<PAGE>
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 March 31, 1999
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 COMMUNICATIONS 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 20,972,111 shares of the Registrant's $.01 par value common stock
outstanding as of May 24, 1999.
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
- --------------------------------------------------------------------------------
EQUALNET COMMUNICATIONS CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, March 31,
1998 1999
--------------- ---------------
(Note) (Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and equivalents $ 459,581 $ 744,414
Accounts receivable, net of allowance
for doubtful accounts of $1,034,253 at June 30,
1998 and $2,417,936 at March 31, 1999 5,839,284 13,235,942
Due from agents 1,596,590 337,120
Advance on acquisition purchase price 3,014,000 -
Prepaid expenses and other 109,684 442,771
--------------- -------------
Total current assets 11,019,139 14,760,247
Property and equipment
Computer equipment 17,824,993 18,793,237
Office furniture and fixtures 1,209,032 1,209,032
Leasehold improvements 1,177,592 1,246,855
--------------- -------------
20,211,617 21,249,124
Accumulated depreciation and amortization (4,837,626) (7,590,123)
--------------- -------------
15,373,991 13,659,001
Customer acquisition costs, net of
accumulated amortization of $13,957,622
at June 30, 1998 and $19,494,491 at
March 31, 1999 355,984 5,408,189
Marketing agents contracts, net of
accumulated amortization of $166,849
at March 31, 1999 - 1,835,342
Other assets 1,011,333 763,854
--------------- -------------
Total assets $ 27,760,447 $ 36,426,633
=============== =============
</TABLE>
Note: The balance sheet at June 30, 1998 has been derived from the audited
financial statements at that date.
2
<PAGE>
EQUALNET COMMUNICATIONS CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, March 31,
1998 1999
------------------- -------------------
(Note) (Unaudited)
<S> <C> <C>
Liabilities and shareholders' equity
Current Liabilities Not Subject to Compromise
- Post Petition (Note 2)
Payable to providers of long distance services $ 6,627,711 $ 1,155,335
Accounts payable 4,237,310 4,827,511
Accrued expenses 3,838,315 2,351,788
Accrued sales taxes 205,108 985,437
Notes payable to long distance providers 1,183,059 -
Debt in default 5,752,535 6,092,553
Debt in default to an Affiliate 400,000 -
Contractual obligations with regard to receivable
sales agreement 2,334,710 3,783,071
Notes Payable - 1,624,183
------------------- -------------------
Total Current Liabilities Not Subject 24,578,748 20,819,878
to Compromise - Post Petition
Current Liabilities Not Subject to Compromise
- Pre Petition (Note 2)
Accrued sales taxes - 287,902
Contractual obligations with regard to receivable
sales agreement - 2,010,072
Notes Payable - 400,000
------------------- -------------------
Total Current Liabilities Not Subject - 2,697,974
to Compromise - Pre Petition
Current Liabilities Subject to Compromise (Note 2) - 15,216,266
------------------- -------------------
Total current liabilities 24,578,748 38,734,118
Deferred rent 223,917 -
Notes Payable - 2,172,436
Convertible Debt - 2,559,812
Shareholders' equity (deficit
Preferred stock, $.01 par value
5,000,000 shares authorized at June 30, 1998
Series A Convertible Preferred Stock (non-voting)
aggregate liquidation preference of $2.1
million; Issued and outstanding shares -
2,000 at June 30, 1998 and March 31, 1999 2,000,000 2,000,000
Series B Senior Convertible Preferred Stock (voting)
aggregate liquidation preference of $3.0
million; Issued and outstanding shares-
3,000 at June 30, 1998 and March 31, 1999 3,000,000 3,000,000
</TABLE>
3
<PAGE>
EQUALNET COMMUNICATIONS CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, March 31,
1998 1999
----------------- ------------------
(Note) (Unaudited)
<S> <C> <C>
Series C Convertible Preferred Stock (voting)
aggregate liquidation preference of $5.8
million; Issued and outstanding shares -
0 at June 30, 1998 and 212,135 at
March 31, 1999 - 5,826,446
Series D Convertible Preferred Stock (voting),
$.01 par value,
aggregate liquidation preference of $3.9
million; Issued and outstanding shares -
0 at June 30, 1998 and 3,850 at
March 31, 1999 - 2,002,235
Common stock, $.01 par value
Authorized shares - 50,000,000 at June 30, 1998
and December 31, 1998. Issued and
outstanding 21,385,832 at June 30, 1998 and
20,189,611 at March 31, 1999. 217,935 235,582
Treasury stock at cost; 400,447 shares at
June 30, 1998 and 3,408,703 at March 31, 1999. (817,153) (2,522,644)
Additional paid in capital 37,063,468 39,613,597
Stock warrants 1,763,240 2,698,810
Deferred compensation (115,826) (20,415)
Retained deficit (40,153,882) (59,873,344)
--------------- ---------------
Total shareholders' equity (deficit) 2,957,782 (7,039,733)
--------------- ---------------
Total liabilities and shareholders' equity (deficit) $ 27,760,447 $ 36,426,633
=============== ===============
</TABLE>
Note: The balance sheet at June 30, 1998 has been derived from the audited
financial statements at that date.
4
<PAGE>
EQUALNET COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1998 1999 1998 1999
-------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
Sales $ 5,765,688 $ 9,345,633 $ 20,574,243 $ 25,356,218
Cost of Sales 4,640,738 7,459,706 15,634,291 24,809,039
-------------- ------------ -------------- --------------
1,124,950 1,885,927 4,939,952 547,179
Selling, general and administrative
expenses 3,749,553 2,255,979 9,005,284 8,488,203
Depreciation and amortization 1,146,239 3,737,712 3,302,027 8,867,608
-------------- ------------- -------------- --------------
Operating loss (3,770,842) (4,107,764) (7,367,359) (16,808,632)
Other income (expense)
Interest income 5,537 - 6,700 877
Interest expense (245,319) (721,942) (1,180,773) (1,984,766)
Miscellaneous (31,507) (54,266) 73,922 (37,165)
-------------- ------------- -------------- --------------
(271,289) (776,208) (1,100,151) (2,021,054)
Loss before federal income
taxes and reorganization costs (4,042,131) (4,883,972) (8,467,510) (18,829,686)
Benefit for federal income taxes - - - -
-------------- ------------- -------------- --------------
Loss before reorganization costs (4,042,131) (4,883,972) (8,467,510) (18,829,686)
Reorganization costs - (234,000) - (376,658)
-------------- ------------- -------------- --------------
Net loss $ (4,042,131) $ (5,117,972) $ (8,467,510) $ (19,206,344)
Preferred stock dividends (11,557) (376,086) (11,557) (513,669)
-------------- ------------- -------------- --------------
Net loss available to Common
shareholders $ (4,053,688) $ (5,494,058) $ (8,479,067) $ (19,720,013)
============== ============= ============== ==============
Net loss per share - basic and diluted $ (0.43) $ (0.29) $ (1.15) $ (1.02)
============== ============= ============== ==============
Weighted average number of shares 9,486,275 19,027,111 7,365,587 19,309,972
============== ============= ============== ==============
</TABLE>
5
<PAGE>
EQUALNET COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
1998 1999
------------------- -------------------
<S> <C> <C>
Operating activities
Net loss $ (8,467,510) $ (19,206,344)
Adjustments to reconcile net income to
cash provided by (used in) operating activities
Depreciation and amortization 3,302,027 8,867,608
Provision for bad debt 1,112,310 1,383,683
Amortization of discount on convertible debt - 106,253
Interest charge on convertible debt issued at discount 150,000 450,000
Change in deferred rent 7,203 (223,917)
Compensation expense recognized for common stock issue 52,502 35,417
Change in operating assets and liabilities:
Accounts receivable 3,141,625 (3,705,510)
Due from agents 1,068,981 (6,727)
Prepaid expenses and other (294,782) 129,594
Other assets (1,167,723) 203,498
Accounts payable and accrued liabilities
not subject to compromise 130,461 (5,220,046)
Accounts payable and accrued liabilities
subject to compromise - 14,083,207
------------------- -------------------
Net cash provided by (used in) operating activities (964,906) (3,103,284)
Investing activities
Purchase of property and equipment (6,369,202) (639,934)
Cash paid for acquisition (1,550,000) (555,000)
Proceeds from sale of equipment - 74,775
------------------- -------------------
Net cash used in investing activities (7,919,202) (1,120,159)
Financing activities
Proceeds from subordinated notes payable - 4,981,615
Proceeds from notes payable 7,407,260
Net repayments on revolving line of credit (4,555,442) -
Net proceeds on contractual obligations with regard
to receivable sales agreement 1,861,274 3,458,433
Repayments on capital lease obligations (51,000) -
Proceeds from issuance of stock 6,249,999 107,155
Proceeds from issuance of warrants 142,740 -
Repayments on long-term debt - (7,038,927)
Proceeds from convertible debt - 2,800,000
Proceeds from exchange of Common Stock for Preferred Stock - 200,000
------------------- -------------------
Net cash provided by (used in) financing activities 11,054,831 4,508,276
------------------- -------------------
Net increase in cash 2,170,723 284,833
Cash, beginning of period 828,478 459,581
------------------- -------------------
Cash, end of period $ 2,999,201 $ 744,414
=================== ===================
Reorganization costs paid $ - $ 71,658
=================== ===================
</TABLE>
6
<PAGE>
EQUALNET COMMUNICATIONS 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 Communications 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 March 31, 1999, and the
results of operations and cash flows for the three months and
nine months ended March 31, 1998 and 1999.
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, 1998, included in
the Company's Annual Report on Form 10-K for the year ended June
30, 1998, 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 - CHAPTER 7 AND 11 FILING
EqualNet Corporation ("EqualNet"), one of the Company's operating
subsidiaries, and EqualNet Wholesale Services, Inc.
("Wholesale"), a wholly owned nonoperating subsidiary of the
EqualNet filed voluntary petitions for relief under Chapter 11 of
the United States Bankruptcy Court for the Southern District of
Texas (the "Bankruptcy Court"), in Houston, Texas. EqualNet's
financial statements have been prepared in accordance with
Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code", and include disclosure
of liabilities subject to compromise. Such financial statements
are consolidated into the Company's consolidated financial
statements. Under Chapter 11, certain claims against EqualNet in
existence prior to the filing of the petitions for relief under
the federal bankruptcy laws are stayed while EqualNet continues
business operations as a debtor-in-possession. These claims are
reflected in the March 31, 1999 balance sheet as "liabilities
subject to compromise." Additional claims (liabilities subject to
compromise) may arise subsequent to the filing date resulting
from rejection of executory contracts, including leases, and from
the determination by the court (or agreed to by parties in
interest) of allowed claims for contingencies and other disputed
amounts.
On October 2, 1998 Wholesale filed its motion to convert its
bankruptcy proceeding from a Chapter 11 reorganization to a
Chapter 7 liquidation. Pursuant to Sections 1107 and 1108 of the
Bankruptcy Code, EqualNet as debtor-in-possession, will continue
to manage and operate EqualNet's assets and business pending the
confirmation of a reorganization plan and subject to the
supervision and orders of the Bankruptcy Court. The Company has
filed its disclosure statement which includes its reorganization
plan. The Bankruptcy Court approved the Disclosure Statement for
the Plan of Reorganization
7
<PAGE>
of EqualNet on March 1, 1999. On April 28, 1999, the Bankruptcy
Court confirmed the Plan of Reorganization subject to funding
which is set by the Bankruptcy Court to be May 24, 1999.
As a debtor-in-possession, EqualNet is authorized to operate its
business, but may not engage in transactions outside of the
normal course of business without approval, after notice and
hearing, of the Bankruptcy Court. A creditors' committee was
formed in October, 1998, which has the right to review and object
to business transactions outside the ordinary course.
The consolidated financial statements do not purport to show: (a)
the realizable value of assets on a liquidation basis or their
availability to satisfy liabilities; (b) ultimate pre-petition
liability amounts that may be allowed for claims or contingencies
or the status or priority thereof; (c) the effect of any changes
that may be made to the capitalization of EqualNet; or (d) the
effect of any changes that may be made in EqualNet's business
operations. The outcome of these matters is not presently
determinable.
Although management intends that EqualNet will emerge from
bankruptcy in a prompt and expeditious manner during the fourth
quarter of fiscal year 1999, there can be no assurance that a
reorganization will be consummated.
In the event EqualNet's plan as confirmed by the Court is
consummated, continuation of the Company's business is dependent
upon the success of future operations and the Company's ability
to meet its obligations as they become due. The Company's
consolidated financial statements have been prepared on a going
concern basis, which contemplates continuity of operations,
realization of assets and liquidation of liabilities and
commitments in the normal course of business. The Chapter 11
filing by EqualNet, as well as related circumstances and the
losses from operations continue to raise substantial doubt about
the Company's ability to continue as a going concern. The
consolidated financial statements included herein do not include
any adjustments relating to the commencement of EqualNet's
bankruptcy case or to reflect the possible future effects on the
recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of
the uncertainty of the Company's ability to continue as a going
concern.
The principal categories of claims classified as "Current
Liabilities Subject to Compromise" on the Company's consolidated
balance sheet are identified below:
<TABLE>
<S> <C>
Payable to providers of long distance services $ 9,833,383
Accounts payable 3,060,247
Accrued expenses 1,139,577
Notes Payable to long distance provider 1,183,059
--------------
$ 15,216,266
==============
</TABLE>
8
<PAGE>
The following condensed financial statements present the financial position of
EqualNet as of March 31, 1999 and the results of its operations and cash flows
for the nine months ended March 31, 1999, and have been prepared on the same
basis as the Company's consolidated financial statements.
EQUALNET CORPORATION
BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
March 31, 1999
(Unaudited)
<S> <C>
Assets
Current assets
Cash and equivalents $ 482,114
Accounts receivable, net of allowance
for doubtful accounts of $1,574,629 4,783,502
Due from agents 329,393
-----------
Total current assets 5,595,009
Property and equipment
Computer equipment 4,558,189
Office furniture and fixtures 1,209,032
Leasehold improvements 1,246,855
-----------
7,014,076
Accumulated depreciation and amortization (4,708,028)
-----------
2,306,048
Other assets 318,518
-----------
Total assets $ 8,219,575
===========
Liabilities and shareholders' deficit
Current Liabilities Not Subject to Compromise
Post Petition (Note 2)
Payable to providers of long distance services $ 262,333
Accounts Payable 2,067,701
Accrued Expenses 821,005
Accrued sales taxes 236,433
Debt in Default to an Affiliate -
Contractual obligations with regard to receivable
Sales agreement (193,972)
Intercompany Note Payable 10,000,000
-----------
Total Current Liabilities Not Subject to Compromise 13,193,500
Post Petition
Current Liabilities Not Subject to Compromise
Pre Petition (Note 2)
Contractual obligations with regard to receivable
Sales agreement 2,010,072
Accrued sales taxes 287,902
Notes Payable 400,000
-----------
Total Current Liabilities Not Subject to 2,697,974
Compromise Pre Petition
Current Liabilities Subject to Compromise
Payable to providers of long distance services 9,833,383
Accounts payable 3,060,247
Accrued expenses 1,139,577
Notes Payable to long distance providers 1,183,059
Intercompany Note Payable 27,605,154
-----------
Total Current Liabilities Subject to Compromise 42,821,420
-----------
Total Current Liabilities 58,712,894
Shareholders' deficit
Common Stock 1
Retained deficit (50,493,320)
-----------
Total shareholders' deficit (50,493,319)
-----------
Total liabilities and shareholders' deficit $ 8,219,575
===========
</TABLE>
9
<PAGE>
EQUALNET CORPORATION
STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31, 1999
(Unaudited)
<S> <C>
Revenues $ 11,589,169
Cost of Revenues 12,416,276
-----------------
(827,107)
Selling, general and administrative
expenses 5,875,703
Depreciation and amortization 1,839,503
-----------------
Operating loss (8,542,313)
Other income (expense)
Interest income 869
Interest expense (270,636)
Miscellaneous (48,718)
-----------------
(318,485)
-----------------
Loss before federal income
taxes and other item (8,860,798)
Benefit for federal income taxes -
-----------------
Loss before other item (8,860,798)
Reorganization Costs (376,658)
-----------------
Net loss $ (9,237,456)
-----------------
</TABLE>
Reorganization expenses, which represent professional fees,
incurred during the quarter ended March 31, 1999 totaled
approximately $234,000.
10
<PAGE>
EQUALNET CORPORATION
STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended
March 31, 1999
----------------------
<S> <C>
Operating activities $ (9,237,456)
Net loss
Adjustments to reconcile net loss to
cash used in operating activities
Depreciation and amortization 1,839,503
Provision for bad debt 2,681,109
Change in deferred rent (223,917)
Change in operating assets and liabilities:
Accounts receivable (1,625,328)
Due from agents 705,694
Other assets (112,554)
Accounts payable and accrued liabilities
not subject to compromise (10,749,706)
Accounts payable and accrued liabilities
subject to compromise 14,651,002
---------------------
Net cash used in operating activities (2,071,653)
Investing activities
Purchase of property and equipment (192,237)
---------------------
Net cash used in investing activities (192,237)
Financing activities
Net proceeds from intercompany note payable 2,807,290
Net change on contractual obligations with regard
to receivable sales agreement (518,610)
---------------------
Net cash provided by financing activities 2,288,680
---------------------
Net increase in cash 24,790
Cash, beginning of period 457,324
---------------------
Cash, end of period $ 482,114
=====================
Reorganization costs paid $ 71,658
=====================
</TABLE>
NOTE 3 - DIP FINANCING AND EXIT FACILITY
Prior to filing for bankruptcy protection, EqualNet and RFC
Capital Corporation ("RFC") entered into an agreement whereby RFC
agreed to amend certain financing agreements with EqualNet to
eliminate EqualNet's bankruptcy filing as an event of default
and, subject to bankruptcy court approval, to continue to finance
EqualNet's receivables under a debtor in possession ("DIP")
facility. On November 24, 1998, the bankruptcy court approved the
DIP financing which allowed EqualNet to continue to obtain funds
from RFC in the same manner as it did prior to the bankruptcy
filing. The financing cost of the DIP facility is prime rate plus
seven percent (7%).
EqualNet will be required to seek additional financing to
consummate its plan of reorganization. The Company currently is
in active negotiations with 2 outside investor groups that could
provide EqualNet with the capital needed for the exit facility.
11
<PAGE>
The Company is continuing discussions with these 2 investor
groups and is negotiating with other potential investors to
provide the capital for the exit facility. If the Company
successfully raises the capital to provide for the exit facility,
the Company would continue to own EqualNet after the bankruptcy
proceedings. There can be no assurance that the Company will
raise the capital required to fund the exit facility.
NOTE 4 - ACQUISITIONS AND ASSET PURCHASES
SA TELECOM
----------
On January 21, 1998, the Company signed an agreement with SA
Telecommunications, Inc. ("SA Telecom"), a switch based, long
distance telecommunications carrier serving customers primarily
in Texas and California to acquire certain assets and customer
bases in exchange for a combination of shares of stock, cash and
assumption of certain liabilities. The transaction was subject to
certain conditions, including approval of the bankruptcy court
supervising the reorganization of SA Telecom under Chapter 11 of
the United States Bankruptcy Code. On March 9, 1998, the Company
won approval from the bankruptcy court. The purchase of SA
Telecom was approved by the Company's shareholders on June 30,
1998 for approximately $3.47 million in cash and approximately
$5.4 million of Series C Preferred Stock and the assumption of
approximately $4 million in debt, payable to Greyrock Business
Credit, subject to final closing adjustments. The Company's newly
formed wholly owned subsidiary, USC Telecom, Inc. ("USC
Telecom"), acquired the SA Telecom assets on July 23, 1998. Prior
to the closing of this transaction and for the purpose of
providing for a smooth transition of the acquired customer base,
the Company and SA Telecom entered into a management agreement
pursuant to which the Company managed the operations of SA
Telecom from April 1, 1998 until the close of the transaction
whereby the Company was responsible for any losses from SA
Telecom's operations on or after April 1, 1998. SA Telecom
provided the Company with notice that the Company owes SA Telecom
for operating losses during the period the management agreement
was effective. The Company disputed the amount of operating
losses as provided by SA Telecom. Additionally, SA Telecom
disputed the final purchase price settlement and requested
additional funding. On December 23, 1998, the bankruptcy court in
the SA Telecom case ruled in favor of SA Telecom and entered a
judgment requiring USC Telecom to pay approximately $812,772 to
SA Telecom. The Company is appealing this decision and is also in
settlement negotiations with SA Telecom. The estimated amount of
this liability has been recorded as additional purchase
consideration.
The Company accounted for the SA Telecom acquisition using the
purchase method of accounting. Accordingly, the results of
operations of the acquired business is included in the Company's
consolidated results of operations from the date of acquisition.
<TABLE>
<CAPTION>
<S> <C>
Purchase consideration (in thousands):
Cash paid $ 3,569
Fair value of preferred stock issued 5,400
Liabilities assumed 4,495
---------
Fair value of assets acquired (including intangibles) $ 13,464
=========
</TABLE>
The Company booked an asset for customer acquisition costs of
approximately $8.7 million. This asset is being amortized by
applying the estimated attrition rate of the acquired customer
base per month against the unamortized balance of the previous
month
12
<PAGE>
(declining balance method) switching to the straight line method
when the straight line method results in greater amortization
over a five-year period.
The Company issued 196,553 shares of Series C Preferred Stock to
SA Telecom as part of the purchase price. The Series C Preferred
Stock is convertible at the holder's option into shares of the
Company's common stock ("Common Stock") at the rate of ten (10)
shares of Common Stock per share of Series C Preferred Stock, or
an aggregate of 1,965,530 shares of Common Stock. The Series C
Preferred Stock has a liquidation preference equal to $27.50
(plus any accrued but unpaid dividends) per share of Series C
Preferred Stock. The Company issued 5,358 shares of Series C
Preferred in January 1999 as additional purchase consideration
and issued 10,224 shares during the quarter ended March 31, 1999
as dividends.
The following results of operations have been prepared assuming
the SA Telecom acquisition occurred as of the beginning of the
periods presented. The pro forma operating results are not
necessarily indicative of future operating results nor of results
that would have occurred had the acquisitions been consummated as
of the beginning of the periods presented.
Nine Months Ended
March 31,
1998 1999
(in thousands, except
per share amounts)
Revenues $ 52,092 $ 20,206
Net income (loss) $ (12,032) $ (17,889)
Net loss per share $ (1.63) $ (0.93)
ACMI
----
In January, 1999, the Company's newly formed wholly owned
subsidiary, ACMI Acquisition Corp. ("ACMI Acquisition") acquired
substantially all of the assets of Limit, LLC d/b/a ACMI
("ACMI"), a network marketing company with approximately 2,500
independent agents. The Company issued 1 million shares of its
Common Stock to ACMI and ACMI Acquisition assumed a note payable
of $1 million ("ACMI Note"). In addition, the Company is required
to issue up to an additional 1.5 million shares of its Common
Stock if ACMI generates $670,000 per month of revenue from new
customers within six (6) months of the closing date. If new
customer revenues are less than $670,000 per month at the end of
the six (6) month period, then the number of additional shares
issuable will be prorated based on the ratio of actual monthly
revenue to $670,000. In the event the Company's Common Stock's
average closing price is below seventy-five cents ($.75) per
share for the period between 150 and 180 days after the closing
date, additional Common Stock would be issuable to ACMI. In
addition to the foregoing, ACMI is entitled to earn more Common
Stock ("Earn Out Shares") if it attains certain performance
measures based on sales at the end of each year over a three year
period. ACMI is not entitled to any Earn Out Shares if its
revenues for a twelve month period are less than $2.5 million. A
director of the Company was granted 105,000 shares of the
Company's Common Stock valued at approximately $164,000 for
facilitating this transaction.
13
<PAGE>
The Company accounted for the ACMI acquisition using the purchase
method of accounting. Accordingly, the results of operations of
the acquired business is included in the Company's consolidated
results of operations from the date of acquisition.
<TABLE>
<CAPTION>
<S> <C>
Purchase consideration (in thousands):
Fair value of Common Stock issued $1,727
Liabilities assumed 1,076
------
Fair value of assets acquired (including intangibles) $2,803
======
</TABLE>
The Company recorded marketing agent contracts as an asset valued
at approximately $2.0 million. This asset is being amortized on
the straight line method over a three year period. The results of
operations related to the ACMI acquisition do not have a material
effect on the operations of the Company and therefore pro forma
information is not presented.
Brittan Communications International Corporation
------------------------------------------------
On January 27, 1999, the Company purchased approximately 80,000
residential long distance customers of Brittan Communications
International Corporation ("BCI") from RFC in a foreclosure sale
for approximately $1.6 million, including the assumption of a
$1.5 million term loan, and the issuance of 300,000 warrants to
RFC valued at $75,000. The warrants entitle the holder to
purchase 300,000 shares of Common Stock at $1.33 per share during
a five year period and were valued using the Black Scholes model.
The term loan is reduced by 80% of the excess of the fair market
value of the Common Stock at the exercise date over the $1.33
exercise price.
The acquired customer base has been recorded in customer
acquisition costs and is being amortized by applying the
estimated attrition rate of the purchased customer base of 8% per
month against the unamortized balance of the previous month
(declining balance method) switching to the straight line method
when the straight line method results in greater amortization
over an 18 month period.
NOTE 5 - DEBT
Netco Acquisition Corp. ("Netco"), a wholly owned subsidiary of
the Company, defaulted on its note payable in the original
principal amount of $6.05 million during the first quarter, due
to failure to make the monthly payments beginning with the July
1998 payment. These payment defaults were cured in September,
1998. Following the cure, the Company has been making interest-
only payments on this loan under a written agreement with the
lender where principal and interest payments are due beginning in
March 1999. As of March 31, 1999 the remaining principal balance
of this debt of $5.5 million is classified as debt in default.
As of September 30, 1998, EqualNet was in default on its $0.4
million cash flow bridge loan obtained from Netco Acquisition,
LLC, an entity owned 50% by the Willis Group, LLC ("Willis
Group"), an affiliate of the Company, as no principal or interest
payments have been made. The principal amount is classified as
Debt in Default to an Affiliate at June 30, 1998. Effective
December 31, 1998, the loan was modified to extend its maturity
to July 31, 1999 and therefore, the Company was not in default at
the end of the current quarter.
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<PAGE>
EqualNet entered into an agreement with RFC, effective June 18,
1997, which is essentially a receivable purchase arrangement
which bases borrowing capacity on a percentage of EqualNet's
outstanding receivables up to a maximum allowable amount of $10.0
million and allows for the lender to cease funding of new
receivables without prior written notice at the lender's option.
The program fee applied to the outstanding balance of net
purchased receivables was prime plus 4.5% per annum (13% at June
30, 1998), but changed to prime plus 7% on September 17, 1998
(after the Chapter 11 filing by EqualNet). As of March 31, 1999,
the amount owed to RFC under this agreement was approximately
$1.8 million with a credit reserve of $ 106,000. This RFC
agreement was extended on July 19, 1998 and subsequently amended
and approved by EqualNet's bankruptcy court on November 23, 1998.
On July 23, 1998, the Company entered into a Loan and Security
Agreement with RFC which was subsequently amended on September 8,
1998 (the agreement as amended, "RFC Loan"). RFC loaned the
Company approximately $1.5 million. Periodic monthly principal
and interest payments of $14,812 are due commencing on November
30, 1998. The balance due on the RFC Loan is payable on June 30,
2000. Interest is payable on the outstanding principal balance in
an amount equal to the prime lending rate plus 5.5%. The RFC Loan
is secured by all of the assets of the Company and the stock of
EqualNet and USC Telecom. In connection with the RFC Loan, the
Company granted to RFC a warrant for the purchase of up to
294,000 shares of Common Stock at the exercise price equal to the
arithmetic average of the closing price of the Common Stock on
Nasdaq for the three trading days immediately preceding the
consummation of the RFC Loan. The warrant expires July 23, 2003.
Proceeds from the RFC Loan were primarily used to retire a
portion of the Greyrock Business Credit Loan which was owed by SA
Telecom (see below). After taking into account the discount
associated with the warrants, the RFC Loan is recorded on the
Company's books at March 31, 1999 in the amount of $1,047,438.
In connection with the July 23, 1998 SA Telecom acquisition, the
Company assumed a note payable to Greyrock Business Credit of
approximately $4.0 million. In August 1998, this loan was paid
off with the proceeds from various RFC loans and the proceeds
from a new $558,370 loan from Greyrock. The loan bears interest
at a rate of prime plus 2.5% and is secured by the assets of USC
Telecom. The principal balance of the Greyrock loan was due on
February 22, 1999. Greyrock has given notice of its intention to
foreclose its security interest in the event the note is not
paid. The Company is currently unable to pay the principal
balance and is in discussions with Greyrock related to amending
the loan agreement. The debt is classified as debt in default on
March 31, 1999.
In August 1998, USC Telecom entered into a receivables purchase
arrangement with RFC and used the proceeds of the initial funding
of $2.1 million to pay off a portion of the debt to Greyrock
Business Credit ("Greyrock"), which was assumed in the SA Telecom
transaction. This facility is USC Telecom's primary source of
working capital. The maximum purchase commitment amount from RFC
is $4.0 million, and the program fee is equal to the prime rate
plus 4.0%. The term of the facility is two years from the funding
date. As of March 31, 1999, the amount owed to RFC under the USC
Telecom agreement was approximately $1.8 million.
On September 2, 1998, the Company executed a loan agreement in
favor of the Willis Group in the amount of $241,106. The loan
documented certain advances which the Willis Group had made on
the Company's behalf. The Willis Group loan is secured by the
assets of the Company and each of its subsidiaries. This loan
bears interest at 11%. Effective
15
<PAGE>
December 31, 1998, the loan was modified to extend its maturity
to July 31, 1999 and, therefore, the Company was not in default
at March 31, 1999.
Effective July 31, 1998, the Company issued two 6% Senior Secured
Convertible Notes due in 2001 (the "2001 Notes") in the amount of
$1.5 million each to the Willis Group, an affiliate of the
Company, and Genesee Fund Limited Portfolio B ("Genesee"), a
British Virgin Islands corporation, both accredited investors.
The 2001 Notes are convertible into a variable number of shares
of the Company's Common Stock. The 2001 Notes bear interest at 6%
and interest payments are due each February 15, May 15, August 15
and November 15 commencing on November 15,1998. The 2001 Notes
were issued with an original issue discount ("OID") in an initial
amount of $100,000 for each note.
The 2001 Notes rank equally with all other unsubordinated debt
obligations of the Company. The Company's obligations under the
2001 Notes are secured by certain collateral pursuant to security
agreements. A holder of the 2001 Note may require the Company to
repurchase the 2001 Note if an event of default occurs. Events of
default include among other things, the Nasdaq delisting of the
Common Stock.
In connection with the issuance of the 2001 Notes, the Company
issued to each of the Willis Group and Genesee a warrant
("Warrant") to purchase 333,116 shares of Common Stock at a
purchase price of $0.9006 per share. The Warrants expire on
September 4, 2003. After taking into account the OID and an
allocation of the purchase price to the Warrants, the 2001 Notes
are recorded on the Company's March 31, 1999 Balance Sheet in the
amount of $2.6 million. As explained below, the 2001 Notes are
convertible to Common Stock at a discount to market. The net
conversion discount of $0.5 million is recorded to interest
expense and paid in capital.
Any holder of a 2001 Note may convert the 2001 Note, in whole or
in part, into shares of Common Stock at a conversion price per
share equal to the lesser of:
The product of (1) the average of the lowest sales
price of the Company's Common Stock on Nasdaq for
the five days immediately preceding the date of
conversion and (2) 85% (subject to reduction
pursuant to the terms of the 2001 Notes); and
$0.9006 (subject to reduction pursuant to the
terms of the 2001 Notes).
The holders of the 2001 Notes have verbally agreed, subject to
the execution of the definitive agreement, that, subject to
certain conditions, the conversion price of the 2001 Notes will
not be less than $.75 per share.
The Note Agreements are being submitted to the shareholders for
ratification at the annual meeting of the shareholders
tentatively scheduled to be held in July, 1999. This is being
done to comply with rules of Nasdaq Stock Market that require
shareholder approval for any transaction involving the issuance
of common stock (or securities convertible into or exercisable
for common stock) equal to 20% or more of the issuer's
outstanding common stock for less than the market value of the
common stock.
If the Note Agreements are not ratified by the shareholders at
the Meeting, the holders of the 2001 Notes and the Series D
Preferred Stock will have the right to require the Company to
redeem, at a 15% premium, all of the 2001 Notes and the Series D
Preferred Stock. The payment of the entire principal amount of
the 2001 Notes and the entire value of the outstanding Series D
Preferred Stock, and the 15% premium thereon, would have a
material adverse effect on the Company's financial condition. The
Company may not have adequate funds to effect any such
redemption. If the Company is required to effect such redemption,
the Company may be forced to seek protection under the United
States bankruptcy laws.
16
<PAGE>
In connection with the January 27, 1999 BCI transaction, USC
Telecom assumed a $1.5 million term loan payable to RFC. The note
bears interest at the prime rate plus 4.5%. The term of the
facility is two years from the funding date. As of March 31,
1999, the amount owed to RFC under the USC Telecom agreement was
approximately $1.5 million. In addition, USC Telecom assumed the
accounts receivable purchase arrangement that BCI had with RFC.
The maximum purchase commitment is $10 million with a program fee
of prime plus 3.0%. As of March 31, 1999 the amount owed to RFC
under this receivable purchase arrangement was approximately $2.1
million
In connection with the January 21, 1999 ACMI acquisition, the
Company's newly formed wholly owned subsidiary, ACMI Acquisition
Corp., assumed a note payable of $1.0 million to Union Planter's
Bank. The loan bears interest at a rate of prime plus .5% and
interest only is currently payable on a quarterly basis. The loan
continues to be secured by the personal guarantees of the two
principals from the company from which the assets were purchased
as well as two other individuals. The note is due June 11, 1999.
The amount owed to Union Planter's Bank as of March 31, 1999 was
$1.0 million.
NOTE 6 - SERIES D PREFERRED STOCK
In connection with the 2001 Notes transaction, the Company issued
to certain buyers, in the aggregate, approximately 3,750 shares
of Series D Preferred Stock in exchange for, in the aggregate,
3,000,000 shares of Common Stock and exchange fees of, in the
aggregate, $200,000. Each share of Series D Preferred Stock will
be entitled to receive dividends at a rate of $60 per share per
year, payable in cash or additional shares of Series D Preferred
Stock.
Holders of shares of Series D Preferred Stock have the right to
convert each of their shares into a number of shares of Common
Stock equal to the quotient of:
the sum of (1) $1,000 (subject to adjustment pursuant
to the Series D Preferred Stock documents), (2) accrued
but unpaid dividends to the applicable conversion date
on the share of Series D Preferred Stock being
converted and (3) accrued but unpaid interest on the
dividends on the share of Series D Preferred Stock
being converted; and
an amount equal to the lesser of:
the product of (1) the average of the lowest sales
price of the Common Stock on Nasdaq for any five
trading days during the 25 trading days
immediately preceding the conversion date and (2)
85% (subject to downward adjustment, if
applicable, pursuant to the Series D Preferred
Stock documents); and
$1.2281 (subject to reduction pursuant to the
Series D Preferred Stock documents),
subject to adjustment pursuant to the anti-dilution provisions.
The holders of the Series D Preferred Stock have agreed that,
subject to certain conditions, the conversion price of the
Series D Preferred Stock will not be less than $.75 per share.
17
<PAGE>
The Company has the option to redeem any of the shares of Series
D Preferred Stock which has not been previously converted at a
redemption price determined by a formula which includes a
substantial premium to the underlying liquidation preference. The
Series D Preferred Stock has a liquidation preference equal to
$1,000 (plus accrued and unpaid dividends plus interest thereon)
per share of Series D Preferred Stock.
The Series D Preferred shareholders can require the Company to
redeem all shares if any of a number of events occur. The Series
D Preferred shareholders have agreed to waive certain redemption
rights effective September 30, 1998, to allow the Series D
Preferred Stock to be classified as equity on the Company's
Balance Sheet as of March 31, 1999. The Company has recorded $2.0
million of Series D Preferred Stock as of March 31, 1999. This
amount was equal to the exchange fees plus the product of
3,000,000 shares of Common Stock exchanged in the transaction
multiplied by the closing price per share of Common Stock on the
date of the exchange plus the value of 44 shares and 56 shares
issued as dividends on November 15, 1998 and February 15, 1999,
respectively.
NOTE 7 - INCOME TAXES
The Company recorded a valuation allowance amounting to the
entire net deferred tax asset balance at March 31, 1999, due to
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 March 31, 1999.
NOTE 8 - LIQUIDITY AND WORKING CAPITAL DEFICIT
The Company's sole current source of capital is provided by
receivable sales agreements with RFC. The Company's two operating
subsidiaries, EqualNet and USC Telecom, have accounts receivable
purchase agreements with RFC. Funding under these agreements are
based on specific accounts receivable eligibility requirements
with the primary factor being the collections history per
account. Funding percentages have declined during the quarter due
to billing delays, errors in bills and related collections
problems.
The Company continues to incur operating deficits and is
exploring ways to increase revenue and reduce operating costs. To
operate profitably, the Company must reduce its variable long-
distance carrier costs, right-size and make efficient its back
office and administrative operations and increase revenues by
implementing new sales and marketing plans. In addition, the
Company intends to continue its strategy to acquire distressed
companies, substantially eliminate their overhead, and therefore
recognize positive cash flow from the acquired assets.
The Company recently completed the acquisitions of ACMI and the
BCI customer base (see Note 4). The Company expects to
immediately generate a profit from the former BCI customer base.
The ACMI acquisition provides sales and marketing activities the
Company needs to replace its eroding customer base. ACMI is a
network marketing company with over 2,500 agents who will be
selling the Company's long distance and other telecommunications
services. The Company has also initiated an inbound telemarketing
program using the distribution of debit cards as the mechanism to
generate incoming calls.
The Company intends to simplify its operations once EqualNet
emerges from bankruptcy. Eliminating the duplicate costs
associated with having two long distance carriers (i.e., USC
18
<PAGE>
Telecom and EqualNet) could be accomplished after the bankruptcy
plan is consummated. The Company continually assesses its long
distance carrier costs and seeks to identify alternatives to
reduce the Company's cost of service.
The Company continues to develop its strategy and is considering
a number of alternatives including expanding its service
offerings to include a number of bundled telecommunications
services.
There can be no assurance the Company will have the capital
resources necessary to implement these measures and return to
profitability. It is highly likely the Company will need
additional capital to complete the funding of the plan of
reorganization and to continue in business during its
restructuring phase. Also, the Company intends to issue 3,000,000
shares of its Common Stock to the Trustee of the Creditor's
Committee in the EqualNet Bankruptcy as partial payment of
obligations under the plan of reorganization. In addition to the
capital required to fund EqualNet's plan of reorganization, the
Company expects that it will need additional capital to fund new
marketing initiatives and new business ventures, such as
Intelesis and its proposed acquisition of NCS. The Company
believes that the rate at which it will be able to develop these
new marketing initiatives and new business ventures will be
directly related to the amount of new capital it has available.
The Company intends to raise the capital it requires for these
activities through possible private placements of its debt and
equity securities. There can be no assurance the Company will be
able to raise the capital it will require. If the Company is not
able to raise the required capital, it may have to curtail its
marketing initiatives and not be able to realize the full
potential of these or other potential business ventures.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
At September 30, 1998 EqualNet had an agreement with AT&T which
was scheduled to expire in April 2000. The agreement covered the
pricing of the services and established minimum semi-annual
revenue commitments ("MSARCs") which must be met to receive the
contractual price and to avoid shortfall penalties. The
commitment with AT&T was segregated into components
differentiated by the type of traffic. EqualNet estimated its
shortfall position to be approximately $11.6 million at the end
of the third MSARC period in October 1998. As a result of the
contract termination, EqualNet may be liable for the total amount
of the unsatisfied MSARC for the period in which the
discontinuance occurs and for 50% of the MSARCs for each semi-
annual period remaining in the contract tariff term, which
amounts to an estimate of $29.1 million.
Effective October 31, 1998, EqualNet rejected its contract with
AT&T. Any liabilities for MSARC relating to periods after the
rejection date will likely be treated in the bankruptcy as pre-
petition unsecured indebtedness. Due to the amount of EqualNet's
secured indebtedness (approximately $16.0 million), it is
unlikely AT&T would realize significant benefits even if it does
assert its claim for additional MSARC payments.
On October 31, 1998, EqualNet entered into a switchless resale
operator agreement with U.S. Republic Communications, Inc. ("U.S.
Republic"). As a result of this agreement, EqualNet was able to
replace its AT&T contract, which was rejected in bankruptcy, with
a wholesale carrier agreement with U.S. Republic. This was a
seamless transition for EqualNet's customers since U.S. Republic
provides its carrier services on the AT&T network. The term of
the agreement is month-to-month and there are no MSARC
requirements. EqualNet is required to prepay for services
provided by U.S. Republic and has entered into an agreement
whereby RFC remits funds directly to U.S. Republic.
In August, 1998, the Company executed a telecommunications
services agreement with Frontier Communications of the West, Inc.
("Frontier"). The Company's operating subsidiaries are utilizing
this switchless resale agreement to provide services to a portion
of their customers. Beginning in December, 1998, this contract
requires an MSARC of $250,000 per month. The Company has been
meeting this MSARC requirement throughout the term of the
agreement which extends to September, 2000. Frontier received a
subordinated security interest in the customers of the Company as
collateral for the extension of credit under this agreement. The
Frontier carrier agreement was amended effective March 17, 1999,
which extended the agreement to December 31, 2000.
19
<PAGE>
From time to time the Company is involved in what it believes to
be routine litigation or other legal proceedings that may be
considered as part of the ordinary course of its business.
On August 7, 1998, Robert H. Turner ("Turner") filed suit against
the Company, Mark A. Willis and Willis Group, LLC in the 61st
District Court of Harris County, Texas in case number 98-37682
alleging an unspecified amount of damages based upon an alleged
breach of his employment contract and other claims. The Company
vehemently denies any wrongdoing or liability in the matter, and
intends to vigorously defend itself in this action. Since no
significant discovery has taken place in this matter, it is
impossible to state with any degree of certainty the amount of
damages, if any, that the Company may incur, or if it will be
successful in asserting any cross claims or counterclaims it may
have in connection with the employment of Turner.
On August 13, 1998, Steverson & Company, Inc. filed suit against
the Company in case number 704,244 in the County Civil Court at
Law Number 2 of Harris County Texas, seeking damages in the
amount of $22,892.78 plus attorneys fees and court costs. The
Company maintains that these charges were for temporary services
personnel utilized by EqualNet, and not the Company. Since then,
Steverson & Company has filed a nonsuit against the Company, and
have filed their claim with the Bankruptcy Court.
On August 13, 1998, Centillion Data Systems, Inc. filed suit
against EqualNet in case number 49D029808CP001147 in the Superior
Court of Marion County, Indiana, seeking damages in the amount of
$115,490.50 for billing and other services allegedly provided to
EqualNet, plus interest, attorneys fees and court costs. The fact
that these charges are a claim in the bankruptcy proceedings of
EqualNet discussed below make it impossible at this time to state
with any degree of certainty the ultimate exposure of EqualNet in
this matter.
On September 3, 1998, the Company received a demand from New
Boston Systems through their attorneys, Steadman & Steele, for
the payment of placement fees for personnel hired by EqualNet.
Although New Boston System's engagement letter was with the
Company, the personnel it placed were hired as employees of
EqualNet. It is the position of the Company that any payment due
to New Boston Systems would be due from EqualNet and not the
Company. The amount claimed as due to New Boston Systems is
$10,526.25.
On September 15, 1998, Technigrafiks, Inc. filed suit against
EqualNet dba Creative Communications in case number 705,562 in
the County Civil Court at Law Number 1 of Harris County, Texas,
seeking damages in the amount of $24,399 for the printing of
plastic cards for debit card sales, plus interest, attorneys fees
and court costs. The fact that these charges are a claim in the
bankruptcy proceedings of EqualNet discussed below make it
impossible at this time to state with any degree of certainty the
ultimate exposure of EqualNet in this matter.
On September 17, 1998, KISS Catalog Ltd. filed suit against the
Company as assignee from Creative Communications International,
Inc. of certain contract rights from KISS Catalog Ltd. in case
number 98 CIV. 6570 in the United States District Court for the
Southern District of New York, seeking payment of $100,000 in
license fees, attorneys fees, and any royalties which may be
owing under the license agreement. On March 17, 1999 KISS Catalog
Ltd. and the Company reached a settlement where the Company made
20
<PAGE>
an initial payment of $20,000 and then will make eleven monthly
payments of $5,000 that commenced on April 16, 1999.
On September 17, 1998, Comerica Leasing Corporation filed suit in
the 270th District Court of Harris County, Texas in case number
98-44481 against the Company and EqualNet for breach of a
settlement agreement arising out of previous litigation for the
enforcement of equipment and office furnishings leases filed on
February 12, 1998 in the 157th District Court of Harris County,
Texas in case number 98-06841. A settlement agreement was entered
into by the parties dismissing the earlier litigation and adding
the Company as an obligor for the payment of the settlement
amounts. Under the terms of the settlement, EqualNet will pay
Comerica $130,000 on the effective date of the agreement, in
addition to issuing warrants for the purchase of up to 300,000
shares of the Company's Common Stock at an exercise price of
$1.50 per share and a term of five years. The Company also agrees
to pay $135,000 on or before June 30, 1999. The remaining balance
will be treated as an unsecured claim in the bankruptcy.
On September 21, 1998, Cyberserve, Inc., WSHS Enterprises, Inc.
and William Stuart (collectively "Bluegate") filed suit in the
215th District Court of Harris County, Texas in case number 98-
45115 against the Company, Willis Group, LLC, Mark A. Willis, and
Netco Acquisition LLC alleging damages for breach of contract,
breach of an employment agreement, fraud and fraud in the
inducement, statutory fraud in a stock transaction, tortious
interference with a contract, conspiracy, and quantum meruit. The
matters complained of originated with a letter of intent dated on
or about October 28, 1997, wherein the Company proposed the
purchase of certain assets of Cyberserve, Inc. and WSHS
Enterprises, Inc. subject to the performance of due diligence by
the parties. Bluegate and certain of its shareholders had
threatened to sue the Company in the event the proposed
transaction was not consummated substantially in conformity with
the terms set forth in the Letter of Intent. The damages Bluegate
alleges it incurred were as a result of, among other things, the
claimed modification of its business to its detriment in
anticipation of the integration of its operations with those of
EqualNet. It is impossible to determine with any degree of
certainty what, if any, liability EqualNet, or any of its
subsidiaries, may incur in this matter. The total amount of
damages are unspecified, but include a demand for a cash payment
of $685,000, a sufficient number of shares of Common Stock of the
Company for the payment of $585,000, an additional 525,000 shares
of Common Stock, and other damages. The Company vehemently denies
any wrongdoing or liability in this matter and intends to
vigorously defend itself against all claims of the plaintiffs.
On September 29, 1998, SA Telecommunications Incorporated
asserted claims pursuant to the Purchase Agreement against USC
Telecom, Inc. and the Company for (i) $654,934 in operating
losses for the period from April 1 through July 22, 1998, (ii)
$278,377 for damages for delayed or unbillable revenue through
USBI/ZPDI, (iii) reimbursement of $8,149 for switch site leases,
(iv) payment of Specified Network Contracts Liabilities (amount
not specified), (v) delivery of 5,358 shares of Series C
Preferred escrowed at closing, and (vi) for return of certain
leased equipment not owned by SA Telecommunications but
previously in its possession and allegedly removed by EqualNet or
USC Telecom. On December 28, 1998, the court signed an order
approving SA Telecom's claims in the amount of $812,772. The
Company and USC Telecom disputed the monetary claims asserted by
SA Telecommunications in its demand and have filed a notice of
appeal of the court's order in these proceedings.
During the past several months, EqualNet and the Company have
experienced severe liquidity problems and have received numerous
notices of default in payment of trade
21
<PAGE>
creditors and other financial obligations. As a result of these
liquidity problems and other matters, on September 10, 1998,
EqualNet filed for protection under Chapter 11 of Title 11 of the
United States Code, in case number 98-39561-H5-11 in the United
States District Court for the Southern District of Texas and
Wholesale filed for protection under Chapter 11 of Title 11 of
the United States Code, in case number 98-39560-H4-11 in the
United States District Court for the Southern District of Texas.
On October 2, 1998, Wholesale filed a motion seeking to convert
its Chapter 11 reorganization proceeding to a Chapter 7
liquidation proceeding. It is impossible to state at this time
whether or not EqualNet as a debtor in bankruptcy will be able to
reorganize its liabilities or to confirm a plan of reorganization
in bankruptcy.
On March 30, 1999, Chas. P. Young filed suit against the Company
in case number 99-15940 in the 164th District Court of Harris
County, Texas seeking damages in the amount of $60,653 plus
interest and attorneys fees and court costs. The Company has
denied that it owes the full amount sought to be recovered by the
plaintiff in the action. At this time, it is impossible to state
with any degree of certainty the amount of the Company's
liability in this matter.
NOTE 10 - SUBSEQUENT EVENTS
The Company's Common Stock began trading on the Nasdaq SmallCap
Market on May 7, 1999, subject to certain contingencies and via
an exception to the normal continued listing requirements of
Nasdaq.
This change occurred as a result of a Nasdaq panel's decision
dated May 5, 1999, following a hearing held February 4, 1999, on
the continued listing of the Company's Common Stock on the Nasdaq
National Market. While the panel ruled that the Company had
failed to meet the minimum bid price and net tangible asset
requirements, the Company was granted a temporary exception from
these standards, subject to the Company meeting certain
conditions. Specifically, in addition to the standard
requirements for listing on the Nasdaq SmallCap Market, on or
before June 1, 1999, the Company must make a public filing with
the SEC and Nasdaq evidencing a minimum of $10 million in net
tangible assets and a closing bid price of $1.00 per share.
Immediately after June 1, 1999, the minimum bid price for the
Company's Common Stock must meet or exceed $1.00 per share for a
minimum of ten consecutive trading days.
The Company believes that it can meet these conditions, however
there can be no assurance that it will do so. If at some future
date the Company's Common Stock should cease to be listed on the
Nasdaq SmallCap Market, it may continue to be listed in the OTC-
Bulleting Board. Such delisting could have an adverse effect on
the liquidity of the Company's Common Stock.
The Company has informed Nasdaq that it intends to propose to its
shareholders at the Company's next annual meeting that they
approve giving the Company's Board of Directors the discretionary
authority to effect a reverse split of the Company's Common stock
if such reverse split is deemed by the Board to be essential for
the Company conforming to Nasdaq's minimum bid price requirement.
The Company anticipates that its next annual meeting of
shareholders will occur sometime in July,1999.
On January 10, 1999, EqualNet Corporation filed a Disclosure
Statement in its bankruptcy proceedings which included a proposed
plan of reorganization (the "Plan"). The Company was a co-
proponent of the Plan. As a result of negotiations with the
committee of unsecured creditors of EqualNet, EqualNet filed an
amended Disclosure Statement on February 9, 1999. The bankruptcy
court approved the amended Disclosure Statement on March 1, 1999.
The creditors of EqualNet approved the Plan and the bankruptcy
court confirmed the Plan on April 27, 1999. The Plan, if
consummated, will result in the exchange of approximately 3
million newly issued shares of the Company's Common Stock and
$1.35 million in cash to a newly created trust for the benefit of
the unsecured creditors of EqualNet and the elimination of
approximately $15 million of unsecured debt of EqualNet.
22
<PAGE>
The Company subsequently obtained commitments from two investor
groups (the "Investors") to provide the $3.6 million required for
the consummation of the Plan and entered into a definitive
agreement with the Investors for their investment in the Company.
These Investors have notified the Company that it is in breach of
its obligations under the terms of the agreement and that they do
not intend to complete the funding and stock purchase. The
Company vehemently denies that it has breached its obligations
under the agreement. However, the Company also is engaged in
negotiations with other prospective sources of funding for the
consummation of the Plan, in the event that the Investors, for
any reason, fail to provide funding as provided in the agreement.
There can be no assurance that the Company will be able to raise
the capital required to consummate the Plan.
On April 20, 1999, the Company signed a definitive agreement for
the acquisition of The Intelesis Group, Inc. ("Intelesis") and a
related entity in a transaction potentially valued at up to $22.5
million. Equalnet has agreed to issue 2.5 million shares of its
Common Stock to Intelesis along with a one-year "earn-out"
opportunity of up to $20 million, which, if achieved, would
represent approximately a $50 million annual revenue run rate for
Intelesis at that time. Intelesis is a development stage company
that holds pending patent and trademark rights to
"FreeCaller(TM)," an advertiser-sponsored, residential
telecommunications service that allows subscribers to make
domestic long distance calls for free in exchange for listening
to a 30-second advertisement. Intelesis has not yet generated any
revenue.
On April 7, 1999, the Company entered into a Letter of Intent to
acquire Network Communications Solutions, LLC ("NCS"), a
privately held Internet service provider, and Web host and design
firm for total purchase price consideration of $1 million,
payable in common stock of the Company. The Company currently is
conducting due diligence on NCS and negotiating a definitive
agreement for the acquisition of NCS. There can be no assurance
that the acquisition of NCS will be consummated.
On October 19, 1998, the Company signed an agreement with S4
Communications Corporation ("S4") to a acquire all of the equity
interest of S4. S4 is a provider of telecommunications services
in the Chicago, Illinois area. Closing of the transaction was
subject to the satisfactory completion of due diligence. The
Company does not currently intend to consummate this transaction.
On February 5, 1999, the Company entered into a subscription
agreement with LaMonda Management Family Limited Partnership
("LaMonda"). Pursuant to the terms of the agreement, LaMonda
purchased 769,000 shares of the Company's Common Stock, plus
warrants to purchase up to 50,000 shares of common stock at an
exercise price of $1.00 per share for one (1) year, plus warrants
to purchase up to 50,000 shares of common stock at an exercise
price of $1.50 per share for two (2) years, plus warrants to
purchase up to 50,000 shares of Common Stock at an exercise price
of $2.00 for three (3) years, for total consideration of
$500,000.
NOTE 11 - FIXED ASSETS
During fiscal year 1998, the Company acquired nine
telecommunications switches (the "Switches") from the Willis
Group, LLC ("Willis Group") for $7.6 million of aggregate
consideration. In a related transaction, the Company acquired
Netco, a corporation controlled by the Willis Group, which held
certain intangible rights related to the operation of the
Switches and assets previously acquired by the Willis Group. The
Company acquired Netco for $5.6 million in aggregate
consideration. As a result of these two transactions, the Company
recorded $13.2 million as its cost basis of the Switches and
related network. The Company incurred additional direct cost to
purchase, install and implement the Switches
23
<PAGE>
and related network of approximately $1 million which have been
capitalized as cost of the Switches and related network.
Netco, the owner of the Switches, subsequently entered into an
agreement with EqualNet whereby EqualNet assumed the operating
responsibilities of the Switches. EqualNet incurred substantial
costs in the fourth quarter of fiscal 1998 in extending the
network's access to most of the large metropolitan areas in the
United States in anticipation of a national marketing effort.
This marketing effort did not produce significant revenue due to
EqualNet's internal provisioning problems and the lack of
sufficient capital. Utilization of the Switches and national
network without sufficient traffic to support the fixed costs
created negative operating margins and created an event that
indicated the $14.2 million asset might be impaired.
In October 1998, EqualNet completed the process of turning off
the Switches and network in an effort to reduce significant fixed
charges. At that time, the Company intended to reconfigure the
network in Texas and Southern California to improve operating
margins on customers located in those geographical areas. The
Company has not, however, completed this reconfiguration and may
not do so. The Company has started a program to partition or
lease ports on the Switches to other carriers. The Company has
entered into one agreement to partition approximately 110 ports
from its Texas Switches. However, the party that has partitioned
the ports currently is not using or paying for all the ports that
it has agreed to partition. EqualNet has successfully interfaced
and integrated the ports with the customer, but the customer is
having difficulty ramping up their international customer base,
and therefore, are currently not able to pay EqualNet. EqualNet
has allowed this customer to build up their business and customer
base before they are required to fully pay EqualNet what they are
owed. The entire network of Switches has over 1,400 ports.
As of March 31, 1999, the Company classified the Switches and
network as operating assets and has supported the carrying value
of the assets through a projected undiscounted cash flow analysis
based on the partitioning ports program plan as discussed above.
Additionally, as part of the plan of reorganization and plan to
return the Company to profitability, the Company will continue to
evaluate the best economic use of the Switches and related
network. As part of this continued evaluation, the Company may
elect to sell all or a portion of the Switches and related
network. Management believes that the carrying value of the
assets will be realized through the operations of the assets or a
combination of operating the assets and potential sale of the
assets. However, it is reasonably possible that the undiscounted
cash flows may change in the near future resulting in the need to
write-down those assets to fair value.
NOTE 12 - SHAREHOLDER'S EQUITY
The Company issued 420,000 shares of its Common Stock in March
1999 to third parties in consideration for services rendered and
for full satisfaction of amounts due. This included the issuance
of 100,000 share of its Common Stock to satisfy the severance
agreement made between the Company and Mr. Michael Hlinak on
April 1, 1998 and 320,000 shares to satisfy services rendered by
other third parties.
On January 21, 1999, the Company entered into a subscription
agreement with Kevin Pirolo whereby Mr. Pirolo committed to
purchase $2 million of Common Stock of the Company at a purchase
price per share equal to 90% of the average closing price per
share of Common Stock for the ten trading days prior to the date
of the confirmation of the Plan. As of May 24, 1999 the shares
had not been purchased.
24
<PAGE>
NOTE 13 - RELATED PARTY TRANSACTIONS
In March 1999, the Company issued 136,296 shares of its Common
Stock to Directors of the Company in satisfaction of amounts owed
for unpaid Director fees. Ronald J. Salazar, a director of the
Company, was also issued 30,000 shares of the Company's Common
Stock for satisfaction of services rendered.
On January 21, 1999, the Company closed a transaction dated
effective December 31, 1998 for the acquisition of substantially
all of the assets of Limit, LLC, a Tennessee limited liability
company. Zane Russell, a director of the Company at the time of
the closing of the transaction, was paid 105,000 shares of Common
Stock as a fee for his role in completing this transaction. See
ACMI Purchase Agreement - Exhibit 10.1.
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 March 31, 1999 increased 62.1% to
$9.3 million compared to sales of $5.8 million for the same period of
the prior year. Gross margin increased during the current quarter to
$1.9 million compared to a gross margin of $1.1 million for the same
period of the prior year. The net loss for the three months ended
March 31, 1999, was $5.1 million and included no tax benefit. The net
loss for the corresponding period in the previous year was $4.0
million and included no tax benefit.
Sales for the nine months ended March 31, 1999 increased 23.2% to
$25.4 million from $20.6 million for the same period of the previous
year. Gross margin decreased for the nine month period 88.9% to $0.5
million from $4.9 million for the comparable period the prior year.
Much of this decrease is attributable to a write off of accounts
receivable of $3.3 million in the second quarter of this year. The
net loss for the nine months ended March 31, 1999 was $19.2 million
and included no tax benefit. The net loss for the corresponding
period in the previous year was $8.5 million and included no tax
benefit.
The following table sets forth for the fiscal periods indicating the
percentages of total sales represented by certain items reflected in
the Company's consolidated statements of income:
25
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 80.5% 79.8% 76.0% 97.8%
----------- ------------ ------------ -----------
Gross margin 19.5% 20.2% 24.0% 2.2%
Selling, general & administrative expenses 65.0% 24.1% 43.8% 33.5%
Depreciation and amortization 19.9% 40.0% 16.0% 35.0%
----------- ------------ ------------ -----------
Operating income (loss) (65.4%) (44.0%) (35.8%) (66.3%)
Other income (expense)
Interest income 0.1% 0.0% 0.0% 0.0%
Interest expense (4.3%) (7.7%) (5.7%) (7.8%)
Miscellaneous (0.5%) (0.6%) 0.4% (0.2%)
----------- ------------ ------------ -----------
(4.7%) (8.3%) (5.3%) (8.0%)
Loss before federal income taxes
and reorganization cost (70.1%) (52.3%) (41.1%) (74.3%)
Provision for federal income taxes 0.0% 0.0% 0.0% 0.0%
----------- ------------ ------------ -----------
Net Loss before reorganization costs (70.1%) (52.3%) (41.1%) (74.3%)
Reorganization costs 0.0% (2.5%) 0.0% (1.5%)
----------- ------------ ------------ -----------
Net Loss (70.1%) (54.8%) (41.1%) (75.8%)
=========== ============ ============ ===========
</TABLE>
Sales
-----
The Company's sales in the three months ended March 31, 1999 increased
62.1% to $9.3 million compared to $5.8 million for the comparable period of
the prior year. The increase was due primarily to an increase in customer
accounts as a result of several acquisitions this fiscal year. During the
current quarter, the Company reported sales of $2.7 million related to the
customers acquired on July 23, 1998 from SA Telecom and $3.6 million
related to customers acquired from the BCI transaction on January 27, 1999.
Sales resulting from the January 1999 acquisition of ACMI were $0.2 million
for the current quarter. Excluding sales from the acquired customers, the
Company's historical customer base experienced a decrease in sales of 51.7%
to $2.8 million in the current quarter compared to $5.8 million for the
comparable period of the prior year. Increasing customer attrition has
caused this decline in sales that has also resulted in a corresponding
decrease in billable minutes. The billable minutes for this historical
customer base for the three months ended March 31, 1999 decreased 23.3% to
13.8 million from 18.0 million for the same period last year. The customer
base acquisitions of the company in this fiscal year have resulted in an
increase in total billable minutes for the current quarter of 137.2% to
42.7 million minutes from 18.0 million minutes for the same period of the
prior year. The acquired SA Telecom customer base generated 19.3 million
billable minutes and the acquired BCI customer base generated 9.6 million
billable minutes in this quarter.
For the nine months ended March 31, 1999, sales increased 23.2% to $25.4
million compared to $20.6 million for the same period in the previous year.
Sales during the first, second, and third quarters of
26
<PAGE>
fiscal 1999 from the July 23, 1998 SA Telecom customer base acquisition
were $3.5, $3.8, and $2.7 million, respectively. The BCI transaction which
occurred in the current quarter generated $3.6 million in sales and the
ACMI transaction generated $0.2 million in revenue in this period. The
Company's historical customer base experienced a decrease in sales for the
nine months ended March 31, 1999 of 43.9% to $11.5 million compared to
$20.6 million for the same period in the previous year. This resulted from
a decrease in billable minutes for this customer base of 30.7% to 46.9
million minutes from 67.7 million minutes for the nine months ended March
31, 1999. The total billable minutes for the Company increased 80.4% to
122.1 million minutes from 67.7 million in the same period the previous
year. The acquired SA Telecom base generated billable minutes of 22.2,
24.1, and 19.3 million for the first, second, and third quarters of this
fiscal year, respectively. The newly acquired BCI customer base generated
9.6 million minutes for the current period. Although several key
acquisitions have improved the Company's sales and billable minutes from
the same period the prior year, the Company has experienced increased
customer attrition. The Company has only recently initiated an expansion of
several existing sales channels and the development of key alternative
sales channels to allow significant future growth.
Cost of Sales
-------------
The cost of sales for the three months ended March 31, 1999, increased
60.7% to $7.5 million compared to $4.6 million for the comparable period of
the prior year. The current quarter increase was primarily attributable to
additional costs associated with the BCI and SA Telecom billings. Cost of
sales for the nine months ended March 31, 1999 increased 58.7% to $24.8
million compared to $15.6 million for the same period last year. Included
in this increase is a $3.3 million write off of accounts receivable in the
second quarter. In addition to the write off, the primary cause of this
increase relates to lower rates per billed minute for the acquired SA
Telecom customer base as compared to the Company's historical customer
base.
The Company's cost of long-distance (which is a component of cost of sales)
for the three months ended March 31, 1999 increased as a percentage of
sales to 57.4% from 55.0% for the comparable period in the previous year.
The cost of long distance for the nine months ended March 31, 1999
increased to 66.1% from 53.9% for the comparable period of the previous
year. The increase in the percentage in the fiscal year is the result of
the costs associated with the Company's network of switches ("Network") and
higher costs related to SA Telecom customers. The cost of long distance for
the SA Telecom customer base was 38.4% of sales for the current quarter.
The cost of long distance related to the BCI customers was $0.9 million for
the quarter. The total long distance costs during the first, second and
third quarters of fiscal 1999 of $5.3, $6.1 and $5.4 million, respectively,
includes approximately $.2, $1.7 and $0.0 million, respectively, related to
the Network.
Commission expense as a percent of sales decreased to 1.2% for the third
quarter of fiscal 1999, compared to 11.5% for the third quarter of fiscal
1998. EqualNet discontinued paying commissions as a result of rejecting its
agent agreements in its bankruptcy case. Commission expenses, as a percent
of sales for the nine months ended March 31, 1999, was 4.0% as compared to
8.4% in the prior period.
Billing expense as a percentage of sales increased to 14.5% for the three
months ended March 31, 1999 compared to 8.0% for the same period in the
previous year. This increase is attributable to the acquisition of the BCI
customers in the third quarter that bill exclusively through Local Exchange
Carriers ("LECs"). The cost of billing through LECs is generally greater
than billing customers directly. Billing expense for the nine months ended
March 31, 1999 increased to 8.8% compared to 8.0% in the same period in
fiscal 1998. Billings through the LECs represented 75.0% and 46.6% of the
Company's revenues for the nine months ended March 31, 1999 and 1998,
respectively.
27
<PAGE>
Bad debt expense as a percentage of sales for the three and nine months
ended March 31, 1999 was 6.3% and 18.3%, respectively, as compared to 6.2%
and 5.4%, respectively, for the three and nine months ended March 31, 1998.
The increase resulted from a $3.3 million write off of accounts receivable
in the second quarter.
Selling, General and Administrative Expenses
--------------------------------------------
Selling, general and administrative expenses decreased to $2.3 million for
the three months ended March 31, 1999 as compared to $3.7 million for the
same period of the prior year. Selling, general and administrative expenses
decreased as a percentage of sales to 24.1% for the three months ended
March 31, 1999, from 65.0% for the same period of the prior year. The
decrease in selling, general and administrative expenses as a percentage of
sales relates to the increase in the Company's revenues during the current
three month period. For the nine months ended March 31, 1999, selling,
general and administrative expenses decreased to 33.5% of sales from 43.8%
of sales for the same period last year.
Salary expense decreased $279,790 for the quarter ended March 31, 1999,
compared to the same quarter of the previous year and decreased by $105,186
for the nine months ended March 31, 1999 versus the same period in 1998.
During the comparative three month periods, departmental direct expenses
including reorganization costs decreased $1.2 million. Departmental
expenses increased by $390,537 during the nine month period ended March 31,
1999 compared to the same period last year. The increase in departmental
expenses for the nine months resulted in part from an increase in legal and
professional fees associated with EqualNet's bankruptcy and other
transactions and registration fees associated with USC Telecom.
Depreciation and Amortization
-----------------------------
Depreciation and amortization increased 226.0% to $3.7 million for the
quarter ended March 31, 1999, as compared to $1.1 million for the same
period in the previous year. Depreciation and amortization expense
increased 168.6% for the nine month period ended March 31, 1999 over the
same period of 1998. The increase relates to current quarter costs for
depreciation of the Network of $0.6 million, amortization of the SA Telecom
customer acquisition costs of $2.1 million, amortization of the acquired
BCI customer base of $.2 million and amortization of the acquired ACMI
marketing agent contracts of $.2 million. The Company did not own any of
these assets during the same period of the prior year.
Liquidity and Capital Resources
-------------------------------
The Company utilized $3.1 million in cash flow from operations for the nine
months ended March 31, 1999, compared to utilizing $1.0 million for the
same period of the prior year. Cash flow deficits in the current nine
months were attributable to operating losses incurred by the Company.
Cash used in investing activities totaled $1.1 million for the nine months
ended March 31, 1999, compared to $7.9 million for the same period of the
previous year. The primary use of cash for investing activities during the
period ended March 31, 1999, was for cash paid in connection with the SA
Telecom acquisition and for cash paid for property, plant and equipment.
Net cash generated in financing activities was $4.5 million for the nine
months ended March 31, 1999, compared to the generation of $11.1 million
for the same period of the previous year. The majority of this amount was
generated from the proceeds received from the issuance of the 2001 Notes
and an increase in funds available under the Company's receivables funding
arrangement as a result of the Company's purchase of BCI's residential
long distance customers from RFC.
28
<PAGE>
As more fully described in Note 5 to the Consolidated Financial Statements,
the Company is submitting to its shareholders for approval of the 2001 Note
and Series D Preferred Stock transactions. If these transactions are not
approved, the shareholders have the right to require the Company to redeem
the 2001 Notes and Series D Preferred Stock. The Company does not have
adequate funds to effect such redemption.
As discussed in the notes to the financial statements, the Company has
significant potential additional liabilities which might result from the
bankruptcy proceedings or reorganization. The Company currently does not
have the capital to settle these potential future liabilities. The Company
will continue to seek additional capital should these liabilities
materialize. However, no assurance can be made that such capital will be
available to meet these potential obligations and the Company may be
required to seek additional protection under the bankruptcy laws.
It is highly likely the Company will need additional capital to complete
the funding of the plan of reorganization and to continue in business
during its restructuring phase. Also, the Company intends to issue
3,000,000 shares of its Common Stock to the Trustee of the Creditor's
Committee in the EqualNet Bankruptcy as partial payment of obligations
under the plan of reorganization. In addition to the capital required to
fund EqualNet's plan of reorganization, the Company expects that it will
need additional capital to fund new marketing initiatives and new business
ventures, such as Intelesis and its proposed acquisition of NCS. The
Company believes that the rate at which it will be able to develop these
new marketing initiatives and new business ventures will be directly
related to the amount of new capital it has available. The Company intends
to raise the capital it requires for these activities through possible
private placements of its debt and equity securities. There can be no
assurance the Company will be able to raise the capital it will require. If
the Company is not able to raise the required capital, it may have to
curtail its marketing initiatives and not be able to realize the full
potential of these or other potential business ventures.
29
<PAGE>
Year 2000 Readiness Disclosure
------------------------------
The Company's Year 2000 ("Y2K") project is intended to address potential
processing errors in computer programs that use two digits, rather than
four, to define the applicable year. The Company is providing Y2K
disclosure because its assessment of Y2K issues is not complete and because
if these issues are not resolved by its software vendors and its underlying
carriers (i.e., MCI Worldcom, AT&T, Frontier and others), it will have
material adverse consequences to the Company.
State of Readiness
------------------
The Company's Y2K issues relate primarily to its internal billing systems,
the Network and the systems of its third party carriers. The Company uses
two billing systems, the CostGuard system developed by IDI, which utilizes
Microsoft's SQL Server software, and a system internally developed by BCI
with a Novell platform. The Company believes the BCI billing system is Y2K
compliant, however, the CostGuard system is not Y2K compliant. The Company
is relying on IDI and Microsoft to modify these systems to be Y2K
compliant. Each of these companies is developing system modifications to be
Y2K compliant. The Company does monitor the progress of its software
vendors and anticipates receiving Y2K compliant versions of its billing
software no later than September 30, 1999.
The Company's Network comprises nine switches manufactured by Siemens
Telecom Networks ("Siemens"). These switches utilize software that is not
currently Y2K compliant. The Company has received a commitment from Siemens
that it will provide Y2K compliant software prior to the end of the
calendar year 1999.
The Company provides its customers with long distance telephone services
through resale agreements utilizing the networks of AT&T, Frontier
Communications, MCI Worldcom and Qwest Communications. These are very large
public companies with the resources necessary to develop and maintain Y2K
compliant systems. The Company monitors Y2K development activities of these
companies primarily through their public disclosures concerning Y2K.
The Company is in the process of auditing its existing computer hardware
for Y2K compliance and making required changes.
With regard to Equalnet's plan for non-information technology systems Year
2000 compliance, Equalnet has identified three key areas to address: 1)
phone service; 2) building/facilities issues; and 3) document retention.
Equalnet operates a computerized phone system that could be vulnerable to
Year 2000 issues. Equalnet is in the process of evaluating this phone
system and will make corrections as necessary. However, it is possible that
an unforeseen problem could still prevent the computerized phone system
from operating properly. Equalnet is currently considering adding
additional personnel qualified to correct problems with the phone system
that may occur.
The building that the corporate offices are located in has computerized
building and secure area access, computerized elevator control, and might
possibly have computerized climate controls and sprinkler systems. To
address any Year 2000 issue that may arise, Equalnet is in the process of
requesting a representative of the building management company to be
available to handle any building-specific problems such as keyed rather
than computerized access to secure areas. Additionally, Equalnet employees
will be prepared to take additional corrective measures such as using
stairs instead of elevators and dressing appropriately for any climate
control problems. Special accommodations may be necessary for Equalnet
employees with handicaps and company management may determine that
30
<PAGE>
conditions exists such that it is necessary to close down the company's
corporate offices for a period of time required to correct any Year 2000
problems related to the building.
Immediately prior to the end of the year, Equalnet will make a computerized
backup of all its software and data. Additionally, certain sensitive
documents such as bank account records and customer lists will also be
reduced to paper. Notwithstanding these plans, it is still possible that a
Year 2000 related problem may result in the loss of data. Equalnet has on
staff several information technology experts who will attempt data
recovery, but it is possible that permanent data loss may occur and
additional costs and expenses will be incurred as a result.
Costs
-----
To date, the Company has not expended any money to deal with Y2K issues. It
does, however, anticipate purchasing software updates from its third party
billing system vendors to update its system to be Y2K compliant. Although
the Company has not received quotes from these vendors, it does not believe
its Y2K software upgrade costs will exceed $100,000. The Company is not
obligated to bear any costs related to the Y2K compliant costs being
incurred by its underlying carriers.
Risks
-----
The Company is engaged in the long distance telecommunications business
and, therefore, connects directly with hundreds of other carriers. While
many carriers have announced plans to assess and remediate their networks,
there is risk that some carriers will not address or resolve Y2K issues.
Failure of these carriers to resolve Y2K issues could result in disruption
of service to the Company's customers or the inability to bill for
services. These problems could result in the Company either losing its
customers or misbilling its customers for long distance services until the
problem is remediated.
The Company's Network has a $10.7 million book basis as recorded on its
consolidated balance sheet at March 31, 1999. If Siemens is unable to
develop and provide the Company with Y2K compliant software, the value of
the Network will be substantially impaired.
The billing system utilized by the Company has been developed by third
party vendors and currently is not Y2K compliant. Without these billing
systems, the Company cannot bill its customers or collect for services. The
inability of these systems to function after 1999 would severely impair the
Company's ability to continue its business.
Contingency Plans
-----------------
The Company is monitoring its Y2K issues relating to the progress being
made by its software vendors, Siemens and its underlying carriers. The
Company does not have any significant internally developed software
required to conduct its business, therefore, it does not require
significant internal assessment or development plans. The Company
anticipates being Y2K compliant by the end of 1999, but cannot control
issues that involve other carriers and outside vendors. The Company is
monitoring Y2K issues of its carriers and software vendors and, to the
extent the Company becomes aware of Y2K compliance problems of those
companies, it intends to move its client base to Y2K compliant carriers or
purchase Y2K compliant software. There can be no assurance that the Company
will be able to utilize the services of any Y2K compliant carrier or
acquire Y2K compliant software needed to utilize its Network or bill or
service its clients.
31
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
No significant change.
32
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time the Company is involved in what it believes to be routine
litigation or other legal proceedings that may be considered as part of the
ordinary course of its business.
On September 29, 1998, SA Telecommunications Incorporated ("SA Telecom")
asserted claims pursuant to the Purchase Agreement against USC Telecom,
Inc. and the Company for (i) $654,934 in operating losses for the period
from April 1 through July 22, 1998, (ii) $278,377 for damages for delayed
or unbillable revenue through USBI/ZPDI, (iii) reimbursement of $8,149 for
switch site leases, (iv) payment of Specified Network Contracts Liabilities
(amount not specified), (v) delivery of 5,358 shares of Series C Preferred
escrowed at closing, and (vi) for return of certain leased equipment not
owned by SA Telecommunications but previously in its possession and
allegedly removed by EqualNet or USC Telecom. On December 28, 1998, the
court signed an order approving SA Telecom's claims in the amount of
approximately $812,772. The Company and USC Telecom disputed each of the
claims asserted by SA Telecommunications in its demand and have filed a
notice of appeal of the court's order in these proceedings.
On September 10, 1998, EqualNet filed for protection under Chapter 11 of
Title 11 of the United States Code, in case number 98-39561-H5-11 in the
United States District Court for the Southern District of Texas and
Wholesale filed for protection under Chapter 11 of Title 11 of the United
States Code, in case number 98-39560-H4-11 in the United States District
Court for the Southern District of Texas. On October 2, 1998, Wholesale
filed a motion seeking to convert its Chapter 11 reorganization proceeding
to a Chapter 7 liquidation proceeding. It is impossible to state at this
time whether or not EqualNet as a debtor in bankruptcy will be able to
reorganize its liabilities or to confirm a plan of reorganization in
bankruptcy.
On March 30, 1999, Chas. P. Young filed suit against the Company in case
number 99-15940 in the 164th District Court of Harris County, Texas seeking
damages in the amount of $60,653 plus interest and attorneys fees and court
costs. The Company has denied that it owes the full amount sought to be
recovered by the plaintiff in the action. At this time, it is impossible to
state with any degree of certainty the amount of the Company's liability in
this matter.
Item 2. Changes in Securities
33
<PAGE>
On January 4, 1999, the Company issued an additional 5,358 shares of its Series
C Preferred Stock to SA Telecommunications, Inc. as payment of the withheld
purchase price from the purchase of assets on July 23, 1998 previously approved
at the meeting of shareholders held on June 30, 1998. The Company also issued
3,596 shares of its Series C Preferred Stock to the holder of the Series C
Preferred Stock as dividends due on this series of preferred stock, payable in
kind.
On January 21, 1999, the Company closed a transaction dated effective December
31, 1998 for the acquisition of substantially all of the assets of Limit, LLC, a
Tennessee limited liability company, in exchange for the issuance of 1,000,000
shares of Common Stock. There are earn out provisions based upon future
performance that could result in the issuance of up to an additional 1,500,000
shares of Common Stock. Zane Russell, a director of the Company at the time of
the closing of the transaction, was paid 105,000 shares of Common Stock as a fee
for his role in completing this transaction. See ACMI Purchase Agreement -
Exhibit 10.1.
On January 27, 1999 the Company issued to RFC Capital Corporation a warrant for
the purchase of 300,000 shares of Common Stock at an exercise price of
approximately $1.33 per share, subject to adjustment (the "RFC Warrant"). The
RFC Warrant is excisable for a period of five years. The RFC Warrant was issued
in connection with the acquisition of a customer base and related accounts
receivable of Brittan Communications International, Inc. ("BCI") by USC Telecom,
Inc. at a foreclosure sale conducted by RFC Capital Corporation as a secured
creditor of BCI.
On February 3, 1999, the Board of Directors approved the formation of the
Equalnet Communications Corp. Independent Contractor Stock Option Plan, which
plan is to be administered by a committee of the Board of Directors, authorized
to compensate independent contractors providing services for the Company and its
subsidiaries with grants of stock, stock options and/or stock appreciation
rights. A total of 3,000,000 shares were initially reserved for issuance. There
have not yet been any grants of stock, options or stock appreciation rights
pursuant to the terms of the plan.
On February 15, 1999, the Company issued 56 shares of its Series D Preferred
Stock to the holders of the Series D Preferred Stock as dividends due on this
series of preferred stock, payable in kind.
On March 9, 1999, the Board of Directors satisfied several outstanding
obligations of the Company with the issuance of Common Stock. These obligations
included the issuance of 320,000 shares of Common Stock to Vinson & Elkins LLP
for payment of legal fees and expenses, the issuance of 100,000 shares of Common
Stock to Michael L. Hlinak in settlement of all amounts due pursuant to a
severance agreement entered into earlier with Mr. Hlinak, and the issuance of
30,000 shares of Common Stock in payment for consulting services rendered by
Director Ronald J. Salazar during calendar year 1998. In addition, Directors
agreed to accept shares of Common Stock in lieu of directors fees due to non-
employee directors since being elected to serve as directors of the Company.
Each director waived the right to be compensated for director fees for any
period of time that they were otherwise compensated as either an employee or
independent contractor or consultant for the Company. The number of shares of
Common Stock issued to each director were as follows: Mark A. Willis received
30,747 shares, Mitchell H. Bodian received 23,777 shares, John Isaac "Ike" Epley
received 19,243 shares, Ronald J. Salazar received 62,529 shares. Shares were
valued at $0.50 per share. The average of the high and low bid price for the
Common Stock on the date of the approval of the payment of these fees was
$0.4845.
On March 9, 1999, the Company issued to Market Pathways Financial Relations,
Incorporated a warrant for the purchase of a total of 250,000 shares of Common
Stock, the first portion for the purchase 83,333 shares at an exercise price of
$1.125 per share, vesting immediately, the second portion for the purchase
83,333 shares at an exercise price of $1.75 per share, vesting one half
immediately and one half on August 30, 1999, and a third portion for the
purchase of 83,334 shares at an exercise price of $2.50 per share, vesting on
August 30, 1999. The warrant is exercisable for a period of five years. Market
Pathways continues to provide financial public relations services for the
Company.
Item 3. Defaults upon Senior Securities
The Company has not made the dividend payments required under the Series A
Preferred Stock agreement. The holder of the stock has agreed to amend the
Series A Preferred Stock agreement. If said
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agreement is approved by the Company's shareholders at the next shareholder
meeting, the Company will no longer be in default on the Series A Preferred
Stock.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS:
-------------------------------------------------
This Quarterly Report on Form 10-Q includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). All statements other than statements of historical
facts included in this report, including without limitation, statements
regarding the Company's financial position, business strategy, products,
products under development, markets, budgets and plans and objectives of
management for future operations, are forward-looking statements. Although
the Company believes that the expectation of such forward-looking
statements are reasonable, it can give no assurance that such expectations
will prove to have been correct. Important factors that could cause actual
results to differ materially from the Company's expectations ("Cautionary
Statements") are disclosed under "Cautionary Statements" and elsewhere in
this Report, including, without limitation, in conjunction with the
forward-looking statements included in this Report. All subsequent written
and oral forward-looking statements attributable to the Company, or persons
on its behalf, are expressly qualified in their entirety by the Cautionary
Statements.
CAUTIONARY STATEMENTS:
---------------------
See "Special Note Regarding Forward-Looking Statements".
NO ASSURANCE OF ADDITIONAL NECESSARY CAPITAL - EqualNet and Wholesale filed
for Chapter 11 protection in September of 1998. The Company will need
additional capital to obtain the creditor's approval of a plan of
reorganization for EqualNet. In addition, it is likely that additional
capital may be needed to fund operating deficits of the Company's other
subsidiaries during the foreseeable future. Although the Company has no
current funding sources, it believes it can attract additional funding if
it is able to reduce the liabilities of EqualNet through the plan of
reorganization. There can be no assurances that the Company will be able to
obtain the necessary capital or sufficiently reduce EqualNet's liabilities
to continue to operate the Company.
ATTRITION RATES - In the event the Company experiences attrition rates in
excess of those anticipated either as a result of increased provisioning
times by its underlying carrier, the purchase of poorly performing traffic,
or the inability to properly manage the existing customer base, additional
charges that affect earnings may be incurred.
DEPENDENCE ON INDEPENDENT MARKETING AGENTS - USC Telecom has a small
internal sales force and obtains the majority of its new customers from
independent marketing agents ("Agents"). USC Telecom's near-term ability to
expand its business depends upon whether it can continue to maintain
favorable relationships with existing Agents and recruit and establish new
relationships with additional Agents. No assurances can be made as to the
willingness of the existing Agents to continue to provide new orders to USC
Telecom or as to USC Telecom's ability to attract and establish
relationships with new Agents
DEPENDENCE ON OTHER FACILITIES-BASED CARRIERS - The Company, even though it
now owns nine switches, depends upon other carriers to provide the
telecommunications services
35
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that it resells to its customers and the detailed information upon which it
bases its customer billings. The Company's near-term ability to expand its
business partially depends upon whether it can continue to maintain
relationships with S4 Communications, MCI WorldCom, Frontier and U.S
Republic. The loss of the telecommunications services that the Company
receives from any of these vendors could have a material adverse effect on
the Company's results of operations and financial condition.
CARRIER COMMITMENTS - The Company and EqualNet have significant commitments
with certain carriers to resell long-distance services. The Company's
contract with its carrier contains clauses that could materially and
adversely impact the Company should the Company incur a shortfall in
meeting its commitments.
To the extent that these carriers are considered to be utilities in
EqualNet's bankruptcy proceeding, these carriers will be entitled to
adequate assurance of payment for carrier services after September 10,
1998, the Bankruptcy Filing Date. Adequate assurance may be in the form of
cash deposits or advance payments in an amount determined by the court as
sufficient to provide these carriers with adequate assurance of payment.
The failure to provide adequate assurance of payment for future services
would give these carriers the right to discontinue to provide such
services. Current sources of funds from operations and working capital may
not be sufficient to provide the amount of adequate assurance of payment
required by these carriers. There can be no assurance that EqualNet will be
able to secure funding for the amount of any adequate assurance that may be
required of EqualNet.
BILLING SYSTEM PROBLEMS EqualNet converted to a new customer management,
billing and rating system - AMS, purchased from Platinum Communications in
March 1998. Unlike NetBase (the system used for most of fiscal year 1998
prior to conversion), AMS has capabilities required for switch-based data
gathering, rating and billing. The conversion coincided with the
acquisition of a new customer base (SA Telecom) and a migration to a switch
based environment, considerable billing errors and delays occurred.
Additionally, there are aspects of AMS that could require continuing
support from Platinum Communications. This reliance upon an outside source
for billing system troubleshooting has slowed the conversion recovery
process. In December, 1998 EqualNet converted its billing system to
CostGuard ENTERPRISE, an industrial class rating, billing and customer care
system built on a Microsoft SQL Server database platform. This system was
purchased from Info Directions, Inc., "IDI" and should improve rating speed
and billing accuracy. Also, EqualNet expects to be able to more readily
extract meaningful data and management reports from CostGuard. The system
design is flexible enough to respond to rapid changes in the
telecommunications marketplace. In fiscal year 1998, EqualNet recorded a
write-off of $270,000 for NetBase and estimated the useful file of AMS to
be approximately one year until the CostGuard system can be implemented.
The new system, CostGuard, will cost $272,000 initially, then $68,000 per
year in subsequent years for ongoing support and software upgrades. There
can be no assurance that the IDI billing system will fully meet EqualNet's
current and on going needs. If the IDI system fails to provide the expected
results, EqualNet may need to invest in other alternative billing systems.
RELATIONSHIPS WITH STATE REGULATORY AGENCIES - EqualNet's and USC Telecom's
intrastate long-distance telecommunications operations are subject to
various state laws and regulations, including prior certification,
notification or registration requirements. EqualNet and USC Telecom must
generally obtain and maintain certificates of public convenience and
necessity from regulatory authorities in most states in which it offers
service. Any failure to maintain proper certification in jurisdictions in
which either of these companies provide a significant amount of intrastate
long-distance service could have a material adverse effect on the Company's
business.
36
<PAGE>
VOLATILITY OF SECURITIES PRICES - Historically, the market price of the
Common Stock has been highly volatile. During the period from July 1, 1997,
to March 31, 1999, the market price for the Common Stock as reported by The
Nasdaq Stock Market has ranged from a high of $3.25 per share to a low of
$.18 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 the Company's actual operational or
financial results.
In addition, the Company's Common Stock began trading on the Nasdaq
SmallCap Market on May 7, 1999, subject to certain contingencies and via an
exception to the normal continued listing requirements of Nasdaq.
This change occurred as a result of a Nasdaq panel's decision dated May 5,
1999, following a hearing held February 4, 1999, on the continued listing
of the Company's Common Stock on the Nasdaq National Market. While the
panel ruled that the Company had failed to meet the minimum bid price and
net tangible asset requirements, the Company was granted a temporary
exception from these standards, subject to the Company meeting certain
conditions. Specifically, in addition to the standard requirements for
listing on the Nasdaq SmallCap Market, on or before June 1, 1999, the
Company must make a public filing with the SEC and Nasdaq evidencing a
minimum of $10 million in net tangible assets and a closing bid price of
$1.00 per share. Immediately after June 1, 1999, the minimum bid price for
the Company's Common Stock must meet or exceed $1.00 per share for a
minimum of ten consecutive trading days.
The Company believes that it can meet these conditions, however there can
be no assurance that it will do so. If at some future date the Company's
Common Stock should cease to be listed on the Nasdaq SmallCap Market, it
may continue to be listed in the OTC-Bulleting Board. Such delisting could
have an adverse effect on the liquidity of the Company's Common Stock.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit
No. Description
------- -----------
10.1 Amended and Restated Asset Purchase Agreement among ACMI
Acquisition Corp., EqualNet Communications Corp., Limit LLC
d/b/a AMCI and members of Limit LLC
10.2 Subscription Agreement with Kevin Pirolo
10.3 Purchase Agreement between RFC Capital Corporation and USC
Telecom, Inc.
10.4 Assumption Agreement between RFC Capital Corporation and USC
Telecom, Inc.
10.5 Common Stock Purchase Warrant for RFC Capital Corporation
10.6 Subscription Agreement with LaMonda Management Family Limited
Partnership
27.1 Financial Data Schedule
b. Reports on Form 8-K
The Company filed a Current Report on Form 8-K on February 5, 1999,
reporting under item -.
37
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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 COMMUNICATIONS CORP.
Date: May 24, 1999
/s/ Mitchell H. Bodian
-------------------------------------------------
Mitchell H. Bodian, President and Chief Executive Officer
(duly authorized officer and principal financial officer)
38
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EXHIBIT 10.1
_____________________________
AMENDED AND RESTATED
ASSET PURCHASE AGREEMENT
_____________________________
DATED AS OF DECEMBER ______, 1998,
AMONG
ACMI ACQUISITION CORP.,
EQUALNET COMMUNICATIONS CORP.,
LIMIT LLC d/b/a ACMI
AND
MEMBERS OF LIMIT LLC
<PAGE>
AMENDED AND RESTATED
ASSET PURCHASE AGREEMENT
This AMENDED AND RESTATED ASSET PURCHASE AGREEMENT (the "Amended
Agreement"), dated as of November 6, 1998, by and among LIMIT LLC, a Tennessee
limited liability company ("Seller"), and the MEMBERS of Seller (set forth in
Schedule 1 and collectively referred to as "Members"), on one hand and ACMI
ACQUISITIONS CORP., a newly formed Delaware corporation (sometimes referred to
as the "Company" or "Purchaser"), and EQUALNET COMMUNICATIONS CORP., a Texas
corporation ("ENET"), with reference to the following RECITALS:
A. Seller is engaged in the business of sales of long distance
network marketing operations. Such business operations of Seller have been
carried on as a distinct business under the name of ACMI. Members are the
owners, of record and beneficially, of all of Seller's membership interests.
B. Purchaser desires to purchase all of the business operations and
assets of Seller ("the Assets"). All of such business operations and Assets of
Seller desired to be purchased by Purchaser hereunder are referred to herein as
the "Business".
C. Purchaser, and Seller and Members, have previously entered into
that certain Asset Purchase Agreement (the "Agreement") dated October 24, 1998
and desire to amend the Agreement.
D. Subject only to the limitations and exclusions contained in this
Amended Agreement and on the terms and conditions hereinafter set forth, Seller
desires to sell and Purchaser desires to purchase the Business, its operations,
and the Assets of Seller used therein.
NOW, THEREFORE, in consideration of the recitals and of the respective
covenants, representations, warranties and agreements herein contained, and
intending to be legally bound hereby, the parties hereto hereby agree as
follows:
ARTICLE I
PURCHASE AND SALE
1. Amended Agreement to Sell. At the Closing (as defined in Section 2.1
hereof) and except as otherwise specifically provided in this Section 1.1,
Seller shall grant, sell, convey, assign, transfer and deliver to Purchaser,
upon and subject to the terms and conditions of this Amended Agreement, all
right, title and interest of Seller in and to (a) the Business as a going
concern, (b) the assumed name used by Seller and all goodwill associated
therewith, and (c) all of the assets, properties and rights of Seller
constituting the Business or used therein, of every kind and
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<PAGE>
description, real, personal and mixed, tangible and intangible, wherever
situated (which Business, name, goodwill, assets, properties and rights are
herein sometimes called the "Assets"), free and clear of all mortgages, liens,
pledges, security interests, charges, claims, restrictions and encumbrances of
and failure whatsoever except Permitted Liens as defined in Section 3.1.13
hereof.
1.1.1 Included Assets. The Assets shall include without limitation
the following assets, properties and rights of Seller used directly or
indirectly in the conduct of, or generated by or constituting, the
Business, except as otherwise expressly set forth in Section 1.1.2 hereof:
(a) all machinery, equipment, tools, vehicles, furniture,
furnishings, leasehold improvements, goods, and other tangible personal
property;
(b) all prepaid items, unbilled costs and fees, and accounts,
notes and other receivables;
(c) all supplies and inventories and office and other supplies;
(d) to the extent permitted by applicable law, all rights under
any written or oral contract, agreement, lease, plan, instrument,
registration, license, certificate of occupancy, other permit or approval
of any nature, or other document, commitment, arrangement, undertaking,
practice or authorization;
(e) all rights under any patent, trademark, service mark, trade
name or copyright, whether registered or unregistered, and any applications
therefor;
(f) all technologies, methods, formulations, data bases, trade
secrets, know-how, inventions and other intellectual property used in the
Business or
(g) all computer software (including documentation and related
object and source codes);
(h) all rights or choses in action arising out of occurrences
before or after the Closing, including without limitation all rights under
express or implied warranties relating to the Assets;
(i) all assets and properties reflected on the Interim Balance
Sheet as defined in Section 3.1.6;
(j) all information, files, records, data, plans, contracts and
recorded knowledge, including customer and supplier lists, related to the
foregoing.
2
<PAGE>
(k) all customers and customers contracts and agreements to the
extent owned by Seller.
1.1.2 Excluded Assets. Notwithstanding the foregoing, the Assets
shall not include any of the assets, properties or rights set forth on the
Disclosure Schedule.
1.2 Amended Agreement to Purchase. At the Closing hereunder, Purchaser
shall purchase the Assets from Seller, upon and subject to the terms and
conditions of this Amended Agreement and in reliance on the representations,
warranties and covenants of Seller and the Members contained herein, in exchange
for the Purchase Price (hereinafter defined in Section 1.3 hereof). In
addition, Purchaser shall assume at the Closing and agree to pay, discharge or
perform, as appropriate, certain liabilities and obligations of Seller only to
the extent and as provided in Section 1.4 of this Amended Agreement. Except as
specifically provided in Section 1.4 hereof, Purchaser shall not assume or be
responsible for any liabilities or obligations of the Business or Seller.
1.3 The Purchase Price.
1.3.1 Purchase Price. The purchase price (the "Purchase Price") for
the Assets shall be payable by the issuance of Two Million Five Hundred Thousand
(2,500,000) unregistered shares of ENET common stock, par value $0.01, ("ENET
Common Stock"), 1,000,000 shares to be delivered at Closing and 1,500,000 shares
("Allocable Shares") to Seller subject to adjustment as provided in Section 1.8
below. The Purchase Price shall be allocated in accordance with Section 2.4
below. On the Closing Date and subject to the other terms and conditions
hereof, including Section 1.9 below, Purchaser shall issue to Seller the
requisite number of shares of ENET Common Stock (the "Shares") on behalf of
Purchaser in accordance with this Section 1.3.1. Appropriate adjustment in the
number of Shares, to be issued and delivered pursuant hereto shall be made to
give effect to any increase or decrease in the number of issued shares of
Purchaser resulting from a stock split-up, consolidation or like capital
adjustment or the payment of a stock dividend or any other relevant change in
capitalization of ENET after the date hereof and prior to the Closing Date.
1.3.2 Securities Law Representations. Each of Seller and the Members
acknowledges that the ENET Common Stock delivered to Seller at Closing shall be
"restricted stock" and have not been registered by Purchaser pursuant to the
Securities Act of 1933, as amended (the "Act") or any state securities laws and
pending such registration may not be offered or sold except pursuant to an
exemption from, or a transaction not subject to, the registration requirements
of the Act or applicable state securities laws. As a result, each of Seller and
the Members hereby agrees that Seller shall not, directly or indirectly, sell,
offer to sell, contract to sell or otherwise transfer any of the Shares unless
the Shares are registered pursuant to an effective registration statement filed
with the Securities and Exchange Commission with respect to the Shares or an
exemption from registration shall be available. Each of Seller and the Members
represents that he or it is familiar with Rule 144 and Rule 144A promulgated
under the Act and understands the resale limitations imposed thereby and by the
3
<PAGE>
Act. Each party hereto acknowledges that each certificate representing the
Shares will bear a restrictive legend evidencing the transfer restrictions
described herein. Each of Seller and the Members acknowledge that the Shares
have not been registered under the Act in reliance by ENET and Purchaser upon
certain exemptions from registration contained therein, including the exemptions
from registration provided by Section 4(2) of the Act and Regulation D
promulgated thereunder.
Each of Seller and the Members further represents and warrants to Purchaser
and ENET that, except as provided in Section 1.3.4 below, Seller and each Member
is acquiring the Shares for the purpose of investment for Seller's own account
and not with a view for sale or distribution thereof within the meaning of
Section 2(11) of the Act. Each Member has (i) knowledge of finance, securities
and investments generally and (ii) experience and skill in investments based on
actual participation. In addition, each Member represents and warrants to
Purchaser and ENET that he (a) is an "accredited investor," as such term is
defined in Rule 501(a) of Regulation D under the Act, (b) can bear the economic
risk of the investment in the Shares, including the total loss of such
investment, (c) has such knowledge and experience in business and financial
matters, including the analysis of or participation in offerings of privately-
issued securities as to be capable of evaluating the merits and risks of an
investment in the Shares, and (d) in connection with the transactions
contemplated hereby, no assurances have been made concerning the future results
of ENET or as to the value of the ENET Common Stock. Seller and each Member
have had access to all information that they deemed necessary or desirable in
connection with Seller's receipt of the Shares and have had an opportunity to
ask questions of and receive answers from the executive officers and other
designated representatives of Seller and Purchaser concerning the terms and
conditions of and the business and operations of Purchaser. The Seller and the
Member have been furnished with (i) the Annual Report on Form 10-K of ENET,
filed with the Commission under the Exchange Act, for the fiscal year ended June
30, 1997 (the "Annual Report") and (ii) the quarterly reports on Form 10-Q of
ENET for the quarterly periods ended September 30, 1997, December 31, 1997,
March 31, 1998, and June 30, 1998, filed with the Commission under the Exchange
Act. Each of the Sellers has been furnished with the complete financial
statements of ENET for the fiscal years ended June 30, 1995, 1996 and 1997.
1.3.3 Risk of Loss. The risk of loss or destruction or damage to any or
all of the Business or Assets from any cause whatsoever at all times prior to
the Closing Date shall be borne by Seller. After the Closing Date, the risk of
loss or destruction of or damage to any or all the Assets from any cause
whatsoever shall be borne by Purchaser.
1.3.4 Registration Rights. If, at anytime within eighteen (18) months
from the date of execution of this Amended Agreement, the average closing price
of a share of ENET Common Stock (as reported on the NASDAQ National Market
System) for the thirty (30) consecutive trading days shall reach One Dollar and
Fifty Cents ($1.50), upon demand to ENET by Seller and/or the Members owning at
least seventy-five percent (75%) of the ENET Common Stock within ten (10) days
from the date thereof, ENET shall be obligated to file with the Securities and
Exchange Commission ("S.E.C.") a registration statement to register one-third
(1/3) of all shares owned by Seller and/or the
4
<PAGE>
Member as of that date. If, at anytime within eighteen (18) months from the
execution date, the average closing price of a share of ENET Common Stock (as
reported on the NASDAQ Market System for thirty (30) consecutive trading days)
shall equal or exceed Two Dollars ($2.00) per share, upon demand to ENET by
Seller and/or the Members owning at least seventy-five percent (75%) of the ENET
Common Stock within ten (10) days from the date thereof, ENET agrees to register
one-half (1/2) of all remaining shares owned by the Seller. If, at anytime
within eighteen (18) months from the execution date, the average closing price
of a share of ENET Common Stock (as reported on the NASDAQ Market System) for
thirty (30) consecutive trading days shall equal or exceed Two Dollars and Fifty
Cents ($2.50) per share, upon demand to ENET by Seller and/or the Members owning
at least seventy-five percent (75%) of the ENET Common Stock within ten (10)
days from the date thereof, ENET agrees that it shall register all of the
remaining shares of stock owned by the Seller and/or the Members.
Notwithstanding the foregoing, (i) if at anytime from October 23, 1998 date
through December 31, 1998, the average closing price of a share of ENET Common
Stock (as reported on the NASDAQ National Market System) shall equal or exceed
One Dollar ($1.00) per share for ten (10) consecutive trading days and for the
same ten day period the average trading volume equals or exceeds 70,000 shares
per day upon demand to ENET by Seller and/or the Members owning at least
seventy-five percent (75%) of the ENET Common Stock within ten (10) days from
the date thereof, ENET shall agree to file with the S.E.C. a registration
statement to register twenty percent (20%) of all Shares then owned by Seller,
or (ii) if there has not been a prior registration statement filed, ENET shall
to file a registration statement to register at least one-third of the Shares
after expiration of twelve (12) months from the Closing Date, and, if there has
not been a prior registration statement filed, all remaining unregistered Shares
immediately upon the expiration of eighteen (18) months from Closing Date. All
registrations required under this section shall be performed as expeditiously as
time and business conditions permit. The cost of the first registration of stock
resulting from the fulfilment of any of the foregoing conditions in 1998 under
this section shall be shared fifty percent (50%) by the Members and fifty
percent (50%) by the Purchaser and the cost of subsequent registrations shall be
born solely by the Members. Should the Sellers and/or the Members elect to
piggyback other registrations of stock by ENET there shall be no cost to the
Seller.
1.3.5 Allocation of Purchase Price. The Purchase Price and the
liabilities assumed by Purchaser in accordance with Section 1.4 hereof and any
non-recourse liabilities to which the Business is subject shall be allocated
among the assets acquired hereunder as described on the Disclosure Schedule
hereof. Seller and Purchaser each hereby covenant and agree that it will not
take a position on any income tax return, before any governmental agency charged
with the collection of any income tax, or in any judicial proceeding that is in
any way inconsistent with the terms of this Section 1.3.5.
1.4 Assumption of Liabilities. In connection with the acquisition of the
Business, Purchaser and ENET shall not assume any debt, expense, liability or
obligation heretofore arising out of the Business or Seller's ownership of the
Assets, except that at the Closing Purchaser shall assume and hereby agrees to
pay, perform or otherwise discharge Seller's obligations after the
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<PAGE>
Closing Date of those fixed and determinable liabilities of Seller listed in the
Disclosure Schedule (but only to the extent such obligations are expressed in
such contracts or Amended Agreements, as provided to Purchaser) and no others
(the "Assumed Obligations"). Seller and the Members acknowledge and agree that
Purchaser is not assuming, does not assume, and shall not be liable or pay for
any debts (including any promissory notes executed by Seller in favor of certain
of the Members), expenses, obligations, liabilities, liens, encumbrances and
other claims of any kind or nature with respect to Seller, the Assets or the
Business (except for the Assumed Obligations), including by way of illustration
but not limitation, any debts, expenses or other liabilities of Seller or any
other contractual commitments, lease arrangements, payroll taxes, sales taxes or
other tax liabilities of any kind or nature arising from the Business or the
Assets prior to the Closing Date. Seller expressly acknowledges and affirms its
liability for all claims, demands and causes of action relating to the Business
or the Assets, whether under any contract or otherwise, accruing or arising
from, on or prior to the Closing Date, other than Assumed Obligations.
1.5 [INTENTIONALLY OMITTED]
1.6 Issuance of Additional Shares. In the event the Seller does not
exercise their rights as provided in Section 1.5 above, and if the average
closing price of the ENET Common Stock for the period between 150 and 180 days
after the Closing Date is less than Seventy-Five Cents ($.75) per share (the
"Price"), then Purchaser shall issue to Seller an additional number of ENET
Common Stock to Seller equal to One Million Eight Hundred Seventy-Five Thousand
(1,875,000), minus 2.5 million times the greater of Fifty Cents ($.50) or the
Post Closing Average Price, divided by the Price.
1.7 Earn-Out Provisions. In addition to the consideration provided in
Section 1.3 above, and the liability assumed as described in Section 1.4 above,
Purchaser will provide additional ENET Common Stock to Seller in accordance with
those percentages in Schedule 1, so long as those Members perform the same
duties as in the past, as follows:
a. At the end of year 1: The difference between: i) The greater of
the "Commissionable Revenue" of Purchaser for the twelve months
immediately following the close of the transaction, or $2,500,000
(the "a.i. Number") and ii) $2,500,000, multiplied by .67, and
then divided by the average price of ENET Common Stock during the
period between 335 and 365 days following the Closing of the
transaction, plus
b. At the end of year 2: The difference of i) The "Commissionable
Revenue" of Purchaser for the thirteenth through twenty-fourth
month immediately following the closing of the transaction (the
"b.i. Number") and ii) The greater of the a.i. Number above, or
$2,500,000, multiplied by .50, and then divided by the average
price of ENET Common Stock during the period 700 and 730 days
following the closing of the transaction, plus
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c. At the end of year 3: The difference of i) The "Commissionable
Revenue" of Purchaser for the twenty-fifth through thirty-sixth
month immediately following the closing of the transaction and
ii) The greater of the b.i. Number above, or $2,500,000,
multiplied by .50, and then divided by the average price of ENET
Common Stock during the period 1065 and 1095 days following the
Closing.
For purpose of this Agreement, the term "Commissionable Revenue" shall
mean, in the aggregate, all gross intrastate, interstate and international
revenues received under existing customer contracts identified in the
Disclosure Schedule in accordance with Section 3.1.19(c), plus all debit
card revenues, plus all commissionable revenue as that term is defined in
the Agent Marketing Agreement, attached as Exhibit E, plus any revenue from
any other activities of Purchaser, less all commissions received by
Purchaser on all revenue described herein and, taxes or other revenues
collected that reflect pass through items not truly reflective of
Purchaser's revenue. Notwithstanding anything to the contrary, in the
event the "Commissionable Revenue" of Purchaser is less than $2,500,000 in
each 365 day period after Closing, then Seller shall not be entitled to any
earn-out under this Section 1.7 for that 365 day period.
1.8 Adjustment to Purchase Price. Purchaser and Seller agree, that if
Purchaser shall have acquired "new customers accounts" with an average monthly
Commissionable Revenue of at least $670,000.00 within six (6) months from the
Closing Date ("New Customers Commissionable Revenue Number"), then Seller shall
be entitled to receive all Allocable Shares. If Purchaser has failed to add an
amount that is at least $670,000.00 in monthly revenue within the six (6) months
from the Closing Date, then Seller shall be entitled to receive a percentage of
the Allocable Shares. Such percentage shall be determined by a fraction, the
numerator of which shall be the New Customers Commissionable Revenue Number and
the denominator shall be $670,000.00. Such percentage shall be multiplied by
1,500,000 shares of Allocable Shares. However, in no event will the product
result in more than 1,500,000 shares of Allocable Shares issued to Seller as a
result of the calculations contained in this Section 1.8 even if the New
Customers Commissionable Revenue Number is greater than $670,000.00. For
purposes of this Amended Agreement, the term "new customers" shall mean a
customer that is not a customer of Seller and is not slated to be a customer of
the Seller as of the Closing Date, and someone for whom Seller was not receiving
a commission from as of the Closing Date. This Section 1.8 shall only apply as
long as Purchaser can provision the new customers and the new orders consistent
with industry standards for service time frames. All sales to new customers
shall be subject to the terms of the Agent Marketing Agreement attached as
Exhibit E.
1.9 [INTENTIONALLY OMITTED]
1.10 Limitation on Shares Issuable Pursuant to Terms of this Agreement.
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1.10.1 Notwithstanding any other provision herein, unless the Stockholder
Approval shall have been obtained from the stockholders of Equalnet
Communications Corp. ("ENET") or been waived by Nasdaq (or other appropriate
stock exchange or market), so long as the Common Stock is listed on the Nasdaq,
the Nasdaq Small Cap, the NYSE or the AMEX, pursuant to either the Earn Out or
Purchase Price Adjustment provisions of this Agreement, ENET shall not be
required to issue a number of shares of Common Stock in excess of the Maximum
Share Amount. ENET shall maintain records which show the number of shares of
Common Stock issued by ENET, which records shall be controlling in the absence
of manifest error.
1.10.2 If on or after the Closing Date and on or prior to July 1, 1999
Seller would become entitled to the issuance of shares pursuant to the terms of
this Agreement that would result, if such shares were to be issued, in the
issuance of a number of shares of Common Stock pursuant to this Agreement in
excess of the Maximum Share Amount (an "Inability to Issue Event" occurs), then
ENET shall promptly, but in no event later than five Business Days after each
such occurrence, give an Inability to Issue Notice to the Seller (by telephone
line facsimile transmission at such number as the Seller has specified in
writing to ENET for such purposes or, if the Seller shall not have specified any
such number, by overnight courier at Seller's address as the same appears on the
records of ENET) and Seller may at any time after such occurrence give an
Inability to Issue Notice to ENET. If ENET shall have given or been required to
give any Inability to Issue Notice, or if Seller shall have given any Inability
to Issue Notice, then the parties shall negotiate in good faith for an
alternative means of compensation to Seller comparable to the value of the
shares they would have otherwise received. Failure by Seller to provide such
notice shall waive any rights of Seller to receive shares of Common Stock in
excess of the Maximum Share Amount pursuant to the terms of this Agreement or
other compensation in lieu of such shares.
1.10.3 An Inability to Issue Notice given by the Seller shall be deemed
for all purposes to be in proper form unless ENET notifies the Seller in writing
within three Business Days after an Inability to Issue Notice has been give
(which notice shall specify all defects in the Inability to Issue Notice) and
any Inability to Issue Notice containing any such defect shall nonetheless be
effective on the date given if the Seller Promptly undertakes to correct all
such defects.
1.10.4 The following definitions shall be applicable to this Section 1.10,
as follows:
"Maximum Share Amount" means 3,677,166 shares, or such greater number as
permitted by the rules of Nasdaq (such amount to be subject to equitable
adjustment from time to time for stock splits, stock dividends, combinations,
capital reorganizations and similar events relating to the Common Stock
occurring after the Issuance Date) for Common Stock; provided, however, that if
for purposes of Rule 4460(i) of the Nasdaq (or any successor or replacement
provision of any stock exchange or stock market on which the Common Stock is
listed or traded) the (i) the issuance of shares of Common Stock issuable as any
Purchase Price Adjustment or (ii) the issuance of the Common Stock purchase
issued in connection with the Earn Out Provisions of this agreement are not
required to be integrated with the Purchase Price, then in each such case the
"Maximum Share
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Amount" shall mean such greater number as equals the maximum number of shares of
Common Stock as are permitted by the rules of the Nasdaq or other such exchange
or market.
"Nasdaq" means the Nasdaq National Market.
"Nasdaq Small Cap" means the Nasdaq Small Cap Market.
"1933 Act" means the Securities Act of 1933, as amended
"1934 Act" means the Securities Exchange Act of 1934, as amended.
"NYSE" means the New York Stock Exchange, Inc.
"SEC" means the Securities and Exchange Commission.
"Stockholder approval" means the approval by a majority of the votes cast
by the holders of shares of Common Stock (in person or by proxy) at a meeting of
the stockholders of ENET (duly convened at which a quorum was present), or, if
permitted by the charter or bylaws of ENET, a written consent of holders of
shares of Common Stock entitled to such number of votes given without a meeting,
for the issuance by ENET of 20% or more of the outstanding Common Stock of the
Company for less than the greater of the book or market value of such Common
Stock, as and to the extent required under Rule 4460(i) of Nasdaq as in effect
at such time (or any successor or replacement provision thereof).
ARTICLE II
CLOSING, ITEMS TO BE DELIVERED, THIRD PARTY
CONSENTS, CHANGE IN NAME AND FURTHER ASSURANCES
2.1 The closing (the "Closing") of the sale and purchase of the assets
shall take place at 10:00 A.M., local time, on _______, 1998 at the offices of
DiCecco, Fant & Burman, LLP, 1900 West Loop South, Suite 1100, Houston, Texas
77027 or on such other date as may be mutually agreed upon in writing by
Purchaser and Seller. The date of the Closing is sometimes herein referred to
as the "Closing Date."
2.2 Items to be Delivered at Closing. At the Closing and subject to the
terms and conditions herein contained:
(a) Seller shall deliver to Purchaser the following:
(i) a duly executed Bill of Sale in substantially the form of Exhibit
A attached hereto, and such other deeds, bills of sale, assignments and
other instruments of conveyance
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conveying the Assets to Purchaser in such form and substance acceptable to
both Seller and Purchaser;
(ii) a Secretary's Certificate in substantially the form of Exhibit B
attached hereto, which Certificate shall include a certified copy of the
Certificate of Good Standing issued by the _______________________ and the
Certificate of Legal Existence issued by the ____________________________.
(iii) a Closing Certificate duly executed by Seller and the Members
in substantially the form of Exhibit C attached hereto;
(iv) INTENTIONALLY OMITTED;
(v) an Employment Agreement duly executed by the Members and Purchaser
in substantially the form of Exhibit D attached hereto;
(vi) an Agent Marketing Agreement duly executed by Members and
Purchaser in substantially the form of Exhibit E attached hereto.
(vii) an opinion of counsel for Seller and the Members substantially
in the form of Exhibit F acceptable to Purchaser's counsel;
(viii) the Escrow Agreement duly executed by Sellers and Members
substantially in the form of Exhibit G attached hereto; and
(ix) all tangible assets.
(b) At the Closing, Purchaser shall deliver to the Escrow Agent, or
Seller and the Members, as the case may be, the following:
(i) one or more stock certificates evidencing the Shares of ENET
Common Stock to be delivered to Seller or Members at the Closing;
(ii) a Secretary's Certificate in substantially the form of Exhibit H
attached hereto, which Certificate shall include a certified copy of the
Certificate of Good Standing issued by the Secretary of the State of Texas for
ENET, and;
(iii) a Secretary's Certificate in substantially the form of Exhibit
I attached hereto, which Certificate shall include a certified copy of the
Certificate of Good Standing issued by the Secretary of State of Delaware for
the Purchaser;
(iv) a Closing Certificate in substantially the form of Exhibit J
attached hereto;
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(v) a duly executed Agent Marketing Agreement for key employees in
substantially the form of Exhibit E attached hereto;
(vi) duly executed Employment Agreements for those key employees in
substantially the from of Exhibit D attached hereto; and
(vii) an opinion of counsel for Purchaser substantially in the form
of Exhibit K attached hereto acceptable to Seller's counsel; and
2.3 Third Party Consents. To the extent that Seller's rights under any
agreement, contract, commitment, lease, Authorization (as defined in Section
3.1.15) or other Asset to be assigned to Purchaser hereunder may not be assigned
without the consent of another person which has not been obtained, this Amended
Agreement shall not constitute an agreement to assign the same if an attempted
assignment would constitute a breach thereof or be unlawful. Seller, at its
expense, shall use its best efforts to obtain any such required consent, and if
such consent shall not be obtained, or if any attempted assignment would be
ineffective or would impair Purchaser's rights under the Asset in question so
that Purchaser would not in effect acquire the benefit of all such rights,
Seller, to the maximum extent permitted by law, shall act after the Closing as
Purchaser's agent in order to obtain for it the benefits thereunder and shall
cooperate, to the maximum extent permitted by law, with Purchaser in any other
reasonable arrangement designed to provide such benefits to Purchaser. Seller
shall identify for Purchaser any such required third-party consents on the
Disclosure Schedule in order that Purchaser may determine if the absence of any
such consents would be of such a material nature as to require an adjustment in
the Purchase Price or preclude Purchaser from proceeding to closing.
2.4 Change in Name. On the Closing Date, Seller and Members shall deliver
to Purchaser all such executed documents as may be required to change Seller's
name and withdraw an assumed name on that date to another name bearing no
similarity to LIMIT LLC or ACMI, including, but not limited to, a name change
amendment and withdrawal of assumed name with the Secretary of State of
Tennessee and an appropriate name change notice for each state where Seller is
qualified to do business. Each of Seller and Member hereby appoints Purchaser
as its attorney-in-fact to file all such documents on or after the Closing Date.
2.5 Further Assurances. Seller from time to time after the Closing, at
Purchaser's request, will execute, acknowledge and deliver to Purchaser such
other instruments of conveyance and transfer and will take such other actions
and execute and deliver such other documents, certifications and further
assurances as Purchaser may reasonably require in order to vest more effectively
in Purchaser, or to put Purchaser more fully in possession of, any of the
Assets, or any of the liabilities or obligations assumed by Purchaser at the
Closing. Each of the parties hereto will cooperate with the other and execute
and deliver to the other parties hereto such other instruments and documents and
take such other actions as may be reasonably requested from time to time by any
other party hereto as necessary to carry out, evidence and confirm the intended
purposes of this Amended Agreement.
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2.6 Conduct of Sellers Business after Purchase. After the Closing,
existing management of Seller will manage the strategic directions of Purchaser
and will manage the day to day affairs of Purchaser, as long as Purchaser meets
financial and other targets mutually agreed upon with the management of ENET and
as long as the programs and products marketed by Purchaser meet the operational
and financial return targets established by the parties. So long as the Sellers
participate in the management of any entity owned or operated by Purchaser or
ENET, it shall be required to provide on no less than a monthly basis, all
information, financial or otherwise, as may be duly requested in writing by
ENET, which information at a minimum shall include a monthly income statement,
statement of cash flow and changes in working capital, and balance sheet.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of the Seller. The Seller and each
Member hereby represents and warrants to Purchaser and ENET that, except as set
forth on a Disclosure Schedule attached hereto, each of which exceptions shall
specifically identify the relevant subsection hereof to which it relates and
shall be deemed to be representations and warranties as if made hereunder:
3.1.1 Corporate Existence. Seller is a limited liability company duly
formed, validly existing and in good standing under the laws of the State of
Tennessee. Seller is duly qualified to do business and is in good standing as a
foreign company in each jurisdiction where the conduct of the Business by it
requires it to be so qualified, all of which jurisdictions are listed on the
Disclosure Schedule.
3.1.2 Corporate Power; Authorization; Enforceable Obligations. Each of
Member and Seller has the power, authority and legal right to execute, deliver
and perform this Amended Agreement. The execution, delivery and performance of
this Amended Agreement by Members and Seller have been duly authorized by all
necessary company and Member action. This Amended Agreement has been, and the
other agreements, documents and instruments required to be delivered by Seller
or the Members in accordance with the provisions hereof (the "Seller's
Documents") will be, duly executed and delivered on behalf of the Members, and
on behalf of Seller by duly authorized officers of the Members and Seller, and
this Amended Agreement constitutes, and the Seller's Documents when executed and
delivered will constitute, the legal, valid and binding obligations of such of
the Members and Seller as is a party thereto, enforceable against such party in
accordance with their respective terms.
3.1.3 No Interest in Other Entities. Except for interests in the entities
described in the Disclosure Schedule in response to this Section (such entities
are hereinafter referred to as the "Subsidiaries"), no shares of any corporation
or any ownership or other investment interest, either
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of record, beneficially or equitably, in any association, partnership, joint
venture or other legal entity are included in the Assets, other than shares of
capital stock representing immaterial, non-controlling interests in publicly-
traded companies obtained by Seller in the ordinary course of the Business.
3.1.4 Validity of Contemplated Transactions, etc. The execution, delivery
and performance of this Amended Agreement by the Members and Seller does not and
will not violate, conflict with or result in the breach of any term, condition
or provision of, or require the consent of any other person under, (a) any
existing law, ordinance, or governmental rule or regulation to which Seller or
Members are subject, (b) any judgment, order, writ, injunction, decree or award
of any court, arbitrator or governmental or regulatory official, body or
authority which is applicable to Seller or Member, (c) the charter documents of
Seller or any securities issued by Seller, or (d) any mortgage, indenture,
agreement, contract, commitment, lease, plan, Authorization (hereinafter defined
in Section 3.1.15), or other instrument, document or understanding, oral or
written, to which Seller or the Members are a party, by which Seller or Member
may have rights or by which the Business or any of the Assets may be bound or
affected, or give any party with rights thereunder the right to terminate,
modify, accelerate or otherwise change the existing rights or obligations of
Seller or the Members thereunder. Except as aforesaid, no authorization,
approval or consent of, and no registration or filing with, any governmental or
regulatory official, body or authority is required in connection with the
execution, delivery or performance of this Amended Agreement by Seller or
Member.
3.1.5 No Third Party Options. There are no existing, agreements, options,
commitments or rights with, of or to any person to acquire any of Seller's
assets, properties or rights included in the Business or Assets or any interest
therein, except for those contracts entered into in the normal course of
business consistent with past practice of Seller.
3.1.6 Financial Statements. Seller has delivered to Purchaser and ENET
true and complete copies of (a) the unaudited balance sheet at December 31, 1997
and the related statements of income and cash flow and changes in equity for the
fiscal year then ended; and (b) unaudited balance sheets of Seller at September
30, 1997 and 1998 and related statements of income and cash flow for the periods
then ended, all of which have been prepared in accordance with generally
accepted accounting principles consistently applied throughout the periods
involved. Such balance sheets, including the related notes, fairly present the
financial position, assets and liabilities (whether accrued, absolute,
contingent or otherwise) of Seller at the dates indicated and such statements of
income, cash flow and changes in shareholders equity fairly present the results
of operations, cash flow and changes in shareholders equity of Seller for the
periods indicated. The unaudited financial statements as at and for the periods
ending September 30,1997 and 1998 contain all adjustments, which are solely of a
normal recurring nature, necessary to present fairly the financial position for
the periods then ended. The Interim Balance Sheet specifically identifies the
assets and liabilities which, if the Closing had been held on the Interim
Balance Sheet Date, would have been transferred to or assumed by Purchaser in
accordance herewith. References in this Amended Agreement to the "Interim
Balance Sheet" shall mean the balance sheet of the Business as of September 30,
1998
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referred to above; and references in this Amended Agreement to the "Interim
Balance Sheet Date" shall be deemed to refer to September 30, 1998.
3.1.7 Accounts Receivable. The accounts receivable of Seller arising from
the Business as set forth on the Interim Balance Sheet or arising since the date
thereof are valid and genuine; have arisen solely out of bona fide sales and
deliveries of goods, performance of services and other business transactions in
the ordinary course of business consistent with past practice; are not subject
to valid defenses, set-offs or counterclaims; and are collectible within 90 days
after billing at the full recorded amount thereof less, in the case of accounts
receivable appearing on the Interim Balance Sheet, the recorded allowance for
collection losses on the Interim Balance Sheet. The allowance for collection
losses on the Interim Balance Sheet has been determined in accordance with
generally accepted accounting principles consistent with past practice.
3.1.8 Inventory. All inventory of Seller used in the conduct of the
Business, was acquired and has been maintained in the ordinary course of the
Business; is of good and merchantable quality; consists substantially of a
quality, quantity and condition usable, leasable or saleable in the ordinary
course of the Business; is valued at reasonable amounts based on the ordinary
course of business of Seller during the past six months; and is not subject to
any write-down or write-off. Seller is not under any liability or obligation
with respect to the return of inventory in the possession of wholesalers,
retailers or other customers.
3.1.9 Absence of Undisclosed Liabilities. Seller has no liabilities or
obligations with respect to the Business, either direct or indirect, matured or
unmatured or absolute, contingent or otherwise, except:
(a) those liabilities or obligations set forth on the Interim Balance Sheet
and not heretofore paid or discharged;
(b) liabilities arising in the ordinary course of business under any
agreement, contract, commitment, lease or plan specifically disclosed on the
Disclosure Schedule or not required to be disclosed because of the term or
amount involved; and
(c) those liabilities or obligations incurred, consistently with past
business practice, in or as a result of the normal and ordinary course of
business since the Interim Balance Sheet Date.
For purposes of this Amended Agreement, the term "liabilities" shall
include, without limitation, any direct or indirect indebtedness, guaranty,
endorsement, claim, loss, damage, deficiency, cost, expense, obligation or
responsibility, fixed or contingent, known or unknown, asserted or unasserted,
choate or inchoate, liquidated or unliquidated, secured or unsecured.
3.1.10 Tax and Other Returns and Reports. All federal, state, local and
foreign tax returns, reports, statements and other similar filings required to
be filed by Seller (the "Tax Returns") with respect to any federal, state, local
or foreign taxes, assessments, interest, penalties, deficiencies, fees
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and other governmental charges or impositions, (including without limitation all
income tax, unemployment compensation, social security, payroll, sales and use,
excise, privilege, property, ad valorem, franchise, license, school and any
other tax or similar governmental charge or imposition under laws of the United
States or any state or municipal or political subdivision thereof or any foreign
country or political subdivision thereof) (the "Taxes") have been filed with the
appropriate governmental agencies in all jurisdictions in which such Tax Returns
are required to be filed, and all such Tax Returns properly reflect the
liabilities of Seller for Taxes for the periods, property or events covered
thereby. All Taxes, including those without limitation which are called for the
Tax Returns, or heretofore or hereafter claimed to by any taxing authority from
Seller, have been properly accrued or paid. The accruals for Taxes contained in
the Interim Balance Sheet are adequate to cover the tax liabilities of Seller
with respect to the Business as of that date and include adequate provision for
all deferred taxes, and nothing has occurred subsequent to that date to make any
of such accruals inadequate. Seller has not received any notice of assessment or
proposed assessment in connection with any Tax Returns and there are not pending
tax examinations of or tax claims asserted against Seller of its assets or
properties. Seller has not extended, or waived the application of, any statute
of limitations of any jurisdiction regarding the assessment or collection of any
Taxes. There are no tax liens (other than any lien for current taxes not yet due
and payable) or properties of Seller. Seller has no knowledge of any basis for
any additional assessment of any Taxes. Seller has made all deposits required by
law to be made with respect to employees' withholding and other employment
taxes, including without limitation the portion of such deposits relating to
taxes imposed upon Seller.
3.1.11 Books of Account. The books, records and accounts of Seller
maintained with respect to the Business accurately and fairly reflect, in
reasonable detail, the transactions and the assets and liabilities of Seller
with respect to the Business. Seller has not engaged in any transaction with
respect to the Business, maintained any bank account for the Business or used
any of the funds of Seller in the conduct of the Business except for
transactions, bank accounts and funds which have been and are reflected in the
normally maintained books and records of the business.
3.1.12 Existing Condition. Since the Interim Balance Sheet Date, Seller
with respect to the Business and the Assets has not:
(a) incurred any liabilities, other than liabilities incurred in the
ordinary course of business consistent with past practice, or discharged or
satisfied any lien or encumbrance, or paid any liabilities, other than in the
ordinary course of business consistent with past practice, or failed to pay or
discharge when due any liabilities of which the failure to pay or discharge has
caused or will cause any material damage or risk of material loss to it or any
of its assets or properties;
(b) sold, encumbered, assigned or transferred any assets or properties
which would have been included in the Business or the Assets if the Closing had
been held on the Interim Balance Sheet Date or on any date since then, except
for the sale of inventory in the ordinary course of business consistent with
past practice;
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(c) created, incurred, assumed or guaranteed any indebtedness for money
borrowed, or mortgaged, pledged or subjected any of its Assets to any mortgage,
lien, pledge, security interest, conditional sales contract or other encumbrance
of any nature whatsoever, except for Permitted Liens (hereinafter defined in
Section 3.1.13);
(d) made or suffered any amendment or termination of any material
agreement, contract, commitment, lease or plan to which it is a party or by
which it is bound, or cancelled, modified or waived any substantial debts or
claims held by it or waived any rights of substantial value, whether or not in
the ordinary course of business;
(e) declared, set aside or paid any dividend or made or agreed to make any
other distribution or payment in respect of its capital shares or redeemed,
purchased or otherwise acquired or agreed to redeem, purchase or acquire any of
its capital shares;
(f) suffered any damage, destruction or loss, whether or not covered by
insurance, (i) materially and adversely affecting its business, operations,
assets, properties or prospects or (ii) of any item or items carried on its
books of account individually or in the aggregate at more than $10,000, or
suffered any repeated, recurring or prolonged shortage, cessation or
interruption of supplies or utility or other services required to conduct its
business and operations;
(g) suffered any material adverse change in its business, operations,
assets, properties, prospects or condition (financial or otherwise);
(h) received notice or had knowledge of any actual or threatened labor
trouble, strike or other occurrence, event or condition of any similar character
which has had or might have an adverse effect on its business, operations,
assets, properties or prospects;
(i) made commitments or agreements for capital expenditures or capital
additions or betterments exceeding in the aggregate $10,000 except such as may
be involved in ordinary repair, maintenance or replacement of its assets; which
are disclosed on the Disclosure Schedule.
(j) increased the salaries or other compensation of, or made any advance
(excluding advances for ordinary and necessary business expenses) or loan to,
any of its employees or made any increase in, or any addition to, other benefits
to which any of its employees may be entitled;
(k) changed any of the accounting principles followed by it or the methods
of applying such principles; or
(l) entered into any transaction other than in the ordinary course of
business consistent with past practice.
(m) entered into any transaction obligating Seller to make payment in
excess of $10,000 other than as disclosed on the Disclosure Schedule.
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3.1.13 Title to Properties. Seller has good, valid and marketable title
to all of its properties and assets, personal and mixed, which would be
included in the Business or the Assets if the Closing took place on the date
hereof, which it purports to own, including without limitation all properties
and assets reflected in the Interim Balance Sheet (except for inventory sold
since the date thereof in the ordinary course of business consistent with past
practice) free and clear of all mortgages, liens, pledges, security interests,
charges, claims, restrictions and other encumbrances and defects of title of any
nature whatsoever, except for (i) liens for current personal property taxes not
yet due and payable, (ii) liens disclosed in the Disclosure Schedule in response
to this Section, and (iii) liens not to exceed in the aggregate $10,000 that are
immaterial in character, amount, and extent, and which do not detract from the
value or interfere with the present or proposed use of the properties they
affect ("Permitted Liens"). Seller has no real property.
3.1.14 Condition of Tangible Assets. All buildings, structures,
facilities, equipment and other material items of tangible property and assets
which would be included in the Assets if the Closing took place on the date
hereof are in good operating condition and repair, subject to normal wear and
maintenance, are usable in the regular and ordinary course of business and
conform to all applicable laws, ordinances, codes, rules and regulations, and
Authorizations relating to their construction, use and operation. No person
other than Seller owns any equipment or other tangible assets or properties
situated on the premises of Seller or necessary to the operation of the business
of Seller, except for leased items disclosed in the Disclosure Schedule and for
items of immaterial value.
3.1.15 Compliance with Law; Authorizations. Seller has complied with
each, and is not in violation of any, law, ordinance, or governmental or
regulatory rule or regulation, whether federal, state, local or foreign, to
which Seller's business, operations, assets or properties is subject including
all rules and regulations of the Federal Trade Commission ("Regulations").
Seller owns, holds, possesses or lawfully uses in the operation of its business
all franchises, licenses, permits, easements, rights, applications, filings,
registrations and other authorizations ("Authorizations") which are in any
manner necessary for it to conduct its business as now or previously conducted
or for the ownership and use of the assets owned or used by Seller in the
conduct of the business of Seller, free and clear of all liens, charges,
restrictions and encumbrances and in compliance with all Regulations. All such
Authorizations are listed and described in the Disclosure Schedule. Seller is
not in default, nor has it received any notice of any claim of default, with
respect to any such Authorization. All such Authorizations are renewable by
their terms or in the ordinary course of business without the need to comply
with any special qualification procedures or to pay any amounts other than
routine filing fees. None of such Authorizations will be adversely affected by
consummation of the transactions contemplated hereby. No member, director,
officer, employee or former employee of Seller or any affiliates of Seller, or
any other person, firm or corporation owns or has any proprietary, financial or
other interest (direct or indirect) in any Authorization which Seller owns,
possesses or uses in the operation of the business of Seller as now or
previously conducted.
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3.1.16 Transactions With Affiliates. No Member, manager, officer or
employee of Seller, or any member of his or her immediate family or any other of
its, his or her affiliates, owns or has a 5% or more ownership interest in any
corporation or other entity that is or was during the last three years a party
to, or in any property which is or was during the last three years the subject
of, any material contract, Amended Agreement or understanding, business
arrangement or relationship with Seller.
3.1.17 Litigation. No litigation, including any arbitration,
investigation or other proceeding of or before any court, arbitrator or
governmental or regulatory official, body or authority is pending or, to the
best knowledge of Seller, threatened against Seller or which relates to the
assets of Seller or the transactions contemplated by this Amended Agreement, nor
does Seller know of any reasonably likely basis for any such litigation,
arbitration, investigation or proceeding, the result of which could adversely
affect Seller, its assets or the transactions contemplated hereby. Seller is not
a party to or subject to the provisions of any judgment, order, writ,
injunction, decree or award of any court, arbitrator or governmental or
regulatory official, body or authority which may adversely affect Seller, its
assets or the transactions contemplated hereby.
3.1.18 Insurance. The assets, properties and operations of Seller are
insured under various policies of general liability and other forms of
insurance, all of which are described in the Disclosure Schedule, which
discloses for each policy the risks insured against, coverage limits, deductible
amounts, all outstanding claims thereunder, and whether the terms of such policy
provide for retrospective premium adjustments. All such policies are in full
force and effect in accordance with their terms, no notice of cancellation has
been received, and there is no existing default or event which, with the giving
of notice or lapse of time or both, would constitute a default thereunder. Such
policies are in amounts which are adequate in relation to the business and
assets of Seller and all premiums to date have been paid in full. Seller has
not been refused any insurance, nor has its coverage been limited, by any
insurance carrier to which it has applied for insurance or with which it has
carried insurance during the past five years. The Disclosure Schedule also
contains a true and complete description of all outstanding bonds and other
surety arrangements issued or entered into in connection with the business,
assets and liabilities of Seller.
3.1.19 Contracts and Commitments. Except as disclosed in the Disclosure
Schedule, Seller is not a party to any written or oral:
(a) agreement, contract or commitment with any present or former
employee or consultant or for the employment of any person, including any
consultant, who is engaged in the conduct of the Business;
(b) agreement, contract or commitment for the future purchase of, or
payment for, supplies or products, or for the performance of services by a third
party which supplies, products or services are used in the conduct of the
Business or the Assets involving in any one case $1,000 or more;
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(c) agreement, contract or commitment to perform services ("Services
Contracts") in connection with the Business or the Assets involving in any one
case $1,000 or more;
(d) agreement, contract or commitment relating to the Business or the
Assets not otherwise listed on the Disclosure Schedule and continuing over a
period of more than six months from the date hereof or exceeding $1,000 in
value;
(e) distribution, dealer, representative or sales agency agreement,
contract or commitment relating to the Business or the Assets;
(f) lease under which Seller is either lessor or lessee relating to
the Business or the Assets or any property at which the Assets are located;
(g) note, debenture, bond, equipment trust agreement, letter of credit
agreement, loan agreement or other contract or commitment for the borrowing or
lending of money relating to the Business or the Assets or agreement or
arrangement for a line of credit or guarantee, pledge or undertaking of the
indebtedness of any other person relating to the Business or the Assets;
(h) agreement, contract or commitment for any charitable or political
contribution relating to the Business or the Assets;
(i) commitment or agreement for any capital expenditure or leasehold
improvement in excess of $10,000 relating to the Business or the Assets;
(j) agreement, contract or commitment limiting or restraining Seller,
the Business or any successor thereto from engaging or competing in any manner
or in any business, nor, to Seller's knowledge, is any employee of Seller
engaged in the conduct of the Business subject to any such agreement, contract
or commitment;
(k) license, franchise, distributorship or other agreement which
relates in whole or in part to any software, patent, trademark, trade name,
service mark or copyright or to any ideas, technical assistance or other know-
how of or used by Seller in the conduct of the Business; or
(l) agreement, contract or commitment relating to the Business or the
Assets not made in the ordinary course of business.
Each of the agreements, contracts, commitments, leases, plans and other
instruments, documents and undertakings listed in the Disclosure Schedule in
response to this Section, or not required to be listed therein because of the
amount thereof, under which Purchaser is to acquire rights or obligations
hereunder is valid and enforceable in accordance with its terms; Seller is, and
to Seller's knowledge all other parties thereto are, in compliance with the
provisions thereof; Seller is not, and to Seller's knowledge no other party
thereto is, in default in the performance, observance
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or fulfillment of any material obligation, covenant or condition contained
therein; and no event has occurred which with or without the giving of notice or
lapse of time, or both, would constitute a default thereunder. Furthermore, no
such agreement, contract, commitment, lease, plan or other instrument, document
or undertaking, in the reasonable opinion of Seller, contains any contractual
requirement with which there is a reasonable likelihood Seller or any other
party thereto will be unable to comply. No written or oral agreement, contract
or commitment described therein requires the consent of any party to its
assignment in connection with the transactions contemplated hereby.
Except as disclosed on the Disclosure Schedule, each Service Contract is in
one of the forms attached to the Disclosure Schedule with only such changes
thereto as are necessary to reflect applicable fees, products, and time periods
and such other changes therein as do not materially affect the rights or
obligations of Seller thereunder.
The Disclosure Schedule accurately discloses with respect to each Services
Contract disclosed therein, the customer name; the form from which such contract
has been derived; whether or not the contract amount is fixed or may be varied
based on services performed; if the contract amount is fixed, the contract
amount, or, if the contract amount is not fixed, a good faith, reasonable
estimate of the contract amount and the estimated contract amount most recently
communicated to the customer; a good faith, reasonable estimate of the work
completed and total costs incurred to the date hereof thereunder; the total
billings as of the date hereof under such contract; the estimated completion
dates therefor; whether or not Seller has any reason to believe that its profit
margin with respect to such contract might be less than it has customarily
achieved in the past for similar contracts; and whether such contract requires
the furnishing of goods or services by persons other than the employees of
Seller.
3.1.20 Additional Information. The Disclosure Schedule contains accurate
lists and summary descriptions of the following:
(a) all inventory, equipment and furniture and fixtures of Seller
included in the Assets as of the Interim Balance Sheet Date, specifying such
items as are owned and such as are leased and, with respect to the owned
property, specifying its aggregate cost or original value and the net book value
as of Interim Balance Sheet Date and, with respect to the leased property as to
which Seller is lessee, specifying the identity of the lessor, the rental rate
and the unexpired term of the lease;
(b) all real property leased by Seller in the conduct of the Business
or upon which the Assets are located as of the Interim Balance Sheet Date,
specifying the identity of the lessor, the rental rate and the unexpired term of
the lease;
(c) the name and address of every bank and other financial institution
in which Seller or its affiliates maintain an account (whether checking, savings
or otherwise), lock box or safe
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deposit box for the Business, and the account numbers and names of persons
having signing authority or other access thereto;
(d) the names and titles of and current annual base salary or hourly
rates for all employees of Seller engaged in the conduct of the Business,
together with a statement of the full amount and nature of any other
remuneration, whether in cash or kind, paid to each such person during the past
or current fiscal year or payable to each such person in the future and the
bonuses accrued for, the vacation and severance benefits to which, each such
person is entitled; and
(e) all names under which Seller has conducted any business or which
it has otherwise used during the last five years.
3.1.21 Labor Matters. Seller has not suffered any strike, slowdown,
picketing or work stoppage by any union or other group of employees affecting
the business of Seller. Seller is not a party to any collective bargaining
agreement, no such agreement determines the terms and conditions of employment
of any employee of Seller, no collective bargaining agent has been certified as
a representative of any of the employees of Seller, and no representation
campaign or election is now in progress with respect to any of the employees of
Seller. Seller is not delinquent as to contributions or payments to, or in
respect of, any employee benefit plan. sponsored, maintained or supported
pursuant to a collective bargaining agreement covering one or more of the
employees of Seller, nor has Seller failed to pay any assessment with respect to
any such plan.
3.1.22 Employee Benefit Plans and Arrangements.
(a) Identification of Employee Benefit Plans. The Disclosure Schedule
contains a complete list of all employee benefit plans, whether formal or
informal, whether or not set forth in writing, and whether covering one person
or more than one person, sponsored or maintained by the Company. For the
purposes hereof, the term "employee benefit plan" includes all plans, funds,
programs, policies, arrangements, practices, customs and understandings
providing benefits of economic value to any employee, former employee, or
present or former beneficiary, dependent or assignee of any such employee or
former employee other than regular salary, wages or commissions paid
substantially concurrently with the performance of the services for which paid.
Without limitation, the term "employee benefit plan" includes all employee
welfare benefit plans within the meaning of section 3(l) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), all employee
pension benefit plans within the meaning of section 3(2) of ERISA. Each
employee benefit plan providing benefits is fully funded or funded through a
policy of insurance and is indicated by the word "insured" placed by the listing
of the plan in the Disclosure Schedule.
3.1.23 Intellectual Property Matters. The Company in the conduct of the
Business did not and does not utilize any patent, trademark, trade name, service
mark, copyright, software, trade secret or know-how except for those listed on
the Disclosure Schedule (the "Intellectual Property"), all of which are owned by
the Company free and clear of any liens, claims, charges or encumbrances.
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The Company does not infringe upon or unlawfully or wrongfully use any patent,
trademark, trade name, service mark, copyright or trade secret owned or claimed
by another. The Company is not in default under, and has not received any notice
of any claim of infringement or any other claim or proceeding relating to any
such patent, trademark, trade name, service mark, copyright or trade secret. No
present or former employee of the Company and no other person owns or has any
proprietary, financial or other interest, direct or indirect, in whole or in
part, in any patent, trademark, trade name, service mark or copyright, or in any
application therefor, or in any trade secret, which the Company owns, possesses
or uses in its operations as now or heretofore conducted. The Disclosure
Schedule lists all confidentiality or nondisclosure agreements to which the
Company or any of Company's employees engaged in the Business is a party which
relates to the Business.
3.1.24 The Software.
(a) Performance. The computer software of Seller included in the
Intellectual Property (the "Software") performs in accordance with the
documentation and other written material used in connection with the Software
and is free of defects in programming and operation, is in machine-readable
form, contains all current revisions of such software, and includes all computer
programs, materials, tapes, know-how, object and source codes, other written
materials, know-how and processes related to the Software. Seller has delivered
to the Purchaser complete and correct copies of all user and technical
documentation related to the Software.
(b) Enhancements, New Products. Neither Seller nor, to the best
knowledge of Seller, any employee or agent thereof has developed or assisted in
the enhancement of the Software except for enhancements included in the Software
as delivered to Purchaser pursuant hereto or the development of any program or
product based on the Software or any part thereof.
(c) Development. No employee of Seller is, or is now expected to be,
in default under any term of any employment contract, agreement or arrangement
relating to the Software or noncompetition arrangement, or any other Contract or
any restrictive covenant relating to the Software or its development or
exploitation. The Software was developed entirely by the employees of Seller
during the time they were employees only of Seller and such Software does not
include any inventions of the employees made prior to the time such employees
became employees of Seller nor any intellectual property of any previous
employer of such employee.
(d) Title. All right, title and interest in and to the Software is
owned by Seller, free and clear of all liens, claims, charges or encumbrances,
are fully transferable to the Purchaser, and no party other than Seller has any
interest in the Software, including without limitation, any security interest,
license, contingent interest or otherwise. Seller's development, use, sale or
exploitation of the Software does not violate, any rights of any other person or
entity and Seller has not received any communication alleging such a violation.
Seller does not have any obligation to compensate any Person for the
development, use, sale or exploitation of the Software nor has Seller
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granted to any other person or entity any license, option or other rights to
develop, use, sell or exploit in any manner the Software, whether requiring the
payment of royalties or not.
(e) Protection of Proprietary Nature of Software. Seller has kept
secret and has not disclosed the source code for the Software to any person or
entity other than certain employees of Seller who are subject to the terms of a
binding confidentiality agreement with respect thereto. Seller has taken all
appropriate measures to protect the confidential and proprietary nature of the
Software, including without limitation the use of confidentiality agreements
with all of its employees having access to the Software source and object code.
There have been no patents applied for and no copyrights registered for any part
of the Software. There are no trademark rights of any person or entity in the
name "[name of software]".
(f) Delivery of All Copies. All copies of the Software embodied in
physical form are being delivered to the Purchaser at or prior to the Closing.
3.1.25 Environmental Matters.
(a) Except as set forth in the Disclosure Schedule, Seller has
obtained all permits, licenses and other authorizations which are required in
connection with the conduct of the Business under Regulations relating to
pollution or protection of the environment, including Regulations relating to
emissions, discharges, releases or threatened releases of pollutants,
contaminants, chemicals, or industrial, toxic or hazardous substances or wastes
into the environment (including without limitation ambient air, surface water,
groundwater, or land), or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport, or handling of
pollutants, contaminants, chemicals, or industrial, toxic or hazardous
substances or wastes.
(b) Except as set forth in the Disclosure Schedule, Seller is in full
compliance in the conduct of the Business with all terms and conditions of the
required permits, licenses and authorizations, and is also in full compliance
with all other limitations, restrictions, conditions, standards, prohibitions,
requirements, obligations, schedules and timetables contained in those laws or
contained in any regulation, code, plan, order, decree, judgment, injunction,
notice or demand letter issued, entered, promulgated or approved thereunder.
(c) Except as set forth in the Disclosure Schedule, Seller is not
aware or, nor has Seller nor any of its subsidiaries received notice of, any
past, present or future events, conditions, circumstances, activities,
practices, incidents, actions or plans which may interfere with or prevent
compliance or continued compliance with those laws or any regulations, code,
plan, order, decree, judgment, injunction, notice or demand letter issued,
entered, promulgated or approved thereunder, or which may give rise to any
common law or legal liability, or otherwise form the basis of any claim, action,
demand, suit, proceeding, hearing, study or investigation, based on or related
to the manufacture, processing, distribution, use, treatment, storage, disposal,
transport, or handling, or the
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emission, discharge, release or threatened release into the environment, of any
pollutant, contaminant, chemical, or industrial, toxic or hazardous substance or
waste.
(d) Except as set forth in the Disclosure Schedule, there is no civil,
criminal or administrative action, suit, demand, claim, hearing, notice or
demand letter, notice of violation, investigation, or proceeding pending or
threatened against Seller in connection with the conduct of the Business
relating in any way to those laws or any regulation, code, plan, order, decree,
judgment, injunction, notice or demand letter issued, entered, promulgated or
approved thereunder.
(e) Seller agrees to cooperate with Purchaser in connection with
Purchaser's application for the transfer, renewal or issuance of any permits,
licenses, approvals or other authorizations or to satisfy any regulatory
requirements involving Seller's business.
3.1.26 Leased Real Property. With respect to the real property that is
leased by Seller, which is identified on the Disclosure Statement:
(i) Seller shall, within ten (10) days after the date of this Amended
Agreement, deliver to Purchaser a true and complete copy of every lease and
sublease to which Seller is a tenant or subtenant (the "Leases"), and shall
describe each Lease on the Disclosure Schedule by listing the name of the
landlord or sublandlord, a description of the leased premises, the commencement
and expiration dates of the current term, the security deposited by Seller with
the landlord or sublandlord, if any, the monthly rental (including base and all
additional rents), and whether Seller may assign the Lease to Purchaser (if the
consent of the landlord or sublandlord is required for such an assignment, that
should be set forth on the Disclosure Schedule);
(ii) each Lease is, and at Closing shall be, in full force and effect
and has not been assigned, modified, supplemented or amended except as listed on
the Disclosure Schedule, and neither Seller nor the landlord or sublandlord
under any Lease is in default under any of the Leases, and no circumstances or
state of facts presently exists which, with the giving of notice or passage of
time, or both, would permit the landlord or sublandlord under any Lease to
terminate any Lease; and
(iii) at Closing Seller shall assign to the Purchaser all right,
title and interest of Seller in and to all Leases (and shall deliver to
Purchaser original copies of all consents required for such assignments) and all
security deposits made by Seller pursuant to any of the Leases, including, but
not limited to, the security deposits listed on the Disclosure Schedule,
together with all interest earned on such deposits.
3.1.27 Availability of Documents. Seller has made available to Purchaser
copies of all documents, including without limitation all agreements, contracts,
commitments, insurance policies, leases, plans, instruments, undertakings
authorizations, permits, licenses, patents, trademarks, trade names, service
marks, copyrights and applications therefor listed in the Disclosure Schedule
hereto
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or referred to herein. Such copies are true and complete and include all
amendments, supplements and modifications thereto or waivers currently in effect
thereunder.
3.1.28 Assets. The Assets include all rights and property necessary to
the conduct of the Business by Purchaser in the manner it is presently conducted
by Seller and no property excluded from the Assets under Section 1.1 hereof
constitutes property or rights material to the Business. Additionally, Seller
hereby represents and warrants that it has in its inventory, at its principal
place of business, calling cards, whose value would be at least $100,000 if an
orderly liquidation were to occur.
3.1.29 Restrictions. Seller is not a party to any indenture, agreement,
contract, commitment, lease, plan, license, permit, authorization or other
instrument, document or understanding, oral or written, or subject to any
charter or other corporate restriction or any judgment, order, writ, injunction,
decree or award which materially adversely affects or materially restricts or,
so far as Seller can now reasonably foresee, may in the future materially
adversely affect or materially restrict, the business, operations, assets,
properties, prospects or condition (financial or otherwise) of the Business
after consummation of the transactions contemplated hereby.
3.1.30 Conditions Affecting Seller. There is no fact, development or
threatened development with respect to the markets, products, services, clients,
customers, facilities, computer software, data bases, personnel, vendors,
suppliers, operations, assets or prospects of the Business which are known to
Seller which would materially adversely affect the business, operations or
prospects of Seller considered as a whole, other than such conditions as may
affect as a whole the economy generally. Seller has used its best efforts to
keep available for Purchaser the services of the employees, agents, customers
and suppliers of Seller active in the conduct of the Business. Seller does not
have any reason to believe that any loss of any employee, agent, customer or
supplier or other advantageous arrangement will result because of the
consummation of the transactions contemplated hereby.
3.1.31 Completeness of Disclosure. No representation or warranty by
Seller in this Amended Agreement nor any certificate, schedule, statement,
document or instrument furnished or to be furnished to Purchaser pursuant
hereto, or in connection with the negotiation, execution or performance of this
Amended Agreement, contains or will contain any untrue statement of a material
fact or omits or will omit to state a material fact required to be stated herein
or therein or necessary to make any statement herein or therein not misleading.
3.2 Representations and Warranties of Purchaser. Purchaser represents and
warrants to Seller as follows:
3.2.1 Corporate Existence. Purchaser is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
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3.2.2 Corporate Power and Authorization. Purchaser has the corporate
power, authority and legal right to execute, deliver and perform this Amended
Agreement. This Amended Agreement has been duly executed and delivered by
Purchaser and constitutes the legal, valid and binding obligation of Purchaser
enforceable against Purchaser in accordance with its terms, subject to any
requirements, limitations or conditions set forth in Section 5.1.8 below.
3.2.3 Validity of Contemplated Transactions, etc. Except as described
herein, the execution, delivery and performance of this Amended Agreement by
Purchaser does not and will not violate, conflict with or result in the breach
of any term, condition or provision of, or require the consent of any other
party to, (a) any existing law, ordinance, or governmental rule or regulation to
which Purchaser is subject, (b) any judgment, order, writ, injunction, decree or
award of any court, arbitrator or governmental or regulatory official, body or
authority which is applicable to Purchaser, (c) the charter documents or ByLaws
of, or any securities issued by, Purchaser, or (d) any mortgage, indenture,
agreement, contract, commitment, lease, plan or other instrument, document or
understanding, oral or written, to which Purchaser is a party or by which
Purchaser is otherwise bound. Except as aforesaid, no authorization, approval
or consent of, and no registration or filing with, any governmental or
regulatory official, body or authority is required in connection with the
execution, delivery and performance of this Amended Agreement by Purchaser.
3.3 Survival of Representations and Warranties. All representations and
warranties made by the parties in this Amended Agreement or in any certificate,
schedule, statement, document or instrument furnished hereunder or in connection
with negotiation, execution and performance of this Amended Agreement shall
survive the Closing for a period of three years. Notwithstanding any
investigation or audit conducted before or after the Closing Date or the
decision of any party to complete the Closing, each party shall be entitled to
rely upon the representations and warranties set forth herein and therein.
ARTICLE IV
AGREEMENTS PENDING CLOSING
4.1 Agreements of Seller Pending the Closing. Seller covenants and agrees
that, pending the Closing and except as otherwise agreed to in writing by
Purchaser:
4.1.1 Business in the Ordinary Course. The Business shall be conducted
solely in the ordinary course consistent with past practice.
4.1.2 Existing Condition. Seller shall not cause nor permit to occur any
of the events or occurrences described in Section 3.1.12 hereof.
4.1.3 Maintenance of Physical Assets. Seller shall continue to maintain
and service the physical assets used in the conduct of the Business in the same
manner as has been its consistent past practice.
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4.1.4 Employees and Business Relations. Seller shall use its best efforts
to keep available the services of the present employees and agents of the
Business and to maintain the relations and goodwill with the suppliers,
customers, distributors and any others having business relations with the
Business.
4.1.5 Maintenance of Insurance. Seller shall notify Purchaser of any
changes in the terms of the insurance policies and binders referred to on
Schedule 3.1.18 hereto.
4.1.6 Intentionally Omitted
4.1.7 Compliance with Laws, etc. Seller shall comply with all laws,
ordinances, rules, regulations and orders applicable to the Business, or
Seller's operations, assets or properties in respect thereof, the noncompliance
with which might materially affect the Business or the Assets.
4.1.8 Update Schedules. Seller shall promptly disclose to Purchaser any
information contained in its representations and warranties or the Schedules
which, because of an event occurring after the date hereof, is incomplete or is
no longer correct as of all times after the date hereof until the Closing Date;
provided, however, that none of such disclosures shall be deemed to modify,
amend or supplement the representations and warranties of Seller or the
schedules hereto for the purposes of Article V hereof, unless Purchaser shall
have consented thereto in writing.
4.1.9 Conduct of Business. Seller shall use its best efforts to conduct
its business in such a manner that on the Closing Date the representations and
warranties of Seller contained in this Amended Agreement shall be true, except
as specifically contemplated by this Article IV, as though such representations
and warranties were made on and as of such date. Furthermore, Seller shall
cooperate with Purchaser and use its best efforts to cause all of the conditions
to the obligations of Purchaser and Seller under this Amended Agreement to be
satisfied on or prior to the Closing Date.
4.1.10 Sale of Assets; Negotiations. Seller shall not, directly or
indirectly, sell, or encumber the Business or all or any part of the Assets,
other than in the ordinary course of its business consistent with past practice,
or initiate or participate in any discussions or negotiations or enter into any
agreement to do any of the foregoing. Seller shall not provide any confidential
information concerning the Business or its properties or assets to any third
party other than in the ordinary course of business.
4.1.11 Access. Seller shall give to Purchaser's officers, employees,
counsel, accountants and other representatives free and full access to and the
right to inspect, during normal business hours, all of the premises, properties,
assets, records, contracts and other documents relating to the Business and
shall permit them to consult with the officers, employees, accountants, counsel
and agents of Seller for the purpose of making such investigation of the
Business, including without limitation the Interim Balance Sheet, as Purchaser
shall desire to make, provided that such investigation shall not
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unreasonably interfere with Seller's business operations. Furthermore, Seller
shall furnish to Purchaser all such documents and copies of documents and
records and information with respect to the affairs of the Business and copies
of any working papers relating thereto as Purchaser shall from time to time
reasonably request and shall permit Purchaser and its agents to make such
physical inventories and inspections of the Business and the Assets as Purchaser
may request from time to time.
4.1.12 Press Releases. Except as required by applicable law, neither
Seller nor any Member shall give notice to third parties or otherwise make any
public statement or releases concerning this Amended Agreement or the
transactions contemplated hereby except for such written information as shall
have been approved in writing as to form and content by Purchaser and ENET,
which approval shall not be unreasonably withheld.
4.2 Agreements of Purchaser Pending the Closing. Purchaser covenants and
agrees that, pending the Closing and except as otherwise agreed to in writing by
Seller:
4.2.1 Actions of Purchaser. Purchaser will not knowingly take any action
which would result in a breach of any of its representations and warranties
hereunder. Furthermore, Purchaser shall cooperate with Seller and use its best
efforts to cause all of the conditions to the obligations of Purchaser and
Seller under this Amended Agreement to be satisfied on or prior to the Closing
Date.
4.2.2 Confidentiality. Except for such disclosure that may be required by
law or regulation, unless and until the Closing has been consummated, Purchaser
will hold, and shall cause its counsel, independent certified public
accountants, appraisers and investment bankers to hold in confidence any
confidential data or information made available to Purchaser in connection with
this Amended Agreement with respect to the Business or the Assets using the same
standard of care to protect such confidential data or information as is used to
protect Purchaser's confidential information. If the transactions contemplated
by this Amended Agreement are not consummated, Purchaser agrees that it shall
return or cause to be returned to Seller all written materials and all copies
thereof that were supplied to Purchaser by Seller and that contain any such
confidential data or information.
4.2.3 Press Releases. Except as required by applicable law or regulation,
Purchaser will not give notice to third parties or otherwise make any public
statement or releases concerning this Amended Agreement or the transactions
contemplated hereby except for such written information as shall have been
approved in writing as to form and content by Seller, which approval shall not
be unreasonably withheld.
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ARTICLE V
CONDITIONS PRECEDENT TO THE CLOSING
5.1 Conditions Precedent to Purchaser's Obligations. All obligations of
Purchaser under this Amended Agreement are subject to conditions required by
this Amended Agreement to be performed or complied with by them prior to or at
the Closing.
5.1.1 Representations and Warranties True as of the Closing Date. The
representations and warranties of Seller contained in this Amended Agreement or
in any schedule, certificate or document delivered by Seller to Purchaser
pursuant to the provisions hereof shall have been true on the date hereof
without regard to any schedule updates furnished by Seller after the date hereof
and shall be true on the Closing Date with the same effect as though such
representations and warranties were made as of such date.
5.1.2 Compliance with this Agreement. Seller shall have performed and
complied with all agreements and conditions required by this Amended Agreement
to be performed or complied with by it prior to or at the Closing.
5.1.3 Closing Certificate. Purchaser shall have received a certificate
from Seller dated the Closing Date, certifying in such detail as Purchaser may
reasonably request that the conditions specified in Sections 5.1.1 and 5.1.2
hereof have been fulfilled and certifying that Seller has obtained all consents
and approvals required with respect to it or the Business and the Assetsby
Section 5.1.6 hereof.
5.1.4 Opinions of Counsel for Seller. Johnson, Grusin, Kee and Surprise,
P.C., counsel for Seller, shall have delivered to Purchaser a written opinion,
dated the Closing Date, in the form of Exhibit F hereto with only such changes
as shall be in form and substance reasonably satisfactory to the Purchaser and
its counsel.
5.1.5 No Threatened or Pending Litigation. On the Closing Date, no suit,
action or other proceeding, or injunction or final judgment relating thereto,
shall be threatened or be pending before any court or governmental or regulatory
official, body or authority in which it is sought to restrain or prohibit or to
obtain damages or other relief in connection with this Amended Agreement or the
consummation of the transactions contemplated hereby, and no investigation that
might result in any such suit, action or proceeding shall be pending or
threatened.
5.1.6 Consents and Approvals. Except for consents required by the terms
of the contracts, commitments, agreements listed in the Disclosure Schedule, the
holders of any indebtedness of Seller, the lessors or lessees of any real or
personal property or assets leased by Seller, the parties (other than Seller) to
any contract, commitment or agreements to which Seller is a party or subject,
any governmental or regulatory official, body or authority or any other person
which owns or has
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authority to grant any governmental, judicial or regulatory official, body or
authority having jurisdiction over Member, Seller or Purchaser to the extent
that their consent or approval is required or necessary under the pertinent
debt, lease, contract, commitment or agreement or other document or instrument
or under applicable orders, laws, rules or regulations, for the consummation of
the transactions contemplated hereby in the manner herein provided, shall have
granted such consent or approval.
5.1.7 Material Adverse Changes. The business, operations, assets,
properties or prospects of the Business shall not have been and shall not be
threatened to be materially adversely affected in any way as a result of any
event or occurrence.
5.1.8 Approvals of ENET Stockholders and Board of Directors. Prior to
consummation of the transactions contemplated herein, ENET must have obtained
approval from its stockholders to (i) enter into the transactions contemplated
herein, and (ii) amend its Articles of Incorporation to increase the number of
shares of common stock to an amount sufficient to be available for issuance to
Seller and the Members all ENET Common stock required to be issued hereunder.
Purchaser shall have obtained by the Board of Directors of ENET resolutions
approving the transactions contemplated by this Amended Agreement.
5.1.9 Confidentiality and Noncompetition Agreements. All Members shall
execute and deliver the Confidentiality and Noncompetition Agreements in a form
satisfactory to Purchaser.
5.1.10 Key Employee Agreements. Each of the employees of the Business
listed in Schedule 5.1.9 hereto shall have executed and delivered an agreement
substantially in the form of Exhibit D hereto.
5.1.11 Approval of Counsel; Corporate Matters. All actions, proceedings,
resolutions, instruments and documents required to carry out this Amended
Agreement or incidental hereto and all other related legal matters shall have
been approved on the Closing Date by DiCecco, Fant & Burman, LLP counsel for
Purchaser, in the exercise of their reasonable judgment. The Members and Seller
shall also have delivered to Purchaser such other documents, instruments,
certifications and further assurances as such counsel may reasonably require.
5.2 Conditions Precedent to the Obligations of Seller. All obligations of
Seller under this Amended Agreement are subject to the fulfillment or
satisfaction, prior to or at the Closing, of each of the following conditions
precedent:
5.2.1 Representations and Warranties True as of the Closing Date. The
representations and warranties of Purchaser contained in this Amended Agreement
or in any list, certificate or document delivered by Purchaser to Seller
pursuant to the provisions hereof shall be true on the Closing Date with the
same effect as though such representations and warranties were made as of such
date.
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5.2.2 Compliance with this Amended Agreement. Purchaser shall have
performed and complied with agreements and conditions required by this Amended
Agreement to be performed or complied with by it prior to or at the Closing:
5.2.3 Closing Certificates. Seller shall have received a certificate from
Purchaser dated the Closing Date certifying in such detail as Seller may
reasonably request that the conditions specified in Sections 5.2.1 and 5.2.2
hereof have been fulfilled.
5.2.4 Opinion of Counsel for Purchaser. DiCecco, Fant & Burman, LLP,
counsel to Purchaser, shall have delivered to Seller a written opinion, dated
the Closing Date, in the form of Exhibit K hereto with only such changes as
shall be in form and substance reasonably satisfactory to Seller and its
counsel.
5.2.5 No Threatened or Pending Litigation. On the Closing Date, no suit,
action or other proceeding, or injunction or final judgment relating thereto,
shall be threatened or be pending before any court or governmental or regulatory
official, body or authority in which it is sought to restrain or prohibit or to
obtain damages or other relief in connection with this Amended Agreement or the
consummation of the transactions contemplated hereby, and no investigation that
might result in any such suit, action or proceeding shall be pending or
threatened.
5.2.6 Approval of Counsel; Corporate Matters. All actions, proceedings,
resolutions, instruments and documents required to carry out this Amended
Agreement or incidental hereto and all other related legal matters shall have
been approved on the Closing Date by counsel for Seller in the exercise of their
reasonable judgment. Purchaser shall also have delivered to Seller such other
documents, instruments, certifications and further assurances as such counsel
for Seller may reasonably require.
ARTICLE VI
INDEMNIFICATION
6.1 General Indemnification Obligation of Seller and the Members. From
and after the Closing, each of Seller and the Members, jointly and severally,
will reimburse, indemnify and hold harmless Purchaser and its successors and
assigns (an "Indemnified Purchaser Party") against and in respect of:
(a) any and all damages, losses, deficiencies, liabilities, costs and
expenses incurred or suffered by any Indemnified Purchaser Party that results
from, relates to or arises out of:
(i) any and all liabilities and obligations of Seller or any nature
whatsoever, except for those liabilities and obligations of Seller which
Purchaser specifically assumes pursuant to this Amended Agreement;
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(ii) any and all actions, suits, claims, or legal, administrative,
arbitration, governmental or other proceedings or investigations against
any Indemnified Purchaser Party that relate to Seller or the Business in
which the principal event giving rise thereto occurred prior to the Closing
Date or which result from or arise out of any action or inaction prior to
the Closing Date of Seller or any director, officer, employee, agent,
representative or subcontractor of Seller, except for those which Purchaser
specifically assumes pursuant to this Amended Agreement; or
(iii) any misrepresentation, breach of warranty or nonfulfillment of
any agreement or covenant on the part of Seller or Members under this
Amended Agreement, or from any misrepresentation in or omission from any
certificate, schedule, statement, document or instrument furnished to
Purchaser pursuant hereto or in connection with the negotiation, execution
or performance of this Amended Agreement; and
(b) any and all actions, suits, claims, proceedings, investigations,
demands, assessments, audits, fines, judgments, costs and other expenses
(including, without limitation, reasonable legal fees and expenses) incident to
any of the foregoing or to the enforcement of this Section 6.1.
6.2 General Indemnification Obligation of Purchaser. From and after the
Closing, Purchaser will reimburse, indemnify and hold harmless Seller and its
successors or assigns (an "Indemnified Seller Party") against and in respect of:
(a) Any and all damages, losses, deficiencies, liabilities, costs and
expenses incurred or suffered by any Indemnified Seller Party that result from,
relate to or arise out of:
(i) any and all liabilities and obligations of Seller which have been
specifically assumed by Purchaser to this Amended Agreement;
(ii) any misrepresentation, breach of warranty or non-fulfillment of
any agreement or covenant on the part of Purchaser under this Amended
Agreement, or from any misrepresentation in or omission from any
certificate, schedule, statement, document or instrument furnished to
Seller pursuant hereto or in connection with the negotiation, execution or
performance of this Amended Agreement; and
(b) any and all actions, suits, claims, proceeding, investigations,
demands, assessments, audits, fines, judgments, costs and other expenses
(including, without limitation, reasonable legal fees and expenses) incident to
any of the foregoing or to the enforcement of this Section 6.2.
6.3 Method of Asserting Claims, Etc. In the event that any claim or
demand for which Seller or the Members would be liable to an Indemnified
Purchaser Party hereunder is asserted
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against or sought to be collected from an Indemnified Purchaser Party by a third
party, the Indemnified Purchaser Party shall promptly notify Seller and the
Members of such claim or demand, specifying the nature of such claim or demand
and the amount or the estimated amount thereof to the extent then feasible
(which estimate shall not be conclusive of the final amount of such claim and
demand) (the "Claim Notice"). Seller and the Members shall have ten days from
the personal delivery or mailing of the Claim Notice (the "Notice Period") to
notify the Indemnified Purchaser Party, (A) whether or not they dispute their
liability to the Indemnified Purchaser Party hereunder with respect to such
claim or demand and (B) notwithstanding any such dispute, whether or not they
desire, at their sole cost and expense, to defend the Indemnified Purchaser
Party against such claim or demand.
(a) If Seller or the Members disputes its liability with respect to
such claim or demand or the amount thereof (whether or not Seller or the Members
desires to defend the Indemnified Purchaser Party against such claim or demand
as provided in paragraphs (b) and (c) below), such dispute shall be resolved in
accordance with Section 6.5 hereof. Pending the resolution of any dispute by
Seller or the Members of its liability with respect to any claim or demand, such
claim or demand shall not be settled without the prior written consent of the
Indemnified Purchaser Party.
(b) In the event that Seller or the Members notifies the Indemnified
purchaser Parties within the Notice Period that they desire to defend the
Indemnified Purchaser Party against such claim or demand then, except as
hereinafter provided, Seller or the Members, respectively, shall have the right
to defend the Indemnified Purchaser Party by appropriate proceedings, which
proceedings shall be promptly settled or prosecuted by them to a final
conclusion in such a manner as to avoid any risk of Indemnified Purchaser Party
becoming subject to liability for any other matter; provided, however, Seller
and the Members shall not, without the prior written consent of the Indemnified
Purchaser Party, consent to the entry of any judgment against the Indemnified
Purchaser Party or enter into any settlement or compromise which does not
include, as an unconditional term thereof, the giving by the claimant or
plaintiff to the Indemnified Purchaser Party of a release, in form and substance
satisfactory to the Indemnified Purchaser Party, as the case may be, from all
liability in respect of such claim or litigation. If any Indemnified Purchaser
Party desires to participate in, but not control, any such defense or
settlement, it may do so at its sole cost and expense. If, in the reasonable
opinion of the Indemnified Purchaser Party, any such claim or demand or the
litigation or resolution of any such claim or demand involves an issue or matter
which could have a materially adverse effect on the business, operations,
assets, properties or prospects of the Indemnified Purchaser Party, including
without limitation the administration of the tax returns and responsibilities
under the tax laws of any Indemnified Purchaser Party, then the Indemnified
Purchaser Party shall have the right to control the defense or settlement of any
such claim or demand and its reasonable costs and expenses shall be included as
part of the indemnification obligation of Seller and the Members hereunder;
provided, however, that the Indemnified Purchaser Party shall not settle any
such claim or demand without the prior written consent of Seller or the Members
which consent shall not be unreasonably withheld. If the Indemnified Purchaser
Party should elect
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to exercise such right, Seller or the Members shall have the right to
participate in, but not control, the defense or settlement of such claim or
demand at its sole cost and expense.
(c) (i) If Seller or the Members elects not to defend the Indemnified
Purchaser Party against such claim or demand, whether by not giving the
Indemnified Purchaser Party timely notice as provided above or otherwise, then
the amount of any such claim or demand, or if the same be defended by Seller or
the Members or by the Indemnified Purchaser Party (but none of the Indemnified
Purchaser Party shall have any obligation to defend any such claim or demand),
then that portion thereof as to which such defense is unsuccessful, in each case
shall be conclusively deemed to be a liability of Seller and the Members
hereunder, unless Seller and the Members shall have disputed their liability to
the Indemnified Purchaser Party hereunder, as provided in (a) above, in which
event such dispute shall be resolved as provided in Section 6.5 hereof.
(ii) In the event an Indemnified Purchaser Party should have a claim
against Seller or the Members hereunder that does not involve a claim or demand
being asserted against or sought to be collected from it by a third party, the
Indemnified Purchaser Party shall promptly send a Claim Notice with respect to
such claim to Seller and the Members. If Seller or the Members disputes its
liability with respect to such claim or demand, such dispute shall be resolved
in accordance with Section 6.5 hereof; if Seller or the Members does not notify
the Indemnified Purchaser Party within the Notice Period that it disputes such
claim, the amount of such claim shall be conclusively deemed a liability of
Seller or the Members, respectively, hereunder.
(d) All claims for indemnification by an Indemnified Seller Party
under this Amended Agreement shall be asserted and resolved under the procedures
set forth above substituting in the appropriate place "Indemnified Seller Party"
for "Indemnified Purchaser Party" and variations thereof and "Purchaser" for
"Seller and the Members."
6.4 Payment. Upon the determination of the liability under Section 6.3 or
6.5 hereof, the appropriate party shall pay to the other, as the case may be,
within ten (10) days after such determination, the amount of any claim for
indemnification made hereunder. In the event that the indemnified party is not
paid in full for any such claim pursuant to the foregoing provisions promptly
after the other party's obligation to indemnify has been determined in
accordance herewith, it shall have the right, notwithstanding any other rights
that it may have against any other person, firm or corporation, to setoff the
unpaid amount of any such claim against any amounts owed by it under any
agreements entered into pursuant to this Amended Agreement, the Seller's
Documents or the Purchaser's Documents. Upon the payment in full of any claim,
either by setoff or otherwise, the entity making payment shall be subrogated to
the rights of the indemnified party against any person, firm or corporation with
respect to the subject matter of such claim.
6.5 Arbitration. In the event that any dispute or controversy arises
between the parties to this Amended Agreement with respect to any provision
hereof, and the other party has been provided three (3) days written notice
(except as may otherwise be provided herein), such dispute
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or controversy shall be submitted for resolution to a board of arbitration in
Harris County, Texas composed of one member selected by the Seller and Members,
one member selected by Purchaser and one member selected by the aforementioned
two members. If the parties can not agree on the third member, either party may
submit a request to the Chief Judge for the United States District Court -
Southern District of Texas, to appoint the third member. Except with respect to
the selection of the members of the board of arbitration, the arbitration shall
be conducted pursuant to the commercial arbitration rules of the American
Arbitration Association. The decision of the board of arbitration (including any
award of costs of the board) shall be final and binding upon the parties, and
judgment upon the award rendered by the arbitrator may be entered in any court
having jurisdiction thereof. The arbitrators' authority shall include the
authority to order discovery, the ability to render equitable types of relief
and, in such event, any aforesaid court may enter an order enjoining and/or
compelling such actions as found by the arbitrators. The arbitrators also shall
make a determination regarding legal and other professional fees and costs
incurred by the parties in connection with such arbitration proceeding and award
any such fees and cost.
6.6 Compliance with Bulk Sales Laws. Purchaser and Seller hereby waive
compliance by Purchaser and Seller with the bulk sales law and any other similar
laws in any applicable jurisdiction in respect of the transactions contemplated
by this Amended Agreement. Seller shall indemnify Purchaser from, and hold it
harmless against, any liabilities, damages, costs and expenses resulting from or
arising out of (i) the parties, failure to comply with any of such laws in
respect of the transactions contemplated by this Amended Agreement, or (ii) any
action brought or levy made as a result thereof, other than those liabilities
which have been expressly assumed, on such terms as expressly assumed, by
Purchaser pursuant to this Amended Agreement.
6.7 Other Rights and Remedies Not Affected. The indemnification rights of
the parties under this Article VI are independent of and in addition to such
rights and remedies as the parties may have at law or in equity or otherwise for
any misrepresentation, breach of warranty or failure to fulfill any agreement or
covenant hereunder on the part of any party hereto, including without limitation
the right to seek specific performance, rescission or restitution, none of which
rights or remedies shall be affected or diminished hereby.
ARTICLE VII
POST CLOSING MATTERS
7.1 Employee Benefits. Seller shall pay directly to each employee of the
Business that portion of all benefits (limited to the arrangements, plans and
programs set forth in the Disclosure Schedule) which has been accrued on behalf
of that employee (or is attributable to expenses properly incurred by that
employee) as of the Closing Date, and Purchaser shall assume no liability
therefor. No portion of the assets of any plan, fund, program or arrangement,
written or unwritten, heretofore
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sponsored or maintained by Seller (and no amount attributable to any such plan,
fund, program or arrangement) shall be transferred to Purchaser, and Purchaser
shall not be required to continue any such plan, fund, program or arrangement
after the Closing Date. The amounts payable on account of all benefit
arrangements (other than as specified in the following subsections) shall be
determined with reference to the date of the event by reason of which such
amounts become payable, without regard to conditions subsequent, and Purchaser
shall not be liable for any claim for insurance, reimbursement or other benefits
payable by reason of any event which occurs prior to the Closing Date. All
amounts payable directly to employees, or to any fund, program, arrangement or
plan maintained by Seller therefor shall be paid by Seller within thirty (30)
days after the Closing Date to the extent that such payment is not inconsistent
with the terms of such fund, program, arrangement or plan. All employees of
Seller who are employed by Purchaser on or after the Closing Date shall be new
employees of Purchaser and any prior employment by Seller of such employees
shall not affect entitlement to, or the amount of, salary or other cash
compensation, current or deferred, which Purchaser may make available to its
employees.
7.2 Non-Solicitation. As of the Closing Date, Purchaser shall offer
employment to, and Seller shall use its best efforts to assist Purchaser in
employing as new employees of Purchaser, all persons presently engaged in the
Business who are identified by Purchaser prior to the Closing Date (the
"Employees"). Seller shall terminate effective as of the Closing Date all
employment agreements it has with any of the Employees. Until the third
anniversary of the Closing Date, Seller will not directly or indirectly solicit
or offer employment to any Employee (i) did not become an employee of Purchaser,
(ii) who is then an employee of Purchaser, or (iii) who has terminated such
employment without the consent of Purchaser within 180 days of such solicitation
or offer, and Purchaser will not directly or indirectly solicit or offer
employment to any person who, after the Closing Date is then an employee of
Seller or who has terminated such employment without the consent of Seller
within 180 days of such solicitation or offer.
7.3 Discharge of Business Obligations. From and after the Closing Date
Seller shall pay and discharge, in accordance with past practice but not less
than on a timely basis, all obligations and liabilities incurred prior to the
Closing Date in respect of the Business, its operations or the assets and
properties used therein (except for those expressly assumed by Purchaser
hereunder), including without limitation any liabilities or obligations to
employees, trade creditors and clients of the Business.
7.4 Maintenance of Books and Records. Each of Seller and Purchaser shall
preserve until the tenth (10th) anniversary of the Closing Date all records
possessed or to be possessed by such party relating to any of the assets,
liabilities or business of the Business prior to the Closing Date. After the
Closing Date, where there is a legitimate purpose, such party shall provide the
other parties with access, upon prior reasonable written request specifying the
need therefor, during regular business hours, to (i) the officers and employees
of such party and (ii) the books of account and records of such party, but in
each case, only to the extent relating to the assets, liabilities or business of
the Business prior to the Closing Date, and the other parties and their
representatives shall have
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the right to make copies of such books and records; provided, however, that the
foregoing right of access shall not be exercisable in such a manner as to
interfere unreasonably with the normal operations and business of such party;
and further, provided, that, as to so much of such information as constitutes
trade secrets or confidential business information of such party, the requesting
party and its officers, directors and representatives will use due care to not
disclose such information except (i) as required by law, (ii) with the prior
written consent of such party, which consent shall not be unreasonably withheld,
or (iii) where such information becomes available to the public generally, or
becomes generally known to competitors of such party, through sources other than
the requesting party, its affiliates or its officers, directors or
representatives. Such records may nevertheless be destroyed by a party if such
party sends to the other parties written notice of its intent to destroy
records, specifying with particularity the contents of the records to be
destroyed. Such records may then be destroyed after the thirtieth (30th) day
after such notice is given unless another party objects to the destruction in
which case the party seeking to destroy the records shall deliver such records
to the objecting party.
7.5 Payments Received. Seller and Purchaser each agree that after the
Closing they will hold and will promptly transfer and deliver to the other, from
time to time as and when received by them, any cash, checks with appropriate
endorsements (using their best efforts not to convert such checks into cash), or
other property that they may receive on or after the Closing which properly
belongs to the other party, including without limitation any insurance proceeds,
and will account to the other for all such receipts. From and after the
Closing, Purchaser shall have the right and authority to endorse without
recourse the name of Seller on any check or any other evidences of indebtedness
received by Purchaser on account of the Business and the Assets transferred to
Purchaser hereunder.
7.6 Use of Name. From and after the Closing Date, Seller will sign such
consents and take such other action as Purchaser shall reasonably request in
order to permit Purchaser to use the name "ACMI" and variants thereof. From and
after the Closing Date, Seller will not itself use the name "ACMI" or any names
similar thereto or variants thereof.
7.7 UCC Matters. From and after the Closing Date, Seller will promptly
refer all inquiries with respect to ownership of the Assets or the Business to
Purchaser. In addition, Seller will execute such documents and financing
statements as Purchaser may request from time to time to evidence transfer of
the Assets to Purchaser, including any necessary assignments of financing
statements.
7.8 Financial Statements. Seller, shall cooperate with Purchaser to
provide such financial statements relating to the Business as may be required by
Rule 3-05 or Article 11 of Regulation S-X promulgated under the Securities Act
of 1933, as amended (the "1933 Act"), and the 1934 Act in connection with the
preparation and filing of any registration statement or periodic report by
Seller pursuant to the 1933 Act or the 1934 Act, including with limitation
unqualified opinions thereon of independent public accountants and consents
thereof as required by the 1933 Act or the 1934 Act
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or the rules and regulations thereunder. If such statements are provided
subsequent to closing, the preparation of such statements shall be at
Purchaser's expense.
7.9 Appointment of Board Member. ENET shall take those steps necessary to
cause the nomination of one designee by Seller to serve on the board of ENET to
be elected at the first annual meeting of stockholders of ENET after the Closing
Date. Until such election, such designee shall be invited to attend Board
meetings to provide input, but shall not be entitled to vote on any matters.
ARTICLE VIII
MISCELLANEOUS
8.1 Termination. (a) Anything herein or elsewhere to the contrary
notwithstanding, this Amended Agreement may be terminated by written notice of
termination at any time before the Closing Date only as follows:
(i) by mutual consent of Seller and Purchaser;
(ii) by Purchaser, (A) at any time if the representations and warranties of
Seller contained in Section 3.1 hereof were incorrect in any material respect
when made or at any time thereafter, or (B) upon written notice to Seller given
at any time after December 31, 1998 such later date as shall have been specified
in a writing authorized on behalf of Seller and Purchaser) if all of the
conditions precedent set forth in Section 5.1 hereof have not been met;
(iii) by Seller, (A) at any time if the representations and warranties of
Purchaser contained in Section 3.2 hereof were incorrect in any material respect
when made or at any time thereafter, or (B) upon written notice to Purchaser
given at any time after December 31, 1998 such later date as shall have been
specified in a writing authorized on behalf of Seller and Purchaser) if all of
the conditions precedent set forth in Section 5.2 hereof have not been met;
(iv) by Purchaser, if the Stockholder Approval (as defined in Section 1.10)
shall not have been obtained on or before July 1, 1999.
(v) by either party if the closing has not occurred on or before ten (10)
days following the date of the next annual meeting of ENET.
(b) In the event of the termination and abandonment hereof pursuant to
the provisions of this Section 8.1, this Amended Agreement (except for Section
4.2.2 which shall continue) shall become void and have no effect, without any
liability on the part of any of the parties or their directors or officers or
stockholders in respect of this Amended Agreement, unless the termination was
the result of the representations and warranties of a party being materially
incorrect when made or the material breach by such party of a covenant hereunder
in which event the party whose representations and warranties were incorrect or
who breached such covenant shall be liable
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to the other party for all costs and expenses of the other party in connection
with the preparation, negotiation, execution and performance of this Amended
Agreement.
8.2 Noncompetition and Related Provisions. Seller and each Member
acknowledge that simultaneous herewith each and all are entering into the
following noncompetition agreements, and other agreements for which independent
consideration described in Section 1.7 has been given by Purchaser and which
Seller and each Member acknowledge will survive this Amended Agreement.
Notwithstanding the agreements between Purchaser and Seller and each Member
provided herein, Seller and each Member acknowledges that, but for Seller and
each Member's willingness to enter into the covenants and agreements contained
in this Amended Agreement as well as those covenants and agreements contained in
certain Employment Agreements entered into simultaneous herewith between
Purchaser and one or more Members who will also become employees of Purchaser,
Purchaser would not be willing to enter into this Amended Agreement or any other
agreements simultaneously herewith.
(a) For the time specified in provision (b) below (the "Restrictive
Period") Seller and each Member agree not to directly or indirectly engage in
the business of services similar to those engaged in by Purchaser at the time of
termination in the territorial limits of the United States during the terms
hereof, and prior to expiration of the Restrictive Period. Further, Seller and
each Member shall not contact any customers of Purchaser with a view to
diverting the patronage of such customer to any entity other than Purchaser.
Seller and each Member shall be deemed to be in competition with Purchaser and
in violation of this noncompetition and covenant not to compete, if payment for
activities prohibited under this Amended Agreement are received by (a) Seller or
any Member, (b) any partnership, corporation or other entities in which Seller
or any Member owns a 10% or greater interest, or (c) any member of a Seller's or
a Member's family.
(b) Seller's and each Member covenant not to compete pursuant to
provision (a) above shall commence with the effective date of this Amended
Agreement and shall continue for the term of the Amended Agreement and for a
period of three (3) years thereafter (the "Restricitve Period"), except for
those Members who also execute Employment Agreements in which case the covenant
shall expire as provided therein.
(c) During the Restrictive Period described in (b) above, Seller and
each Member agree not to solicit any employees, customers or suppliers of
Purchaser to induce them to change employment or sever or change any business
relationship or engagement with Purchaser.
(d) It is mutually agreed that the time period and geographical areas
of the aforesaid covenants are reasonable and acceptable to both parties hereto
and necessary to protect Purchaser's legitimate business interests given the
consideration paid to Seller and each Member under the terms of this Amended
Agreement. Purchaser, in addition to all the remedies available at law or in
equity shall be entitled to enjoin the commencement or continuance of any
violation by Seller and each Member of the noncompetition, non-disclosure, and
other provisions of this
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Amended Agreement and may without notice to Seller and each Member apply to any
court of competent jurisdiction for entry of an immediate restraining order or
injunction. In addition, Seller and each Member agree to immediately, upon
demand, account for and pay over to Purchaser an amount equal to all
compensation, commission, bonus salary, gratuity or the compensation of any
kind, directly or indirectly received by or for the use of Seller and each
Member resulting from any activity, transaction or employment in breach or
violation of the provisions of this Amended Agreement, such amount being agreed
to constitute partial liquidated damages in the event the amount of actual
damages to be sustained by Purchaser on account of any such breach or violation
is not capable of measurement.
(e) Purchaser, Seller and each Member hereby expressly understand and
agree that the covenants contained herein shall not be held invalid or
unenforceable because of the scope of the territory or actions subject hereto or
restricted hereby, or the period of time within which such covenants is
operative; but the maximum territory, the actions subject to such covenants, and
the period of time in which such covenant is enforceable, respectively, are
subject to determination and reformation by a final judgment of any court which
has jurisdiction over the parties and subject matter of this Amended Agreement.
8.3 Brokers' and Finders' Fees.
(a) Seller represents and warrants to Purchaser that all negotiations
relative to this Amended Agreement have been carried on by it directly without
the intervention of any person, who may be entitled to any brokerage or finder's
fee or other commission in respect of this Amended Agreement or the consummation
of the transactions contemplated hereby, and Seller agrees to indemnify and hold
harmless Purchaser against any and all claims, losses, liabilities and expenses
which may be asserted against or incurred by it as a result of Seller's
dealings, arrangements or agreements with any such person.
(b) Purchaser has entered into an agreement with Zane Russell who is
entitled receive a finder's fee in respect of this Amended Agreement or the
consummation of the transactions contemplated hereby, and Purchaser agrees to
indemnify and hold harmless Seller against any and all claims, losses,
liabilities and expenses which may be asserted against or incurred by it as a
result of Purchaser's dealings, arrangements or agreements with Zane Russell or
any such person.
8.4 Sales, Transfer and Documentary Taxes, etc. Seller shall pay all
federal, state and local sales, documentary and other transfer taxes, if any,
due as a result of the purchase, sale or transfer of the Assets in accordance
herewith whether imposed by law on Seller or Purchaser and Seller shall
indemnify, reimburse and hold harmless Purchaser in respect of the liability for
payment of or failure to pay any such taxes or the filing of or failure to file
any reports required in connection therewith.
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8.5 Expenses. Except as otherwise provided in this Amended Agreement,
each party hereto shall pay its own expenses incidental to the preparation of
this Amended Agreement, the carrying out of the provisions of this Amended
Agreement and the consummation of the transactions contemplated hereby.
8.6 Contents of Agreement; Parties in Interest; etc. This Amended
Agreement sets forth the entire understanding of the parties hereto with respect
to the transactions contemplated hereby. It shall not be amended or modified
except by written instrument duly executed by each of the parties hereto. Any
and all previous agreements and understandings between or among the parties
regarding the subject matter hereof, whether written or oral, are superseded by
this Amended Agreement.
8.7 Assignment and Binding Effect. This Amended Agreement may not be
assigned prior to the Closing by any party hereto without the prior written
consent of the other parties. Subject to the foregoing, all of the terms and
provisions of this Amended Agreement shall be binding upon and inure to the
benefit of and be enforceable by the successors and assigns of the Members,
Seller and Purchaser.
8.8 Waiver. Any term or provision of this Amended Agreement may be waived
at any time by the party entitled to the benefit thereof by a written instrument
duly executed by such party.
8.9 Notices. Any notice, request, demand, waiver, consent, approval or
other communication which is required or permitted hereunder shall be in writing
and shall be deemed given only if delivered personally or sent by telegram or by
registered or certified mail, postage prepaid, as follows:
If to Purchaser, to:
ACMI ACQUISITION CORP.
1250 Wood Branch Park Drive
Houston, Texas 77079
Attention: Mitchell Bodian
With a required copy to:
DiCecco, Fant & Burman, L.L.P.
1900 West Loop South, Suite 1100
Houston, Texas 77027
Attention: Darryl M. Burman
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If to Seller or the Members, to:
LIMIT LLC
5425 E. Rains Road, Suite 1
Memphis, TN 38115
Attention: Nathan I. Prager
With a required copy to:
Johnson, Grosin, Kee and Surprise, P.C.
780 Ridgelake Blvd., Suite 202
Memphis, TN 39120
Attention: David J. Johnson
If to ENET to:
EQUALNET COMMUNICATIONS CORP.
1250 Wood Branch Park Drive
Houston, Texas 77079
Attention: Mitchell Bodian
With a required copy to:
DiCecco, Fant & Burman, LLP
1900 West Loop South, Suite 1100
Houston, Texas 77027
Attention: Darryl M. Burman
or to such other address as the addressee may have specified in a notice duly
given to the sender as provided herein. Such notice, request, demand, waiver,
consent, approval or other communication will be deemed to have been given as of
the date so delivered, telegraphed or mailed.
8.10 Texas Law to Govern. This Amended Agreement shall be governed by and
interpreted and enforced in accordance with the laws of the State of Texas.
8.11 No Benefit to Others. The representations, warranties, covenants and
Amended Agreements contained in this Amended Agreement are for the sole benefit
of the parties hereto and, in the case of Article VI hereof, the other
Indemnified Parties, and their heirs, executors,
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administrators, legal representatives, successors and assigns, and they shall
not be construed as conferring any rights on any other persons.
8.12 Headings, Gender and "Person". All section headings contained in
this Amended Agreement are for convenience of reference only, do not form a part
of this Amended Agreement and shall not affect in any way the meaning or
interpretation of this Amended Agreement. Words used herein, regardless of the
number and gender specifically used, shall be deemed and construed to include
any other number, singular or plural, and any other gender, masculine, feminine,
or neuter, as the context requires. Any reference to a "person" herein shall
include an individual, firm, corporation, partnership, trust, governmental
authority or body, association, unincorporated organization or any other entity.
8.13 Schedules and Exhibits. All Exhibits and Schedules referred to
herein are intended to be and hereby are specifically made a part of this
Amended Agreement.
8.14 Severability. Any provision of this Amended Agreement which is
invalid or unenforceable in any jurisdiction shall be ineffective to the extent
of such invalidity or unenforceability without invalidating or rendering
unenforceable the remaining provisions hereof, and any such invalidity or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
8.15 Counterparts. This Amended Agreement may be executed in any number
of counterparts and any party hereto may execute any such counterpart, each of
which when executed and delivered shall be deemed to be an original and all of
which counterparts taken together shall constitute but one and the same
instrument. This Amended Agreement shall become binding when one or more
counterparts taken together shall have been executed and delivered by the
parties. It shall not be necessary in making proof of this Amended Agreement or
any counterpart hereof to produce or account for any of the other counterparts.
IN WITNESS WHEREOF, the parties hereto have duly executed this Amended Agreement
on the date first written.
ATTEST: ACMI ACQUISITION CORP.
By
______________________________ __________________________________
___________________, Secretary By:________________________________
Title:_____________________________
ATTEST: LIMIT LLC
By_________________________________
________________________________ Its Manager
_____________________, Secretary
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MEMBERS:
______________________________________ ___________________________________
Name: ________________________________ Name:
______________________________________ ___________________________________
Name: ________________________________ Name: _____________________________
______________________________________ ___________________________________
Name: ________________________________ Name: _____________________________
______________________________________
Name: ________________________________
EqualNet Communications Corp. executed this Amended Agreement solely for the
purpose of the delivery of its shares of ENET Common Stock pursuant to Section
1.3 and compliance with Section 7.9.
EQUALNET COMMUNICATIONS CORP.
By:_________________________________________
Its:________________________________________
Title:______________________________________
ATTEST:
_______________________________
____________________, Secretary
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EXHIBIT 10.2
SHARE SUBSCRIPTION AGREEMENT
Equalnet Communications Corp. ("Equalnet"), a Texas corporation, as issuer, and
Kevin Pirolo as subscribing shareholder ("Subscriber"), hereby enters into this
Share Subscription Agreement effective January 21, 1999. Subject to the approval
of the Board of Directors of Equalnet, and subject to the preparation of
definitive documentation acceptable to the respective legal counsel for issuer
and subscribing shareholder, the parties agree as follows:
1. Subscriber agrees to subscribe for the purchase of $2,000,000 of registered
$0.01 par value common stock of Equalnet Communications Corp. (the "Common
Stock") valued at a purchase price equal to ninety (90%) percent of the average
closing price of the shares of the Common Stock for the ten (10) trading days
prior to the date of the confirmation of the plan of Reorganization of EqualNet
Corporation in its pending bankruptcy proceeding in Cause Number 98-39561-H5-11
in the United States District Court for the Southern District of Texas.
2. This subscription is subject to the confirmation of the plan of
Reorganization of EqualNet Corporation in its pending bankruptcy proceeding in
Cause Number 98-39561-H5-11 in the United States District Court for the Southern
District of Texas on or prior to June 30, 1999, and the continued listing of the
shares of Equalnet on the Nasdaq National Market at the time of the confirmation
of such plan.
3. Payment for such shares shall be at such time as may be mutually agreed to by
the parties, which in any event shall be prior to the issuance and delivery of
such shares.
4. Subscriber declares that he is subscribing for said shares as an investment
for his own account and has no present intent to divide, resell or otherwise
distribute them.
5. Unless Equalnet is notified in writing at its corporate office address of
1250 Wood Branch Park Drive, Houston, Texas 77079, such shares will be issued in
the name as set forth in paragraph 1 above.
6. The signature of the authorized representative of Equalnet below indicates
receipt of this Subscription for presentation to the Board of Directors for
approval, but does not indicate that the Board of Directors has either acted
upon or approved the share issuance contemplated herein.
Dated January 21, 1999.
SUBSCRIBER
/s/ Kevin Pirolo
- ---------------------------
Kevin Pirolo
Equalnet Communications Crop.
By: /s/ Mark A. Willis
- --------------------------
Mark A. Willis, Chairman
ATTACHMENT 4
<PAGE>
EXHIBIT 10.3
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT is made on January 27, 1999 by and between RFC
CAPITAL CORPORATION (the "Seller") and USC TELECOM, INC., a Delaware corporation
("Purchaser") under the following circumstances:
RECITALS
A. The Seller desires to sell all right, title and interest of Brittan
Communications International Corporation, a Texas corporation ("BCI") in and to
certain assets as more particularly described hereinafter (the "BCI Assets"),
pursuant to a voluntary surrender and peaceful repossession by the Seller as a
secured creditor under Section 9-503 of Article 9 of the Uniform Commercial
Code, Texas Business Commerce Code, Chapter 9, and Ohio Revised Code, Chapter
1309 (collectively, the "UCC") and a sale or disposition of the BCI Assets under
Section 9-504 of the UCC (the "Foreclosure"). BCI utilized the BCI Assets in
connection with its business conducted under the name "BCI."
B. The Purchaser desires to purchase the BCI Assets for such consideration
as is hereinafter more fully set forth.
NOW, THEREFORE, for good and valuable consideration the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
ARTICLE 1
PURCHASE AND SALE OF ASSETS
SECTION 1.1 SALE OF ASSETS. Seller hereby sells, and Purchaser hereby
purchases, all right, title and interest of BCI in and to the following BCI
Assets (the "Assets"):
1.1.1 EQUIPMENT. All equipment, machinery, tools, fixtures,
furnishings and furniture of BCI and used by BCI in its business;
1.1.2 CUSTOMER BASE. All of BCI's past, present and future customer
contracts, agreements, LOA's (i.e. letters of agency or other
authorizations obtained by BCI), any customer lists relating thereto and
any information regarding prospective customers and contracts, agreements,
LOA's or other arrangements and all of the goodwill and other intangible
assets associated with any of the foregoing and used by BCI in its
business;
<PAGE>
1.1.3 RECEIVABLES. All of BCI's accounts, accounts receivable or
receivables (a) arising from the provision or sale of telecommunication
services, including any services or sales ancillary thereto by BCI,
including the right to payment of any interest or finance charges and other
obligations of a payor (as used herein, the term "Payor" means the party
obligated to make payments in respect to any Receivable) with respect
thereto, (b) all security interests or liens in properties subject thereto
from time to time purporting to secure payment by any Payor, (c) all
rights, remedies, guaranties, indemnities and warranties and proceeds
thereof, proceeds of insurance policies, UCC financing statements and other
agreements or arrangements of whatever character from time to time
supporting or securing payment of such Receivable, including, but not
limited to, any Billing and Collection Agreement and any Clearinghouse
Agreement, and (d) all collections, records and proceeds with respect to
any of the foregoing; except that the term Receivables shall not include
any Purchased Receivable, as that term is defined in that certain
Receivables Sale Agreement dated as of June 29, 1998 by and between BCI, as
Seller, and RFC Capital Corporation, as Purchaser (the "Sale Agreement";
1.1.4 LIFE INSURANCE. Proceeds of a certain Key Man Life Insurance
Policy in the face amount of $1,000,000 on the life of Jim G. Edwards (the
"Insurance Policy");
1.1.5 OTHER ASSETS. All of BCI's contract rights with U.S. Billing,
Inc. and/or Billing Concepts, Inc.
SECTION 1.2 EXCLUDED ASSETS. The Seller shall retain: (i) any cash or all
cash equivalents of BCI in which Seller has an interest as of the date hereof;
and (ii) any Purchased Receivables as that term is defined in the Sale Agreement
(collectively "Excluded Assets").
SECTION 1.3 LIABILITIES ASSUMED. Except as set forth herein and except as
set forth in a certain Assumption Agreement between the Seller and Purchaser of
even date herewith (the "Assumption Agreement"), Purchaser assumes no debts,
liabilities and/or obligations in connection with the purchase of the Assets.
Purchaser shall have no obligation to maintain the effectiveness of the
Insurance Policy or pay any premium with respect thereto, however Purchaser
shall advise the Seller of any notice of lapse of the Insurance Policy and, upon
request of the Seller, shall reassign the Insurance Policy to the Seller or
otherwise assist the Seller in maintaining the Insurance Policy in effect as
collateral security for the obligations of the Purchaser assumed hereby or in
the Assumption Agreement.
SECTION 1.4 PURCHASE PRICE. The purchase price for the Assets (the
"Purchase Price") shall be payable by Purchaser to Seller as set forth in
Exhibit 1.4 attached hereto and incorporated herein.
SECTION 1.5 SECURITY INTEREST. Purchaser hereby grants to the Seller a
security interest in all of the Assets, including all cash and noncash proceeds
thereof and any replacements or substitutions therefor. The security interest
granted herein shall secure Purchaser's obligation to pay the Purchase Price to
the Seller, as well as each of Purchaser's undertakings to the Seller hereunder.
ARTICLE 2
THE CLOSING
SECTION 2.1 THE CLOSING. The closing of the transactions contemplated
hereby (the "Closing") shall take place at the offices of Seller, Columbus, Ohio
on January 27, 1999 (the "Closing
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Date"), unless the parties may mutually agree upon some other date (and, if so
agreed, the definition of Closing Date shall be deemed modified to mean such
other date) or place in writing.
SECTION 2.2 DELIVERIES BY SELLER. On the Closing Date, Seller shall
deliver to Purchaser, in addition to any other items specified elsewhere in this
Agreement, the following:
2.2.1 BILL OF SALE. Bill of Sale in the form attached hereto as
Exhibit 2.2.1 ( the "Bill of Sale").
2.2.2 POSSESSION. Possession of the Assets.
SECTION 2.3 DELIVERIES BY PURCHASER. On the Closing Date, Purchaser shall
deliver to Seller the Purchase Price, in addition to all other items specified
elsewhere in this Agreement.
ARTICLE 3
REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLER
The Seller makes the following representations, warranties and covenants to
Purchaser:
SECTION 3.1 AUTHORIZATION. The Seller has full power to execute, deliver
and perform its obligations under this Agreement. This Agreement is the legal,
valid and binding obligation of Seller, enforceable against the Seller in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, moratorium or other laws affecting the enforcement of
creditors rights generally or by equitable principles.
SECTION 3.2 TITLE TO PROPERTY. At the Closing, the Seller shall transfer
all right, title and interest of BCI in the Assets in accordance with the terms
of and pursuant to the Bill of Sale.
SECTION 3.3 NO BREACH OF STATUTE, DECREE, OR CONTRACT. The execution,
delivery and performance of this Agreement does not breach any applicable
statute, regulation or ordinance of any governmental authority, and does not
conflict with or result in a breach of or default under any of the terms,
conditions or provisions of any documents regulating the conduct of the Seller's
business, or any order, writ, injunction, decree, contract, agreement or
instrument to which the Seller is a party or by which the Assets may be bound,
and does not result in the creation or imposition of any lien, charge or
encumbrance of any nature upon any of the Assets and does not give to others any
interest or rights in, or with respect to, any of the Assets, except to
Purchaser as provided hereunder.
SECTION 3.4 LITIGATION; ORDERS. There is no suit, action, claim,
administrative or arbitration or other proceeding, investigation or inquiry of
any kind (collectively, "Actions") pending or, to the Seller's knowledge,
threatened against or affecting any of the Assets, or the ability of the Seller
to consummate the transactions contemplated by this Agreement, by any person,
corporation, partnership, firm, association, business entity, organization or
other enterprise, or by an administrative agency or other governmental body.
There is no outstanding order, writ, injunction or decree of any kind
(collectively, "Orders") of any court, administrative agency, other governmental
body or arbitration tribunal against or affecting any of the Assets, or the
ability of the Seller to consummate the transactions contemplated by this
Agreement.
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SECTION 3.5 CONSENTS. All consents, if any, necessary in connection with
the consummation of the sale of Assets have been made, filed, given or obtained.
SECTION 3.6. LIENS. Seller makes no representation, warranty or covenant
to Purchaser as to the priority of its security interests and liens upon the
Assets.
SECTION 3.7 COMPLIANCE WITH UCC. Seller has complied with all
requirements of the UCC in connection with the Foreclosure and the sale and
purchase of the Assets contemplated hereby, and every aspect of the Foreclosure
and the sale and purchase of the Assets contemplated hereby was commercially
reasonable.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser represents and warrants as follows:
SECTION 4.1 AUTHORIZATION. Purchaser has full power to execute, deliver
and perform its obligations under this Agreement. This Agreement is the legal,
valid and binding obligation of Purchaser, enforceable against Purchaser in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, moratorium or other laws affecting the enforcement of
creditors rights generally or by equitable principles.
SECTION 4.2 LITIGATION; ORDERS. There are no Actions pending or, to
Purchaser' knowledge, threatened against Purchaser, and no Orders against
Purchaser, that may have the effect of prohibiting the sale and purchase
contemplated by this Agreement.
SECTION 4.3 NO BREACH OF STATUTE, DECREE, OR CONTRACT. The execution,
delivery and performance of this Agreement does not breach any applicable
statute, regulation or ordinance of any governmental authority, and does not
conflict with or result in a breach of or default under any of the terms,
conditions or provisions of any documents regulating the conduct of Purchaser's
business, or any order, writ, injunction, decree, contract, agreement or
instrument to which Purchaser is a party or by which the Assets may be bound.
SECTION 4.4 CONSENTS. Purchaser is not required to make, file, give or
obtain any consents with, to or from any persons or governmental authorities or
private agencies in connection with the purchase of the Assets.
ARTICLE 5
COVENANTS OF SELLER
SECTION 5.1 FURTHER ASSURANCES. From time to time, whether at or after
the Closing, Seller will execute and deliver such further instruments and take
such other action as may be necessary to carry out the terms of this Agreement,
and will take no action that will prevent its performance of this Agreement in
accordance with its terms.
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ARTICLE 6
COVENANTS OF PURCHASER
SECTION 6.1 REMOVAL OF ASSETS. At the Closing, Purchaser shall receive
and accept actual or constructive possession of the Assets, and Purchaser
accepts such Assets "AS IS, WHERE IS," without warranty, and Purchaser assumes
all risk of loss with respect thereto. Purchaser shall remove the Assets from
BCI's place of business within fourteen (14) days from the date of the Closing.
The removal of the Assets by Purchaser shall be done by it and its agents in a
manner so as not to cause any destruction or damage to the business premises of
BCI and not to destroy or damage in any manner the business records of BCI, the
Excluded Assets or the records pertaining thereto. Upon the removal of the
Assets, Purchaser shall repair any damage caused by it or its agents and shall
leave the location in a broom clean condition.
Section 6.2 FURTHER ASSURANCES. From time to time, whether at or after
the Closing, Purchaser will execute and deliver such further instruments and
take such other action as may be necessary to carry out the terms of this
Agreement, and will take no action that will prevent its performance of this
Agreement in accordance with its terms.
ARTICLE 7
MISCELLANEOUS
SECTION 7.1 SURVIVAL. The representations and warranties of the parties
hereto included or provided for in this Agreement shall survive for a period of
four years from the date of this Agreement and shall thereafter expire and be of
no further force or effect, provided that a notice of a breach of such
representations or warranties delivered prior to such expiration shall extend
the survival of the representations and warranties with respect to the subject
of the notice.
SECTION 7.2 COUNTERPARTS. This Agreement may be executed in one or more
counterparts (each of which shall be considered an original but all of which
together shall be deemed to constitute one and the same Agreement), and shall
become effective when one or more counterparts have been signed by each of the
parties and delivered to the other party.
SECTION 7.3 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Ohio, without reference to
the choice of law principles thereof. The parties agree that all actions or
proceedings arising or in connection with this Agreement, any documents
incorporated herein or executed in connection herewith shall be tried and
litigated only in the Federal District Court for the Southern District of Ohio
or the State Courts of Franklin County. The parties hereto waive any right each
may have to assert the doctrine of forum non conveniens or to object to venue to
the extent that any proceeding that is brought in accordance with this section.
Service of process, sufficient for personal jurisdiction in any action in
connection with this Agreement may be made to the addressees set forth in
Section 7.6.
SECTION 7.4 ENTIRE AGREEMENT. This Agreement and the Exhibit hereto
constitute the entire agreement among the parties and supersedes all prior
written or oral agreements and understandings
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among the parties, and there are no representations, warranties, covenants,
agreements or understandings among the parties other than those set forth or
referred to herein or therein.
SECTION 7.5 EXPENSES. Except as set forth in this Agreement, all legal
and other costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such costs
and expenses.
SECTION 7.6 NOTICES. All notices, demands or other communications which
may be or are required to be given by any party to any other party pursuant to
this Agreement, shall be in writing and shall be mailed by certified mail,
return receipt requested, postage prepaid, or transmitted by hand delivery,
national overnight express, telegram or facsimile transmission, addressed as
follows:
If to Seller: RFC Capital Corporation
130 E. Chestnut St.
Columbus, Ohio 43215
Attention: Mark D. Quinlan
Fax: (614) 229-7980
With a copy to: Porter, Wright, Morris & Arthur
41 South High Street
Columbus, Ohio 43215-6194
Fax Number: 614-227-2100
Attention: Jack R. Pigman, Esq.
If to Purchaser: USC Telecom, Inc.
1250 Wood Branch Park Drive
Houston, TX 77079
Attention: Mitchell Bodian
until such time as either party notifies the other of a change of address. Each
notice or other communication which shall be mailed, delivered or transmitted in
the manner described above shall be deemed sufficiently given and received for
all purposes at such time as it is delivered to the addressee (with the return
receipt, the delivery receipt, or the affidavit of messenger or telefax
transmission log being deemed conclusive evidence of such delivery) or at such
time as delivery is refused by the addressee upon presentation. Delivery of the
notices to the persons who are to receive copies of such notices, as provided
for in this Section 7.6, shall constitute effective delivery of notice to the
parties hereto.
SECTION 7.7 CAPTIONS. The captions in this Agreement are for convenience
and information only, are not an integral part of this Agreement and are not to
be considered in the interpretation of any part hereof.
SECTION 7.8 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective heirs,
personal representatives, successors and assigns; provided, however, that
neither the Seller nor Purchaser shall assign their respective rights under this
Agreement without the prior written consent of the other party.
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SECTION 7.9 INTERPRETATION, NO PRESUMPTION. This Agreement has been
negotiated and incorporates the suggestions of the parties hereto. Therefore,
no presumptions shall arise favoring any party by virtue of the authorship of
any of its provisions.
SECTION 7.10 WAIVER OF A JURY TRIAL. THE SELLER AND PURCHASER ACKNOWLEDGE
AND AGREE THAT THERE MAY BE A CONSTITUTIONAL RIGHT TO A JURY TRIAL IN CONNECTION
WITH ANY CLAIM, DISPUTE OR LAWSUIT ARISING BETWEEN OR AMONG THEM, BUT THAT SUCH
RIGHT MAY BE WAIVED. ACCORDINGLY, EACH PARTY AGREES THAT NOTWITHSTANDING SUCH
CONSTITUTIONAL RIGHT, IN THIS COMMERCIAL MATTER EACH PARTY BELIEVES AND AGREES
THAT IT SHALL BE IN ITS BEST INTEREST TO WAIVE SUCH RIGHT, AND, ACCORDINGLY,
HEREBY WAIVE SUCH RIGHT TO A JURY TRIAL, AND FURTHER AGREES THAT THE BEST FORUM
FOR HEARING ANY CLAIM, DISPUTE OR LAWSUIT, IF ANY, ARISING IN CONNECTION WITH
THIS AGREEMENT SHALL BE A COURT OF COMPETENT JURISDICTION SITTING WITHOUT A
JURY.
SECTION 7.11 LIMITATION OF DAMAGES. The Seller and Purchaser agree that
any claim for damages arising hereunder shall be limited to actual damages or
losses sustained by the aggrieved party, not to exceed the Purchase Price, and
shall not include any compensatory, consequential, exemplary or punitive
damages, fees or costs of any type.
SECTION 7.12 INDEMNIFICATION. (a) The Seller hereby agrees to indemnify,
defend and hold harmless Purchaser and its directors, officers, employees and
agents, from and against any action, demand, suit, cause of action, proceeding
or counterclaim threatened or brought against such party by a third party who is
not the Purchaser or an affiliate of the Purchaser or anyone claiming by or
through the Purchaser or an affiliate of the Purchaser, based upon a claim
which, if true, would mean that (i) the Seller had breached any of the
representations, warranties or covenants set forth in this Purchase Agreement or
in the Bill of Sale of even date herewith, (ii) the Seller had failed to proceed
in a commercially reasonable manner, as that term is used in the UCC and under
applicable case law interpreting that term, or (iii) the sale and purchase of
the Assets contemplated hereby would constitute a fraudulent transfer under
federal or state law; provided, that such indemnification shall be limited to:
(x) all costs of defense (including, but not limited to, reasonable
investigation costs, reasonable attorney fees and all other reasonable costs of
defending any such claim), (y) any monetary amounts required to settle any such
action or to satisfy any judgment, order, award or similar requirement entered
in such action, and (z) any actual monetary damages incurred by the Purchaser.
(b) On the date on which any payment is due from the Seller to Purchaser
under Section 7.12(a), to the extent Purchaser's operation, sale, use or
collections with respect to the Assets has resulted in Purchaser obtaining cash
flow in excess of the expected cash flow from the Assets (the "Excess Value"),
the Excess Value shall be a dollar-for-dollar credit against any liability of
the Seller to the Purchaser under the indemnity set forth in Section 7.12(a).
(c) The Seller hereby agrees to indemnify, defend and hold harmless
Purchaser and its directors, officers, employees and agents from and against any
fees, costs or expenses incurred by or on behalf of Purchaser or any of its
affiliates as a result of any fines, penalties, charges or other requirements
imposed upon Purchaser or any of its affiliates by any telecommunications
regulatory body, including, without limitation, the Federal Communications
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Commission or the Texas Public Utilities Commission, with respect to the
purchase and operation of the Assets; provided, however, that, Seller shall only
be responsible for up to $100,000 of any fines, penalties or other charges
imposed upon Purchaser or any of its affiliates by any such regulatory body and
shall, in no event, be responsible for (i) the approximately $1.2 million fine
currently pending against BCI by the Federal Communications Commission or (ii)
any fines, penalties or other charges imposed as a result of the conduct of
Purchaser following the purchase of the Assets.
IN WITNESS WHEREOF, this Agreement has been signed by or on behalf of each
of the parties as of the day and year first above written.
SELLER:
RFC CAPITAL CORPORATION
By: /S/ Mark D. Quinlan
---------------------------
Title: Vice President
PURCHASER:
USC TELECOM, INC.
By: /S/ Mitchell Bodian
---------------------------
Title: President
8
<PAGE>
SCHEDULE 1.4
- ------------
. Purchaser, or any affiliate thereof including EqualNet Communications Corp.
("ECC"), shall convey to Seller the right to purchase from ECC 300,000
shares of ECC's common stock, $.01 par value, on terms specified and
described more fully as set forth in that certain Common Stock Purchase
Warrant of even date hereof and by reference made a part hereof, which
right to purchase such shares shall vest and be exercisable as of the
Issuance Date (as defined in such Common Stock Purchase Warrant).
. Purchaser agrees to assume pursuant to that certain Assumption Agreement of
even date herewith that certain Promissory Note dated as of June 29, 1998,
and any and all documents and instruments executed in conjunction
therewith, by and between the Seller and BCI and as of the Closing Date
evidencing indebtedness to the Seller in an amount equal to $1,513,781.25,
which such indebtedness shall be amortized pursuant to a Loan Amortization
Schedule set forth at Schedule 1 attached hereto.
. The assumption by Purchaser of that certain Receivables Sale Agreement
dated June 29, 1998, as amended, by and between the Seller and BCI pursuant
to the Assumption Agreement.
. The assumption by Purchaser of that certain One Plus Billing and
Information Management Services Agreement dated January 17, 1998 by and
between Billing Concepts Inc. dba U.S. Billing and BCI.
. Such other terms, conditions, payments, obligations, or consideration,
inclusive of assumed payment arrearages or debts, paid to Qwest
Communications Company or any other creditor of BCI by Purchaser.
COLUMBUS/0504311.06
May 19, 1999 (1:28PM)
9
<PAGE>
EXHIBIT 10.4
ASSUMPTION AGREEMENT
This Agreement is made in favor of RFC Capital Corporation, a Delaware
corporation, located at 130 East Chestnut Street, Suite 400, Columbus, Ohio
43215 (as such, together with its successors and assigns, "RFC"), by USC
Telecom, Inc., a Delaware corporation, located at 1250 Wood Branch Park Drive,
Houston, Texas 77079 (herein "USC"), as of this 27th day of January, 1999.
RECITALS
A. Brittan Communications International Corporation (herein "BCIC") has
heretofore executed and delivered to RFC the following documents:
i. Promissory Note dated June 29, 1998, in the original principal amount
of $1,500,000 (herein the "Note") a copy of which is attached hereto
as Exhibit B; and
ii. financing statements to perfect the security interests granted to RFC
by the Loan Agreement in all of BCIC's equipment, customer base and
proceeds of that certain Key Man Life Insurance Policy as more fully
described in that certain Loan and Security Agreement dated June 29,
1998, as amended by a First Amendment to Loan and Security Agreement
dated July 13, 1998, a copy of which is attached hereto collectively
as Exhibit A (herein the "Loan Agreement") (collectively the
"Financing Statements").
All of the foregoing, including the Note and the Financing Statements are
hereinafter sometimes collectively referred to as the "Loan Documents". Any
capitalized term used herein and not otherwise defined shall have the respective
meaning ascribed thereto in the Loan Agreement.
B. Simultaneously herewith, RFC and USC are entering into a Purchase Agreement
(the "Purchase Agreement") providing for the purchase by USC of the Assets
(as defined in the Purchase Agreement) and Equalnet Communications Corp.,
the wholly owning parent of USC ("ECC"), is granting to RFC a Common Stock
Purchase Warrant (the "Warrant") for the purchase of 300,000 shares of the
Common Stock of ECC (the "Common Stock")
C. RFC has heretofore provided notice to BCIC of BCIC's default of certain
terms and conditions of the Loan Documents and, as a direct result thereof,
BCIC has acknowledged such defaults and has consented to the surrender of
the collateral covered by the Loan Documents and the sale of the Collateral
pursuant to Section 9-504 of the Uniform Commercial Code in effect in Ohio
and Texas as evidenced by that certain Voluntary Surrender dated January
27, 1999, entered into by and between BCIC and RFC.
D. Pursuant to the terms and provisions hereof, USC desires to expressly
assume as direct obligor all of the obligations of BCIC to RFC under the
Loan Documents and such other contracts, agreements or documents as more
fully described herein.
NOW THEREFORE, in consideration of the foregoing, of RFC's forbearance from
demanding payment in full of the Notes, the promises and agreements contained
herein and for
<PAGE>
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, USC, intending to be legally bound, agrees for itself, its
successors and assigns, as follows:
1. Subject to paragraphs 5 and 6 hereof, USC hereby assumes and agrees to
perform all of the obligations, contractual undertakings, and agreements of
BCIC pursuant to the terms of the Loan Documents, including without
limitation, unconditionally promising to pay all principal, interest and
fees, as provided therein. Notwithstanding anything to the contrary set
forth in this Agreement, in the event USC is not successful in executing a
carrier agreement with Qwest Communications Inc. or another carrier on or
before December 31, 1999, or, if prior to entering into any such carrier
agreement service to the Customer Base acquired by USC pursuant to the
Purchase Agreement is interrupted and results in a material attrition of
such Customer Base, the recourse available to RFC against USC with respect
to the repayment of any indebtedness or other liabilities under any of the
Loan Documents is reduced by fifty percent (50%), and with respect to the
balance of such liabilities, RFC's recourse is limited to the extent of
RFC's security interest or any other interest in the Assets (as defined in
the Purchase Agreement).
2. Subject to paragraph 6 hereof, USC hereby assumes and agrees to perform all
of the obligations, contractual undertakings, and agreements of BCIC
pursuant to the terms of that certain Receivables Sale Agreement dated June
29, 1998 ("Sale Agreement"), by and between RFC and BCIC. Notwithstanding
the foregoing, RFC's recourse as against USC for any obligations or
liabilities assumed under this Agreement in respect of the Sale Agreement is
hereby limited to (i) the extent of RFC's rights against USC thereunder
arising after the date of this Agreement and (ii) the extent of RFC's
security interest or any other interest in the Assets (as defined in the
Purchase Agreement).
3. USC further assumes and agrees to perform all of the obligations,
contractual undertakings, covenants and agreements of BCIC pursuant to the
respective terms and conditions of those certain contracts, documents or
agreements set forth on Exhibit C attached hereto (the "Other Agreements").
4. Without further consideration, USC and BCIC agree to execute and deliver
such other instruments or documents, including but not limited to UCC
amendments or continuation statements, or take such other action as RFC may
deem reasonably necessary to continue in full force and effect any of the
interests, security or otherwise, or obligations evidenced by the Loan
Documents, Sale Agreement or Other Agreements.
5. USC hereby acknowledges and agrees that the principal balance and accrued
interest remaining unpaid on the Note is $1,513,781.25 as of January 27,
1999, and that by virtue of this Agreement such amount, and no other amounts
that may be due under the Note as of the date hereof, shall become the
express, direct obligations of USC.
6. The indebtedness and other obligations assumed by USC pursuant to this
Agreement shall be reduced, upon the exercise from time to time by RFC or
its transferee of the Warrant, in an amount equal to the product of (i) 80%
and (ii) the excess of the Fair Market Value of the
2
<PAGE>
shares of Common Stock received by RFC or such transferee upon any such
exercise over the exercise price paid to ECC by RFC or such transferee. As
used herein, "Fair Market Value" means (i) if the Common Stock is then
quoted on the Nasdaq National Market, the Nasdaq SmallCap Market or listed
on any national securities exchange, the arithmetic average of the closing
price of the Common Stock on such market or exchange for the three trading
days immediately preceding the date of exercise; (ii) if not so quoted or
listed, the average of the daily high bid and low asked prices in the over-
the-counter market as reported by the National Association of Securities
Dealers, Inc. Automated Quotation System or such other system then in use,
on the trading day immediately preceding the date of exercise; or (iii) if
no bids for such security are then quoted by any such organization, the fair
market value of the Common Stock as agreed to by RFC and USC, or if such
parties cannot agree, as reasonably determined in good faith by an
independent investment banker mutually acceptable to RFC and USC.
7. RFC hereby acknowledges and agrees that USC shall have the right to offset
any obligations and liabilities of USC created by this Agreement against any
amounts owing to USC by RFC pursuant to the indemnification provision of the
Purchase Agreement. In the event RFC owes an obligation to USC under Section
7.12 of the Purchase Agreement, RFC agrees not to satisfy that obligation by
means of set off except as against any recourse obligation of USC to RFC
under this Agreement.
8. This Agreement shall be interpreted, and the rights of the parties hereunder
shall be determined, under the laws of the State of Ohio.
9. Except as modified herein, the Loan Documents, Sale Agreement and Other
Agreements shall remain in full force and effect, and BCIC and USC shall be
bound by all the terms and conditions thereof. RFC has not released, and
this Agreement shall not be construed, to release BCIC from any of its
obligations under the Loan Documents, Sale Agreement or Other Agreements.
BCIC hereby consents to the terms of this Agreement and agrees that its
obligations under the Loan Documents, Sale Agreement and Other Agreements
shall be continuing as provided therein. BCIC waives notice of acceptance
hereof, notice of breach or default, and all other notices, demands or
protests to which BCIC might otherwise be or become entitled under the Loan
Documents, Sale Agreement, the Other Agreements or otherwise. BCIC's
liability hereunder shall not be affected by any extension or modification
of any term, condition or provision of the Loan Documents, Sale Agreement or
Other Agreements, or any other indulgences as may be provided or permitted
by RFC, or by any addition, substitution, exchange or release of any
security or any party primarily or secondary liable with respect to such
Loan Documents, Sale Agreement or Other Agreements.
10. USC and BCIC hereby severally waive any claim or right which either of them
might now have or hereafter acquire against the other on the obligations
evidenced by the Loan Documents, Sale Agreement or Other Agreements,
including, without limitation, any right of subrogation, reimbursement,
exoneration, contribution, indemnification, whether or not such claim,
remedy or right arises in equity, or under contract, statute or common law.
3
<PAGE>
11. No provision of the Loan Documents, Sale Agreement or Other Agreements may
be modified without the prior written acceptance thereof by USC.
12. USC hereby represents and warrants that it has the full power and lawful
authority to carry on its business as presently conducted and to own and
operate its assets, properties and business, and that the execution and
delivery of this Agreement and consummation of the transactions
contemplated hereby has been duly and validly authorized and executed and
is the legally binding and enforceable agreement as to each.
13. USC is not subject to any restriction contained in any agreement, lien,
lease, order, judgment or decree that would prevent the consummation of the
transactions contemplated by this Agreement.
14. This Agreement may be executed in one or more counterparts all of which
together shall constitute a binding and enforceable agreement with respect
to each party.
15. This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns. USC
may not assign any of its rights and obligations hereunder or any interest
in the Loan Documents, Sale Agreement or Other Agreements without the prior
written consent of RFC. RFC may, at any time, without the consent of USC,
assign any of its rights and obligations hereunder or interests in the Loan
Documents, Sale Agreement or Other Agreements.
16. The invalidity of any provision or provisions of this Agreement shall not
affect the other provisions, and this Agreement shall be construed in all
respects as if any invalid provisions were omitted.
17. The respective obligations of USC and BCIC under this Agreement shall be
several and not joint.
4
<PAGE>
IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as of
the date set forth above.
Executed in the
presence of: USC TELECOM, INC.
/S/ Dean H. Fisher /S/ Mitchell Bodian
- ------------------ ----------------------------------------
Dean H. Fisher, Secretary By: Mitchell Bodian
Its: President
BRITTAN COMMUNICATIONS INTERNATIONAL
CORPORATION
/S/ Jim G. Edwards
----------------------------------------
By: James G. Edwards
Its: President
ACCEPTED:
RFC CAPITAL CORPORATION
/S/ Mark D. Quinlan
-----------------------------------------
By: Mark D. Quinlan
Its: Vice President
5
<PAGE>
EXHIBIT C
LIST OF OTHER AGREEMENTS
. That certain One Plus Billing and Information Management Services Agreement
dated January 17, 1998 by and between BCIC and Billing Concepts, Inc. dba
U.S. Billing, Inc.
COLUMBUS/0504313.04
6
<PAGE>
EXHIBIT 10.5
THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE. SUCH SECURITIES MAY
NOT BE SOLD, ASSIGNED OR OTHERWISE TRANSFERRED EXCEPT UPON SUCH REGISTRATION OR
UPON DELIVERY TO THE COMPANY OF AN OPINION OF COUNSEL IN FORM SATISFACTORY TO
THE CORPORATION THAT REGISTRATION IS NOT REQUIRED FOR SUCH SALE, ASSIGNMENT OR
TRANSFER.
THE TRANSFER OF THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF IS
SUBJECT TO COMPLIANCE WITH THE CONDITIONS SPECIFIED BELOW, AND NO TRANSFER OF
THIS WARRANT OR SUCH SECURITIES SHALL BE VALID UNTIL SUCH CONDITIONS HAVE BEEN
FULFILLED.
EQUALNET COMMUNICATIONS CORP.
COMMON STOCK PURCHASE WARRANT
Certificate No. Issuance Date: January 27, 1999
EQUALNET COMMUNICATIONS CORP., a Texas corporation (the "Company"), located
at 1250 Wood Branch Park Drive, Houston, Texas 77079, hereby certifies that,
for value received, and in connection with that certain Purchase Agreement of
even date herewith (the "Purchase Agreement") between the Company and RFC
Capital Corporation, a Delaware corporation ("RFC"), RFC, or subject to Section
11, its transferee (the "Holder"), is entitled to purchase from the Company
300,000 shares (the "Warrant Shares") of the Company's common stock, $.01 par
value (the "Common Stock"), on terms specified below, which right to purchase
the Warrant Shares shall vest on the Issuance Date hereof (the "Effective Time")
and, unless specified otherwise herein, shall be exercisable at any time at the
sole discretion of the Holder hereof before the close of business on January 27,
2004 (the "Expiration Date"). All capitalized terms used herein and not
otherwise defined shall have the meaning ascribed thereto in the Purchase
Agreement.
The number and exercise price of such Warrant Shares shall be subject to
adjustment as provided below.
1. Terms of Warrant. (a) Subject to adjustment as provided in Section 6
below, the exercise price (the "Exercise Price") for the Warrant Shares shall
equal $1.33.
(b) As used herein, "Fair Market Value" shall mean (i) if the Common
Stock is then quoted on the Nasdaq National Market, the Nasdaq SmallCap
Market or listed on any national securities exchange, the arithmetic
average of the closing price of the Common Stock on such market or exchange
for three consecutive trading days; or (ii) if not so quoted or listed, the
average of the daily high bid and low asked prices in the over-the-counter
market as reported by the National Association of Securities Dealers, Inc.
Automated Quotation System or such other system then is use, on any trading
day.
<PAGE>
2. Exchange of Warrants. This Warrant, at any time prior to the exercise
hereof, upon presentation and surrender to the Company, may be exchanged, alone
or with other Warrants of like tenor registered in the name of Holder, for
another Warrant or several Warrants in the name of Holder, which shall each
provide for the purchase of the number of Warrant Shares as requested by Holder
thereof, so long as the aggregate number of Warrant Shares purchasable under the
new Warrant or Warrants equals the aggregate number of Warrant Shares
purchasable under the Warrant or Warrants surrendered.
3. Exercise of Warrant. The Holder of this Warrant may, at any time on or
after the Effective Time, and on or before the Expiration Date, exercise this
Warrant in whole at any time or in part from time to time for the purchase of
the Warrant Shares which such Holder is then entitled to purchase hereunder at
the Exercise Price. Unless all obligations and liabilities assumed by USC
Telecom, Inc. pursuant to that certain Assumption Agreement of even date
herewith have theretofore been paid in full, if at any time prior to the
Expiration Date, the Fair Market Value of the Common Stock is equal to or
greater than $2.50, RFC shall be deemed, on the next business day following such
determination of Fair Market Value (the "Deemed Exercise Date"), to have
exercised this Warrant with respect to at least 240,000 Warrant Shares (or such
lesser number as is then remaining under this Warrant). Within three business
days after the Deemed Exercise Date, RFC shall deliver an Exercise Notice to the
Company with respect to such deemed exercise of this Warrant specifying,
consistent with the preceding sentence, the exact number of shares that it
desires to acquire pursuant to the exercise and including the payment of the
Exercise Price and all other information required to be delivered to exercise
this Warrant.
In order to exercise this Warrant in whole or in part, Holder hereof shall
deliver to the Company (i) a written notice of such Holder's election to
exercise this Warrant (the "Exercise Notice"), which notice shall specify the
number of the Warrant Shares to be purchased, (ii) payment of the Exercise
Price, and (iii) this Warrant; provided, that, in case the issuance of such
securities shall not have been registered under the Securities Act of 1933, as
amended (the "Securities Act"), the Company may require that such Holder furnish
to the Company a written statement that such Holder is purchasing such
securities for such Holder's own account for investment and not with a view to
the distribution thereof and that none of such securities are being or will be
offered or sold in violation of the provisions of the Securities Act. Upon
receipt thereof, the Company shall, as promptly as practicable and in any event
within five days, execute or cause to be executed and deliver to such Holder a
certificate representing the aggregate number of such Warrant Shares to be
issued (unless the Exercise Notice specifies a greater number of certificates,
in which case such greater number of certificates shall be delivered in the
denominations so specified). The stock certificate or certificates so delivered
shall be registered in the name of such Holder, or subject to Section 11, such
other name as shall be designated in such Exercise Notice.
No fractional shares are to be issued upon the exercise of this Warrant,
but the Company shall pay cash in respect of any fraction of a share which would
otherwise be issuable in an amount equal to the same fraction of the market
price per share of the Warrant Shares on the day of the exercise, as reasonably
determined by the Company. If this Warrant shall have been exercised only in
part, the Company shall, at the time of delivery of said certificate or
certificates, make appropriate notation on this Warrant and return the same to
such Holder. The
2
<PAGE>
Company shall pay all expenses, taxes and other charges payable in connection
with the preparation, execution and delivery of stock certificates under this
Section, except that, in case such stock certificates shall be registered in a
name or names other than the name of the Holder of this Warrant, all stock
transfer taxes payable upon the execution and delivery of such stock certificate
or certificates shall be paid by the Company hereof at the time of delivering
the Exercise Notice mentioned above. Promptly on notice from the Company, the
Holder hereof shall deliver with such Exercise Notice evidence, satisfactory to
the Company, that such taxes have been paid.
4. Shelf Registration Under the Securities Act. As soon as practicable
after the Effective Time, but not later than 90 days after the Effective Time,
the Company shall file a registration statement on an appropriate form for a
continuous registered shelf offering under Rule 415 of the Securities Act (the
"Shelf Registration Statement") covering the registration of all of the Warrant
Shares (the "Shelf Registered Securities"). The Company shall use its best
efforts to cause the Shelf Registration Statement to be declared effective by
the Securities and Exchange Commission ("SEC") as soon as practicable following
the Effective Time, but not later than 180 days after the Effective Time, and
shall continuously maintain the effectiveness of the Shelf Registration
Statement at all times thereafter until the third anniversary after the exercise
of the last Warrant Shares (the "Last Exercise Date"). RFC's right to offer and
sell Shelf Registered Securities pursuant to the Shelf Registration Statement
shall be subject to the following limitations:
(a) Notice of Proposed Sale. RFC shall give the Company written notice
of its bona fide intention to sell Shelf Registered Securities pursuant to
the Shelf Registration Statement at least five (5) business days in advance
of the proposed date of sale, and the Company shall act as soon as
practicable to make any necessary filings with the Securities and Exchange
Commission and regulatory bodies as may be necessary to permit the sale of
the Shelf Registered Securities.
(b) Expenses. RFC shall bear all discounts, commissions or other
amounts payable to underwriters or brokers and fees and disbursements of
counsel for RFC in connection with sales of Shelf Registered Securities by
RFC. All other expenses incurred in connection with a sale of Shelf
Registered Securities pursuant to this Section 4, including, without
limitation all federal and "blue sky" registration and qualification fees,
printers' and accounting fees, and fees and disbursements of counsel for
the Company shall be borne by the Company.
(c) Curative Measures. If for any reason the Shelf Registration
Statement ceases to be effective at any time prior to the second
anniversary after the Last Exercise Date, then the Company shall use its
best efforts to cause the Shelf Registration Statement (or a new shelf
registration statement conforming to the provisions of this Section 4) to
be declared effective by the SEC and remain effective until the second
anniversary after the Last Exercise Date.
5. Piggyback Registration Under the Securities Act.
If, at any time, the Company proposes to register under the Securities Act,
any of its Common Stock (whether in a primary or secondary offering), or
securities convertible into or
3
<PAGE>
exercisable for Common Stock, on a form under the Securities Act permitting
registration of primary or secondary offerings, it will each such time give
written notice of its intention to do so to Holder, and Holder shall have the
right to participate in such registration as provided in this Section 5. The
Company will give Holder at least 30 days' prior written notice of the filing of
any such registration statement. There shall be no limit on the number of times
Holder shall have the right to participate in such registrations or
qualifications of Common Stock or other securities. If Holder desires to
participate in such registration or qualification of Common Stock or other
securities, Holder shall notify the Company, within 15 days after notice from
the Company of the proposed filing of any such registration statement, of the
number of Warrant Shares acquired upon exercise of this Warrant or which may be
acquired upon exercise of this Warrant (and which will be acquired in accordance
with the terms of this Warrant prior to the effectiveness of any registration
statement referred to herein) which Holder desires to have so included. In the
event the Company decides to proceed with such registration or qualification,
the Company will, at its sole expense, use its reasonable efforts to cause all
such Warrant Shares so requested by Holder to be registered or qualified to
permit the sale thereof; provided, however, that if, in connection with the
offering by the Company of Common Stock or other securities pursuant to a
registration under the Securities Act, the managing underwriter shall impose a
limitation on the number of secondary common shares of the Company which may be
included in any such registration statement because, in its judgment, the
inclusion of additional secondary shares would materially and adversely affect
such public offering, then any shares to be sold by the Company shall have
priority of registration and sale and in determining the number of secondary
shares to be registered and sold, the number of shares of Common Stock otherwise
required to be included in the underwritten public offering may be reduced,
provided, however, that after any such reduction the common shares to be
included in such offering shall be allocated among all holders having such
registration rights in proportion, as nearly as possible, to the respective
number of shares of Common Stock held by each shareholder to the number of
common shares then issued and outstanding. The Company shall bear all of the
expense of any registrations pursuant to this Section 5, except for the pro rata
portion of brokerage or underwriters' discounts or commissions relating to the
shares sold on behalf of the selling shareholders and Holder.
6. Share Dividends, Reclassification, Reorganization, Antidilution
Provisions, Etc. This Warrant is subject to the following further provisions:
(a) If, prior to the expiration of this Warrant by exercise or by its
terms, the Company shall issue any of its shares as a share dividend or
subdivide the number of outstanding shares into a greater number of shares,
then, in either of such cases, the exercise price shall be proportionately
decreased and the number of Warrant Shares at the time purchasable pursuant
to this Warrant shall be proportionately increased; and conversely, in the
event the Company shall contract the number of outstanding shares by
combining the shares into a smaller number of shares, then, in such case,
the exercise price shall be proportionately increased and the number of
Warrant Shares at that time purchasable pursuant to this Warrant shall be
proportionately decreased. If the Company shall, at any time during the
life of this Warrant, declare a dividend payable in cash on its shares and
shall at substantially the same time offer to its shareholders a right to
purchase new shares from the proceeds of such dividend or for an amount
substantially equal to the dividend, all shares so issued shall, for the
purpose of this Warrant, be deemed to have been issued as a share dividend.
Any dividend paid or distributed upon the shares in shares
4
<PAGE>
of any other class or securities convertible into shares shall be treated
as a dividend paid in shares to the extent that shares are issuable upon
the conversion thereof.
(b) If, prior to the expiration of this Warrant by exercise or by its
terms, the Company shall be recapitalized by reclassifying its outstanding
shares into shares with a different par value, or the Company or a
successor corporation shall consolidate or merge with or convey all or
substantially all of its or any successor corporation's property and assets
to any other corporation or corporations (any such corporation being
included within the meaning of the term "successor corporation"
hereinbefore used in the event of any consolidation or merger of any such
corporation with, or the sale of all or substantially all of the property
of any such corporation to, another corporation or corporations), the
Holder shall thereafter have the right to purchase the number of shares of
the Company, or of any successor corporation, to which the Holder would
have been entitled had the Holder owned the number of shares represented by
this Warrant at the time of such recapitalization, consolidation, merger or
conveyance of all or substantially all of the property or assets, upon the
basis and on the terms and conditions and during the time specified in this
Warrant in lieu of the Warrant Shares of the Company theretofore
purchasable upon the exercise of this Warrant had such recapitalization,
consolidation, merger, or conveyance not taken place; and in any such
event, the rights of the Holder to an adjustment in the number of Warrant
Shares purchasable upon the exercise of this Warrant as herein provided
shall continue and be preserved in respect of any shares, securities or
assets which the holder of this Warrant becomes entitled to purchase.
(c) In case:
(i) the Company shall take a record of the holders of its shares
for the purpose of entitling them to receive a dividend payable
otherwise than in cash, or any other distribution in respect of the
shares (including cash), pursuant to, without limitation, any spin-off,
split-off or distribution of the Company's assets; or
(ii) the Company shall take a record of the holders of its shares
for the purpose of entitling them to subscribe for or purchase any
shares of any class or to receive any other rights; or
(iii) of any classification, reclassification or other
reorganization of the shares which the Company is authorized to issue,
consolidation or merger of the Company with or into another
corporation, or conveyance of all or substantially all of the assets of
the Company; or
(iv) of the voluntary or involuntary dissolution, liquidation or
winding up of the Company;
then, and in any such case, the Company shall mail to the Holder, at least 20
days prior thereto, a notice stating the date or expected date on which a record
is to be taken for the purpose of such dividend, distribution or rights, or the
date on which such classification, reclassification, reorganization,
consolidation, merger, conveyance, dissolution, liquidation or winding up is to
take place, as the case may be. Such notice shall also specify the date or
expected date, if any is
5
<PAGE>
to be fixed, as of which holders of shares of record shall be entitled to
exchange their shares for securities or other property deliverable upon such
classification, reclassification, reorganization, consolidation, merger,
conveyance, dissolution, liquidation or winding up, as the case may be.
(d) In case the Company at any time while this Warrant shall remain
unexpired and unexercised shall sell all or substantially all of its
property or dissolve, liquidate or wind up its affairs, the Holder may
thereafter receive upon exercise hereof in lieu of each share of the
Company which it would have been entitled to receive the same kind and
amount of any securities or assets as may be issuable, distributable or
payable upon any such sale, dissolution, liquidation or winding up with
respect to each share of the Company.
7. Representations and Warranties of the Company. The Company represents
and warrants that the Warrant Shares to be issued upon exercise of this Warrant
will be validly issued, fully paid, and nonassessable.
8. Reservation of Shares Issuable on Exercise of Warrants. The Company will
at all times reserve and keep available out of its authorized shares, solely for
issuance upon the exercise of this Warrant and other similar Warrants, such
number of Warrant Shares and other shares as from time to time shall be issuable
upon the exercise of this Warrant and all other similar Warrants at the time
outstanding.
9. Loss, Theft, Destruction or Mutilation. Upon receipt by the Company of
evidence satisfactory to it (in the exercise of its reasonable discretion) of
the ownership of and the loss, theft, destruction or mutilation of this Warrant
and (in the case of loss, theft or destruction) of an indemnity satisfactory to
it (in the exercise of its reasonable discretion), and (in the case of
mutilation) upon surrender and cancellation thereof, the Company will execute
and deliver, in lieu thereof, a new Warrant of like tenor.
10. Warrant Holder Not a Shareholder. The Holder, as such, shall not be
entitled by reason of this Warrant to any rights whatsoever of a shareholder of
the Company.
11. Restrictions on Transfer. Each Holder of the Warrant or Warrant Shares
hereby acknowledges being informed that the Warrant or Warrant Shares must be
held by him indefinitely unless the Warrant or Warrant Shares are registered for
sale by such Holder under the Securities Act or an exemption from such
registration is available. Each certificate for Warrant Shares issued upon
exercise of Warrants shall bear a legend to the effect that such Warrant Shares
may not be transferred except upon compliance with the provisions of the
Securities Act. This Warrant is transferable only on the books of the Company by
the Holder in person or by attorney, on surrender of this Warrant, properly
endorsed.
12. Recognition of Holder. Prior to due presentment for registration of
transfer of this Warrant, the Company may treat the Holder as the person
exclusively entitled to receive notices and otherwise to exercise rights
hereunder.
13. Taxes and Expenses. Except as otherwise provided herein, the Company
will pay any applicable transfer taxes and other reasonable transfer expenses
incurred with respect to the issue of this Warrant or the Warrant Shares
issuable upon exercise thereof.
6
<PAGE>
14. Mailing of Notices, Etc. All notices and other communications from the
Company to the Holder of this Warrant shall be mailed by first-class, registered
mail, postage prepaid, to the address furnished to the Company in writing by the
Holder of this Warrant.
15. Applicable Law. This Warrant shall be governed by, and construed in
accordance with, the laws of the State of Texas.
Dated: January 27, 1999 EQUALNET COMMUNICATIONS CORP
By: /S/ Mitchell Bodian
----------------------------------
Mitchell Bodian
Chief Executive Officer
7
<PAGE>
SUBSCRIPTION
To: EqualNet Communications Corp.
The undersigned, the Holder of the within Warrant, hereby irrevocably
elects to exercise the purchase rights represented by such Warrant for, and to
purchase thereunder, ________ shares of the Company, and herewith makes payment
of $____________ therefor, and requests that the certificate for such shares be
issued in the name of and be delivered to __________________________, whose
address is ___________________________________.
RFC Capital Corporation
Date: By:
--------------------- ------------------------------
Name:
Its:
ASSIGNMENT
For value received, the undersigned hereby sells, assigns and transfers
unto _________________ the right represented by the within Warrant to purchase
from the Company ________ shares of the Company as provided by the within
Warrant and appoints __________________________ attorney to transfer such right
on the books of the Company with full power or substitution in the premises.
Signed in the presence of: RFC Capital Corporation
By:
- --------------------------- ------------------------------
Name:
Its:
Dated:
---------------------
8
<PAGE>
EXHIBIT 10.6
STOCK WARRANT PURCHASE AGREEMENT
This STOCK AND WARRANT PURCHASE AGREEMENT (this "Agreement") is made as
of January 31, 1999, by and among LaMonda Management Family Limited Partnership,
A Nevada Limited Partnership ("Purchaser" or "LaMonda"), and EQUALNET
COMMUNICATIONS CORP., a Texas corporation (the "Company" or "Equalnet").
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, an aggregate of 500,000 shares of Common Stock (as herein defined) of
the Company and warrants to purchase an aggregate of 150,000 additional shares
of Common Stock.
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. Purchase and Sale of Securities, Closing
1.1 Purchase and Sale of Securities
(a) Subject to the terms and conditions herein set forth, the
Company agrees to sell to Purchaser and Purchaser agrees to purchase from the
Company, an aggregate of 769,000 shares (the "LaMonda Share") of the Company's
Common Stock, par value $.01 per share (the "Common Stock") and warrants,
exercisable for three (3) years from the date of issuance, for the purchase of
50,000 additional shares of Common Stock with purchase price at $1.00 per share;
50,000 additional shares of Common Stock with purchase price at $1.50 per share;
and 50,000 additional shares of Common Stock with purchase price at $2.00 per
share (the "LaMonda Warrants"), for an aggregate purchase price of $500,000.
(b) The Company shall cause Intelesis Group, Inc. to issue
250,000 shares of their Common Stock to purchase for $1.00 and shall furnish
Intelesis Group, Inc. with at least one half of the consideration to be paid by
LaMonda and shall furnish the Intelesis Group, Inc. with at least one half of
the consideration to be paid by LaMonda.
(c) The Company will nominate C. Keith LaMonda for a seat on its
Board of Directors.
1.2 Closing. The purchase and delivery of the Securities shall take
place at a closing (the "Closing") at the offices of Equalnet, Houston, Texas,
at 10:00 a.m. local time, on February 5, 1999, 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 Securities in definitive form 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.
1.3 Payment. Purchaser agrees to pay 75,000 by wire transfer on or
before Closing Date with remainder balance of 925,001 due on or before March 4,
1999 by wire transfer.
<PAGE>
2. Purchaser's Conditions of Closing. The Purchaser's obligation to
purchase and pay for the Securities is subject to the satisfaction or waiver, on
or before the Closing Date, of the conditions contained in this Section 2.
2.1 Representations and Warranties. The representations and warranties
contained in Paragraph 4 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 comtemplated; and the Company shall have delivered to the Purchaser a
certificate of a duly authorized officer of the Company, dated the Closing Date,
to such effect.
2.2 Purchase Permitted by Applicable Laws. The purchase of and payment
for the Securities shall not be prohibited by any applicable law or governmental
regulation.
2.3 Compliance with Securities Laws. The offering and sale of the
Securities under this Agreement shall have complied with all applicable
requirements of federal and state securities laws.
3. Company's Conditions of Closing. The Company's obligations to sell
the Securities hereunder is subject to the satisfaction or waiver, on or before
the Closing Date, of the conditions contained in this Section 3.
3.1 Representations and Warranties. The representations and warranties
contained in Paragraph 5 hereof shall be true in all material respects on and as
of the Closing Date, of the conditions contained in this Section 3.
3.2 Purchase of Securities. The Purchaser shall have purchased and paid
for the Securities.
3.3 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 properties or rights, or any of
its 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.
4. 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:
4.1 Corporate Existence. The Company is a corporation duly organized,
legally existing, and in good standing under the laws of the State of Texas.
4.2 Corporate Power and Authorization. The Company has the requisite
corporate power and authority to issue the Securities and to execute, deliver,
and perform its obligations under this Agreement and to consummate the
transactions contemplated hereby (including the issuance, against payment
therefore, of the shares of Common Stock issuable on exercise of the Warrants
(the "Warrant Shares"). All action on the Company's part requisite for the due
issuance against payment therefor of the Securities and the Warrant Shares and
for the due execution, delivery, and performance of this Agreement has been duly
and effectively taken.
4.3 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).
<PAGE>
5. Representations and Warranties of Purchaser. To induce the Company
to enter into this Agreement, LaMonda represents and warrants to the Company
that:
5.1 Purchase for Investment:
(a) Purchaser is acquiring the Securities 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 (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 Securities have not been
registered under the Securities Act and that the Warrant Shares will not be
registered under the Securities Act.
(c) Purchaser is an "accredited invertor" 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 Securities, 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 it has been provided with copies
of the Company's Annual Report on Form 10-K for the year ended June 30, 1998, as
amended, each of the Company's Quarterly Reports on Form 10-Q for the quarter
ended September 30, 1998, a the Company's Current Report on Form 8-K filed
September 21, 1998. Purchaser also acknowledges that the Company has advised it
of the facts set forth on Schedule A hereto (the "Material Non-public
Information"). Purchaser acknowledges that they are aware that the United States
securities laws prohibit them, their representatives, and any person who has
received Material Non-public Information about the Company from purchasing or
selling securities of the Company or from communicating such information to any
other person under circumstances in which it is reasonably forseeable that such
person will purchase or sell such securities in reliance on such information.
Purchaser covenant and agree not to purchase or sell any securities of the
Company (other than pursuant to this Agreement) or to communicate Material
Non-public Information to any person until such time as all of the Material
Non-public Information has been made public by the Company or the Company has
informed the Purchaser that such information is no longer material.
(e) Purchaser acknowledges that the Securities 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 Securities (or the Warrant Shares, as applicable), or an available
exemption from registration under the Securities Act, the Securities (or the
Warrant Shares, as applicable) must be held indefinitely.
(f) Purchaser agrees that the Shares (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
<PAGE>
COMPANY TO THE EFFECT THAT SUCH EXEMPTION FROM REGISTRATION IS AVAILABLE IN
CONNECTION WITH SUCH SALE."
5.2 Authorization; No Conflict. LaMonda is a Nevada limited partnership
duly organized, legally existing and in good standing under the laws of the
State of Florida. LaMonda has all requisite corporate 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 the partnership agreement of LaMonda or any material contract,
agreement, obligation or commitment applicable to Purchaser.
6. Termination, Amendment and Waiver.
6.1 Termination. This Agreement may be terminated at any time prior to
the Closing Date:
(a) by mutual written consent of Purchaser and the Company;
(b) by either Purchaser or the Company:
(i) if the transaction contemplated by this Agreement shall not
have been consummated on or before February 28, 1999,
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
(ii) if any permanent injunction or other order of a court or
other competent authority preventing the consummation of
the transactions contemplated by this Agreement shall have
become final an nonapplicable.
(c) by Purchase, 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; and
(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.
6.2 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.
7. Miscellaneous.
7.1 Amendment. This Agreement may be amended by the parties hereto at
any time. This Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties.
7.2 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) 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.
<PAGE>
7.3 Assignment. This Agreement shall not be assigned by operation of
law or otherwise, and any attempt at assignment shall be void.
7.4 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 deliver of
this Agreement and shall terminate on the fourth anniversary of the Closing
Date.
7.5 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. 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.
7.6 Notices. All communications provided for hereunder shall be
delivered personally or sent by registered or certified mail and, if to the
Purchaser, to the address set forth on the signature page hereto and if to the
Company addressed to it as EqualNet Holding Corp., 1250 Wood Branch Park Drive,
Houston, Texas 77079-1212. Attn: General Counsel, or to such other address with
respect to any party as such party shall notify the other in writing. Within 5
days after the date of such mailing (save for any postal interruption) such
communication shall be deemed to have been received.
7.7 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.
7.8 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 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. Purchaser and 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 its address set forth herein, such service
to become effect 30 days after such mailing. Nothing herein shall affect the
right of the Company or the Purchaser to serve process in any other manner
permitted by law.
7.9 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.
7.10 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.
7.11 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.
<PAGE>
7.12 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.
7.13 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.
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/ Mark Willis
--------------------------------------
Name: Mark Willis
------------------------------------
Title: Chairman
-----------------------------------
LAMONDA MANAGEMENT FAMILY LIMITED PARTNERSHIP
By: /s/ C. Keith LaMonda
--------------------------------------
Name: C. Keith LaMonda
------------------------------------
Title: CEO
-----------------------------------
address for notices:
1850 Lee Road, Suite 202
Winter Park, Florida 32789
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Equalnet Communications Corp. contained in the
accompanying Quarterly Report on Form 10-Q and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 15,653,878
<ALLOWANCES> 2,417,936
<INVENTORY> 0
<CURRENT-ASSETS> 14,760,247
<PP&E> 21,249,124
<DEPRECIATION> 7,590,123
<TOTAL-ASSETS> 36,426,633
<CURRENT-LIABILITIES> 38,734,118
<BONDS> 0
0
12,828,681
<COMMON> 235,582
<OTHER-SE> (20,103,996)
<TOTAL-LIABILITY-AND-EQUITY> 36,426,633
<SALES> 9,345,633
<TOTAL-REVENUES> 9,345,633
<CGS> 7,459,706
<TOTAL-COSTS> 5,993,691
<OTHER-EXPENSES> 54,266
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 721,942
<INCOME-PRETAX> 4,883,972
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,883,972
<DISCONTINUED> 0
<EXTRAORDINARY> 234,000
<CHANGES> 0
<NET-INCOME> (5,494,058)
<EPS-BASIC> (0.29)
<EPS-DILUTED> (0.29)
</TABLE>
