversely affect the transactions contemplated by this Agreement or (ii)
questions the validity or legality of any such transaction or seeks to
recover damages or to obtain other relief in connection with any such
transaction.
(vi) Netco Acquisition and Netco shall have delivered to EqualNet a
certificate to the effect that each of the conditions specified above in
Section 6(b)(i)-(ii) is satisfied in all respects.
(vii) EqualNet shall have received from Vinson & Elkins L.L.P.,
counsel to Netco Acquisition and Netco, an opinion in form and substance
as set forth in Exhibit D attached hereto, addressed to EqualNet and dated
as of the Closing Date.
(viii) Netco Acquisition and Netco shall have executed and delivered
to EqualNet the Merger Agreement.
All actions to be taken by Netco Acquisition and Netco in connection with
consummation of the transactions contemplated hereby and all certificates,
opinions, instruments, and other documents required to effect the transactions
contemplated
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hereby will be reasonably satisfactory in form and substance to EqualNet.
EqualNet may waive any condition specified in this Section 6(b) if it executes a
writing so stating at or prior to the Closing.
7. TERMINATION.
(a) TERMINATION OF AGREEMENT. This Agreement may be terminated only as
provided below:
(i) EqualNet, Sub, Netco Acquisition and Netco may terminate this
Agreement by mutual written consent at any time prior to the Closing;
(ii) Either EqualNet, Sub, Netco Acquisition or Netco may terminate
this Agreement by giving written notice to the other parties prior to the
Closing if the shareholders of EqualNet fail to give any required approval
of this Agreement and the transactions contemplated hereby upon a vote at
the Shareholders Meeting or at any adjournment thereof;
(iii) Netco Acquisition and Netco may terminate this Agreement by
giving written notice to EqualNet and Sub at any time prior to the Closing
(A) in the event EqualNet or Sub has breached any representation, warranty
or covenant on their part contained in this Agreement in any material
respect, Netco Acquisition and Netco have notified EqualNet or Sub of the
breach or occurrence, and the breach or occurrence has continued without
cure for a period until the earlier of 15 days after the notice of breach
or the scheduled Closing Date or (B) if the Closing shall not have
occurred on or before February 1, 1998, by reason of the failure of any
condition precedent under Section 6(a) (unless the failure results
primarily from Netco Acquisition or Netco breaching any representation,
warranty or covenant on its part contained in this Agreement); and
(iv) EqualNet and Sub may terminate this Agreement by giving written
notice to Netco Acquisition or Netco at any time prior to the Closing (A)
in the event Netco Acquisition or Netco has breached any representation,
warranty or covenant on their part contained in this Agreement in any
material respect, EqualNet has notified Netco Acquisition and Netco of the
breach, and the breach has continued without cure for a period until the
earlier of 15 days after the notice of breach or the scheduled Closing
Date or (B) if the Closing shall not have occurred on or before February
1, 1998, by reason of the failure of any condition precedent under Section
6(b) (unless the failure results primarily from EqualNet or Sub breaching
any representation, warranty or covenant on his part contained in this
Agreement).
(b) EFFECT OF TERMINATION. If this Agreement is terminated pursuant to
Section 7(a), all rights and obligations of the Parties hereunder shall
terminate without any Liability of any Party to any other Party (except for any
Liability of any Party for any breach of a covenant or for any knowing and
willful breach of any representation or warranty).
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8. REMEDIES FOR BREACHES OF THIS AGREEMENT.
(a) SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All of the representations
and warranties of the Parties contained in Sections 3 and 4 shall survive the
Closing hereunder for a period of four years from the date of this Agreement.
(b) INDEMNIFICATION PROVISIONS FOR BENEFIT OF NETCO ACQUISITION, ITS
MEMBERS AND ADV. If any representation or warranty set forth in Section 3 or any
covenant or agreement set forth herein made by EqualNet or Sub is breached, then
EqualNet agrees to indemnify Netco Acquisition and any member of Netco
Acquisition or ADV that becomes a holder of any of the Shares from and against
any Adverse Consequences that Netco Acquisition and each such member or ADV may
suffer through and after the date of the claim for indemnification to the extent
resulting from, arising out of, relating to, or caused by such breach.
(c) INDEMNIFICATION PROVISIONS FOR BENEFIT OF EQUALNET. If Netco
Acquisition or Netco breaches any of its representations and warranties in
Section 4 or any covenant or agreement set forth herein made by Netco
Acquisition and Netco, then Netco Acquisition agrees to indemnify EqualNet from
and against any Adverse Consequences EqualNet may suffer through and after the
date of the claim for indemnification to the extent resulting from, arising out
of, relating to, or caused by such breach.
(d) MATTERS INVOLVING THIRD PARTIES.
(i) If any third party shall notify any Party (the "Indemnified
Party") with respect to any matter (a "Third Party Claim") that may give
rise to a claim for indemnification against any other Party (the
"Indemnifying Party") under this Section 8, then the Indemnified Party
shall promptly notify the Indemnifying Party thereof in writing; provided,
no delay on the part of the Indemnified Party in notifying the
Indemnifying Party shall relieve the Indemnifying Party from any
obligation hereunder unless (and then solely to the extent) the
Indemnifying Party thereby is prejudiced.
(ii) The Indemnifying Party will have the right to defend the
Indemnified Party against the Third Party Claim with counsel of the
former's choice reasonably satisfactory to the Indemnified Party so long
as (1) the Indemnifying Party notifies the Indemnified Party in writing
within 15 days after the Indemnified Party has give notice of the Third
Party Claim that the Indemnifying Party will indemnify the Indemnified
Party from and against the entirety of any Adverse Consequences the
Indemnified Party may suffer resulting from, arising out of, relating to,
in the nature of, or caused by the Third Party Claim, (2) the Indemnifying
Party provides the Indemnified Party with evidence reasonably acceptable
to the Indemnified Party that the Indemnifying Party will have the
financial resources to defend against the Third Party Claim and fulfill
its indemnification obligations hereunder, (3) the Third Party Claim
involves only money damages and does not seek an injunction or other
equitable relief, (4) settlement of, or an adverse judgment with respect
to, the Third Party Claim is not in the good faith judgment of the
Indemnified Party, likely to establish a
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precedential custom or practice materially adverse to the continuing
business interests of the Indemnified Party, and (5) the Indemnifying
Party conducts the defense of the Third Party Claim actively and
diligently.
(iii) So long as the Indemnifying Party is conducting the defense of
the Third Party Claim in accordance with Section 8(d)(ii), (1) the
Indemnified Party may retain separate co-counsel at its sole cost and
expense and participate in the defense of the Third Party Claim, (2) the
Indemnified Party will not consent to the entry of any judgment or enter
into any settlement with respect to the Third Party Claim without the
prior written consent of the Indemnifying Party (not to be withheld
unreasonably), and (3) the Indemnifying Party will not consent to the
entry of any judgment or enter into any settlement with respect to the
Third Party Claim without the prior written consent of the Indemnified
Party (not to be withheld unreasonably).
(iv) In the event any of the conditions in Section 8(d)(ii) is or
becomes unsatisfied, however, (1) the Indemnified Party may defend
against, and consent to the entry of any judgment or enter into any
settlement with respect to, the Third Party Claim in any manner it
reasonably may deem appropriate (and the Indemnified Party need not
consult with, or obtain any consent from, the Indemnifying Party in
connection therewith), (2) the Indemnifying Party will reimburse the
Indemnified Party promptly and periodically for the costs of defending
against the Third Party Claim (including reasonable attorneys' fees and
expenses), and (3) the Indemnifying Party will remain responsible for any
Adverse Consequences the Indemnified Party may suffer resulting from,
arising out of, relating to, in the nature of, or caused by the Third
Party Claim to the fullest extent provided in this Section 8.
(e) CLAIMS FOR INDEMNIFICATION.
(i) Whenever any claim shall arise for indemnification under Section
8(b) or 8(c), the Indemnified Party shall describe such claim in a written
notice ("Notice of Claim") to the Indemnifying Party (and for purposes of
this Section 9(e), a notice given pursuant to Section 9(d) shall
constitute a "Notice of Claim") and, when known, specify the facts
constituting the basis for such claim and the amount or an estimate of the
amount of such claim.
(ii) Following the receipt by the Indemnifying Party of each Notice
of Claim, the Indemnifying Party may give the Indemnified Party written
notice ("Notice of Objection") (1) attaching a copy of such Notice of
Claim, (2) stating that, in the opinion of the Indemnifying Party, the
claim described in such Notice of Claim is invalid (either in whole or in
specified part), (3) giving the reasons for the alleged invalidity, and
(4) stating that, based on such alleged invalidity, the Indemnifying Party
objects to the payment of any portion of the amount claimed pursuant to
such Notice of Claim. If a Notice of Objection alleges that a Notice of
Claim is only partially invalid, the Indemnifying Party within 30 days of
the receipt of such Notice of Claim, agrees to deliver to the Indemnified
Party that portion of the amount claimed pursuant to such Notice of Claim
as to which no objection is made.
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(f) DETERMINATION OF ADVERSE CONSEQUENCES. There shall be taken into
account the time cost of money (using the Applicable Rate as the discount rate)
and appropriate adjustments shall be made for tax consequences and insurance in
determining Adverse Consequences for purposes of this Section 8.
(g) OTHER INDEMNIFICATION PROVISIONS. The foregoing indemnification
provisions are in addition to, and not in derogation of, any statutory,
equitable, or common law remedy any Party may have for breach of this Agreement.
9. MISCELLANEOUS.
(a) PRESS RELEASES AND PUBLIC ANNOUNCEMENTS. No Party shall issue any
press release or make any public announcement relating to the subject matter of
this Agreement prior to the Closing without the prior written approval of Netco
Acquisition and EqualNet; provided, either Party may make any public disclosure
it believes in good faith is required by applicable law or the requirements of
NASDAQ.
(b) NO THIRD-PARTY BENEFICIARIES. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns except for the members of Netco Acquisition and
ADV with respect to and as contemplated by Sections 3 and 8.
(c) SUCCESSION AND ASSIGNMENT. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns. No Party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of other Parties.
(d) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
(e) NOTICES. All notices, requests, demands, claims, and other
communications hereunder shall be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be sent by (i) personal delivery
(including courier service), (ii) telecopier during normal business hours to the
number indicated, or (iii) registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended recipient as set forth
below (any communication shall be deemed given upon receipt):
IF TO EQUALNET OR SUB:
1250 Wood Branch Park Drive
Houston, TX 77079-1212
Attention: General Counsel
Telecopier No.: 281-529-4686
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WITH A COPY TO:
Fulbright & Jaworski L.L.P.
1301 McKinney, Suite 5100
Houston, Texas 77010
Attention: Robert F. Gray, Jr.
Telecopier No.: 713-651-5246
IF TO NETCO OR NETCO ACQUISITION:
5005 Woodway, Suite 350
Houston, Texas 77056
Attention: Mark Willis and Jim Harris
Telecopier No.: 713-626-8333
WITH A COPY TO:
MCM Partners
10500 NE 8th, Suite 1920
Bellevue, Washington 98004-4332
Attention: Chris Purrier and Howard Coleman
Telecopier No.: 425-462-4645
AND:
Vinson & Elkins L.L.P.
1001 Fannin, Suite 2300
Houston, Texas 77002-6760
Attention: Rell Tipton
Telecopier No.: 713-615-5553
Any Party may change its telecopier number or its address to which notices,
requests, demands, claims, and other communications hereunder are to be
delivered by giving the other Party notice in the manner herein set forth.
(f) GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware.
(g) AMENDMENTS AND WAIVERS. No amendments of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by the
Parties. No waiver by any Party of any default, misrepresentation, or breach of
warranty or covenant hereunder, whether intentional or not, shall be deemed to
extend to any prior or subsequent default, misrepresentation, or breach of
warranty or covenant hereunder or affect in any way any rights arising by virtue
of any prior or subsequent such occurrence.
(h) SEVERABILITY. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforce-
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ability of the offending term or provision in any other situation or in any
other jurisdiction.
(i) EXPENSES. Each of the Parties will bear its own costs and expenses
(including legal fees and expenses) incurred in connection with this Agreement
and the transactions contemplated hereby.
(j) CONSTRUCTION. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties, and no presumption or burden of proof shall arise
favoring or disfavoring either Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance.
(k) INCORPORATION OF EXHIBITS, ANNEXES, AND SCHEDULES. The Exhibits,
Annexes, and Schedules identified in this Agreement are incorporated herein by
reference and made a part hereof.
(l) WARRANT. Contemporaneous with the execution hereof, EqualNet shall
execute and deliver to Netco Acquisition the Warrant Agreement in the form of
Exhibit G attached hereto and a duly completed Warrant Certificate in the form
attached as Exhibit A to the such Warrant Agreement.
(m) CERTAIN SHAREHOLDERS. By December 10, 1997, EqualNet shall deliver to
Netco Acquisition the form of agreement attached as Exhibit H hereto duly
executed by the indicated shareholders.
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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
EQUALNET HOLDING CORP.
By: /s/ ZANE RUSSELL
Name: ZANE RUSSELL
Title: CEO
EQ ACQUISITION SUB, INC.
By: /s/ MICHAEL L. HLINAK
Name: MICHAEL L. HLINAK
Title: COO
NETCO ACQUISITION CORP.
By: /s/ MARK WILLIS
Name: MARK WILLIS
Title: PRES.
NETCO ACQUISITION, LLC
By: /s/ JAMES T. HARRIS
Name: JAMES T. HARRIS
Title: SECRETARY
[signature page to Agreement of Merger and Plan of Reorganization]
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x x x x x x x x x x x x
TWG, MCM and ADV are joining in this Agreement solely for the purpose of
making the representations and agreements set forth in Section 4(j) and the
agreements set forth in the following provisions of this paragraph. As to each
representation and agreement set forth in Section 4(j), each of TWG, MCM and ADV
hereby (a) make such representation only as to itself and (where applicable) the
Shares acquired by it and (b) make such agreements only as to itself and (where
applicable) the Shares acquired by it. As an inducement to EqualNet and Sub to
enter into this Agreement, ADV agrees to make to Netco Acquisition and Netco the
Working Capital Loans and Additional Working Capital Loan contemplated and as
required on its part by Section 4.03 of the Limited Liability Company Agreement
of Netco Acquisition (up to an aggregate principal amount of $1,500,000), and at
the Closing ADV agrees to convert such Working Capital Loans and Additional
Working Capital Loan made by ADV into and in exchange for the EqualNet Common
Shares to be issued pursuant to Section 2(b)(ii) of this Agreement with respect
to the Working Capital Loans and Additional Working Capital Loan made by ADV. As
an inducement to EqualNet and Sub to enter into this Agreement, TWG agrees to
make to Netco Acquisition the Working Capital Loans contemplated and required on
its part by Section 4.03 of the Limited Liability Company Agreement of Netco
Acquisition (up to an aggregate principal amount of $1,500,000), and at the
Closing TWG agrees to convert such Working Capital Loans made by TWG into and in
exchange for the EqualNet Common Shares to be issued pursuant to Section
2(b)(ii) of this Agreement with respect to the Working Capital Loans made by
TWG.
WILLIS GROUP, LLC
By: /s/ MARK WILLIS
Name: MARK WILLIS
Title: PRES.
[signature page to Agreement of Merger and Plan of Reorganization]
-37-
<PAGE>
MCM PARTNERS
By: /s/ DONALD R. MORKEN
Name: DONALD R. MORKEN
Title: GENERAL PARTNER OF MCM PARTNERS
ADVANTAGE FUND, LTD.
By: /s/ ARNO DE GROOT
Name: ARNO DE GROOT
Title: PRESIDENT
[signature page to Agreement of Merger and Plan of Reorganization]
-38-
<PAGE>
AMENDMENT TO
AGREEMENT OF MERGER AND PLAN OF REORGANIZATION
This Amendment to that certain Agreement of Merger and Plan of
Reorganization (the "Agreement") dated December 2, 1997 by and among EqualNet
Holding Corp., EQ Acquisition Sub, Inc., Netco Acquisition, LLC, Netco
Acquisition Corp. Willis Group, LLC, MCM Partners, and Advantage Fund, Ltd., is
entered into as of December 19, 1997 for the following purposes:
Whereas, subparagraphs 7.(a)(iii) and 7.(a)(iv) of the Agreement allow
each party certain rights to terminate the Agreement if the conditions for
closing of the transactions contemplated in such agreement are not completed by
February 1, 1998; and
Whereas the parties herto desire to change such date,
Now, therefore, the parties hereto agree as follows: the date "February
1, 1998" contained in subaragraphs 7.(a)(iii) and 7.(a)(iv) of the Agreement is
hereby changed and amended in each instance to "March 31, 1998".
No other change, amendment or modification of the Agreement is hereby
made. This Amendment is signed effective December 19, 1997. This Amendment may
be executed in multiple counterpart originals, all of which taken together shall
constitute one document. A facsimile signature of any of the undersigned shall
have the same force and effect as an original signature.
EqualNet Holding Corp. EQ Acquisition Sub, Inc.
By: /s/ MICHAEL L. HLINAK By: /s/ MICHAEL L. HLINAK
Michael L. Hlinak, C.O.O Michael L. Hlinak, President
Netco Acquisition, LLC Netco Acquisition Corp.
By: /s/ MARK WILLIS By: /s/ MARK WILLIS
Mark Willis, President Mark Willis, President
Page 1 of Amendment
<PAGE>
Willis Group, LLC MCM Partners
By: /s/ MARK WILLIS By: /s/ DONALD R. MORKEN
Mark Willis, President Donald R. Morken, General
Partner
Advantage Fund, Ltd.
By: /s/ ARNO DE GROOT
Arno De Groot, President
Page 2 of Amendment
<PAGE>
AMENDMENT TO AGREEMENT OF MERGER
AND PLAN OF REORGANIZATION
This Amendment to Agreement of Merger and Plan of Reorganization
("Amendment") is entered into as of February 12, 1998, by and between
EqualNet Holding Corp. ("EqualNet"), EQ Acquisition Sub, Inc. ("Sub"), Netco
Acquisition, LLC ("Netco Acquisition"), and Netco Acquisition Corp. ("Netco").
RECITALS
Each of the parties referenced in the preamble to this Amendment is a
party to an Agreement of Merger and Plan of Reorganization dated December 2,
1997 (the "Agreement"). Any capitalized term used but not defined herein shall
have the meaning ascribed to such term in the Agreement or in the below
referenced Statement of Resolutions establishing Series of Shares, as
applicable.
The Parties desire to amend the Agreement in accordance with the terms of
this Amendment.
NOW, THEREFORE, in and for the covenants and agreements set forth herein,
the Parties agree as follows:
1. Exhibit B to the Agreement (Statement of Resolutions establishing
Series of Shares) shall be amended by replacing the reference to "$1.20" in
Section 6(a) thereof with "$1.00".
2. Exhibit B to the Agreement is generally amended to include a covenant
on the part of EqualNet that it will use its best efforts to cause the number of
shares of EqualNet Common Stock authorized under EqualNet's Articles of
Incorporation to be increased to permit the full conversion of the Series A
Convertible Preferred Stock and a limitation on the holder of the Series A
Convertible Preferred Stock to the effect that the obligation of EqualNet to
issue shares upon the conversion of the Series A Convertible Preferred Stock in
whole or in part shall be conditioned upon EqualNet having a number of
unreserved authorized shares of EqualNet Common Stock at such time sufficient to
cover the number of shares relating to the conversion. Netco Acquisition and
Netco agree to cause the holders of any EqualNet Common Shares issued by
EqualNet pursuant to the Agreement to affirmatively vote such shares for such
increase in the unreserved authorized number of EqualNet Common Shares.
By entering into this Amendment, neither Netco Acquisition nor Netco
waives by implication or otherwise any of the conditions set forth in Section
6.1(a) of the Agreement. This Amendment contains the entire understanding and
agreement between the Parties with respect to the subject matter of this
Amendment and supersedes any prior or contemporaneous statements, understandings
or agreements with respect to such subject matter.
<PAGE>
EQUALNET HOLDING CORP.
By: /s/ MICHAEL L. HLINAK
Name: Michael L. Hlinak
Title: Senior Vice President
EQ ACQUISITION SUB, INC.
By: /s/ MICHAEL L. HLINAK
Name: Michael L. Hlinak
Title: President
NETCO ACQUISITION, LLC
By: /s/ JAMES T. HARRIS
Name: James T. Harris
Title: Vice President
NETCO ACQUISITION CORP.
By: /s/ JAMES T. HARRIS
Name: James T. Harris
Title: Vice President
-2-
EXHIBIT 10.4--STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT
By and Among
THE WILLIS GROUP, LLC
and
EQUALNET HOLDING CORP.
Dated as of December 2, 1997
<PAGE>
TABLE OF CONTENTS
Page
1. Definitions. .........................................................1
2. Purchase and Sale of Common Stock; Closing.............................4
2A. Purchase and Sale of Common Stock...............................4
2B. Closing.........................................................5
3. Purchaser's Conditions of Closing......................................5
3A. Opinion of the Company's Counsel................................5
3B. Representations and Warranties..................................5
3C. Charter Documents and By-Laws...................................5
3D. Purchase Permitted by Applicable Laws...........................5
3E. Letter of Accountants; Accompanying Officer's Certificate.......5
3F. Shareholder Approval............................................6
3G. Compliance with Securities Laws.................................6
3H. No Adverse U.S. Legislation, Action or Decision.................6
3I. Approvals and Consents..........................................6
3J. Board Nominees..................................................6
3K. No Material Adverse Change. There shall not have occurred
any Material Adverse Change with respect to the Company since
the date hereof.................................................6
3L. Network Transactions............................................6
4. Company's Conditions of Closing........................................7
4A. Representations and Warranties..................................7
4B. Purchase of Shares..............................................7
4C. Shareholder Approval............................................7
4D. No Adverse Action or Decision...................................7
4E. Network Transactions............................................7
5. Affirmative Covenants..................................................7
5A. Conduct of Business of the Company..............................7
5B. Valid Issuance.................................................10
5C. Government Regulations.........................................10
5D. ERISA..........................................................10
5E. Corporate Existence; Maintenance of Properties.................11
5F. Insurance......................................................11
5G. Further Assurances.............................................11
5H. Securities Act Registration Statements.........................11
5I. Notices of Certain Events......................................12
5J. Board Nominees.................................................12
(i)
<PAGE>
5K. Environmental Laws.............................................12
5L. Registration Rights............................................12
5M. Shareholder Approval; Preparation of Proxy Statements..........13
5N. No Solicitation................................................13
5O. Listing of Common Stock........................................15
6. Representations and Warranties........................................15
6A. Corporate Existence............................................15
6B. Corporate Power and Authorization..............................15
6C. Board Recommendation...........................................15
6D. Binding Obligations............................................16
6E. No Violation...................................................16
6F. Consents.......................................................16
6G. Financial Information..........................................16
6H. Liabilities....................................................17
6I. Litigation.....................................................17
6J. Compliance with ERISA..........................................17
6K. Taxes; Governmental Charges....................................17
6L. Defaults.......................................................17
6M. Compliance with the Law........................................18
6N. Investment Company Act.........................................18
6O. Public Utility Holding Company Act.............................18
6P. Fees and Commissions...........................................18
6Q. Disclosure.....................................................18
6R. Structure; Capitalization......................................18
6S. Environmental Matters..........................................19
6T. Intellectual Property and Other Intangible Assets..............20
6U. Insurance Coverage.............................................21
7. Representations and Warranties of Purchaser...........................21
7A. Purchase for Investment........................................21
7B. Authorization; No Conflict.....................................22
8. Termination, Amendment and Waiver.....................................22
8A. Termination....................................................22
8B. Effect of Termination..........................................23
9. Miscellaneous.........................................................23
9A. Fees and Expenses..............................................23
9B. Amendment......................................................23
9C. Extension; Waiver..............................................23
9D. Assignment.....................................................24
9E. Survival of Representations and Warranties.....................24
9F. Successors and Assigns; No Third Party.........................24
9G. Notices........................................................24
9H. Descriptive Headings...........................................24
9I. Satisfaction Requirement.......................................24
(ii)
<PAGE>
9J. Governing Law; Consent to Jurisdiction.........................25
9K. Remedies.......................................................25
9L. Entire Agreement...............................................25
9M. Severability...................................................25
9N. Counterparts...................................................25
9O. Brokerage......................................................25
(iii)
<PAGE>
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT (this "Agreement") is made as of December
2, 1997, by and among WILLIS GROUP, LLC, a Texas limited liability company (the
"Purchaser"), and EQUALNET HOLDING CORP., a Texas corporation (the "Company").
RECITALS
Purchaser desires to purchase from the Company, and the Company desires
to issue and sell to Purchaser, subject to the terms and conditions set forth
herein, 4,000,000 shares of Common Stock (as hereinafter defined) of the
Company.
AGREEMENTS
In consideration of the recitals and the mutual covenants herein
contained and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto hereby agree as follows:
1. DEFINITIONS. For the purpose of this Agreement, and in addition to
terms defined elsewhere in this Agreement, the following terms shall have the
following meanings. In addition, all terms of an accounting character not
specifically defined herein shall have the meanings assigned thereto by
accounting principles generally accepted in the United States of America.
"AFFILIATE" shall mean, with respect to any Person, a Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person, except a Subsidiary of such Person. A Person shall be
deemed to control a corporation if such Person possesses, directly or
indirectly, the power to direct or cause the direction of the management and
policies of such corporation, whether through the ownership of voting
securities, by contract or otherwise.
"BUSINESS DAY" shall mean any day which is not a Saturday, Sunday or day
on which banks are authorized by law to close in the States of New York and
Texas.
"CAPITALIZED LEASE OBLIGATIONS" shall mean all rental obligations which,
under GAAP in effect on the day such obligation is incurred, are required to be
capitalized on the books of the Company or any Subsidiary, in each case taken at
the amount thereof accounted for as indebtedness (net of interest expense) in
accordance with such principles.
"CODE" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
"COMMISSION" shall mean the United States Securities and Exchange
Commission.
"CURRENT INDEBTEDNESS" shall mean any obligation for borrowed money
(including notes payable and drafts accepted representing extensions of credit
whether or not representing obligations for borrowed money) payable on demand or
within a period of one year from the date of creation thereof; PROVIDED that any
obligation shall be treated as Funded Indebtedness, regardless of its term, if
such obligation is renewable pursuant to the terms thereof or of a revolving
credit or similar agreement effective for more than one year after the date of
the creation of such obligation, or may
1
<PAGE>
be payable out of the proceeds of a similar obligation pursuant to the terms of
such obligation or of any such agreement. Any obligation secured by a Lien on,
or payable out of the proceeds of production from, property of the Company or
any Subsidiary shall be deemed to be Funded or Current Indebtedness, as the case
may be, of the Company or such Subsidiary even though such obligation shall not
be assumed by the Company or such Subsidiary.
"ENVIRONMENTAL LAW" shall mean any judgment, decree, order, law,
license, rule, regulation or private agreement (such as covenants, conditions,
and restrictions), of any federal, state or local executive, legislative,
judicial, regulatory or administrative agency, board, or authority designed to
protect the environment, air, surface, water, groundwater or soil, control
pollution, or regulate the exploration, manufacturing, processing, distributing,
use, storage, transport or handling of Hazardous Materials, including, without
limitation, the Comprehensive Environmental Response, Compensation, and
Liability Act (42 U.S.C. ss. 9601 ET SEQ.) ("CERCLA"), the Oil Pollution Act (33
U.S.C. ss. 2701 ET SEQ.) ("OPA"), the Resource Conservation and Recovery Act (42
U.S.C. ss. 6901 ET SEQ.) ("RCRA"), and the Federal Water Pollution Control Act
(33 U.S.C. ss. 1251 ET SEQ.) ("CWA"), as such laws have been or hereafter may be
amended or supplemented, and any and all analogous present and future federal,
state, and local laws in jurisdictions where the Company and its Subsidiaries do
business.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time. Section references to ERISA are to ERISA as in
effect at the date of this Agreement and any subsequent provisions of ERISA
amendatory thereof, supplemental thereto or substituted therefor.
"ERISA AFFILIATE" shall mean each trade or business (whether or not
incorporated) which together with the Company or a Subsidiary of the Company
would be deemed to be a "single employer" within the meaning of Section 4001 of
ERISA immediately following the acquisition.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
"FUNDED INDEBTEDNESS" shall mean and include without duplication any
obligation payable more than one year from the date of the creation thereof
(including the current portion of Funded Indebtedness), which under GAAP is
shown on the balance sheet as a liability (including, without limitation,
Capitalized Lease Obligations and excluding reserves for deferred income taxes
and other reserves to the extent that such reserves do not constitute an
obligation).
"GAAP" shall mean generally accepted accounting principles consistently
applied throughout the period or periods in question.
"GOVERNMENTAL AUTHORITY" shall mean any foreign or domestic federal,
state, county, municipal, or other governmental or regulatory authority, agency,
board, body, commission, instrumentality, court, or any political subdivision
thereof.
"GOVERNMENTAL REQUIREMENT" shall mean any law, statute, code,
ordinance, order, rule, regulation, judgment, decree, injunction, franchise,
permit, certificate, license, authorization, or other direction or requirement
(including but not limited to any of the foregoing which relate to
2
<PAGE>
Environmental Laws, energy regulations and occupational, safety and health
standards or controls) of any Governmental Authority.
"HAZARDOUS MATERIALS" shall mean, collectively, (i) those substances
included within the definition of or identified as "hazardous substances,"
"hazardous materials," "toxic substances," or "solid waste" in or pursuant to,
without limitation, CERCLA, OPA, RCRA, and the Occupational Health and Safety
Act, and in the regulations promulgated pursuant to said laws, all as amended;
(ii) any material, waste or substance which is or contains (A) petroleum,
including crude oil or any fraction thereof, natural gas, or synthetic gas
usable for fuel or any mixture thereof; (B) asbestos; (C) polychlorinated
biphenyls; (D) designated as a "hazardous substance" pursuant to Section 307 or
311 of the CWA; (E) flammable explosives; or (F) radioactive materials; and
(iii) any such other substances, materials and wastes which are or become
regulated as hazardous or toxic under applicable local, state or federal law, or
which are currently classified as hazardous or toxic under local, state or
federal laws or regulations.
"INDEBTEDNESS" shall mean Funded Indebtedness and/or Current
Indebtedness.
"LIEN" shall mean any mortgage, pledge, security interest, encumbrance,
lien or charge of any kind (including any agreement to give any of the
foregoing, any conditional sale or other title retention agreement, any lease in
the nature thereof, and the filing of or agreement to give any financing
statement or like instrument under the laws of any jurisdiction).
"MATERIAL ADVERSE EFFECT" or "MATERIAL ADVERSE CHANGE" means any
material and adverse effect on, or change to, (i) the assets, liabilities,
financial condition, business, or operations of the Company and its Subsidiaries
on a Consolidated basis, or (ii) the ability of the Company and its Subsidiaries
on a Consolidated basis to carry out their business as at the date of this
Agreement.
"NASDAQ" shall mean the Nasdaq Stock Market, Inc., National Market
System.
"NETWORK AGREEMENT AND PLAN OF REORGANIZATION" shall mean that certain
agreement by and among the Company, EQ Acquisition Sub, Inc., Netco Acquisition,
L.L.C. and Netco Acquisition Co., dated as of the date of this Agreement.
"SWITCH AGREEMENT" shall mean that certain agreement by and among the
Company, EQ Acquisition Sub, Inc. and the Purchaser dated as of the date of this
Agreement.
"NOTE AND WARRANT PURCHASE AGREEMENT" shall mean that certain agreement
by and among the Purchaser, the Company and its Subsidiaries dated as of October
1, 1997.
"OFFICER'S CERTIFICATE" shall mean a certificate signed in the name of
the delivering party, by its President, one of its Vice Presidents, its
Treasurer or other authorized officer so designated by the receiving party.
"PBGC" shall mean the Pension Benefit Guaranty Corporation established
pursuant to Section 4002 of ERISA, or any successor entity thereto.
3
<PAGE>
"PENSION PLAN" shall mean any multiemployer plan or single-employer
plan, as defined in Section 4001 of ERISA and subject to Title IV of ERISA,
which is maintained after the Acquisition for employees of the Company, any of
its Subsidiaries or any ERISA Affiliates.
"PERMITS" shall mean all licenses, permits, exceptions, franchises,
accreditations, privileges, rights, variances, waivers, approvals and other
authorizations (including, without limitation, those relating to environmental
matters) of, by or from Governmental Authorities necessary for the conduct of
the business of the Company and its Subsidiaries immediately prior to the
Closing and as proposed to be conducted by the Company and its Subsidiaries
after the Closing.
"PERSON" shall mean and include an individual, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization, a limited
liability company and a government or any department or agency thereof.
"RELEASE" shall mean release, spill, emission, leaking, pumping,
injection, deposit, disposal, discharge, dispersal, leaching or migration into
the environment or into or out of any property, including the movement of
Hazardous Materials through or in the air, surface water, or groundwater.
"REMEDIAL ACTION" shall mean any action required by any federal, state
or judicial body or administration or agency acting under an Environmental Law
to (i) clean up, remove or treat Hazardous Materials in the environment; (ii)
prevent a Release or threat of Release or minimize the further Release of
Hazardous Materials so they do not migrate or endanger or threaten to endanger
public health or the environment; (iii) perform post-remedial monitoring and
care; or (iv) cure a violation of any Environmental Law.
"REPORTABLE EVENT" shall mean an event described in Section 4043(b) of
ERISA with respect to which the 30-day notice requirement has not been waived by
the PBGC.
"RESPONSIBLE OFFICER" shall mean the President, any Vice President (of
whatever designation), the Treasurer or the Secretary or any officers performing
functions similar to those performed by the persons who at the time shall be
such officers.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended.
"SINGLE-EMPLOYER PENSION PLAN" shall mean a Pension Plan which is a
"single-employer plan" as defined in Section 4001 of ERISA.
"SUBSIDIARY" shall mean any corporation or similar entity a majority of
the stock of every class of which, except directors' qualifying shares, shall,
at the time as of which any determination is being made, be owned by the
Company, either directly or indirectly.
2. PURCHASE AND SALE OF COMMON STOCK; CLOSING.
2A. PURCHASE AND SALE OF COMMON STOCK. The Company, subject to the terms
and conditions herein set forth, hereby agrees to sell to the Purchaser and,
subject to the terms and conditions herein set forth, the Purchaser agrees to
purchase from the Company, 4,000,000 shares (the "Shares") of the Company's
Common Stock, par value $.01 per share (the "Common Stock")
4
<PAGE>
at a purchase price of $1.00 per share, which will represent approximately 41%,
together with other Common Stock, warrants and convertible notes which will be
held by Purchaser on the Closing Date, of the Company's outstanding Common Stock
on a fully diluted basis on the Closing Date.
2B. CLOSING. The purchase and delivery of the Shares shall take place at
a closing (the "Closing") at the offices of Vinson & Elkins L.L.P., Houston,
Texas, at 10:00 a.m., local time, on January 28, 1998, or at such other time and
place or on such other business day thereafter as the parties hereto may agree
(herein called the "Closing Date"). On the Closing Date, the Company will
deliver the Shares in definitive form, and in such authorized denominations as
the Purchaser may request (such request to be in writing and delivered to the
Company at least forty-eight hours prior to the Closing), against receipt of the
purchase price therefor by wire transfer of immediately available funds, to the
Company, or by such other payment method as is mutually agreed to by the
Purchaser and the Company.
3. PURCHASER'S CONDITIONS OF CLOSING. The Purchasers' obligation to
purchase and pay for the Shares is subject to the satisfaction or waiver, on or
before the Closing Date, of the conditions contained in Paragraphs 3A through
3L.
3A. OPINION OF THE COMPANY'S COUNSEL. The Purchaser shall have received
from Fulbright & Jaworski L.L.P., special counsel for the Company, a legal
opinion addressed to the Purchaser and dated the Closing Date substantially in
the form attached hereto as Exhibit A.
3B. REPRESENTATIONS AND WARRANTIES. The representations and warranties
contained in Paragraph 6 hereof shall be true in all material respects on and as
of the Closing Date, except to the extent of changes caused by the transactions
herein contemplated; and the Company shall have delivered to the Purchaser an
Officer's Certificate, dated the Closing Date, to such effect.
3C. CHARTER DOCUMENTS AND BY-LAWS. The Purchaser shall have received a
certificate, dated the Closing Date, of the Secretary of the Company attaching
(i) a true and complete copy of the Company's Articles of Incorporation with all
amendments thereto, as filed with the Secretary of State of the State of Texas,
(ii) a true and complete copy of the Company's By-Laws in effect as of such
date, (iii) certificates of good standing of the appropriate officials of the
jurisdiction of incorporation of the Company, and (iv) resolutions of the Board
of Directors of the Company authorizing the execution and delivery of this
Agreement and the issuance of the Shares.
3D. PURCHASE PERMITTED BY APPLICABLE LAWS. The purchase of and payment
for the Shares shall not be prohibited by any applicable law or governmental
regulation (including, without limitation, Regulations G, T and X of the Board
of Governors of the Federal Reserve System) and such purchase and payment shall
not in and of themselves subject the Purchaser to any material tax, penalty,
liability or other materially onerous condition under or pursuant to any
applicable law or governmental regulation.
3E. LETTER OF ACCOUNTANTS; ACCOMPANYING OFFICER'S CERTIFICATE. The
Purchaser shall have received a certificate from the chief financial officer or
chief executive officer of the Company, dated the Closing Date, to the effect
that the interim financial statements at or for the period ended September 30,
1997, have been prepared using the same accounting policies as those used in
preparing the financial statements for the year ended June 30, 1997 (except as
such policies were
5
<PAGE>
otherwise required to be changed or modified by the Company during the interim
period by an appropriate Governmental Authority or the American Institute of
Certified Public Accountants ("AICPA") or similar accounting boards or bodies),
and that since June 30, 1997, such policies have been used in maintaining the
Company's accounting books and records.
3F. SHAREHOLDER APPROVAL. The Company shall have obtained the approval
of its shareholders at the Shareholders Meeting (as defined herein) for the
matters set forth in Paragraph 5M.
3G. COMPLIANCE WITH SECURITIES LAWS. The offering and sale of the Shares
under this Agreement shall have complied with all applicable requirements of
federal and state securities laws.
3H. NO ADVERSE U.S. LEGISLATION, ACTION OR DECISION. Subsequent to the
date hereof, no legislation, order, rule, ruling or regulation shall have been
enacted or made by or on behalf of any governmental body, department or agency
of the United States, nor shall any legislation have been introduced and
favorably reported for passage to either House of Congress by any committee of
either such House to which such legislation has been referred for consideration,
nor shall any decision of any court of competent jurisdiction within the United
States have been rendered which would materially and adversely affect an
investment in the Shares. There shall be no action, suit, investigation or
proceeding pending, or to the Company's knowledge, threatened, against or
affecting the Company or any of its Subsidiaries, or any of their respective
properties or rights, or any of their affiliates, associates, officers or
directors, before any court, arbitrator or administrative or governmental body
which (i) seeks to restrain, enjoin, prevent the consummation of or otherwise
adversely affect the transactions contemplated by this Agreement or (ii)
questions the validity or legality of any such transaction or seeks to recover
damages or to obtain other relief in connection with any such transaction, and
to the Company's knowledge there shall be no valid basis for any such action,
proceeding or investigation.
3I. APPROVALS AND CONSENTS. The Company shall have duly received all
authorizations, consents, approvals, licenses, franchises, permits and
certificates by or of all federal, state and local governmental authorities, by
any third parties pursuant to the terms of any agreement to which the Company is
a party or by the National Association of Securities Dealers, Inc. or any other
body or agency with jurisdiction, by contract or otherwise, over the Company,
necessary for the issuance of the Shares by the Company and the consummation of
the transactions contemplated hereby, and all thereof shall be in full force and
effect at the time of the Closing. The Company shall have delivered to the
Purchaser an Officer's Certificate, dated the Closing Date, to such effect.
3J. BOARD NOMINEES. The nominees designated by the Purchaser shall have
been appointed to the Company's Board of Directors effective upon the Closing.
3K. NO MATERIAL ADVERSE CHANGE. There shall not have occurred any
Material Adverse Change with respect to the Company since the date hereof.
3L. NETWORK TRANSACTIONS. The Company shall have simultaneously closed
the transactions pursuant to the Network Agreement and Plan of Reorganization
and the Switch Agreement.
6
<PAGE>
4. COMPANY'S CONDITIONS OF CLOSING. The Company's obligations to sell
the Shares hereunder is subject to the satisfaction or waiver, on or before the
Closing Date, of the conditions contained in Paragraphs 4A through 4E.
4A. REPRESENTATIONS AND WARRANTIES. The representations and warranties
contained in Paragraph 7 hereof shall be true in all material respects on and as
of the Closing Date; and the Purchaser shall have delivered to the Company an
Officer's Certificate, dated the Closing Date, to such effect.
4B. PURCHASE OF SHARES. The Purchaser shall have purchased and paid for
the Shares.
4C. SHAREHOLDER APPROVAL. The Company shall have obtained the approval
of its shareholders at the Shareholders Meeting (as defined herein) for the
matters set forth in Paragraph 5M.
4D. NO ADVERSE ACTION OR DECISION. There shall be no action, suit,
investigation or proceeding pending, or to the Company's knowledge, threatened,
against or affecting the Company or any of its Subsidiaries, or any of their
respective properties or rights, or any of their affiliates, associates,
officers or directors, before any court, arbitrator or administrative or
governmental body which (i) seeks to restrain, enjoin, prevent the consummation
of or otherwise adversely affect the transactions contemplated by this Agreement
or (ii) questions the validity or legality of any such transaction or seeks to
recover damages or to obtain other relief in connection with any such
transaction.
4E. NETWORK TRANSACTIONS. The Company shall have simultaneously closed
the transactions pursuant to the Network Agreement and Plan of Reorganization
and the Network Switches Agreement and Plan of Reorganization.
4F. LISTING. The Shares shall have been approved for listing, subject
to official notice of issuance, on the NASDAQ National Market as of the Closing
Date.
5. AFFIRMATIVE COVENANTS. All covenants contained herein shall be given
independent effect.
5A. CONDUCT OF BUSINESS OF THE COMPANY.
(a) ORDINARY COURSE. Except as set forth in SCHEDULE 5(A)(a), during the
period from the date of this Agreement to the Closing Date (except for
transactions to which Purchaser or its affiliates are a party or as otherwise
specifically contemplated by the terms of this Agreement), the Company shall and
shall cause its Subsidiaries to carry on their respective businesses in the
usual, regular and ordinary course in substantially the same manner as
heretofore conducted and, to the extent consistent therewith, use commercially
reasonable efforts to preserve intact their current officers and employees and
preserve their relationships with customers, suppliers, licensors, licensees,
distributors and others having business dealings with them, in each case
consistent with past practice, to the end that their goodwill and ongoing
businesses shall be unimpaired to the fullest extent possible at the Closing
Date. Without limiting the generality of the foregoing, and except as otherwise
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expressly contemplated by this Agreement and the Schedules hereto, the Company
shall not, and shall not permit any of its Subsidiaries to:
(i) (A) declare, set aside or pay any dividends on, or make any
other distributions in respect of, any of its capital stock, other than
dividends and distributions by any direct or indirect wholly owned
Subsidiary of the Company to the Company or a wholly owned Subsidiary of
the Company, (B) split, combine or reclassify any of its capital stock
or issue or authorize the issuance of any other securities in respect
of, in lieu of or in substitution for shares of its capital stock or (C)
purchase, redeem or otherwise acquire any shares of capital stock of the
Company or any of its Subsidiaries or any other securities thereof or
any rights, warrants or options to acquire any such shares or other
securities other than in connection with the exercise of outstanding
stock options and warrants and satisfaction of withholding obligations
under outstanding stock options and restricted stock;
(ii) issue, deliver, sell, pledge or otherwise encumber any
shares of its capital stock, any other voting securities or any
securities convertible into, or any rights, warrants or options to
acquire, any such shares, voting securities or convertible securities
other than, in the case of the Company, the issuance of shares of Common
Stock upon the exercise of stock options and warrants outstanding on the
date of this Agreement in accordance with their current terms;
(iii) amend its Articles of Incorporation, By-laws or other
comparable charter or organizational document;
(iv) acquire or agree to acquire (A) by merging or consolidating
with, or by purchasing a substantial portion of the stock or assets of,
or by any other manner, any business or any corporation, partnership,
association, joint venture, limited liability company or other entity or
division thereof or (B) any assets that, in each case, would be
material, individually or in the aggregate, to the Company and its
Subsidiaries taken as a whole, except purchases in the ordinary course
of business consistent with past practice;
(v) sell, lease, mortgage, pledge, grant a Lien on or otherwise
encumber or dispose of any of its properties or assets, except (A) sales
or leases in the ordinary course of business consistent with past
practice and (B) other immaterial transactions not in excess of $250,000
in the aggregate;
(vi) (A) incur indebtedness for borrowed money or guarantee any
such indebtedness of another Person, issue or sell any debt securities
or warrants or other rights to acquire any debt securities of the
Company or any of its Subsidiaries, guarantee any debt securities of
another Person, enter into any "keep well" or other agreement to
maintain any financial statement condition of another Person or enter
into any arrangement having the economic effect of any of the foregoing,
except for working capital borrowings under currently existing revolving
credit facilities incurred in the ordinary course of business, or (B)
make any loans, advances or capital contributions to, or investments in,
any other Person that would be material, individually or in the
aggregate, to the Company and its Subsidiaries taken as a whole, other
than to the Company or any direct or indirect wholly owned Subsidiary of
the Company;
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(vii) make or incur any new capital expenditure (other than
purchases in the ordinary course of business), which, singly or in the
aggregate with all other expenditures, would exceed $100,000;
(viii) make any material election relating to Taxes or settle or
compromise any material Tax liability;
(ix) pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction, in the
ordinary course of business consistent with past practice or in
accordance with their terms, of liabilities reflected or reserved
against in, or contemplated by, the most recent consolidated financial
statements (or the notes thereto) of the Company included in the
Commission Documents or incurred in the ordinary course of business
consistent with past practice;
(x) waive the benefits of, or agree to modify in any manner, any
confidentiality, standstill or similar agreement to which the Company or
any of its Subsidiaries is a party;
(xi) adopt a plan of complete or partial liquidation or
resolutions providing for or authorizing such a liquidation or a
dissolution, merger, consolidation, restructuring, recapitalization or
reorganization;
(xii) enter into any new collective bargaining agreement;
(xiii) change any material accounting principle used by it,
except as required by regulations promulgated by the Commission or as
mandated by AICPA or similar accounting boards or bodies;
(xiv) settle or compromise any litigation (whether or not
commenced prior to the date of this Agreement) other than settlements or
compromises: (A) of litigation where the amount paid in settlement or
compromise does not exceed $100,000, or (B) in consultation and
cooperation with the Purchaser, and, with respect to any such
settlement, with the prior written consent of the Purchaser, which shall
not be unreasonably withheld or delayed;
(xv) except for those contracts and agreements entered into in
the ordinary course of business with the consent of the Purchaser, which
consent shall not be unreasonably withheld or delayed, enter into any
joint venture or partnership contract or agreement; or
(xvi) authorize any of, or commit or agree to take any of, the
foregoing actions.
(b) CHANGES IN EMPLOYMENT ARRANGEMENTS. During the period from the date
of this Agreement to the Closing Date, neither the Company nor any of its
Subsidiaries shall adopt or amend (except as may be required by law) any bonus,
profit sharing, compensation, stock option, pension, retirement, deferred
compensation, employment or other employee benefit plan, agreement, trust, fund
or other arrangement for the benefit or welfare of any employee, director or
former director or employee, increase the compensation or fringe benefits of any
officer of the Company or any of its Subsidiaries, or, except as provided in an
existing benefit plan or in the ordinary course of business
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consistent with past practice, increase the compensation or fringe benefits of
any employee or former employee or pay any benefit not required by any existing
plan, arrangement or agreement.
(c) SEVERANCE. During the period from the date of this Agreement to the
Closing Date, neither the Company nor any of its Subsidiaries shall grant any
new or modified severance or termination arrangement or increase or accelerate
any benefits payable under its severance or termination pay policies in effect
on the date hereof.
(d) OTHER ACTIONS. During the period from the date of this Agreement to
the Closing Date, the Company shall not, and shall not permit any of its
Subsidiaries to, take any action that would, or that could reasonably be
expected to, result (i) in any of the representations and warranties of the
Company set forth in this Agreement becoming untrue or (ii) in any of the
covenants contained in this Agreement becoming unperformable. Pending the
Closing, the Company will promptly advise the Purchaser of any action or event
of which they become aware which has the effect of making incorrect any of such
representations or warranties or which has the effect of rendering unperformable
any of such covenants.
5B. VALID ISSUANCE. The Company covenants that the Shares will, upon
issuance and upon full payment therefor in accordance with the terms hereof, be
validly issued, fully paid and nonassessable and free from all taxes, liens and
charges with respect to the issuance thereof.
5C. GOVERNMENT REGULATIONS. The Company covenants that it will comply,
and will cause each of its Subsidiaries to comply, with all applicable
governmental restrictions and regulations, the failure to comply with which
would have a material adverse effect on the business or financial condition of
the Company and its Subsidiaries taken as a whole, and obtain and maintain in
good standing all licenses, permits and approvals from any and all governments,
governmental commissions, boards or agencies of jurisdictions in which it or any
of its Subsidiaries carries on business required in respect of the operations of
the Company or any of its Subsidiaries, the failure to comply with which would
have a material adverse effect on the business or financial condition of the
Company and its Subsidiaries taken as a whole.
5D. ERISA. Promptly (and in any event within 30 days) after the Company
or any of its Subsidiaries knows or has reason to know that a Reportable Event
with respect to any Pension Plan has occurred, that any Pension Plan is or may
be terminated, reorganized, partitioned or declared insolvent under Title IV of
ERISA or that the Company or any of its Subsidiaries will or may incur any
liability to or on account of a Pension Plan under Sections 4062, 4063, 4064,
4201 or 4204 of ERISA, the Company will deliver to the Purchaser a certificate
of the chief financial officer of the Company setting forth information as to
such occurrence and what action, if any, the Company is required or proposes to
take with respect thereto, together with any notices concerning such occurrences
which are (a) required to be filed by the Company or the plan administrator of
any such Pension Plan controlled by the Company or its Subsidiaries, with the
PBGC or (b) received by the Company or its Subsidiaries from any plan
administrator of a multiemployer or other Pension Plan not under their control.
The Company shall furnish to the Purchaser a copy of each annual report (Form
5500 Series) of any Pension Plan received or prepared by the Company or any of
its Subsidiaries. Each annual report and any notice required to be delivered
hereunder shall be delivered no later than 10 days after the later of the date
such report or notice is filed with the Internal Revenue
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Service or the PBGC or the date such report or notice is received by the Company
or any of its Subsidiaries, as the case may be.
5E. CORPORATE EXISTENCE; MAINTENANCE OF PROPERTIES. The Company
covenants that it (i) will do or cause to be done all things reasonably
necessary to preserve and keep in full force and effect the corporate existence
and material rights of the Company and all of its Subsidiaries, (ii) will cause
its properties and the properties of its Subsidiaries used or useful in the
conduct of their respective businesses to be maintained and kept in good
condition, repair and working order and will use commercially reasonable efforts
to cause to be made all necessary repairs, renewals, replacements, betterments
and improvements thereto, and (iii) will, and will cause each of its
Subsidiaries to, qualify and remain qualified to conduct business in each
jurisdiction where the nature of the business or the ownership of property by
the Company or such Subsidiary may require such qualification and where the
failure to so qualify would have a material adverse effect on the business or
financial condition of the Company and its Subsidiaries taken as a whole.
5F. INSURANCE. The Company covenants that it will maintain, and will
cause each of its Subsidiaries to maintain, with financially sound and reputable
insurance companies, funds or underwriters, insurance for the Company and its
Subsidiaries of the kinds, covering the risks and in the relative proportionate
amounts usually carried by companies conducting business activities similar to
those of the Company and its Subsidiaries.
5G. FURTHER ASSURANCES. The Company covenants that it shall cooperate
with the Purchaser and execute such further instruments and documents as the
Purchaser shall reasonably request to carry out to the satisfaction of the
Purchaser the transactions contemplated by this Agreement.
5H. SECURITIES ACT REGISTRATION STATEMENTS. The Company covenants that
the Purchaser shall have the right, at any time when it may be deemed to be a
controlling person of the Company, to participate in the preparation of such
registration statement (regardless of whether or not the Purchaser will be a
selling security holder in connection with such registration statement) and to
request the insertion therein of material furnished to the Company in writing
which in the Purchaser's judgment should be included. In connection with any
registration statement referred to in this Paragraph 5H, the Company will
indemnify the Purchaser, its members, officers and directors and each person, if
any, who controls the Purchaser within the meaning of Section 15 of the
Securities Act, against all losses, claims, damages, liabilities and expenses
caused by any untrue statement or alleged untrue statement of a material fact
contained in any registration statement or prospectus or any amendment thereof
or supplement thereto or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except insofar as such losses, claims, damages, liabilities or
expenses are caused by any untrue statement or alleged untrue statement or
omission or alleged omission contained in written information furnished to the
Company by the Purchaser expressly for use in such registration statement. If,
in connection with any such registration statement, the Purchaser shall furnish
written information to the Company expressly for use in the registration
statement, the Purchaser will indemnify the Company, its directors, each of its
officers who signs such registration statement and each person, if any, who
controls the Company within the meaning of the Securities Act against all
losses, claims, damages, liabilities and expenses caused by any untrue statement
or alleged untrue statement of a material fact or any omission or
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alleged omission of a material fact required to be stated in the registration
statement or prospectus or any preliminary prospectus or any amendment thereto
or supplement thereto or necessary to make the statements therein not
misleading, but only to the extent that such untrue statement or alleged untrue
statement or such omission or alleged omission is contained in information so
furnished in writing by the Purchaser for use therein.
5I. NOTICES OF CERTAIN EVENTS. The Company shall promptly give notice to
the Purchaser (i) of any default or event of default that has not been cured
within any applicable grace period under any (y) Indebtedness of the Company or
any of its Subsidiaries, and (z) contractual obligation of the Company or any of
its Subsidiaries or (ii) of any pending or threatened litigation, investigation
or proceeding to which the Company or any of its Subsidiaries is or is
threatened to be a party and of which the Company has been given notice;
PROVIDED that any such default as specified in (z) above, litigation,
investigation or proceeding would have a material adverse effect on the business
or financial condition of the Company and its Subsidiaries taken as a whole. Any
notice delivered pursuant to this Paragraph 5I shall be accompanied by an
Officer's Certificate specifying the details of the occurrence referred to
therein and stating what action the Company proposes to take with respect
thereto.
5J. BOARD NOMINEES. Effective as of the Closing, the directors of the
Company shall elect four (4) new directors (representing a majority of the
Company's Board of Directors), three (3) of which shall have been designated by
the Purchaser, to the Company's Board of Directors. Such directors shall serve
terms expiring at the annual shareholders meeting of the Company applicable to
the class to which each such director is elected.
5K. ENVIRONMENTAL LAWS. The Company and its Subsidiaries shall comply
with all applicable Environmental Laws the failure to comply with which would
have a material adverse effect on the business or financial condition of the
Company and its Subsidiaries taken as a whole. If the Company or any Subsidiary
shall receive written notice that there exists a violation of Environmental Law
with respect to its operations or any real property owned, formerly owned, used,
or leased thereby, which violation could have a material adverse effect on the
business or financial condition of the Company and its Subsidiaries taken as a
whole, the Company shall immediately notify in writing the Purchaser.
Furthermore, if the Company or any Subsidiary shall receive written notice that
there exists a violation of Environmental Law with respect to its operations or
any real property owned, formerly owned, used or leased thereby, which violation
could have a material adverse effect on the business or financial condition of
the Company and its Subsidiaries taken as a whole, the Company shall within the
time period permitted by the applicable governmental authority (unless otherwise
contested by the Company in good faith) remove or remedy such violation in
accordance with all applicable Environmental Laws unless the Board of Directors
of the Company determines that it would be in the best interest of the Company
to delay the remedy of such violation, so long as no material adverse effect is
suffered by the Company during such delay.
5L. REGISTRATION RIGHTS. The Company hereby grants to the Purchaser (and
any transferees of the Shares) the same rights to cause the Company to register
the Shares, and all other shares of the Company's Common Stock acquired by the
Purchaser pursuant to the Switch Agreement or issued upon the exercise of the
warrant issued to Purchaser pursuant to the Switch Agreement, under state and
federal securities laws and all such other rights as set forth in SECTION 4.1.11
of the Note and Warrant Purchase Agreement at any time from and after the
Closing Date;
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PROVIDED, HOWEVER, that such registration rights shall be effective immediately
upon the Closing Date notwithstanding whether or not the Note or Warrants under
the Note and Warrant Purchase Agreement have been converted or exercised, as the
case may be.
5M. SHAREHOLDER APPROVAL; PREPARATION OF PROXY STATEMENTS.
(a) The Company shall, as soon as practicable following the
execution and delivery of this Agreement duly call, give notice of,
convene and hold a meeting of the Company's shareholders (the
"Shareholders Meeting") for the following purposes: (i) approving this
Agreement, the issuance of the Shares and the transactions contemplated
hereby, (ii) ratifying the Note and Warrant Purchase Agreement and the
transactions contemplated thereby, (iii) approving the acquisition, by
merger, of certain operating network assets (the "Network") from that
certain Network company, of which the Purchaser is an equity holder, for
consideration consisting of Common Stock, convertible preferred stock
and other securities of the Company as more fully described in the
Network Agreement and Plan of Reorganization relating to the purchase of
the Network, (iv) approving the acquisition, by merger, of certain
network switches relating to the Network (the "Network Switches") from
that certain Network Switches company, of which the Purchaser is an
equity holder, for consideration consisting of Common Stock, warrants to
purchase Common Stock and cash as more fully described in the Switch
Agreement, (v) approving an amendment to the Company's Articles of
Incorporation to increase the aggregate number of authorized shares of
Common Stock to 50,000,000, and (vi) approving the other related
transactions. The Company will, through its officers and its Board of
Directors, unanimously recommend to its shareholders the approval and
adoption of the foregoing transactions.
(b) Promptly following the date of this Agreement, the Company
shall prepare and file with the Commission a proxy statement relating to
the Shareholders Meeting (such proxy statement as amended or
supplemented from time to time, the "Proxy Statement"). The Purchaser
shall have the right to review and approve the Proxy Statement prior to
the Company filing the Proxy Statement with the Commission which
approval shall not be unreasonably withheld. The Company will use all
commercially reasonable efforts to cause the Proxy Statement to be
mailed to the Company's shareholders as promptly as practicable. The
Company will notify the Purchaser promptly of the receipt of any written
or oral comments from the Commission or its staff and of any request by
the Commission or its staff for amendments or supplements to the Proxy
Statement or for additional information and will supply the Purchaser
with copies of all correspondence between the Company or any of its
representatives, on the one hand, and the Commission or its staff, on
the other hand, with respect to the Proxy Statement.
(c) The Company will cause its transfer agent to make stock
transfer records relating to the Company available to the extent
reasonably necessary to effectuate the intent of this Agreement.
5N. NO SOLICITATION. (a) The Company shall not, nor shall it permit any
of its Subsidiaries to, nor shall it authorize or permit any officer, director
or employee of the Company or any investment banker, attorney or other advisor,
agent or representative of the Company or any of its Subsidiaries to, directly
or indirectly, (i) solicit, initiate or encourage the submission of any takeover
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proposal, (ii) enter into any agreement (other than confidentiality and
standstill agreements in accordance with the immediately following proviso) with
respect to any takeover proposal, or (iii) participate in any discussions or
negotiations regarding, or furnish to any Person any information with respect
to, or take any other action to facilitate any inquiries or the making of any
proposal that constitutes, or may be reasonably be expected to lead to, any
takeover proposal; PROVIDED, HOWEVER, in the case of this clause (iii), that
prior to the vote of shareholders of the Company for approval of the matters
referred to in Paragraph 5M hereof (and not thereafter if such matters are
approved thereby) to the extent required by the fiduciary obligations of the
Board of Directors of the Company, determined in good faith by a majority of the
disinterested members thereof based on the advice of outside counsel, the
Company, in response to an unsolicited superior proposal and a request for
information pursuant thereto, may furnish information to any person or "group"
within the meaning of Section 13(d)(3) of the Exchange Act pursuant to a
confidentiality agreement. Without limiting the foregoing, it is understood that
any violation of the restrictions set forth in the preceding sentence by any
officer, director or employee of the Company or any of its Subsidiaries or any
investment banker, attorney or other advisor, agent or representative of the
Company, whether or not such Person is purporting to act on behalf of the
Company or otherwise, shall be deemed to be a material breach of this Agreement
by the Company. For purposes of this Paragraph 5M, "takeover proposal" means (i)
any proposal, other than a proposal by the Purchaser or any of its Affiliates,
for a merger or other business combination involving the Company, (ii) any
proposal or offer, other than a proposal or offer by the Purchaser or any of its
Affiliates, to acquire from the Company or any of its Affiliates in any manner,
directly or indirectly, an equity interest in the Company or any Subsidiary, any
voting securities of the Company or any Subsidiary or a material amount of the
assets of the Company and its Subsidiaries, taken as a whole, or (iii) any
proposal or offer, other than a proposal or offer by the Purchaser or any of its
Affiliates, to acquire from the shareholders of the Company by tender offer,
exchange offer or otherwise more than 20% of the outstanding shares of Common
Stock.
(b) Neither the Board of Directors of the Company nor any committee
thereof shall, except in connection with the termination of this Agreement
pursuant to Paragraph 8A, (i) withdraw or modify, or propose to withdraw or
modify, in a manner adverse to the Purchaser the approval or recommendation by
the Board of Directors of the Company or any such committee thereof of this
Agreement or take any action having such effect; PROVIDED, HOWEVER, that a
statement by the Board of Directors of the Company to its shareholders as
contemplated by Rule 14e-2(a) of the Exchange Act following Purchaser's receipt
of a Notice of Superior Proposal (defined below) shall not be deemed to
constitute a withdrawal or modification of its recommendation of this Agreement,
or (ii) approve or recommend, or propose to approve or recommend, any takeover
proposal. Notwithstanding the foregoing, in the event that the Board of
Directors of the Company receives a takeover proposal that, in the exercise of
its fiduciary obligations (as determined in good faith by a majority of the
disinterested members thereof based on the advice of outside counsel), it
determines to be a superior proposal, the Board of Directors of the Company may
withdraw or modify its approval or recommendation of this Agreement and may
(subject to the following sentence) terminate this Agreement, in each case at
any time after midnight on the fifth Business Day following Purchaser's receipt
of written notice (a "Notice of Superior Proposal") advising Purchaser that the
Board of Directors of the Company has received a takeover proposal that it has
determined to be a superior proposal, specifying the material terms and
conditions of such superior proposal (including the proposed financing for such
proposal and a copy of any documents conveying such proposal) and identifying
the person making such superior proposal. The Company may terminate this
Agreement
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pursuant to the preceding sentence only if the shareholders of the Company have
not yet voted upon the matters set forth in Paragraph 5M hereof. Any of the
foregoing to the contrary notwithstanding, the Company may engage in discussions
with any Person or group that has made an unsolicited takeover proposal for the
limited purpose of determining whether such proposal is a superior proposal.
Nothing contained herein shall prohibit the Company from taking and disclosing
to its shareholders a position contemplated by Rule 14e-2(a) following
Purchaser's receipt of a Notice of Superior Proposal.
(c) For purposes of this Paragraph 5N, a "superior proposal" means any
BONA FIDE takeover proposal to acquire, directly or indirectly, for
consideration consisting of cash, securities or a combination thereof, all of
the shares of Common Stock then outstanding or all or substantially all of the
assets of the Company and its Subsidiaries, and otherwise on terms that a
majority of the disinterested members of the Board of Directors of the Company
determines in its good faith reasonable judgment (based on the advice of a
financial advisor of nationally recognized reputation, a copy of which shall be
provided to Purchaser) to be more favorable to the Company's shareholders than
the transactions contemplated by this Agreement, the Network Agreement and Plan
of Reorganization and the Switch Agreement.
(d) In addition to the obligations of the Company set forth in paragraph
(b), the Company shall promptly advise the Purchaser orally and in writing of
any takeover proposal or any inquiry with respect to or which could lead to any
takeover proposal, the material terms and conditions of such inquiry or takeover
proposal (including the financing for such proposal and a copy of such documents
conveying such proposal), and the identity of the Person making any such
takeover proposal or inquiry.
5O. LISTING OF COMMON STOCK. The Company warrants and agrees for the
benefit of the Purchaser that it will use commercially reasonable efforts to
cause the Shares to be approved for listing, subject to official notice of
issuance, on the NASDAQ National Market as of the Closing Date.
6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to the Purchaser as of the date hereof and as of the Closing Date
that:
6A. CORPORATE EXISTENCE. The Company is a corporation duly organized,
legally existing, and in good standing under the laws of the State of Texas.
6B. CORPORATE POWER AND AUTHORIZATION. The Company has the requisite
corporate power and authority to issue the Shares, to execute, deliver, and
perform its obligations under this Agreement and, subject to approval of this
Agreement by the holders of a majority of the shares of Common Stock as of the
record date for the Shareholders Meeting present in person or represented by
proxy, to consummate the transactions contemplated hereby. All action, except
for the approval by the shareholders of the Company, on the Company's part
requisite for the due issuance of the Shares and for the due execution,
delivery, and performance of this Agreement has been duly and effectively taken.
6C. BOARD RECOMMENDATION. The Board of Directors of the Company, at a
meeting duly called and held, has by vote of those directors present (i)
determined that this Agreement and the
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transactions contemplated hereby and by Section 5M hereof are fair to and in the
best interests of the shareholders of the Company and (ii) resolved to
unanimously recommend that the Company's shareholders approve this Agreement and
the transactions contemplated hereby and by Section 5M hereof.
6D. BINDING OBLIGATIONS. This Agreement is enforceable in accordance
with its terms (except that enforcement may be subject to (i) any applicable
bankruptcy, insolvency or similar laws generally affecting the enforcement of
creditors' rights (ii) general principles in equity regardless of whether such
enforcement is sought in a proceeding in equity or at law, and except to the
extent enforceability of the indemnification provisions may be limited under
applicable securities laws).
6E. NO VIOLATION. Except as disclosed in SCHEDULE 6E, neither the
execution and delivery of this Agreement, the consummation of the transactions
provided for herein or contemplated hereby nor the fulfillment by the Company of
the terms hereof will (a) violate any provision of the Articles of Incorporation
or the by-laws of the Company, (b) result in a default, give rise to any right
of termination, cancellation, acceleration or imposition of any Indebtedness or
Lien, or require any consent or approval (other than any consent or approval
that has previously been obtained), under any of the terms, conditions or
provisions of any of the Permits or any note, bond, mortgage, indenture, loan,
distribution agreement, license, agreement, lease, or instrument or obligation
to which the Company is a party or by which the Company may be bound (except
where the failure to obtain such consent or approval will not have a Material
Adverse Effect), or (c) violate any law, judgment, order, writ, injunction,
decree, statute, rule, or regulation of any Governmental Authority applicable to
the Company (except where such violation will not have a Material Adverse
Effect).
6F. CONSENTS. Except as disclosed in SCHEDULE 6F, all consents,
approvals, qualifications, orders, or authorizations of, or filings with, any
Governmental Authority, and all consents under any material contracts,
agreements, or instruments by which the Company is bound or to which it is
subject, and required in connection with the Company's valid execution,
delivery, or performance of this Agreement and the offer, sale, and delivery of
the Shares and the consummation of any other transaction contemplated on the
part of the Company have been obtained or made.
6G. FINANCIAL INFORMATION.
(a) The Consolidated balance sheet of the Company and its
Subsidiaries as at June 30, 1997, and the related Consolidated
statements of operations, shareholders' equity and cash flows for the
12-month period then ended, including in each case the related schedules
and notes, reported on by Ernst & Young LLP, are complete and correct
and fairly present in all material respects the Consolidated financial
position of the Company and its Subsidiaries as at the date thereof and
the Consolidated results of operations and changes in cash flows for
such period, in accordance with GAAP.
(b) The unaudited Consolidated balance sheet of the Company and
its Subsidiaries as at September 30, 1997, and the related unaudited
Consolidated statements of operations, shareholders' equity and cash
flows for the three-month period then ended, as included in the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1997, true copies of which have been previously delivered
to Purchaser, are complete and correct and fairly present in all
material respects the Consolidated financial position of the
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Company and its Subsidiaries as at the date thereof and the Consolidated
results of operations and changes in cash flows for such period in
conformity with GAAP, subject only to normal year-end audit adjustments.
(c) Since June 30, 1997, there has been no Material Adverse
Effect.
6H. LIABILITIES. Except for liabilities incurred in the ordinary course
of business, none of the Company or any of its Subsidiaries has any material
(individually or in the aggregate) liabilities, direct or contingent (including
but not limited to liability with respect to any Plan) except as disclosed or
referred to in SCHEDULE 6H or in the financial statements referred to in
Paragraph 6H. Neither the Company nor any of its Subsidiaries has any
Indebtedness other than Indebtedness disclosed in SCHEDULE 6H.
6I. LITIGATION. Except as disclosed in SCHEDULE 6I or as described in
any report filed by the Company with the Commission and delivered to Purchaser,
there is no action, suit, or proceeding, or any governmental investigation or
any arbitration, in each case pending or, to the knowledge of the Company,
threatened against the Company or any of its Subsidiaries or any material
property of any thereof before any court or arbitrator or any governmental or
administrative body, agency or official (i) which challenges the validity of
this Agreement; or (ii) which, if adversely determined, would have a Material
Adverse Effect.
6J. COMPLIANCE WITH ERISA. Each Plan is in substantial compliance with
ERISA, no Plan has an accumulated or waived funding deficiency within the
meaning of Section 412 or Section 418(B) of the Code, no proceedings have been
instituted to terminate any Plan, and except as disclosed in SCHEDULE 6J, none
of the Company or any of its Subsidiaries nor any ERISA Affiliate has incurred
any material liability to or on account of a Plan under ERISA, and except as
disclosed in SCHEDULE 6J, no condition exists which presents a material risk to
the Company or any of its Subsidiaries of incurring such a liability.
6K. TAXES; GOVERNMENTAL CHARGES. Each of the Company and its
Subsidiaries has filed all tax returns and reports required to be filed and has
paid all taxes, assessments, fees, and other governmental charges levied upon
any of them or upon any of their respective properties or income which are due
and payable, including interest and penalties, or has provided adequate reserves
for the payment thereof, except where the failure to so file, pay, or reserve
would not have a Material Adverse Effect.
6L. DEFAULTS. Except as disclosed in SCHEDULE 6L, none of the Company or
any of its Subsidiaries is in default, nor has any event or circumstance
occurred which, but for the passage of time or the giving of notice, or both,
would constitute a default (in any respect which may have a Material Adverse
Effect) under any loan or credit agreement, indenture, mortgage, deed of trust,
security agreement, or other instrument or agreement evidencing or pertaining to
any Indebtedness of the Company or any Subsidiary, or under any material
agreement or instrument to which the Company or any Subsidiary is a party or by
which the Company or any Subsidiary is bound. No default hereunder has occurred
and is continuing.
6M. COMPLIANCE WITH THE LAW. None of the Company or any of its
Subsidiaries (a) is in violation of any Governmental Requirement or (b) has
failed to obtain any license, permit, franchise,
17
<PAGE>
or other governmental authorization necessary to the ownership of any of their
respective properties or the conduct of their respective business, which
violation or failure would have (in the event that such a violation or failure
were asserted by any Person through appropriate action) a Material Adverse
Effect.
6N. INVESTMENT COMPANY ACT. None of the Company or any of its
Subsidiaries is an "investment company" or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended.
6O. PUBLIC UTILITY HOLDING COMPANY ACT. None of the Company or any of
its Subsidiaries is a "holding company," or a "Subsidiary company" of a "holding
company," or an "affiliate" of a "holding company" or of a "Subsidiary company"
of a "holding company," or a "public utility" within the meaning of the Public
Utility Holding Company Act of 1935, as amended.
6P. FEES AND COMMISSIONS. None of the Company or any of its Subsidiaries
nor, to the knowledge of any of the Company, their Affiliates has retained a
finder, broker, agent, financial advisor, or other intermediary (collectively,
an "INTERMEDIARY") in connection with the transactions contemplated by this
Agreement, and the Company agrees to pay and to indemnify and hold harmless
Purchaser from and against liability for any compensation to any Intermediary
and the fees and expenses of defending against such liability or alleged
liability.
6Q. DISCLOSURE. The Company's filings made pursuant to the Exchange Act
and listed on SCHEDULE 6Q hereto as of their respective dates, did not contain
any untrue statement of a material fact and did not omit to state any material
fact necessary in order to make the statements contained therein or herein not
misleading in the light of the circumstances under which they were made.
6R. STRUCTURE; CAPITALIZATION.
(a) SCHEDULE 6R contains (except has noted therein) a complete
and correct list of the Company's Subsidiaries, showing, as to each
Subsidiary, the correct name thereof, the jurisdiction of its
organization, and the percentage of shares of each class of its capital
stock or similar equity interests outstanding owned by the Company and
each other Subsidiary.
(b) All of the outstanding shares of capital stock or similar
equity interests of each Subsidiary shown in SCHEDULE 6R as being owned
by the Company and its Subsidiaries have been validly issued, are fully
paid and nonassessable, and are owned by the Company or such other
Subsidiaries free and clear of any Lien (except as otherwise disclosed
in SCHEDULE 6R.
(c) No Subsidiary of the Company is a party to, or otherwise
subject to any legal restriction of any agreement (other than this
Agreement and customary limitations imposed by corporate law statutes)
restricting the ability of such Subsidiary to pay dividends out of
profits or make any other similar distributions of profits to the
Company or any of its Subsidiaries that owns outstanding shares of
capital stock or similar equity interests of such Subsidiary.
(d) As of the Closing Date and after giving effect to the
transactions contemplated in this Agreement, the Network Agreement and
the Switch Agreement (i) the Company's
18
<PAGE>
authorized capital stock will consist of 55,000,000 shares, of which
50,000,000 are designated Common Stock and 5,000,000 shares are
designated preferred stock (2,000 of which will be designated as Series
A Convertible Preferred Stock, $.01 par value per share); (ii)
14,269,357 shares of Common Stock, issued and outstanding and 5,450,677
shares are or will be reserved for issuance in connection with the
Company's outstanding warrants and stock options all of which, when
issued in accordance with the terms of such warrants and stock options,
will be validly issued, fully paid, and non-assessable; (iii) no shares
of Common Stock are owned or held by or for the account of the Company
or any of its Subsidiaries (except as disclosed in the financial
statements described in Paragraph 6G); (iv) except as disclosed on
SCHEDULE 6R, neither the Company nor any of its Subsidiaries has
outstanding any stock or other securities convertible into or
exchangeable for any shares of capital stock, any rights to subscribe
for or to purchase or any options for the purchase of, or any agreements
providing for the issuance (contingent or otherwise) of, or any calls,
commitments or claims of any other character relating to the issuance
of, any capital stock, or any stock or securities convertible into or
exchangeable for any capital stock which have not been waived (other
than as contemplated by this Agreement); and (v) except as disclosed in
SCHEDULE 6R, neither the Company nor any of its Subsidiaries is subject
to any obligation (contingent or otherwise) to repurchase or otherwise
acquire or retire any shares of capital stock.
6S. ENVIRONMENTAL MATTERS.
(a) Neither any property of any of the Company or any of its
Subsidiaries nor the operations conducted thereon violate any order of
any court or Governmental Authority or Environmental Laws which
violations could reasonably be expected to result in liability in excess
of $250,000 or which could reasonably be expected to result in remedial
obligations in excess of $250,000, assuming disclosure to the applicable
Governmental Authority of all relevant facts, conditions and
circumstances, if any, pertaining to the relevant property.
(b) Without limitation of clause (a) above, no property of any
of the Company or any of its Subsidiaries nor the operations currently
conducted thereon or by any prior owner or operator of such property or
operation, are in violation of or subject to any existing, pending or,
to the knowledge of the Company, threatened action, suit, investigation,
inquiry or proceeding by or before any court or Governmental Authority
or to any remedial obligations under Environmental Laws which could
reasonably be expected to result in liability in excess of $250,000, or
which could reasonably be expected to result in remedial obligations in
excess of $250,000 assuming disclosure to the applicable Governmental
Authority of all relevant facts, conditions and circumstances, if any,
pertaining to the relevant property.
(c) All notices, permits, licenses or similar authorizations, if
any, required to be obtained or filed in connection with the operation
or use of any and all property of the Company and its Subsidiaries,
including but not limited to past or present treatment, storage,
disposal or release of Hazardous Materials into the environment, have
been duly obtained or filed, except where the failure to so obtain or
file would not have a Material Adverse Effect.
6T. INTELLECTUAL PROPERTY AND OTHER INTANGIBLE ASSETS.
19
<PAGE>
(a) The Company and its Subsidiaries (i) own or have the right
to use, free and clear of all liens, claims, and restrictions, all
patents, trademarks, service marks, trade names, and copyrights, and all
applications, licenses, and rights with respect to the foregoing, and
all trade secrets, including know-how, inventions, designs, processes,
works of authorship, computer programs, and technical data and
information (collectively, "INTELLECTUAL PROPERTY") used and sufficient
for use in the conduct of its business as now conducted and/or as
presently proposed to be conducted (including, without limitation, the
development, manufacture, operation, and sale of all products and
services sold or proposed to be sold by the Company and its Subsidiaries
during the next 24 months following the date of this Agreement) without
infringing upon or violating any right, lien, or claim of others,
including, without limitation, former employees and former employers of
its past and present employees, and (ii) except described in SCHEDULE
6T, is not obligated or under any liability whatsoever to make any
payments by way of royalties, fees, or otherwise to any owner or
licensee of, or other claimant to, any patent, trademark, service mark,
trade name, copyright, or other intangible asset, with respect to the
use thereof or in connection with the conduct of its business or
otherwise.
(b) Any and all Intellectual Property of any kind, relating to
the business of the Company and its Subsidiaries currently being
developed, or developed in the future, by any employee of the Company
and its Subsidiaries while in the employ of the Company and its
Subsidiaries shall be the property solely of the Company and its
Subsidiaries. The Company and its Subsidiaries have taken security
measures to protect the secrecy, confidentiality, and value of all
Intellectual Property, which measures are reasonable and customary in
the industry in which the Company and its Subsidiaries operate. The
Company and its Subsidiaries' employees and other persons who, either
alone or in concert with others, developed, invented, discovered,
derived, programmed, or designed the Intellectual Property (the
"TECHNICAL EMPLOYEES"), or who have knowledge of or access to
information about the Intellectual Property, have entered into a written
agreement with the Company or its Subsidiaries, in form and substance
satisfactory to the Company's management (the "PROPRIETARY INFORMATION
AGREEMENT") regarding ownership and treatment of the Intellectual
Property.
(c) Except as described in SCHEDULE 6T, none of the Company or
its Subsidiaries has received any communications alleging that the
Company or such Subsidiary has violated, or by conducting its business
as proposed would violate, any of the patents, trademarks, service
marks, trade names, copyrights, or trade secrets or other proprietary
rights of any other Person or entity. None of the Company's and its
Subsidiaries' employees is obligated under any contract (including
licenses, covenants, or commitments of any nature) or other agreement,
or subject to any judgment, decree, or order of any court or
administrative agency, that would interfere with the use of such
employee's best efforts to promote the interests of the Company or its
Subsidiaries or that would conflict with the Company's or its
Subsidiaries' business as presently conducted and as proposed to be
conducted. Neither the execution nor delivery of this Agreement, nor the
carrying on of the Company's or its Subsidiaries' business by the
employees of the Company and its Subsidiaries, nor the conduct of the
Company's or its Subsidiaries' business as proposed to be conducted,
will conflict with or result in a breach of the terms, conditions, or
provisions of, or constitute a default under, any contract, covenant, or
instrument under which any of such employees is now obligated.
20
<PAGE>
It is not, and will not become, necessary to utilize any inventions of
any of the Company's or its Subsidiaries' employees (or people the
Company and its Subsidiaries currently intends to hire) made prior to
their employment by the Company and its Subsidiaries other than those
that have been assigned to the Company and its Subsidiaries pursuant to
the Proprietary Information Agreement signed by such employee.
6U. INSURANCE COVERAGE. The properties of the Company and its
Subsidiaries are insured in amounts deemed adequate by the Company's management
against risks usually insured against by Persons operating businesses similar to
those of the Company and its Subsidiaries in the localities where such
properties are located.
7. REPRESENTATIONS AND WARRANTIES OF PURCHASER. To induce the Company to
enter into this Agreement, Purchaser represents and warrants to the Company
that:
7A. PURCHASE FOR INVESTMENT.
(a) Purchaser is acquiring the Shares for its own account and
not with a view to the public resale or distribution of all or any part
thereof in any transaction which would constitute a "distribution"
within the meaning of the Securities Act. Purchaser acknowledges that it
does not currently intend to assign its rights under this Agreement to
any third party prior to the Closing.
(b) Purchaser acknowledges that the Shares have not been
registered under the Securities Act.
(c) Purchaser is an "accredited investor" within the meaning of
Rule 501 under Regulation D promulgated under the Securities Act, is
experienced in evaluating investments in companies such as the Company,
has such knowledge and experience in financial and business matters as
to be capable of evaluating the merits and risks of its investment and
has the ability to bear the entire economic risk of its investment.
Purchaser has made its own evaluation of its investment in the Common
Stock, based upon such information as is available to it and without
reliance upon the Company or any other person or entity, and Purchaser
agrees that neither the Company nor any other person or entity has any
obligation to furnish any additional information to Purchaser except as
expressly set forth herein.
(d) Purchaser acknowledges that the Shares may not be sold,
transferred, pledged, hypothecated, or otherwise disposed of without
registration under the Securities Act or an exemption therefrom, and
that in the absence of an effective registration statement covering the
Shares or an available exemption from registration under the Securities
Act, the Shares must be held indefinitely.
(e) Purchaser agrees that the Shares shall bear legends in
substantially the following form:
"THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR
INVESTMENT AND MAY NOT BE SOLD OR OFFERED FOR SALE OR OTHERWISE
TRANSFERRED,
21
<PAGE>
EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT, OR (ii) AN APPLICABLE EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT. ANY SALE PURSUANT TO
CLAUSE (ii) OF THE PRECEDING SENTENCE MUST BE ACCOMPANIED BY AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY TO THE
EFFECT THAT SUCH EXEMPTION FROM REGISTRATION IS AVAILABLE IN
CONNECTION WITH SUCH SALE."
7B. AUTHORIZATION; NO CONFLICT. Purchaser has all requisite power and
authority to enter into this Agreement and to carry out and perform its
obligations under the terms of this Agreement. This Agreement is a legal, valid,
and binding obligation of Purchaser. The execution, delivery, and performance of
this Agreement by Purchaser and the consummation by Purchaser of the
transactions contemplated hereby will not conflict with or result in a default
under the terms of any material contract, agreement, obligation, commitment, or
organizational document applicable to Purchaser.
8. TERMINATION, AMENDMENT AND WAIVER.
8A. TERMINATION. This Agreement may be terminated at any time prior to
the Closing Date, whether before or after approval of matters presented in
connection with this Agreement by the shareholders of the Company:
(a) by mutual written consent of Purchaser and the Company;
(b) by either Purchaser or the Company;
(i) if the shareholders of the Company fail to give any
required approval of this Agreement and the transactions
contemplated hereby upon a vote at a duly held meeting of
shareholders of the Company or at any adjournment thereof;
(ii) if the transaction contemplated by this Agreement
shall not have been consummated on or before February 1, 1998,
unless the failure to consummate the transaction contemplated by
this Agreement is the result of a material breach of this
Agreement by the party seeking to terminate this Agreement; or
(iii) if any permanent injunction or other order of a
court or other competent authority preventing the consummation
of the transactions contemplated by this Agreement or the
Network Agreement and Plan of Reorganization or Network Switches
Agreement and Plan of Reorganization shall have become final and
nonappealable.
(c) by Purchaser, if the Company breaches any of its
representations or warranties herein or fails to perform in any material
respect any of its covenants, agreements or obligations under this
Agreement;
22
<PAGE>
(d) by the Company, if Purchaser breaches any of its
representations or warranties herein or fails to perform in any material
respect any of its covenants, agreements or obligations under this
Agreement; and
(e) by the Company to the extent permitted under Section 5N.
8B. EFFECT OF TERMINATION. In the event of termination of this Agreement
by either the Company or Purchaser as provided in Section 8A, this Agreement
shall forthwith become void and have no effect, without any liability or
obligation on the part of Purchaser or the Company, other than the provisions of
Section 9A.
9. MISCELLANEOUS.
9A. FEES AND EXPENSES.
(a) The Company agrees to pay Purchaser a fee in immediately
available funds of $500,000 (the "Termination Fee") promptly upon the
termination of the Agreement in the event this Agreement is terminated
by the Company as permitted by Section 5N. The Termination Fee shall be
payable promptly upon termination of this Agreement if the foregoing
events shall have occurred prior to termination.
(b) In addition, the Company agrees, in the event that the
transactions hereby contemplated shall be consummated to pay all
reasonable out-of-pocket expenses of the Purchaser arising in connection
with the transactions and other agreements and instruments contemplated
by this Agreement, including reasonable fees and expenses of counsel
incurred in connection with the preparation and negotiation of this
Agreement, any other agreement or instrument to be executed and
delivered in connection with this Agreement. The Company agrees to pay
the Purchaser and/or their counsel, as appropriate, all such fees and
expenses incurred up to and including the Closing, at the Closing.
9B. AMENDMENT. This Agreement may be amended by the parties hereto at
any time before or after any required approval of matters presented in
connection with the transaction contemplated by this Agreement by the
shareholders of the Company; provided, however, that after any such approval,
there shall be made no amendment that by law requires further approval by such
shareholders without the further approval of such shareholders. This Agreement
may not be amended except by an instrument in writing signed on behalf of each
of the parties.
9C. EXTENSION; WAIVER. At any time prior to the Closing Date, the
parties may, to the extent legally allowed, (a) extend the time for the
performance of any of the obligations or the other acts of the other parties,
(b) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto or (c) subject to the
proviso of Section 9B, waive compliance with any of the agreements or conditions
contained herein. Any agreement on the part of a party to any such extension or
waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party. The failure of any party to this Agreement to assert any
of its rights under this Agreement or otherwise shall not constitute a waiver of
such rights.
23
<PAGE>
9D. ASSIGNMENT. This Agreement shall not be assigned by operation of law
or otherwise before the Closing Date, and any attempt at assignment shall be
void; PROVIDED, HOWEVER, that the Purchaser shall be permitted to assign its
rights under this Agreement to a third party ("Purchaser Assignee") before the
Closing Date so long as (i) Purchaser retains its obligations under this
Agreement, (ii) such third party becomes a party to this Agreement and joins
Purchaser in the representations and warranties in Paragraph 7 of this
Agreement, and (iii) Purchaser first offers to assign its rights under this
Agreement to a third party designated by the Company ("Company Designee") on
substantially similar terms as offered by Purchaser Assignee and the Company
Designee shall fail to respond or purchase such rights during the offer period
(the term of which period the Parties hereto shall mutually agree).
9E. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and
warranties contained herein or made in writing by or on behalf of any party to
this Agreement in connection herewith shall survive the execution and delivery
of this Agreement, regardless of any investigation made by the Purchaser or on
their behalf, and shall terminate on the fourth anniversary of the Closing Date.
9F. SUCCESSORS AND ASSIGNS; NO THIRD PARTY. All covenants and agreements
in this Agreement contained by or on behalf of the parties hereto shall bind and
inure to the benefit of the respective successors and assigns of the parties
hereto and, to the extent provided in this Agreement, to the benefit of any
future holders of any Common Stock. Subject to the foregoing, nothing in this
Agreement shall confer upon any person or entity not a party to this Agreement,
or the legal representatives of such person or entity, any rights or remedies of
any nature or kind whatsoever under or by reason of this Agreement.
9G. NOTICES. All communications provided for hereunder shall be sent by
registered or certified mail and, if to the Purchaser, to the following: 5005
Woodway, Suite 350, Houston, Texas 77056, Attn: Mark Willis, with a copy to
Robert K. Hatcher, at Vinson & Elkins L.L.P., 1001 Fannin, Houston, Texas 77002;
if to the Company addressed to it at EqualNet Holding Corp., 1250 Wood Branch
Park Drive, Houston, Texas 77079-1212, Attn: General Counsel, with a copy to
Fulbright & Jaworski L.L.P., 1301 McKinney, Suite 5100, Houston, Texas 77010,
Attn: Robert F. Gray, Jr., or to such other address with respect to any party as
such party shall notify the other in writing; provided, however, that any such
communication to the Company may also, at the option of the Purchaser, be either
delivered to the Company at the Company's address set forth above or to any
officer of the Company. Within 5 Business Days after the date of such mailing
(save for any postal interruption) such communication shall be deemed to have
been received.
9H. DESCRIPTIVE HEADINGS. The descriptive headings of the several
Paragraphs of this Agreement are inserted for convenience only and do not
constitute a part of this Agreement.
9I. SATISFACTION REQUIREMENT. If any agreement, certificate or other
writing, or any action taken or to be taken, is by the terms of this Agreement
required to be satisfactory to the Purchaser, the determination of such
satisfaction shall be made by the Purchaser in its sole and exclusive reasonable
judgment exercised in good faith.
9J. GOVERNING LAW; CONSENT TO JURISDICTION. This Agreement shall be
construed and enforced in accordance with, and the rights of the parties shall
be governed by, the law of the State
24
<PAGE>
of Texas without giving effect to the choice of law or conflicts principles
thereof. Any legal action or proceeding with respect to this Agreement may be
brought in the courts of the State of Texas or of the United States of America
for the Southern District of Texas, and, by execution and delivery of this
Agreement, the Company hereby accepts for itself and in respect of its property,
generally and unconditionally, the jurisdiction of the aforesaid courts. The
Company irrevocably consents to the service of process out of any of the
aforementioned courts in any such action or proceeding by the mailing of copies
thereof by registered or certified mail, postage prepaid, to the Company at its
address set forth in Section 9G, such service to become effect 30 days after
such mailing. Nothing herein shall affect the right of the Purchaser to serve
process in any other manner permitted by law or to commence legal proceedings or
otherwise proceed against the Company in any other jurisdiction.
9K. REMEDIES. In case any one or more of the covenants and/or agreements
set forth in this Agreement shall have been breached by the Company or the
Purchaser, the Company or the Purchaser, as applicable, may proceed to protect
and enforce its or their rights either by suit in equity and/or by action at
law.
9L. ENTIRE AGREEMENT. This Agreement, including the Schedules hereto,
and the other writings referred to herein or delivered pursuant hereto contain
the entire agreement among the parties with respect to the subject matter hereof
and supersede all prior and contemporaneous arrangements or understandings with
respect thereto.
9M. SEVERABILITY. Any provisions of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
9N. COUNTERPARTS. This Agreement may be executed simultaneously in two
or more counterparts, each of which shall be deemed an original, but which
together shall constitute a single agreement.
9O. BROKERAGE. Each party hereto will indemnify and hold harmless the
others against and in respect of any claim for brokerage or other commissions
relative to this Agreement or to the transactions contemplated hereby, based in
any way on agreements, arrangements or understandings made or claimed to have
been made by such party with any third party.
25
<PAGE>
IN WITNESS WHEREOF, the parties hereto caused this Agreement to be duly
executed and delivered as of the date first above written.
EQUALNET HOLDING CORP.
By: /s/ ZANE RUSSELL
Name: ZANE RUSSELL
Title: CEO
WILLIS GROUP, LLC
By: /s/ MARK WILLIS
Name: MARK WILLIS
Title: PRES.
[signature page to Stock Purchase Agreement]
26
<PAGE>
AMENDMENT TO
STOCK PURCHASE AGREEMENT
This Amendment to that certain Stock Purchase Agreement (the
"Agreement") dated December 2,1997 by and among EqualNet Holding Corp., and
Willis Group, LLC, is entered into as of December 19, 1997:
Whereas, subparagraph 8A.(b)(ii) of the Agreement allows each party
certain rights to terminate the Agreement if the conditions for closing of the
transactions contemplated in such agreement are not completed by February 1,
1998; and
Whereas the parties hereto desire to change such date,
Now, therefore, the parties hereto agree as follows: the date "February
1, 1998" contained in subparagraphs 8A.(b)(ii) of the Agreement is hereby
changed and amended in each instance to "March 31, 1998".
No other change, amendment or modification of the Agreement is hereby
made. This Amendment is signed effective December 19, 1997. This Amendment may
be executed in multiple counterpart originals, all of which taken together shall
constitute one document. A facsimilie signature of any of the undersigned shall
have the same force and effect as an original signature.
EqualNet Holding Corp. Willis Group, LLC
By:/s/ MICHAEL L. HLINAK By: /s/ MARK WILLIS
Michael L. Hlinak, C.O.O. Mark Willis, President
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-31-1997
<CASH> 65,600
<SECURITIES> 0
<RECEIVABLES> 6,389,351
<ALLOWANCES> 567,458
<INVENTORY> 0
<CURRENT-ASSETS> 7,592,023
<PP&E> 5,893,654
<DEPRECIATION> 3,711,228
<TOTAL-ASSETS> 12,667,760
<CURRENT-LIABILITIES> 17,824,076
<BONDS> 0
0
0
<COMMON> 66,828
<OTHER-SE> (5,453,005)
<TOTAL-LIABILITY-AND-EQUITY> 12,667,760
<SALES> 14,808,555
<TOTAL-REVENUES> 14,808,555
<CGS> 10,993,553
<TOTAL-COSTS> 10,993,553
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 754,225
<INTEREST-EXPENSE> 785,454
<INCOME-PRETAX> (4,275,380)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,275,380)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,275,380)
<EPS-PRIMARY> (.68)
<EPS-DILUTED> (.68)
</TABLE>
