<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 DECEMBER 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)
<TABLE>
<S> <C>
TEXAS 76-0457803
(State of Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
</TABLE>
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)
NA
(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 32,301,192 shares of the Registrant's $.01 par value common stock
outstanding as of February 8, 2000.
- --------------------------------------------------------------------------------
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<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EQUALNET COMMUNICATIONS CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents............................. $ 266,000 $ 396,000
Accounts receivable, trade....................... 7,873,000 5,212,000
Other receivables................................ 472,000 --
Prepaid expenses and other....................... 401,000 315,000
------------ ------------
Total current assets............................. 9,012,000 5,923,000
------------ ------------
Property and equipment............................. 20,801,000 22,351,000
Less accumulated depreciation and amortization..... (8,368,000) (10,089,000)
------------ ------------
Net property and equipment....................... 12,433,000 12,262,000
------------ ------------
Customer acquisition costs, net.................... 3,862,000 2,254,000
Other assets....................................... 407,000 313,000
------------ ------------
Total assets................................... $ 25,714,000 $ 20,752,000
============ ============
LIABILITIES AND EQUITY (DEFICIT)
Current Liabilities
Accounts payable................................... $ 3,991,000 $ 5,303,000
Accrued liabilities................................ 5,749,000 4,403,000
Current portion of long term debt--related party... 322,000 324,000
Current portion of long term debt.................. 2,726,000 2,749,000
Debt in default.................................... 558,000 558,000
Contractual obligations with regard to receivables
sales agreement................................... 3,339,000 2,727,000
------------ ------------
Total current liabilities...................... 16,685,000 16,064,000
------------ ------------
Long term debt..................................... 5,301,000 4,384,000
Other long term liabilities........................ -- 629,000
Commitments and contingencies
Stockholders' Equity (Deficit):
Preferred stock.................................. 16,153,000 16,433,000
Common stock..................................... 284,000 320,000
Treasury stock, at cost.......................... (232,000) (232,000)
Additional paid-in-capital....................... 46,840,000 48,275,000
Stock warrants................................... 3,019,000 3,019,000
Deferred compensation............................ (20,000) (20,000)
Accumulated deficit.............................. (62,316,000) (68,120,000)
------------ ------------
Total stockholders' equity (deficit)........... 3,728,000 (325,000)
------------ ------------
Total liabilities and stockholders' equity
(deficit)................................... $ 25,714,000 $ 20,752,000
============ ============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
EQUALNET COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------- -------------------------
1998 1999 1998 1999
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Sales................... $ 7,618,000 $ 6,672,000 $ 16,011,000 $14,825,000
Cost of Sales........... 5,797,000 3,269,000 13,286,000 7,688,000
Bad Debt Expense........ 3,667,000 2,500,000 4,063,000 2,678,000
------------ ----------- ------------ -----------
Gross profit............ (1,846,000) 903,000 (1,338,000) 4,459,000
------------ ----------- ------------ -----------
Selling, general, and
administrative
expenses............... 2,495,000 2,862,000 6,160,000 5,214,000
Depreciation and
amortization........... 2,915,000 2,118,000 5,130,000 3,527,000
------------ ----------- ------------ -----------
Operating loss.......... (7,256,000) (4,077,000) (12,628,000) (4,282,000)
------------ ----------- ------------ -----------
Other income (expense):
Interest, net......... (600,000) (250,000) (1,334,000) (720,000)
Other................. -- (113,000) 17,000 (191,000)
------------ ----------- ------------ -----------
(600,000) (363,000) (1,317,000) (911,000)
------------ ----------- ------------ -----------
Loss before income taxes
and reorganization
costs.................. (7,856,000) (4,440,000) (13,945,000) (5,193,000)
Benefit for federal
income taxes........... -- -- -- --
Loss before
reorganization costs... (7,856,000) (4,440,000) (13,945,000) (5,193,000)
Reorganization costs.... (71,000) -- (143,000) --
Net loss................ $ (7,927,000) $(4,440,000) $(14,088,000) $(5,193,000)
============ =========== ============ ===========
Preferred stock
dividends and deemed
distributions.......... $ (2,087,000) $ (551,000) $ (2,457,000) $ (611,000)
Net loss available to
common shareholders.... $(10,014,000) $(4,991,000) $(16,545,000) $(5,804,000)
============ =========== ============ ===========
Net loss per share--
basic and diluted...... $ (0.54) $ (0.17) $ (0.85) $ (0.20)
============ =========== ============ ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
EQUALNET COMMUNICATIONS CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
-------------------------
1998 1999
------------ -----------
<S> <C> <C>
Operating activities:
Net loss from continuing operations................ $(14,088,000) $(5,193,000)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization..................... 5,191,000 3,527,000
Interest charge on convertible debt issued at
discount......................................... 450,000 --
Provision for bad debt............................ 4,063,000 2,678,000
Common Stock issued for services.................. -- 64,000
Changes in working capital components:
Accounts receivable, trade....................... (3,470,000) 158,000
Prepaid expenses and other current assets........ 53,000 (86,000)
Accounts payable and accrued liabilities......... 7,051,000 (34,000)
Other, net....................................... -- 343,000
------------ -----------
Net cash provided by (used in) operating
activities......................................... (750,000) 1,457,000
------------ -----------
Investing activities:
Purchases of property and equipment................ (121,000) (121,000)
Cash paid for acquisition.......................... (555,000) (150,000)
Proceeds from sale of equipment.................... 75,000 --
------------ -----------
Net cash used in investing activities............... (601,000) (271,000)
------------ -----------
Financing activities:
Proceeds from long-term debt....................... 2,923,000 --
Repayments on long-term debt....................... (4,887,000) (894,000)
Proceeds from convertible debt..................... 2,800,000 --
Proceeds from sale of common stock................. -- 450,000
Proceeds from exchange of common stock for
preferred stock................................... 200,000 --
Net proceeds (repayments) on contractual
obligations with regard to receivable sales
agreements........................................ (145,000) (612,000)
------------ -----------
Net cash provided by (used in) financing
activities........................................ 891,000 (1,056,000)
------------ -----------
Net increase (decrease) in cash..................... (460,000) 130,000
Cash at beginning of period......................... 460,000 266,000
------------ -----------
Cash at end of period............................... $ -- $ 396,000
============ ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
EQUALNET COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION
The unaudited consolidated financial statements of Equalnet Communications
Corp. (the "Company") for the three and six month periods ended December 31,
1999 and 1998 have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis. Significant accounting
policies followed by the Company and its subsidiaries are disclosed in the
notes to the consolidated financial statements included in the Company's Annual
Report on Form 10-K for the year ended June 30, 1999. In the opinion of the
Company's management, the accompanying condensed consolidated financial
statements contain the adjustments, consisting of normal recurring accruals,
necessary to present fairly the consolidated position of the Company and its
consolidated subsidiaries at December 31, 1999, and the consolidated results of
their operations and cash flows for the periods ended December 31, 1999 and
1998. Operating results for the three and six months ended December 31, 1999
are not necessarily indicative of the results which may be expected for the
year ended June 30, 2000.
We have reclassified certain prior period amounts to conform to the current
presentation.
NOTE 2--BANKRUPTCY FILINGS
EqualNet Corporation ("EqualNet"), one of the Company's operating
subsidiaries, and EqualNet Wholesale Services ("Wholesale"), a wholly-owned
non-operating subsidiary of EqualNet filed voluntary petitions for relief under
Chapter 11 ("Chapter 11") of the United States Bankruptcy Code (the "Bankruptcy
Code") on September 10, 1998 in the United States Bankruptcy Court for the
Southern District of Texas, Houston, Texas. On October 2, 1998, Wholesale filed
its motion to convert its bankruptcy proceedings from a Chapter 11
reorganization to a Chapter 7 liquidation. Pursuant to the Bankruptcy Code,
EqualNet managed its assets and operated its business as a debtor-in-possession
pending confirmation of its reorganization plan, which plan was confirmed on
April 28, 1999 and consummated on May 28, 1999. The plan of reorganization
provided for the restructuring of amounts and repayment terms for secured and
unsecured creditors. In conjunction with the confirmation and consummation of
the reorganization plan, certain debts were reduced. As voting control of the
Company's common stock remained the same as a result of the confirmation of the
plan of reorganization, fresh start accounting was not used in accordance with
AICPA Statement of Position 90-7.
NOTE 3--DEBT
USC Telecom defaulted on its note payable of approximately $0.6 million in
February 1999 and, accordingly, the corresponding debt is classified as debt in
default as of December 31, 1999 and June 30, 1999. As further discussed in Note
6, the Company entered into a settlement agreement with the note holder on
October 9, 1999 whereby the outstanding principal and accrued interest will be
paid by the issuance of a number of shares of the Company's unregistered common
stock.
In November 1999, Netco Acquisition Corp. ("Netco"), the Company wholly
owned subsidiary, amended its note payable with Finova Capital Corporation.
Under the Second Amendment to the Loan and Security Agreement (the
"Agreement"), Netco modified the timing of certain payments of principal and
interest. Netco is current with its obligations under this Agreement.
NOTE 4--INCOME TAXES
The Company recorded a valuation allowance amounting to the entire net
deferred tax asset balance at December 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 December
31, 1999.
NOTE 5--MANAGEMENT'S PLANS TO RETURN TO PROFITABILITY
For the three and six month periods ended December 31, 1999 and 1998, the
Company reported pre-tax net operating losses, has a working capital
deficiency, and debt in default. The Company also has significant
5
<PAGE>
EQUALNET COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(UNAUDITED)
amounts of debt due within the next twelve months. While the Company's
management is attempting to raise additional funds and/or refinance these
obligations, there is no guarantee additional financing will be available on
commercially reasonable or acceptable terms, or on terms which would not be
dilutive to stockholders, if at all. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Pre-tax net
operating losses were attributable to several internal and external factors.
Continued provisioning challenges through the end of calendar year 1998 led to
delayed billing and increased customer attrition. In addition, the Company
attempted to convert to a new customer management, billing, and rating system
in late fiscal year 1998 which proved to be unsuccessful. Simultaneous with the
Company's attempted conversion and implementation to this customer management,
billing, and rating system the Company acquired a significant customer base;
conversion problems adversely affected the Company's cash collections and, to a
greater extent, led to increased customer attrition.
A significant portion of the Company's capital is provided by receivable
sales agreements with a third-party. Funding under these agreements are based
on specific accounts receivable eligibility requirements with the primary
factor being the collections history per account.
The Company's management is continuing actions to strengthen the financial
position of the Company. New products are being developed to significantly
enhance sales and revenue, including (i) bundled minute long distance products
resembling cellular offerings, (ii) wholesale international rates for retail
customers (iii) pre-paid debit-cards, (iv) advertiser-sponsored long distance
and (v) the pursuit of acquisitions expected to be accretive to earnings. The
Company is also considering entering the wholesale international long distance
market and offering local service as a competitive local exchange carrier.
Additionally, the Company is evaluating several proposals for the resumption of
an agent program in order to increase its customer base, as well as negotiating
with several third parties for possible acquisitions to form strategic
alliances in order to maximize the utilization of the Company's
telecommunications switches (the "Switches").
The Company believes the new product offerings noted above are particularly
significant to increasing the Company's revenues and returning to
profitability. Furthermore, management believes the Company must continue to
increase its innovation and not depend on competitive pricing alone in order to
become more competitive in the marketplace. Most of the new product offerings
noted above are pricing packages only and will not require a significant amount
of capital. Any new product offerings requiring technology advancements will
most likely come from strategic alliances or potential mergers. Financing for
potential strategic alliances or mergers is expected to come from the issuance
of the Company's common stock.
In order to provide financing to support operations, the Company must also
continue to increase revenue generated from its existing resources. Specific
actions to maximize revenue generated by the switch network include (i) placing
dedicated customers on the network via connectivity to a local switch, (ii)
port leasing of switch assets and (iii) international product offerings
accessed through the switches. In addition, the Company is continuing to reduce
its primary carrier costs for its existing customer base. The Company continues
to make improvements in its billing and MIS systems to more accurately bill
customers, maximize customer revenue and ensure proper audit of vendor invoices
related to the cost of service. The Company has also implemented a cost
reduction program, and continues to refine these efforts, related to general,
administrative, and overhead expenditures. In addition to utilizing the
Switches to provide transmission of its customer traffic, the Company is
focusing on offering bundled services to its customers, mainly long-distance
service, Internet access, and local service.
6
<PAGE>
EQUALNET COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(UNAUDITED)
Management believes the plans discussed above are critical to returning the
Company to profitability. Additionally, the Company intends to seek possible
strategic alliances and business combinations in order to more rapidly
implement its plans for increasing the service offerings or for reducing costs
of the Company. Management is attempting to balance the cash flows from
operations to meet current needs, and is continuously seeking additionally
capital resources to fund the expansion of service offerings of the Company.
Should capital resource requirements to achieve management's plan to return to
profitability significantly exceed management's ability to meet those needs,
the Company's ability to return to profitability could be significantly delayed
or impaired.
NOTE 6--COMMITMENTS AND CONTINGENCIES
On August 7, 1998, Robert H. Turner, the Company's former Chief Executive
Officer filed suit against the Company alleging an unspecified amount of
damages based upon an alleged breach of his employment contract and other
claims. Although the Company denies any wrongdoing or liability in the matter;
the Company has entered into negotiations with Mr. Turner. The Company believes
it has adequate reserves for this matter.
On September 21, 1998, Cyberserve, Inc., WSHS Enterprises, Inc. and William
Stuart (collectively "Bluegate") filed suit against the Company and Netco
Acquisition LLC alleging damages for breach of contract and other alleged
claims. The matters originated with a letter of intent 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 Company denies any wrongdoing
or liability in this matter and intends to vigorously defend itself against all
claims of the plaintiffs. This action is in the initial stage of discovery
proceedings. Accordingly, at this time the Company is unable to determine the
amount of the exposure, if any, under this action.
On September 29, 1998, SA Telecommunications Incorporated asserted claims
pursuant to the Purchase Agreement against USC Telecom and the Company for
operating losses for the period from April 1, 1998--July 22, 1998, damages for
delayed or unbillable revenue, delivery of shares of the Company's Series C
Senior Preferred Stock, and other items. On December 28, 1998, the court signed
an order approving those claims in the amount of approximately $813,000. The
Company and USC Telecom disputed the monetary claims asserted by SA
Telecommunications in its demand and filed a notice of appeal of the court's
order in the proceedings. On October 9, 1999, SA Telecommunications, Greyrock
Business Credit, and the Company presented an agreement to the SA Telecom
bankruptcy court providing for the settlement of the SA Telecommunications
judgment and amounts owed to Greyrock. The agreement calls for the payment of
the remaining principal balance of the promissory note to Greyrock, plus
accrued but unpaid interest, by the issuance of a number of shares of the
Company's unregistered common stock valued at the lessor of $0.28 per common
share (as adjusted to account for any stock split) or the market price of the
unregistered common stock at the date registration of the shares is effective.
In addition, the agreement calls for satisfaction of the remaining obligation
to SA Telecommunications by the payment of $150,000 cash plus the issuance of
an amount of the Company's unregistered common stock equal to approximately
$660,000 valued at the lesser of $0.28 per common share (as adjusted to account
for any stock split) or the market price of the unregistered common stock at
the date registration of the shares is effective; the Company paid the cash
component of this agreement in October 1999.
7
<PAGE>
EQUALNET COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(UNAUDITED)
On December 15, 1999, Qwest Communications Corporation ("Qwest") filed suit
against RFC Capital Corporation ("RFC"), Equalnet Communications Corp., USC
Telecom, Inc., Brittan Communications International Corporation ("BCI") and Jim
G. Edwards in the Franklin County Common Pleas Court, Columbus, Ohio, (Cause
No. 99CVH-12-10638) alleging damages for breach of contract, fraud, conspiracy
to commit fraud and money owed through successor liability arising out of USC
Telecom's purchase of certain assets of BCI at a foreclosure sale conducted by
BCI's secured lender, RFC. Qwest is also seeking punitive damages. No specific
amount of either actual or punitive damages has been pled by Qwest. The Company
denies the allegations of Qwest as set forth in its petition. It is impossible
at this time to accurately determine the extent of either USC Telecom's or the
Company's exposure, if any, in these proceedings.
On January 26, 2000, WorldCom Network Services, Inc. and MFS Telecom, Inc.
(collectively "WorldCom") filed suit against Equalnet Communications Corp. and
USC Telecom, Inc. in the United States District Court for the District of
Delaware (Cause No. 00-049) alleging damages under the filed rate doctrine of
the Communications Act of 1934, for breach of contract, quantum meruit and
unjust enrichment in the amount of $7,800,000 arising out of services allegedly
provided to customers acquired by USC Telecom from SA Telecommunications, Inc.
and its subsidiaries in their combined bankruptcy proceedings. The Company
denies the allegations of WorldCom as set forth in its petition. It is
impossible at this time to accurately determine the extent of either USC
Telecom's or the Company's exposure, if any, in these proceedings.
EqualNet's reorganization plan required the Company to issue 3 million
shares of its Common Stock to the Unsecured Creditors' Trust (the Trust) for
the benefit of holders of unsecured claims who were non-insiders or affiliates
of the Company. The Trust may sell up to 375,000 shares of the Company's Common
Stock during each of the first four consecutive six month periods after the
effective date of the reorganization plan. Based upon the price and trading
volume, the Company may authorize the Trust to sell more than 375,000 shares of
Common Stock during any of the four six month periods. If the gross proceeds,
prior to commission, of the Trust's stock sales in any six month period are
less than the average price of $1 per share, then the Company shall pay the
trust an amount of cash to make up the difference between the actual sales
price and $1 per share. At any time during the four six month periods, but not
thereafter, the Company may elect to purchase for $1.50 per share, the entire
balance of shares of Common Stock held by the Trust. Since the effective date
of the reorganization plan, the Trust has sold shares of Common Stock for less
than $1. The Company believes it has adequate reserves for this matter.
EqualNet's reorganization also calls for the Company to issue additional
shares of Common Stock of the Company should the average closing price of the
Company's stock, during the 25 consecutive trading days preceding the date that
is two years after the effective date of the reorganization be less than $1 per
share as defined Plan of Reorganization.
From time to time the Company is involved in what it believes to be routine
litigation, or other legal proceedings that may be considered as part of the
ordinary course of its business. The Company does not believe that the adverse
determination of any such claims would have a material adverse effect on either
the results of operations or the financial condition of the Company.
8
<PAGE>
EQUALNET COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(UNAUDITED)
NOTE 7--EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Weighted
Average Per Share
Net Loss Common Shares Amount
------------ ------------- ---------
<S> <C> <C> <C>
Three Months Ended
December 31, 1999
Net loss.................. $ (4,440,000)
Dividends applicable to
preferred stock.......... $ (551,000)
------------
Basic and diluted EPS --
Net loss applicable to
common stock........... $ (4,991,000) 30,225,900 $(0.17)
============ ========== ======
Three Months Ended
December 31, 1998
Net loss.................. $ (7,927,000)
Dividends applicable to
preferred stock.......... $ (2,087,000)
------------
Basic and diluted EPS --
Net loss applicable to
common stock........... $(10,014,000) 18,385,832 $(0.54)
============ ========== ======
Six Months Ended December
31, 1999
Net loss.................. $ (5,193,000)
Dividends applicable to
preferred stock.......... $ (611,000)
------------
Basic and diluted EPS --
Net loss applicable to
common stock........... $ (5,804,000) 29,426,483 $(0.20)
============ ========== ======
Six Months Ended December
31, 1998
Net loss.................. $(14,088,000)
Dividends applicable to
preferred stock.......... $ (2,457,000)
------------
Basic and diluted EPS --
Net loss applicable to
common stock........... $(16,545,000) 19,448,324 $(0.85)
============ ========== ======
</TABLE>
The analysis above assumes there are no conversions of any securities during
the periods presented because there is a loss in each quarter and, as a result,
the effect of the conversion of any security would be anti-dilutive.
NOTE 8--ACQUISITIONS
On November 1, 1999, one of the Company's wholly-owned subsidiaries acquired
certain assets of the Intelesis Group, Inc., a development stage company which
had been developing an advertiser-sponsored long distance service. The Company
paid total consideration of $150,000 cash, contributed a note receivable of
approximately $631,000, and issued approximately 900,000 shares of the
Company's common stock.
NOTE 9--EQUITY TRANSACTIONS
In November 1999, the Company entered into an agreement with third-parties
to issue approximately 1.3 million shares of the Company's common stock for
approximately $450,000 cash.
In November and December 1999, the Company redeemed 97 shares of its Series
D Preferred Stock in exchange for 482,060 shares of the Company's common stock.
On December 19, 1999, the Company issued 229,120 shares of the Company's
common stock to a third-party for payment of professional services rendered
under the Independent Contractor Stock Option Plan.
On December 31, 1999 the Company converted all of the 833,333 issued and
outstanding shares of its Series E Convertible Preferred Stock, valued at
$500,000, into 833,333 shares of the Company's common stock.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements of Equalnet Communications Corp. (the "Company") and notes
thereto included elsewhere in this report.
Results of Operations
Sales for the three months ended December 31, 1999 decreased $0.9 million,
or 12.4%, compared to sales of $7.6 million for the same period of the prior-
year. Sales decreased $1.2 million, or 7.4%, for the six month period ended
December 31, 1999 as compared to the same period of the prior-year. The decline
in revenues is primarily attributable to decreased per-minute long distance
charges and normal customer attrition, offset by new business.
Gross margin increased $2.7 million, or 148.9%, for the three month period
ended December 31, 1999 as compared to the same period of the prior-year; gross
margin increased $5.8 million, or 433.3%, for the six month period ended
December 31, 1999 as compared to the same period of the prior-year. These
increases are primarily due to the decrease in the costs of the Company's
network of telecommunications switches which were not incurred in the current
periods, plus savings associated with renewed carrier contracts at decreased
prices.
The net loss applicable to common stock for the three months ended December
31, 1999 was $4.9 million, compared to the $10.0 million loss for the
corresponding period in the prior-year. The net loss applicable to common stock
for the six month period ended December 31, 1999 was $5.8 million, compared to
the $16.5 million loss for the corresponding period in the prior-year.
Gross Margin
Cost of sales for the three month period ended December 31, 1999 decreased
$2.5 million, or 43.6%, as compared to the same period of the prior-year. Cost
of sales for the six month period ended December 31, 1999, decreased $5.6
million, or 42.1%, as compared to the same period of the prior-year. The
primary cause of these decreases were costs associated with the Company's
network of telecommunications switches which were not incurred in the current
periods, normal customer attrition, and savings associated with renewed carrier
contracts at decreased prices. Gross margin for the three months ended December
31, 1999, increased $2.7 million, or 148.9%, to a gross profit of $0.9 million.
This increase includes the non-cash writeoffs of uncollectable accounts of $2.5
million and $3.7 million for the three months ended December 31, 1999 and 1998,
respectively. Gross margin for the six months ended December 31, 1999 increased
$5.8 million, or 433.3%, to a gross profit of $4.5 million. This increase
includes the non-cash writeoffs of uncollectable accounts of $2.7 million and
$4.1 million for the six months ended December 31, 1999 and 1998, respectively.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses increased $.4 million, or
14.7%, for the three months ended December 31, 1999, when compared to the same
period of the prior-year; this increase is primarily attributable to additional
salaries and miscellaneous expenses associated with the Company's new
advertiser-sponsored long distance program. Selling, general, and
administrative expenses for the six month period ended December 31, 1999
decreased $.9 million, or 18.4%, as compared to the corresponding period in the
prior-year. This decrease is directly attributable to the overall decreases in
the Company's infrastructure for the applicable periods.
Depreciation and Amortization
Depreciation and amortization decreased $0.8 million, or 27.3%, for the
three month period ended December 31, 1999, as compared to the $2.9 million for
the same period of the prior-year. Depreciation and
10
<PAGE>
amortization decreased $1.6 million, or 31.2%, for the six month period ended
December 31, 1999, as compared to the $5.1 million for the same period in the
prior-year. These decreases are directly attributable to the "declining
balance" method for amortizing customer acquisition costs, which results in
accelerated depreciation amounts in the initial period of amortization as
compared to subsequent periods, as well as write-offs of customer acquisition
costs in the prior periods not incurred in the current periods.
Liquidity and Capital Resources
For the six months ended December 31, 1999, the Company's working capital
requirements for operations and capital expenditures (excluding acquisitions)
were funded through the use of internally-generated funds.
The Company generated $1.5 million in cash flow from operations for the six
months ended December 31, 1999, compared to the $.8 million cash flow used in
operations for the same period of the prior-year. Cash flow deficits in the
same period of the prior-year were primarily attributable to operating losses
incurred by the Company.
Cash used in investing activities was $0.3 million for the six months ended
December 31, 1999, compared to the $0.6 million used for the same period of the
previous year. Included in the cash used in investing activities for the
current period was $150,000 in connection with the purchase of certain assets
of a development-stage company which had been developing an advertiser-
sponsored long distance service.
Net cash used in financing activities was $1.1 million for the six months
ended December 31, 1999, compared to the cash provided by financing activities
of $0.9 million for the same period of the prior-year. This difference is
primarily the result of the Company relying less on borrowings to fund
operations.
Management's Plans to Return to Profitability
For the three and six month periods ended December 31, 1999 and 1998, the
Company reported pre-tax net operating losses, has a working capital
deficiency, and debt in default. The Company also has significant amounts of
debt due within the next twelve months. While the Company's management is
attempting to raise additional funds and/or refinance these obligations, there
is no guarantee additional financing will be available on commercially
reasonable or acceptable terms, or on terms which would not be dilutive to
stockholders, if at all. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Pre-tax net operating losses
were attributable to several internal and external factors. Continued
provisioning challenges through the end of calendar year 1998 led to delayed
billing and increased customer attrition. In addition, the Company attempted to
convert to a new customer management, billing, and rating system in late fiscal
year 1998 which proved to be unsuccessful. Simultaneous with the Company's
attempted conversion and implementation to this customer management, billing,
and rating system the Company acquired a significant customer base; conversion
problems adversely affected the Company's cash collections and, to a greater
extent, led to increased customer attrition.
A significant portion of the Company's capital is provided by receivable
sales agreements with a third-party. Funding under these agreements are based
on specific accounts receivable eligibility requirements with the primary
factor being the collections history per account.
The Company's management is continuing actions to strengthen the financial
position of the Company. New products are being developed to significantly
enhance sales and revenue, including (i) bundled minute long distance products
resembling cellular offerings, (ii) wholesale international rates for retail
customers (iii) pre-paid debit-cards, (iv) advertiser-sponsored long distance
and (v) the pursuit of acquisitions expected to be accretive to earnings. The
Company is also considering entering the wholesale international long distance
market, and offering local service as a competitive local exchange carrier.
Additionally, the Company is evaluating several proposals for the resumption of
an agent program in order to increase its customer base, as well as negotiating
with several third parties for possible acquisitions to form strategic
alliances in order to maximize the utilization of the Company's
telecommunications switches (the "Switches").
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The Company believes the new product offerings noted above are particularly
significant to increasing the Company's revenues and returning to
profitability. Furthermore, management believes the Company must increase its
innovation and not depend on competitive pricing alone in order to become more
competitive in the marketplace. Most of the new product offerings noted above
are pricing packages only and will not require a significant amount of capital.
Any new product offerings requiring technology advancements will most likely
come from strategic alliances or potential mergers. Financing for potential
strategic alliances or mergers is expected to come from the issuance of the
Company's common stock.
In order to provide financing to support operations, the Company must also
continue to increase revenue generated from its existing resources. Specific
actions to maximize revenue generated by the switch network include (i) placing
dedicated customers on the network via connectivity to a local switch, (ii)
port leasing of switch assets and (iii) international product offerings
accessed through the switches. In addition, the Company is continuing to reduce
its primary carrier costs for its existing customer base. The Company continues
to make improvements in its billing and MIS systems to more accurately bill
customers, maximize customer revenue and ensure proper audit of vendor invoices
related to the cost of service. The Company has also implemented a cost
reduction program, and continues to refine these efforts, related to general,
administrative, and overhead expenditures. In addition to utilizing the
Switches to provide transmission of its customer traffic, the Company is
focusing on offering bundled services to its customers, mainly long-distance
service, Internet access, and local service.
Management believes the plans discussed above are critical to returning the
Company to profitability. Additionally, the Company intends to seek possible
strategic alliances and business combinations in order to more rapidly
implement its plans for increasing the service offerings or for reducing costs
of the Company. Management is attempting to balance the cash flows from
operations to meet current needs, and is continuously seeking additionally
capital resources to fund the expansion of service offerings of the Company.
Should capital resource requirements to achieve management's plan to return to
profitability significantly exceed management's ability to meet those needs,
the Company's ability to return to profitability could be significantly delayed
or impaired.
Year 2000 Issue
The Company successfully completed all work to resolve the potential impact
of year 2000 on the processing of date-sensitive information by the Company's
computerized information systems and equipment with embedded chips. The Company
has not experienced any material disruption from the year 2000 issue relating
to the century rollover. The Company will continue to monitor all critical
systems for the appearance of delayed year 2000 related issues, problems
relative to the leap year, and problems encountered through suppliers,
customers, and other third-parties with whom the Company deals.
For substantially all of the Company's internal systems, the remediation
phase of its year 2000 activities were an incidental consequence of routine
updates to existing systems. Expenses incurred by the Company related to the
year 2000, which were not material, have been expensed as incurred and funded
from operations. A majority of these costs would have been incurred as part of
normal system and application upgrades.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In November 1999, the Company entered into an agreement with third-parties
to issue approximately 1.3 million shares of the Company's common stock for
approximately $450,000 cash.
In November and December 1999, the Company redeemed 97 shares of its Series
D Preferred Stock in exchange for 482,060 shares of the Company's common stock.
On December 19, 1999, the Company issued 229,120 shares of the Company's
common stock to a third-party for payment of professional services rendered
under the Independent Contractor Stock Option Plan.
On December 31, 1999, the Company redeemed all of the 833,333 issued and
outstanding shares of its Series E Convertible Preferred Stock, valued at
$500,000, into 833,333 shares of the Company's common stock.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
<TABLE>
<C> <S>
10.1 Asset Purchase Agreement by and among Freecaller Communications
Corporation f/k/a Intelesis Acquisition Corp as Buyer, The Intelesis
Group, Inc. as Seller, and Freecaller Communications Corporation as
Assignor dated October 29, 1999.
10.2 Amendment to Asset Purchase Agreement by and among Freecaller
Communications Corporation f/k/a Intelesis Acquisition Corp as Buyer,
The Intelesis Group, Inc. as Seller, and Freecaller Communications
Corporation as Assignor dated November 18, 1999.
27.1 Financial Data Schedule
</TABLE>
b. Reports on Form 8-K
None.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EQUALNET HOLDING CORP.
Date: February 14, 2000 /s/ Michael P. Gallagher
--------------------- ---------------------
Michael P. Gallagher, Chief
Financial Officer
(duly authorized officer and
principal financial officer)
14
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EXHIBIT 10.1
================================================================================
ASSET PURCHASE AGREEMENT
BY AND AMONG
FREECALLER COMMUNICATIONS CORPORATION F/K/A
INTELESIS ACQUISITION CORP.
BUYER
THE INTELESIS GROUP, INC.
SELLER
FREECALLER COMMUNICATIONS CORPORATION
ASSIGNOR
OCTOBER 29, 1999
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1
DEFINITIONS AND CONSTRUCTION
1.1 DEFINITIONS OF CERTAIN TERMS.................................... 5
1.2 CONSTRUCTION.................................................... 8
ARTICLE 2
PURCHASE AND SALE OF ASSETS
2.1 TRANSFERRED ASSETS.............................................. 8
2.2 EXCLUDED ASSETS................................................. 9
2.3 CLOSING......................................................... 9
2.4 TRANSFER DOCUMENTS.............................................. 9
2.5 PURCHASE PRICE FOR THE ASSETS................................... 10
2.6 LIABILITIES NOT ASSUMED BY THE BUYER............................ 10
2.7 TRANSFER TAXES; RECORDING FEES.................................. 11
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
OF THE SELLER
3.1 CORPORATE MATTERS............................................... 11
3.2 VALIDITY OF AGREEMENT & CONFLICT W/ OTHER INSTRUMENTS........... 11
3.3 APPROVALS, LICENSES AND AUTHORIZATIONS.......................... 12
3.4 TITLE TO AND CONDITION OF PROPERTIES............................ 13
3.5 CONTRACTS AND COMMITMENTS ...................................... 13
3.6 CONDITION OF ASSETS............................................. 15
3.7 WARRANTIES AND PRODUCT LIABILITY................................ 15
3.8 COMPLIANCE WITH LAWS............................................ 15
3.9 FINDER'S FEES................................................... 15
3.10 ABSENCE OF CERTAIN PAYMENTS..................................... 15
3.11 ABSENCE OF CERTAIN PROHIBITED ACTIVITIES........................ 15
3.12 NO MATERIAL MISSTATEMENTS OR OMISSIONS.......................... 16
3.13 SECURITIES LAW MATTERS.......................................... 16
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
OF THE BUYER
4.1 CORPORATE MATTERS............................................... 17
4.2 APPROVALS AND AUTHORIZATIONS.................................... 17
4.3 FINDER'S FEES................................................... 17
4.4 COMPLIANCE WITH SECURITIES LAWS................................. 18
ARTICLE 5
ADDITIONAL AGREEMENTS
5.1 ACCESS TO INFORMATION........................................... 18
5.2 DELIVERY OF CORPORATE DOCUMENTS; RETENTION OF RECORDS........... 18
5.3 FURTHER ASSURANCES.............................................. 19
5.4 CONTINUITY OF BUSINESS.......................................... 19
5.5 INFORMATION..................................................... 19
5.6 COMPLIANCE...................................................... 19
5.7 COOPERATION AFTER CLOSING....................................... 20
5.8 NONDISCLOSURE OF PROPRIETARY INFORMATION........................ 20
5.9 WARRANTY CLAIMS................................................. 21
5.10 COVENANT NOT TO COMPETE WITH THE BUSINESS....................... 21
5.11 CONTINUATION OF BUSINESS........................................ 22
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5.12 USE OF NAMES.................................................... 23
ARTICLE 6
BUYER CONDITIONS
6.1 REPRESENTATIONS, WARRANTIES AND COVENANTS....................... 23
6.2 INSTRUMENTS OF TRANSFER......................................... 23
6.3 NO LITIGATION................................................... 23
6.4 LICENSES, CONSENTS AND APPROVALS................................ 23
6.5 RESOLUTIONS..................................................... 23
6.6 NO ADVERSE EVENT................................................ 23
6.7 OTHER LEGAL MATTERS............................................. 24
ARTICLE 7
SELLER' CONDITIONS
7.1 REPRESENTATIONS, WARRANTIES AND COVENANTS....................... 24
7.2 RECEIPT OF TRANSFERRED ASSETS................................... 24
7.3 LICENSES, CONSENTS AND APPROVALS................................ 24
7.4 NO LITIGATION................................................... 24
7.5 RESOLUTIONS..................................................... 24
ARTICLE 8
INDEMNIFICATION
8.1 INDEMNIFICATION BY THE SELLER................................... 24
8.2 INDEMNIFICATION BY THE BUYER.................................... 25
8.3 PROCEDURE....................................................... 26
8.4 PAYMENT......................................................... 28
8.5 FAILURE TO PAY INDEMNIFICATION.................................. 28
8.6 SUBROGATION..................................................... 28
8.7 ADJUSTMENT OF LIABILITY......................................... 28
8.8 INDEPENDENT INDEMNITIES......................................... 28
8.9 INVESTIGATION AND DUE DILIGENCE................................. 28
8.10 EXPRESS NEGLIGENCE.............................................. 29
ARTICLE 9
NATURE OF STATEMENTS AND SURVIVAL OF
COVENANTS, REPRESENTATIONS, WARRANTIES
AND AGREEMENTS
ARTICLE 10
TERMINATION
10.1 EVENTS OF TERMINATION........................................... 29
10.2 LIABILITY UPON TERMINATION...................................... 29
10.3 NOTICE OF TERMINATION........................................... 29
ARTICLE 11
DISPUTE RESOLUTION
11.1 NEGOTIATION..................................................... 30
11.2 ARBITRATION..................................................... 30
ARTICLE 12
MISCELLANEOUS
12.1 GOVERNMENTAL FINDINGS........................................... 31
12.2 ACCESS TO INFORMATION........................................... 31
12.3 PUBLIC ANNOUNCEMENTS............................................ 31
12.4 OTHER ACTION.................................................... 32
12.5 EXPENSES........................................................ 32
12.6 NOTICES......................................................... 32
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12.7 BULK TRANSFER LAWS.............................................. 32
12.8 SUCCESSORS; ASSIGNMENT.......................................... 32
12.9 ENTIRE AGREEMENT................................................ 33
12.10 GOVERNING LAW................................................... 33
12.11 SEVERABILITY.................................................... 33
12.12 NO THIRD PARTY BENEFICIARIES.................................... 33
12.13 COUNTERPARTS.................................................... 33
12.14 NEGOTIATED TRANSACTION.......................................... 33
EXHIBITS AND SCHEDULES
Exhibit A.................................... Excluded Assets
Exhibit B.................................... Assumed Liabilities
Exhibit C.................................... Intelesis Resolutions
Exhibit D .................................. Assignment of FREECALLER service
mark
Exhibit E.................................... Non-Competition Agreements
Exhibit F.................................... Agreement to File form S-3
Exhibit G.................................... Software/Patent Purchase Agreement
Exhibit H.................................... Assignment of Software/Patent
Purchase Agreement
Exhibit I.................................... Assignment of Common Law Trade
and Service Marks
Exhibit J.................................... Assignment of Domain Names
Exhibit K.................................... Assignment of Rights
4
<PAGE>
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement is made and entered into this 29th day of October,
1999, by and among Freecaller Communications Corporation fka Intelesis
Acquisition Corp., a Delaware corporation (the "Buyer"), being a wholly owned
subsidiary of Equalnet Communications Corp. ("ENET"), The Intelesis Group, Inc.,
fka The Intelesis Communications Group, Inc. a Florida corporation ("Intelesis"
or the "Seller"), and Freecaller Communications Corporation, a wholly owned
subsidiary of The Intelesis Group, Inc. ("Assignor").
WITNESSETH:
WHEREAS, the Seller desires to transfer to the Buyer all of its properties and
assets relating to its Freecaller advertiser sponsored telecommunications
business except as excluded herein and certain liabilities, and the Buyer
desires to acquire the properties and assets and assume certain scheduled
liabilities, all upon the terms and subject to the conditions set forth herein;
and
WHEREAS, the Buyer is in the process of changing its name to Freecaller
Communications Corp., Freecaller Acquisition Corp. or a similar name; and
WHEREAS, the parties hereto desire to set forth certain representations,
warranties and agreements, all as more fully set forth below;
NOW, THEREFORE, in consideration of the premises, the respective covenants and
agreements contained herein and other good and valuable consideration, the
receipt and sufficiency of which the parties hereby acknowledge, the parties
hereto agree as follows (all capitalized terms not otherwise defined in this
Agreement shall have the meanings given to them in Article 1):
ARTICLE 1
DEFINITIONS AND CONSTRUCTION
1.1 DEFINITION OF CERTAIN TERMS. In addition to terms defined elsewhere in
this Agreement, the following terms have the meanings assigned to them in this
Section 1.1 unless the context otherwise indicates, for purposes of this
Agreement, The Schedules and Disclosure Schedule:
"Additional Consideration" will have the meaning defined in Section 2.5.
"Affiliate" means, with respect to any Person, any other Person that,
directly or indirectly through one or more intermediaries, controls, is
controlled by or is under common control with that person.
"Agreement" means this Asset Purchase Agreement, as amended from time to
time by the Parties.
"Assumed Liabilities" has the meaning given that term in Section 2.5.
"Business Day" means any day other than a Saturday, Sunday or other day on
which commercial banks in Houston, Texas are authorized by law to close.
"Buyer" has the meaning specified in the preamble.
"Cash Consideration" means $150,000.00 cash
"Common Stock" means the common stock, $0.01 par value per share of ENET
"Contracts and Other Agreements" means all contracts, agreements, purchase
orders, sales orders, understandings, indentures, notes, bonds, loans,
instruments, leases, mortgages
5
<PAGE>
franchises, licenses, commitments or binding arrangements, whether express or
implied, oral or written, to which the Seller is a party or bound or to which
the Transferred Assets are subject.
"Control", as used in the definitions of Affiliate and Subsidiary in this
Section 1.1, means the ownership, directly or indirectly of 50% or more of the
voting securities of a Person or the possession of the power to direct, or cause
the direction of the management and policies of that Person, whether through the
ownership of voting stock, by contract or otherwise.
"Damages" means any and all judgments, claims, causes of action,
investigations or audits by Governmental Entities, suits, proceedings,
liabilities, losses, damages, demands, assessments, impositions, fines,
penalties, obligations, costs, expenses, actual damages (and, only with respect
to Third Party Claims, consequential and punitive damages) including in each
case, interest, awards, judgments, penalties, settlements, fines, costs of
remediation, costs and expenses incurred in connection with investigating and
defending any claims or causes of action (including attorneys' fees and expenses
and all fees and expenses of consultants and other professionals).
"Debt Obligations" means any contract, agreement, indenture, note or other
instrument relating to the borrowing of money or any guarantee or other
contingent liability in respect of any indebtedness or obligation of any Person
(other than the endorsement of negotiable instruments for deposit or collection
in the ordinary course of business).
"Equipment" means all machinery, transportation equipment, tools,
equipment, furnishings and fixtures owned, leased or subject to a contract of
purchase and sale, or lease commitment, that are used by the Seller.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Excluded Assets" has the meaning given that term in Section 2.2.
"Governmental Entity" means any arbitrator, court, administrative or
regulatory agency, commission, department, board or bureau or body or other
government or authority or instrumentality or any entity of Person exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government.
"Hazardous Materials" means any (i) petroleum or petroleum products, (ii)
hazardous substances and (iii) any other chemical, substance or waste that is
regulated by any Governmental Entity under any Environmental Law.
"Indemnitee" means the Person or Persons indemnified or entitled, or
claiming to be entitled to be indemnified, pursuant to the provisions of Section
8.1 or Section 8.2, as the case may be.
"Indemnitor" means the Person or Persons having the obligation to indemnify
pursuant to the provisions of Section 8.1 or Section 8.2, as the case may be.
"Inventories" means all inventories of finished goods, tooling, inventory,
work in progress and raw materials owned by Seller, wherever situated.
"Law" means all foreign, federal, state, provincial and local laws, rules,
decrees, regulations, ordinances and orders.
"Leasehold Interests" means the interests of the Seller as lessee to any
real property.
"Lien" means any lien, pledge, claim, charge, security interest, mortgage,
deed of trust or other encumbrances, option, defect or other rights of any
nature whatsoever.
6
<PAGE>
"Material Adverse Change" and "Material Adverse Effect" means a single
event, occurrence or fact that, together with all other events, occurrences and
facts could reasonably be expected to result in a loss to the Business, would
have, or might reasonably be expected to have, a material adverse effect on the
assets, business, prospects, operations or condition (financial or otherwise) of
the Transferred Assets or the Business.
"Person" means an individual, firm, corporation, division, association,
partnership, joint venture, limited liability company, organization, business or
Governmental Entity.
"Proprietary Information" means collectively (i) Proprietary Rights and
(ii) any and all other information and material proprietary to the Seller,
owned, possessed or used by the Seller, whether or not the information is
embodied in writing or other physical form, and which is not generally known to
the public, that (y) relates to financial information regarding the Seller
including (A) business plans and (B) sales, financing, pricing and marketing
procedures or methods of the Seller or (z) relates to specific business matters
concerning the Seller, including the identity of, or other information,
regarding sales personnel or customers of the Seller.
"Proprietary Rights" means all invention disclosures, patents, patent
rights, patent applications, trademark (registered and unregistered), trademark
registration applications, trade names, licenses, service marks (registered and
unregistered) service mark registration applications, registered copyrights
owned, licensed or used by the Seller, and refers to all Proprietary Rights and
any and all other proprietary rights of any kind (including all models, design
registrations, inventor's certificates, trade secrets, know-how, technical
information and data, logos, trade dress and unregistered marks and names (and
all goodwill associated therewith), confidentiality agreements and confidential
information, copyrightable works, unregistered and common law copyrights,
computer software and hardware and all documentation and related rights, and any
and all applications, registrations or the like relating to any of the
foregoing), and all tangible manifestations of Seller and all technical
information relating thereto, whether written, on computer disks, tapes or
other storage media or mental impressions, including any and all drawings,
blueprints, lists of materials, patterns, molds, records, documents,
specifications, diagrams, formulae, product design standards, tools, die, jigs,
models, prototypes, product information literature, computer programs, data
compilations, project files, test development files, reference lists,
notebooks, memoranda, notes, and any other materials that embody, contain, or
reflect any of the foregoing, anywhere in the world and owned, licensed or used
by the Seller.
"Remedial Action" has the meaning given that term in Section 8.3(f).
"Retained Liabilities" has the meaning given that term in Section 2.7.
"Securities Act" means the Securities Act of 1933, as amended.
"Seller" has the meaning given that term in the preamble.
"Shares" means 899,807 shares of the Common Stock, which shall be issued to
Intelesis in certificates as follows; one certificate for 500,000 shares; two
certificates for 10,000 each; one certificate for 87,250; one certificate for
73,800; one certificate for 52,000; one certificate for 51,365; one certificate
for 31,000; one certificate for 24,500; one certificate for 23,400; one
certificate for 21,000; one certificate for 9,300 and one certificate for 6,192
"Subsidiary" means, as to a Person, the controlled Affiliate of that
Person.
"Survival Period" has the meaning given that term in Article 9.
7
<PAGE>
"Taxes" means all foreign, federal, state, provincial, local and other
taxes, charges, fees, duties, levies, imposts, customs or other assessments,
including all net income, gross income, gross receipts, sales, use, ad valorem,
transfer, franchise, profits, profit share, license, lease, service, service
use, value added, withholding, payroll, employment, unemployment, disability,
social security (or similar), registration, excise, estimated, severance,
stamps, occupation, premium, real property, personal property, windfall
profits, environmental, alternative or add-on minimum, or other taxes, fees,
assessments, customs, duties, levies, imposts, or charges of any kind
whatsoever. Together with any interest, penalties, additions to tax, fines or
other additional amounts imposed thereon or related thereto, and the term "Tax"
means any one of the foregoing Taxes.
"Transferred Assets" has the meaning given that term in Section 2.1(a).
"$" means United States dollars.
1.2 CONSTRUCTION
(a) Unless expressly stated otherwise, when used in this Agreement, (i),
"including" means "including without limitation", (ii) the words "hereof",
"herein" and "hereunder", and similar words, refer to this Agreement as a whole
and not to any particular section, subsection, paragraph or provision of this
Agreement and (iii) references to Articles, Sections, Schedules and Exhibits
refer to the corresponding Articles, Sections, Schedules and Exhibits of this
Agreement.
(b) The headings of the Articles, Sections, Schedules and Exhibits have
been inserted for convenience of reference only and shall in no way restrict or
otherwise modify any of the terms or provision of this Agreement or affect in
any way the meaning or interpretation of this Agreement.
ARTICLE 2
PURCHASE AND SALE OF ASSETS
2.1 TRANSFERRED ASSETS
(a) Subject to the terms and conditions of this Agreement and in
consideration of the obligations of the Buyer, as provided herein, and except as
otherwise provided in Section 2.2, at the Closing, the Seller shall sell,
assign, transfer, grant, bargain, deliver and convey to the Buyer all of the
Seller' right, title, interest in, to and under all of its assets, properties
and rights, including, but not limited to, those listed below, except as
expressly excluded herein (all of those assets, properties, rights and business
being hereinafter sometimes collectively referred to as the "Transferred
Assets"):
(i) the telecom switch utilized by and/or owned by Seller;
(ii) All patent rights, including but not limited to Freecaller,
including any owned by Assignor
(iii) all trademark and/or servicemark rights, including but
not limited to Freecaller, including any owned by Assignor;
(iv) all of Seller's Proprietary Information, including all
intellectual and intangible property, including any owned by
Assignor ;
(v) All domain names, including, but not limited to, freecaller.com,
freetalker.com, freecaller.net, and freecallermedia.com and
including any owned by Assignor;
(vi) The right, at Buyer's option to use the name Freecaller
Communications Corporation, and Assignor agrees that, if
requested, it will take any and all action necessary and proper
to change its corporate name and allow Buyer or its assignee the
right to use said name.
8
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(b) The Seller shall use its best efforts to obtain all consents of
third parties as are necessary for the assignment of the Transferred Assets. To
the extent that any of the Transferred Assets are not assignable by the terms
thereof or consents to the assignment thereof cannot be obtained as provided
herein, the Transferred Assets shall be held by the Seller and all benefits and
obligations derived thereunder shall be for the account of the Buyer; provided,
that where entitlement of the Buyer to those Transferred Assets hereunder is not
recognized by any third party shall, at the request of the Buyer, enforce in a
reasonable manner as directed by the Buyer, at the cost of and for the account
of the Buyer, any and all rights of the Seller against that third party.
2.2 EXCLUDED ASSETS. Notwithstanding anything in Section 2.1(a) to the
contrary, the Transferred Assets shall not include those assets of the Seller
listed or described on Exhibit A attached hereto (collectively, the "Excluded
Assets").
2.3 CLOSING. Subject to the conditions set forth in this Agreement, the
closing shall take place at the offices of ENET, at 1250 Wood Branch Park Drive,
Houston, Texas at 10:00 a.m. on October 29,1999, or at any other time, date and
place as the parties hereto shall mutually agree upon in writing (the "Closing
Date"). Failure to consummate the transactions contemplated hereby on that date
shall not result in a termination of this Agreement or relieve any party hereto
of any obligation hereunder. Title to, ownership of, control over and risk of
loss of the Transferred Assets shall pass to the Buyer at 5:00p.m., Houston,
Texas time on the Closing Date.
2.4 TRANSFER DOCUMENTS. At the Closing:
(a) The Parties to this agreement (the "Parties") shall:
(i) execute, acknowledge and deliver to the Buyer all deeds, bills of
sale, endorsements, assignments, and other good and sufficient
instruments of conveyance, sale, transfer and assignment and with
all required documentary and revenue stamps of applicable
Governmental Entities affixed, as shall be required to vest
effectively in the Buyer good and marketable title in and to the
Transferred Assets, free and clear of all Liens;
(ii) deliver to the Buyer possession of all of the Transferred Assets
and all of the documents and other information required to be
delivered pursuant to Section 5.2(a).
(iii) deliver to the Buyer all documents required to be delivered
hereunder, including the Assignments attached as Exhibits H, I, J
and K.
(iv) deliver to Buyer and its affiliates releases from Todd Fisch,
Kirsten Fisch, Richard Sablon, any Affiliates, related parties,
related or affiliated companies or any other entities or persons
associated and/or affiliated with any of said persons or entities
to ENET and Buyer, Affiliates or related entities from any and
all liability to said individuals or entities in connection with
any consulting or other agreement between said parties.
Notwithstanding the foregoing the consulting agreement between
Richard Sablon and/or First Canyon Limited effective as of April
15, 1999 shall be and remain in full force and effect according
to its terms.
(v) Deliver to Buyer the non-competition agreements on the terms as,
and from the persons referenced in 5.10 hereof as reflected in
Exhibit E attached hereto.
(vi) Deliver to Buyer such indemnification by Seller to assure that
Buyer, including its parent, affiliates and/or subsidiaries has
no liability or responsibility whatsoever in connection with said
office from and after November 1, 1999. Buyer agrees to remove
all of its property from said Miami office on or before November
1, 1999. In the event the premises
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are subleased, Seller agrees to use its best efforts to obtain
indemnification of the Buyer to assure that Buyer, including its
parent, affiliates and/or subsidiaries has no liability or
responsibility whatsoever in connection with said office from
and after November 1, 1999.
(vii) Buyer and Seller, and their respective officers, directors,
shareholders, affiliates, and all other persons related to or
connected with any of the foregoing corporations will execute
and deliver to the other full and complete releases and
indemnifications from and against any and all claims any of them
may have against the other, including any parent, subsidiaries
and affiliates of said three corporations, including but not
limited to any claims arising out of Buyer's advancement of
funds or tangible property to Seller.
(viii) Buyer shall deliver to Seller the agreement of ENET to the
filing of an S-3 Registration Statement within 180 days of the
Closing Date in the form attached as Exhibit F.
(ix) Assignor shall execute and deliver to Buyer the assignment
attached as Exhibit D, together with any and all other documents
necessary and proper to comply with its undertakings hereunder
as requested by Buyer.
(x) Buyer shall deliver to Seller the Cash Consideration, and the
Shares of Common Stock.
(b) The Buyer shall execute and deliver to the Seller all documents
required to be delivered hereunder.
2.5 PURCHASE PRICE FOR THE ASSETS. In consideration of the transfer to the
Buyer of the Transferred Assets and the non-compete agreements in Section 5.10,
at the closing the Buyer shall (a) deliver (i) the Cash Consideration and the
Shares of Common Stock, or at Seller's option copies of letters to ENET's
transfer agent requesting issuance of the Common Stock to the Seller, (ii)
assume the payment obligations of the Seller with respect to those Trade
Payables and Accrued Liabilities listed and scheduled on Exhibit B attached
hereto and payable by Buyer on or before November 15, 1999 plus pay rent on the
office at Suite 262, 11900 Biscayne Blvd., Miami, Florida (the "Miami Office")
through October 31, 1999 and final telephone bills relating to the Miami office
through September 30, 1999 (collectively, the "Assumed Liabilities"). In
addition, Seller shall receive the Additional Consideration of a release from
any obligation to USC Telecom, Inc. regarding phone bills and shall be assigned
any and all rights of Buyer as the Responsible Organization in connection with
the following telephone numbers: 877-550-1600, 877-550-1800, 877-550-2600, 877-
550-2800.
2.6 LIABILITIES NOT ASSUMED BY THE BUYER. Except for the Assumed Liabilities,
the Seller shall pay and discharge in the due course all of their liabilities,
debts and obligations relating to the Transferred Assets, whether known or
unknown, now existing or hereafter arising, contingent or liquidated, including
any tax liabilities of Seller, including those pertaining to the Transferred
Assets or the Business for periods prior to the Closing Date, any Debt
Obligations and the liabilities and obligations set forth in clauses (a) through
(d) below (collectively, the "Retained Liabilities"). Without limiting the
generality of the foregoing, the Retained Liabilities shall include the
following:
(a) any liability or obligation of the Seller arising out of or in
connection with the negotiation and preparation of this Agreement and the
consummation and performance of the transactions contemplated hereby, whether or
not the transactions are consummated, including tax liability so arising.
(b) any liability or obligation for any and all Taxes of, or pertaining or
attributable to, (i) the Seller or (ii) the Transferred Assets for any period or
portion thereof that ends on or before the Closing Date;
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(c) any liability (other than with respect to the Assumed Liabilities) to
which any of the parties may become subject as a result of the fact that the
transactions contemplated by this Agreement are being effected without
compliance with the bulk sales provisions of the Uniform Commercial Code as in
effect in any state or any similar statute as enacted in any jurisdiction; and
(d) all other liabilities and obligations arising prior to the Closing and
related to the conduct or operation of the Transferred Assets or the Business on
or prior to the Closing Date, including the Pre-Closing Obligations.
2.7 TRANSFER TAXES; RECORDING FEES.
(a) The Buyer and the Seller acknowledge and agree that the Purchase Price
includes any and all sales, use, transfer or other similar Taxes imposed as a
result of the consummation of the transactions contemplated by this Agreement.
The Seller hereby agrees to indemnify the Buyer against, and agrees to protect,
save and hold the Buyer harmless from, any loss, liability, obligation or claim
(whether or not ultimately successful) for sales, use, transfer or other similar
Taxes imposed as a result of the consummation of the transactions contemplated
by this Agreement.
(b) The Seller shall pay any and all recording, filing or other fees
relating to the conveyance or transfer of the Transferred Assets from the Seller
to the Buyer.
ARTICLE 3
REPRESENTATION AND WARRANTIES
OF THE SELLER
Except as otherwise set forth in the section of the Disclosure Schedule that
corresponds to the relevant representation or warranty, the Seller, represents
and warrants to the Buyer as follows in this Article 3:
3.1 CORPORATE MATTERS.
(a) The Seller and Assignor are corporations duly organized, validly
existing and in good standing under the laws of the State of Florida. Assignor
is a corporation duly organized, validly existing and in good standing under the
laws of the State of Florida. Both have all requisite power and authority under
all applicable Laws, ordinance and orders of Governmental Entities to own,
operate and lease its properties and assets and to carry on its Business in the
manner currently conducted, except where the failure to have that power and
authority would not have a Material Adverse Effect. Both are licensed or
qualified to transact business as a foreign corporation and are in good standing
in the jurisdictions in which they conduct business, and there is no other
jurisdiction in which the nature and extent of the Seller's and Assignor's
business or the character of its assets make qualification necessary, except
where the failure to have so qualified would not have a Material Adverse Effect.
The Seller and Assignor have all requisite corporate authority to enter into
this Agreement and to perform their obligations under this Agreement.
3.2 VALIDITY OF AGREEMENT AND CONFLICT WITH OTHER INSTRUMENTS.
(a) This agreement, and the transactions contemplated hereby, have been
duly authorized and approved by all necessary action on the part of the Seller,
including the approval of the directors of the Seller. This Agreement has been
duly executed and delivered by the Seller and is a legal, valid and binding,
obligation of the Seller enforceable against the Seller in accordance with its
terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws from time to time in
effect that affect
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creditors' rights generally and by legal and equitable limitations on the
availability of specific remedies.
(b) The execution, delivery and performance of this Agreement and other
agreements and documents to be, and the compliance with the provisions hereof or
thereof, by the Seller will not, with or without the passage of time or the
giving of notice or both
(i) conflict with, constitute a breach, violation or termination of
any provision of, or give rise to any right of termination,
cancellation or acceleration, or loss of any right or benefit or
both, under, any of the Entitlements or Contracts and other
agreements relating to the business of Seller,
(ii) conflict with or violate the articles of incorporation or bylaws
of the Seller,
(iii) give rise to any preferential or other right of any third party
to purchase any material assets of the Transferred Assets.
(iv) result in acceleration of, or increase in, any amounts due with
respect to the Assumed Liabilities.
(v) result in the creation or imposition of any Lien on any of the
Transferred Assets, or
(vi) violate any law, statute, ordinance, regulation, judgement,
writ, injunction, rule, decree, order or any restriction of any
kind or character applicable to the Transferred Assets, the
Seller or any of their respective properties or assets relating
to the business of Seller.
other than conflicts, breaches, violations, terminations, cancellations,
accelerations, increases, creations or impositions that would not materially and
adversely affect the ability of the Seller to consummate the transactions
contemplated by this Agreement.
(c) Attached as Exhibit C are true, correct and complete copies of the
resolutions adopted by the board of directors of the Seller approving this
Agreement and the transactions contemplated hereby. Those resolutions were
adopted at meetings duly called and convened at which quorums were present and
acting throughout or by written consents executed in accordance with the
respective bylaws of the Seller and the Florida Business Corporation Act. Those
resolutions are in full force and effect without amendment or modification.
3.3 APPROVALS, LICENSES AND AUTHORIZATIONS.
(a) No order, license, consent, waiver, permit, authorization or approval
of, or exemption by, or the giving of notice to, or the qualification,
registration with, or the taking of any other action in respect of, any Person
not a party to this Agreement including any Governmental Entity, and no filing,
recording, publication or registration in any public office or any other place
is now, or under existing law in the future will be, necessary on behalf of the
Seller to authorize their execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated hereby (including
assignment of the Transferred Assets), or to effect the legality, validity,
binding effect or enforceability hereof.
(b) All material licenses, permits, concessions, warrants, franchises and
other governmental authorizations and approvals of all Governmental Entities
required or necessary for the Seller to carry on the Business in the places and
in the manner currently conducted have been duly obtained and are in full force.
No material violations are in existence or have been recorded with respect to
the Permits, and no proceeding is pending or, to the knowledge of the Seller,
threatened with respect to the revocation or limitation of any of the Permits.
Except as set forth in Section 3.3(b) of the Disclosure Schedule, the Seller
have complied with all Laws applicable to the Business, and all rules,
regulations and orders respecting the provision of services by the Seller,
except for violations that would not have a Material Adverse Effect.
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3.4 TITLE TO AND CONDITION OF PROPERTIES.
(a) Seller owns no real property.
(b) The Seller has a good and marketable title to the Equipment identified
as being owned by it free and clear of all liens.
(c) The Seller has valid title to all Inventories identified as being owned
by Seller free and clear of all Liens.
(d) The Seller owns the Accounts Receivable identified as being owned by
Seller free and clear of all Liens. All of the Accounts Receivable are
collectible in the ordinary course of business in accordance with past practice
(but in no event more than 120 days from the due date) and will not be subject
to any offset or other defenses to the payment thereof.
(e) The Seller owns, or possesses adequate licenses or other rights to use,
all rights to the Proprietary Rights identified as patents, patent applications,
trademarks and service mark registrations and applications therefor included in
the Proprietary Rights have been duly registered or filed with the United States
Patent and Trademark office or, to the extent registered or applied for in other
countries, the corresponding offices of those other countries, and the
registrations have been properly maintained and renewed in accordance with all
applicable Laws. Buyer acknowledges that Seller has advised Buyer regarding the
administrative abandonment of the Freecaller service mark on September 23, 1999.
There are no adverse claims or demands of any Person pending, or to the
knowledge of the Seller, threatened that pertain to any of the Proprietary
Information and no potential claims from any Persons for infringement of
patents, trademarks or copyrights used in connection with the Transferred
Assets. The Proprietary Information constitutes proprietary rights sufficient to
allow the Buyer to continue to operate the Transferred Assets in Business as
conducted prior to the Closing Date, and there are no other proprietary rights
of any kind or nature owned or used by the Seller (or any of their Affiliates or
divisions) that are necessary in connection with the operation of the Business
and that are not included in the Proprietary Information. Except as set forth in
Section 3.4(e) of the Disclosure Schedule, the operation of the Business
utilizing the Transferred Assets has not and does not violate or infringe any
trade secrets or confidential information, United States or foreign copyrights,
trademarks, service marks, or similar rights and, to the knowledge of the
Seller, any United States of foreign patents, patent applications, utility
models, design registrations, or the like. Except as reflected in Section 3.4(e)
of the Disclosure Schedule, no employees or agents of the Seller has entered
into any agreement relating to the business of Seller regarding know-how, trade
secrets, cession, delegation or assignment of any rights or inventions or
prohibition or restriction of competition or solicitation of customers, or any
other similar restrictive agreement or covenant, whether written or oral, with
any person other than the Seller. All licenses are in full force and effect,
there has not been any material default in any obligation to be performed by the
Seller thereunder, the Seller have not waived or released any material right
thereunder, and except as noted in Sections 3.10 and 3.4(e), neither the
execution and delivery of this Agreement nor the consummation of the
transactions contemplated by this Agreement will constitute a breach or default
of, violate, or give rise to a right to cancel or terminate any of such
licenses.
3.5 CONTRACTS AND COMMITMENTS.
(a) None of the Transferred Assets is subject to or bound by:
(i) any agreement, contract or commitment requiring the expenditure
or series of related expenditures of funds in excess of US
$1,000.00 (other than purchase orders in the ordinary course of
business for goods necessary for the Seller to complete then
existing contracts or sales
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orders), or expenditure in connection with preserving or
establishing Proprietary Rights;
(ii) any agreement, contract or commitment requiring the payment for
goods or services are actually provided or the provision of
goods or services at a price less than the Seller' cost of
producing the goods or providing the services;
(iii) any loan or advance to, or investment in, any Person or any
agreement, contract, commitment or understanding relating to the
making of any loan, advance or investment;
(iv) any Debt Obligations;
(v) any management service, employment, consulting or other similar
type contract or agreement;
(vi) any agreement, contract or commitment that would limit the
freedom of the Buyer or any Affiliate of the Buyer following the
Closing Date to engage in any line of business, own, operate,
sell, transfer, pledge or otherwise dispose of or encumber any
of the Transferred Assets or to compete with any Person or to
engage in any business or activity in any geographic area;
(vii) any agreement, lease, contract or commitment or series of
related agreements, leases or commitments not entered into in
the ordinary course of business or, except for agreements to
purchase or sell goods and services entered into in the ordinary
course of business of the Seller, not cancelable by the Seller
without penalty to the Seller within 30 days;
(viii) any agreement or contract obligating the Seller or that would
obligate or require any subsequent owner of any of the
Transferred Assets to provide for indemnification or
contribution with respect to any matter;
(ix) any sales, distributorship or similar agreement relating to the
products sold or service provided by the Seller;
(x) any license, royalty or similar agreement; other than the
Software Royalty Agreement with Ricardo Sablon dated August 27,
1998, a true copy of which is attached as Exhibit G, which
Agreement is being assigned to Buyer, and Seller and Assignor
represent and warrant that said agreement is in full force and
effect and that there are no defaults or notices of default or
terminations pending;
(xi) any other agreement, contract or commitment that might
reasonably be expected to have a Material Adverse Effect; or
(xii) any agreement pursuant to which consequential or special damages
payable by a Seller have not been waived.
(b) The Seller is not in breach of any provision of, or in default (nor
does the Seller have knowledge of any event or circumstance that with notice, or
lapse of time or both, would constitute a default) under, the terms of any
Contracts and Other Agreements that constitute a part of the Transferred Assets,
except for breaches of defaults that would not have a Material Adverse Effect.
All of the Contracts and Other Agreements that constitute a part of the
Transferred Assets are in full force and effect. The Seller is not aware of any
pending or
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threatened disputes with respect to any of the Contracts and Other Agreements
that constitute part of the Transferred Assets.
(c) The enforceability of the Contracts and Other Agreements that
constitute a part of the Transferred Assets will not be affected by the
execution and delivery of this Agreement or the consummation of the transactions
contemplated hereby, and none of the Contracts and Other Agreements that
constitute a part of the Transferred Assets requires the receipt of a consent or
waiver of any Person or Governmental Entity prior to the sale, assignment,
transfer, conveyance or delivery thereof pursuant to this Agreement.
3.6 CONDITION OF ASSETS. The Inventories and Equipment and all other plant,
property and equipment included in the Transferred Assets or used in the
Business are in good operating condition, repair and working order and free of
any known defects. Seller has not deferred any regularly scheduled maintenance
procedure for any Individual Transferred Asset that could cost in excess of US
$1,000.00.
3.7 WARRANTIES AND PRODUCT LIABILITY.
(a) Except for (i) warranties implied by law, the Seller has not given or
made any warranties in connection with the sale of goods or services on or prior
to the Closing Date, including warranties covering the customer's consequential
damages. The Seller is not aware of any facts or the occurrence of any event
forming the basis of any present claim against any of the Seller with respect to
warranties relating to products manufactured, sold or distributed by or on
behalf of the Seller on or prior to the Closing Date.
(b) To the knowledge of the Seller, there is no state of facts or any event
forming the basis of any present claim against the Seller not fully covered by
insurance, except for deductibles and self-insurance retentions, for personal
injury or property damage alleged to be caused by products shipped or services
rendered by or on behalf of the Seller.
3.8 COMPLIANCE WITH THE LAWS. The Seller has complied in all material respects
with all laws applicable to its business and operations of the Transferred
Assets.
3.9 FINDER'S FEES. The Seller has not employed or retained any investment
banker, broker, agent, finder or other party, or incurred any obligation for
brokerage fees, finder's fees or commissions with respect to the sale by the
Seller of any of the Transferred Assets or with respect to the transactions
contemplated by this Agreement, or otherwise dealt with anyone purporting to act
in the capacity of a finder or broker with respect thereto whereby any party
hereto may be obligated to pay a fee or commission.
3.10 ABSENCE OF CERTAIN PAYMENTS. The Seller has not, and to the knowledge of
the Seller, no Affiliate, officer, director, agent, employee of, or other person
associated with or acting on behalf of the Seller has, within the five years
immediately preceding the date of this Agreement used any funds of the Seller
for unlawful contributions or gifts to, or entertainment of government officials
or other unlawful expenses relating to political activity, or made any direct or
indirect unlawful payments to government officials or employees or officers of
customers from funds of the Seller, or established or maintained any unlawful or
unrecorded funds.
3.11 ABSENCE OF CERTAIN PROHIBITED ACTIVITIES. The Seller has not conducted
the business or operations of the Transferred Assets, or made any sales in
connection therewith, including sales into Cuba, Iraq, Iran, Libya, North Korea
or Sudan, in any manner that would violate any applicable Law relating to
embargoes or antiboycott matters.
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3.12 NO MATERIAL MISSTATEMENTS OR OMISSIONS. This Agreement, including the
Schedules and Disclosure Schedule, does not contain any untrue statement of a
material fact or omit to state any material fact necessary to make all of the
statements herein not false or misleading.
3.13 SECURITIES LAW MATTERS.
(a) The Seller recognizes and understands that the Shares of Common Stock
to be issued to the Seller as provided in this Agreement (the "Securities") will
not be registered under the Securities Act, or under the securities laws of any
state (the "securities laws"). The securities are not being so registered in
reliance upon exemptions from registration under the Securities Act and the
securities laws which are predicated, in part, on the representations,
warranties and agreements of the Seller contained within. Equalnet
Communications Corp. has agreed to file an S-3 Registration Statement, including
the Common Stock herein within 180 days after closing, which agreement shall be
delivered to Seller by Buyer at closing.
(b) The Seller represents and warrants that (i) it has knowledge and
experience in business, finance, securities and investments, such experience
being based on actual participation therein, (ii) it is capable of evaluating
the merits and risks of an investment in the Shares and the suitability thereof
as an investment therefor, (iii) it is an experienced and sophisticated investor
in investments, including investments similar to that of the Shares, (iv) the
Shares to be acquired by it in connection with the sale of the Transferred
Assets will be acquired solely for investment and not with a view toward resale
or redistribution in violation of the securities laws, (v) its jurisdiction of
incorporation (in the case of the Seller) (vi) 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 Common Stock, (vii) it has made
investments of a nature similar to the Shares, and, by reason of such
investments, and its business and financial experience, has acquired the
capacity to protect its interest in investments similar to that of the Shares
and (viii) it is an "accredited investor" within the meaning of Regulation D
promulgated by the Commission pursuant to the Securities Act. Seller understands
that ENET is not under any obligation to file a registration statement or to
take any other action under the securities laws with respect to any such
securities, except as set forth in Section 3.13(a) above.
(c) The Seller has consulted with its own counsel in regard to the
securities laws and is fully aware (i) of the circumstances under which it is
required to hold the securities, (ii) of the limitations on the transfer or
disposition of the securities, (iii) that the securities must be held
indefinitely unless the transfer thereof is registered under the securities laws
or an exemption from registration is available and (iv) that no exemption from
registration is likely to become available for at least one year from the date
of acquisition of the securities. Seller has been advised by its counsel as to
the provisions of Rules 144 and 145 as promulgated by the Commission under the
Securities Act and has been advised of the applicable limitations thereof.
Seller acknowledges that the Buyer is relying upon the truth and accuracy of the
representations and warranties in this Section 3.13 by the Seller in
consummating the transactions contemplated by this Agreement without registering
the securities under the securities laws.
(d) The Seller has been furnished with (i) the Annual Report on Form 10-K
of ENET, filed with the Securities Exchange Commission under the Exchange Act,
for all fiscal years as requested by Seller(the "Annual Report") and (ii) the
quarterly reports on Form 10-Q of ENET, as filed with the Securities Exchange
Commission under the Exchange Act, for all quarterly periods as requested by
Seller (the "Quarterly Reports"). (iii) all correspondence from Nasdaq Stock
Market concerning the potential removal of ENET common stock from trading on
either the Nasdaq National Market or the Nasdaq Small Cap Market if requested by
Seller. Seller has been furnished with the complete financial statements of ENET
for the fiscal years ended June 30, 1996, 1997 and 1998. Seller has been
furnished with a summary description of the terms of the Common Stock, and the
Buyer has made available to the Seller the opportunity to ask questions and
receive answers concerning the terms and conditions of the transactions
contemplated by this Agreement and to obtain any additional information which
they possess or reasonably
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acquire for the purpose of verifying the accuracy of information furnished to
the Seller as set forth herein or for the purpose of considering the
transactions contemplated hereby. ENET has offered to make available to the
Seller upon request at any time all exhibits filed by ENET with the Commission
as part of any of the reports filed therewith.
(e) The Seller agrees the certificates representing the Shares to be
acquired hereunder will be imprinted with the following legend, the terms of
which are specifically agreed to:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS, BUT HAVE BEEN ACQUIRED
FOR THE PRIVATE INVESTMENT OF THE HOLDER THEREOF, AND MAY NOT BE OFFERED,
SOLD OR TRANSFERRED UNTIL EITHER (i) A REGISTRATION STATEMENT UNDER SUCH
SECURITIES ACT OR SUCH APPLICABLE STATE SECURITIES LAW SHALL HAVE BECOME
EFFECTIVE WITH REGARD THERETO, OR (ii) THE CORPORATION SHALL HAVE RECEIVED
AN OPINION OF COUNSEL ACCEPTABLE TO THE CORPORATION AND ITS COUNSEL THAT
REGISTRATION UNDER SUCH SECURITIES ACT OR SUCH APPLICABLE STATE SECURITIES
LAWS IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED OFFER, SALE OR
TRANSFER.
Seller understands and agrees appropriate stop transfer notations will be
placed in the records of ENET and with its transfer agents in respect of the
securities which are to be issued to the Seller hereunder.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE BUYER
The Buyer represents and warrants to the Seller as follows:
4.1 CORPORATE MATTERS. The Buyer is a corporation duly incorporated and validly
existing under the laws of the State of Delaware. The Buyer has all requisite
power and authority to enter into this Agreement and to perform its obligations
under this Agreement. This Agreement and all transactions contemplated hereby,
have been duly approved by all necessary action on the part of the Buyer. No
further corporate action is necessary on the part of the Buyer to execute and
deliver this Agreement or to consummate the transactions contemplated hereby.
This Agreement has been duly executed and delivered by each of ENET and the
Buyer and is a legal, valid and binding obligation of each of them, enforceable
against it in accordance with its terms, except as enforceability may be limited
by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
from time to time in effect that affect creditor's rights generally and by legal
and equitable limitations on the availability of specific remedies.
4.2 APPROVALS AND AUTHORIZATIONS. No order, license, consent, waiver,
authorization or approval of, or exemption by, or the giving of notice to, or
the registration with, or the taking of any other action in respect of, any
Person not a party to this Agreement, including any Governmental Entity, and no
filing, recording, publication, or registration in any public office or any
other place is now, or under existing law in the future will be, necessary on
behalf of the Buyer to authorize its execution, delivery and performance of this
Agreement or any other agreement contemplated hereby to be executed and
delivered by the Buyer or ENET for the consummation of the transactions
contemplated hereby or thereby, or to effect the legality, validity, binding
effect or enforceability thereof.
4.3 FINDER'S FEES. The Buyer has not employed or retained any investment
banker, broker, agent, finder or other party, or incurred any obligation for
brokerage fees, finder's fees or
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commissions, with respect to the sale of the Transferred Assets or with respect
to the transactions contemplated by this Agreement, or otherwise dealt with
anyone purporting to act in the capacity of a finder or broker with respect
thereto whereby any party hereto may be obligated to pay a fee or commission.
4.4 COMPLIANCE WITH SECURITIES LAWS. The most recent Annual Report, as of the
date of filing thereof with the Commission, complied as to form in all material
respects with the requirements of the Exchange Act and the regulations
promulgated thereunder, and did not contain an untrue statement of material fact
or omit to state a material fact required to be stated therein or necessary in
order to make the statements therein not misleading.
ARTICLE 5
ADDITIONAL AGREEMENTS
5.1 ACCESS TO INFORMATION. Until the Closing, the Seller will furnish the
Buyer and its employees, officers, accountants, attorneys, agents, investment
bankers and other authorized representatives with all financial, operating and
other data and information concerning the Transferred Assets, commitments and
properties of the Seller as the Buyer reasonably shall request from time to time
and will afford the Buyer and its respective employees, officers, accountants,
attorneys, agents, investment bankers and other authorized representatives
access and will be given the opportunity to ask questions of, and receive
answers from, representatives of the Seller with respect to the Contracts and
other Agreements, the Transferred Assets and the other properties of the Seller.
No investigations by the Buyer or their respective employees, representatives or
agents shall reduce or otherwise affect the obligation or liability of the
Seller with respect to any representations, warranties, covenants or agreements
made in this Agreement or in any Exhibit, Schedule or other certificate,
instrument, agreement or document, including the Disclosure Schedule, executed
and delivered in connection with this Agreement. The Seller will cooperate with
the Buyer and its employees, officers, accountants, attorneys, agents and other
authorized representatives in the preparation of any documents or other
materials that may be required by any Governmental Entity.
5.2 DELIVERY OF CORPORATE DOCUMENTS; RETENTION OF RECORDS.
(a) The Seller shall deliver to the Buyer all documents and other written
information relating to the Transferred Assets, the Assumed Liabilities and the
current operations of the Transferred Assets, including all files relating to
the Accounts Receivable and the Trade Payables, computer disks, reflecting any
books or records, documents or other papers, or other information or data
relating to the operation of the Business but are entitled to retain the
historical books and records relating to the Business to the extent those books
and records are not necessary for the ongoing operations of the Business by the
Buyer.
(b) In the event and for so long as any party is contesting or defending
against any action, suit, proceeding, hearing, investigation, charge, complaint,
claim or demand asserted by a third party (including any Governmental Entity) in
connection with (i) any transaction contemplated by this Agreement or (ii) any
fact, situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act or transaction on or prior
to the Closing Date involving the Transferred Assets, the other party will to
the extent reasonably practical cooperate with the contesting or defending party
and its counsel in the contest or defense, and provide testimony and access to
its books and records as shall be necessary in connection with the contest or
defense, all at the sole cost and expense of the contesting or defending party
(except to the extent the contesting or defending party is entitled to
indemnification therefor under Article 8); provided, that nothing herein
requires any party to retain any books and records other than in the ordinary
course of business; provided further, any party, before destroying any
historical books and records that relate in whole or in part to the Transferred
Assets, shall give the other party reasonable notice of its intention to destroy
those
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books and records and an opportunity to make copies thereof at the sole expense
of the party destroying those copies. In addition, the Buyer agrees to provide
the Seller with reasonable access to any books and records included in the
Transferred Assets as may be necessary for the preparation of any Tax returns or
financial statements. Notwithstanding the foregoing, information as to which the
contesting or defending party may reasonably assert would waive a privilege need
not be disclosed.
5.3 FURTHER ASSURANCES. The Seller and Assignor shall execute, acknowledge and
deliver, or cause to be executed, acknowledged and delivered, to the Buyer all
bills of sale, assignments and other instruments of transfer, assignment and
conveyance, in form and substance satisfactory to counsel for the Buyer, as
shall be necessary to vest in the Buyer all right, title and interest in and to
the Transferred Assets free and clear of all Liens (except Permitted Liens) and
shall use commercially reasonable efforts to cause to be taken any other action
as the Buyer reasonably may required to more effectively implement and carry
into effect the transactions contemplated by this Agreement. Seller and
Assignor shall take all steps necessary to fully dissolve Assignor's corporate
existence.
5.4 CONTINUITY OF BUSINESS. From the date of this Agreement up to the Closing
Date, the Seller shall use commercially reasonable efforts to (a) keep the
Seller's business organization intact, (b) carry on its Business in the usual,
regular and ordinary manner with a view to maintaining the goodwill that the
Seller currently enjoys, (c) perform all obligations under the Entitlements and
the Contracts and Other Agreements, (d) keep in full force and effect all
present insurance policies or other comparable insurance coverage, relating to
or affecting the Transferred Assets and Assumed Liabilities, (e) use
commercially reasonable efforts to maintain the Transferred Assets in a state of
repair, order and condition consistent with the Seller' usual practice (f)
maintain the Inventories at a level consistent with the Seller's usual practice,
(g) maintain their books of accounts and records relating to the Business in the
usual, regular and ordinary manner, (h) comply with all Laws applicable to the
use, ownership and possession of the Transferred Assets and the management and
operation of the Business so as not to cause a Material Adverse Effect, (i)
other than Permitted Liens, not create a Lien on any of the Transferred Assets
or permit there to be created or exist any Liens thereon that would not be
released upon the transfer of the Transferred Assets to the Buyer pursuant to
this Agreement, (j) take any further actions as the Buyer reasonably may request
to preserve and maintain the Transferred Assets or the Assumed Liabilities and
(k) promptly notify the Buyer in writing if the Seller becomes aware of any
change that shall have occurred with respect to the Transferred Assets or the
Business that would reasonably be expected to have a Material Adverse Effect
whether or not occurring in the ordinary course of business.
5.5 INFORMATION. During the period from the date of this Agreement to the
Closing Date, the Buyer and the Seller will promptly inform the other in writing
of any claim, action or any proceeding commenced against the other party with
respect to the transactions contemplated by this Agreement or any of the
Transferred Assets.
5.6 COMPLIANCE.
(a) The Seller shall use commercially reasonable efforts to:
(i) cause all of the obligations imposed upon it in this Agreement to
be duly complied with, and all conditions precedent to those
obligations to be satisfied; and
(ii) obtain any and all consents, waivers, amendments, modifications,
approvals, authorizations, notations and licenses necessary to
the consummation of the transactions contemplated by this
Agreement.
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(b) The Seller shall cause all Liens on the Transferred Assets to be
released as of the Closing Date.
5.7 COOPERATION AFTER CLOSING.
(a) In the event Buyer should discover that Seller did not or does not have
title to the Transferred Assets, the Seller shall cooperate with Buyer after the
Closing hereunder in clearing the title to any of the Transferred Assets if the
Seller's title to any of the property, as the case may be, as of the Closing
Date, shall be defective, not marketable or nonassignable. In this connection,
the Seller shall take all commercially reasonable action, including the
furnishing of documents and evidences of title and assistance in the preparation
and trial of any necessary litigation, to clear title to that property, all of
which shall be at the expense of the Seller.
(b) For the greater of eight years from the Closing Date and any period as may
be required by any statute, regulation or Governmental Entity or any then
pending litigation, the Buyer shall permit the Seller and their
representative reasonable access to the business records and files of the
Seller that are transferred to the Buyer in connection herewith in
anticipation of, or preparation for, existing or future litigation or any
Tax audit in which any of the Seller or any of their Affiliates is involved
and which is related to the Transferred Assets, during regular business
hours and upon reasonable notice at the Buyer's principal place of business
or at any location where the records are stored; provided, however, that
(i) any access shall be had or done in a manner so as not to interfere with
the normal conduct of the Business, (ii) the Buyer shall not be required to
provide access to any confidential record or records, the disclosure of
which would violate any governmental statute or regulation or applicable
confidentiality agreement with any Person, and (iii) the Buyer shall not
be required to provide access to any confidential record or records, the
disclosure of which would cause the Buyer or any of their Affiliates to
waive any attorney-client privilege or attorney work product privilege, it
being understood and agreed that the records delivered by the Seller to the
Buyer shall not be deemed to be restricted from the Seller pursuant to
either clause (ii) or (iii) above.
(c) For the greater of eight years from the Closing Date and any period as may
be required by any statute, regulation or Governmental Entity or any then
pending litigation, the Seller shall permit the Buyer and their
representatives reasonable access to the general business records and files
of the Seller in anticipation of, or preparation for, existing or future
litigation or any Tax audit in which any of the Buyer or any of their
Affiliates is involved and which is related to the Business or the
Transferred Assets, during regular business hours and upon reasonable
notice at the Seller' principal places of business or at any location
where the records are stored; provided, however, that (i) any access shall
be had or done in a manner so as not to interfere with the normal conduct
of the Seller' business, (ii) the Seller shall not be required to provide
access to any confidential record or records, the disclosure of which would
violate any governmental statute or regulation or applicable
confidentiality agreement with any Person, and (iii) the Seller shall not
be required to provide access to any confidential record or records, the
disclosure of which would cause the Seller or any of their Affiliates to
waive an attorney-client privilege or attorney work product privilege.
5.8 NONDISCLOSURE OF PROPRIETARY INFORMATION.
(a) From and after the Closing Date, the Seller and its Affiliates shall hold
in confidence and will not directly or indirectly at any time reveal,
report, publish, disclose or transfer to any Person other than the Buyer
any of the Proprietary Information that is not generally known to the
public or utilize any of the Proprietary Information for any purpose.
Notwithstanding the foregoing, the Seller and its Affiliates may disclose
information that is (i) required to be disclosed by applicable tax or
securities Laws to the extent, and only to the extent, those Laws require
the disclosure and the general text of the disclosure and the Buyer
consents to the disclosure, which consent shall not be withheld or delayed
unreasonably, and (ii) required to be disclosed by final
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order of a court of competent jurisdiction; provided, that, if Seller or
its Affiliate is served or threatened with litigation that would require
the Seller or the Affiliate to disclose that information, the Seller or
that Affiliate shall tender the Buyer the opportunity to defend, at their
cost, against the disclosure.
(b) The Seller acknowledges that all documents and objects containing or
reflecting any Proprietary Information, whether developed by the Seller or by
someone else for it or any of their Affiliates, will after the Closing Date
become the exclusive property of the Buyer and be delivered to the Buyer.
(c) Because of the unique nature of the Proprietary Information, the Seller
understands and agrees that the breach or anticipated breach of the obligations
of them or their Affiliates under this Section 5.8 will result in immediate and
irreparable harm and injury to the Buyer and its Affiliates, for which they will
not have an adequate remedy at law, and that the Buyer and its Affiliates and
their successors and assigns shall be entitled to relief in equity to enjoin the
breach or anticipated breach and to seek any and all other legal and equitable
remedies to which they may be entitled, without the necessity of posting bond or
other security therefor.
5.9 WARRANTY CLAIMS. With respect to any claims made pursuant to warranties to
third Persons in connection with products manufactured, sold or distributed or
services provided by the Seller prior to the Closing Date that relate to the
Transferred Assets and that are covered by valid and existing warranties of the
Seller, the Buyer agrees to assume and pay for any claims to the extent, but
only to the extent, that the claims are reflected on Exhibit B. Any claims in
excess of that amount shall remain part of the Retained Liabilities. The Buyer
agrees to provide the necessary services to satisfy any claims made pursuant to
warranties of third Persons in connection with products manufactured, sold or
distributed or services provided by the Seller prior to the Closing Date that
relate to the Business and that are covered by valid and existing warranties of
the Seller at a price equal to the Buyer's variable out-of-pocket costs. The
foregoing limitations, however, shall not be deemed in any way to limit the
right of the Buyer to seek indemnification from the Seller for any Buyer Losses
in connection with products manufactured, sold or distributed or services
provided by the Seller prior to the Closing Date to the extent the Buyer incurs
a monetary liability to any third Person with respect to those matters or
obligated to take any action other than that expressly covered by this Section
5.9.
5.10 COVENANT NOT TO COMPETE.
(a) The Seller and its officers, directors and shareholders, as shown on
Exhibit E agree to execute the non-competition agreements in Exhibit E and
severally agree that, effective as of the Closing Date and for a period of two
years thereafter, no member of the Selling Group or any of their respective
current and future Affiliates shall, without written consent of the Buyer,
directly or indirectly, alone or with others, conduct, participate in, invest in
or engage in any business in the Continental United States that sells and/or
markets advertiser sponsored telecommunications service; provided, that it shall
not be a breach of this Section 5.10 if
(i) a member of the Selling Group were to purchase an equity interest
in a business that competes with the Business and that equity
interest comprises securities that are publicly traded and that
represent in the aggregate, together with any other securities
purchased or held by the member, less than five percent of the
total equity interest in the competitive business; or
(ii) a member of the Selling Group purchases a debt security of a
business that competes with the Business and the class of debt
securities is publicly traded;
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in the case of clauses (i) and (ii), so long as the member does not appoint,
cause the appointment of or become a director, officer other form of decision or
policy maker of the competitive business.
(b) Each member of the Selling Group acknowledges that this covenant not to
compete is being provided as an inducement to the Buyer to acquire the
Transferred Assets and that this Section 5.10 contains reasonable limitations as
to time, geographical area and scope of activity to be restrained and does not
impose a greater restraint than is reasonably necessary to protect the goodwill,
technology or other business interests of the Buyer.
(c) In addition to the restrictions set forth in paragraph (a) of this
Section 5.10, each member of the Selling Group agrees that, effective as of the
Closing Date and for a period of two years thereafter, no member of the Selling
Group or any of their respective current or future Affiliates shall, either
directly or indirectly, (i) make known to any person, firm or corporation that
is engaged in the business of advertiser sponsored telecommunications, the names
and addresses of any of the customers or agents of the Buyer or any of the
Buyer's Affiliates or any other information pertaining to such persons, (ii)
call on, solicit or sell to, or attempt to call on, solicit or sell to, any of
the customers or agents of the Buyer relative to advertiser sponsored
telecommunications whether for that member of the Selling Group or for any other
person, firm or corporation within any jurisdiction in which the Buyer or any of
their Affiliates is conducting or has conducted the Business, except as
otherwise permitted in Section 5.10.
(d) Each member of the Selling Group further acknowledges that a remedy at
law for any breach or attempted breach of this Section 5.10 will be inadequate
and further agrees that any breach of this Section 5.10 will result in
irreparable harm to the Business; and the member covenants and agrees that
neither it nor any of its Affiliates will oppose any demand for specific
performance and injunctive and other equitable relief in the case of any breach
or attempted breach. Notwithstanding anything in this Agreement to the contrary,
the Buyer may seek enforcement of this covenant not to compete through judicial
process without the necessity of posting bond or other security and without the
necessity of complying with the provisions of Article 11 regarding resolution of
disputes, which shall not apply to this Section 5.10.
(e) Whenever possible, each provision of this Section 5.10 shall be
interpreted in a manner as to be effective and valid under applicable law, but
if any provision of this Section 5.10 shall be prohibited or invalid under
applicable law, the provision shall be ineffective to the extent of the
prohibition of invalidity, without invalidating the remaining provisions of this
Section 5.10. If any provision of this Section 5.10 shall, for any reason, be
judged by any court of competent jurisdiction to be invalid or unenforceable,
the judgment shall not affect, impair or invalidate the remainder of this
Section 5.10. but shall be confined in its operation to the provision of Section
5.10 directly involved in the controversy in which the judgment shall have been
rendered. If the provisions of this Section 5.10 should ever be deemed to exceed
the time or geographic limitations permitted by applicable Laws, the provision
shall be reformed to the maximum time or geographic limitations permitted by
applicable Law.
5.11 CONTINUATION OF BUSINESS. Nothing in this Agreement, in any Schedule
hereto or in any agreement, instrument or other document executed or delivered
in connection with this Agreement shall require the Buyer to continue its
businesses or operations or to manage and operate the Business with any duty or
standard of care to the Seller. The Seller acknowledges and agrees that the
Buyer in its sole discretion may continue, manage, modify or discontinue it's
operations, liquidate or otherwise change or cease it's operations.
5.12 USE OF NAMES. All uses of the names utilized by Seller and Assignor in
connection with the Transferred Assets and the Freecaller business are being
transferred to the Buyer hereunder as part of the Transferred Assets. The
Seller and Assignor agree that neither will take any action
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that reasonably could be expected to affect adversely the Buyer's right to those
names or cause confusion with respect to the Buyer's use of those names.
ARTICLE 6
BUYER CONDITIONS
The obligations of the Buyer to purchase the Transferred Assets and to
assume the Assumed Liabilities as contemplated hereby is, at the option of the
Buyer, subject to the satisfaction on or before the Closing Date of the
conditions set forth below, any of which may be waived (together with any
related breach thereof) by the Buyer in writing.
6.1 REPRESENTATIONS, WARRANTIES AND COVENANTS. The representations and
warranties of the Seller contained in this Agreement shall be true, correct and
complete on and as of the Closing date with the same force and effect as though
those representations had been made or given on and as of the Closing Date,
except for those matters due to changes in facts from the date hereof required
or permitted by this Agreement. Each and all of the agreements and covenants of
the Seller to be performed or complied with by the Seller on or before the
Closing Date pursuant to this Agreement shall have been performed or complied
with. Seller shall have delivered to the Buyer a certificate signed by duly
authorized officers, in the case of the Seller, dated the Closing Date regarding
the matters referenced in Section 6.1.
6.2 INSTRUMENTS OF TRANSFER. The Seller shall have executed, acknowledged and
delivered to the Buyer all bills of sale, assignments and other instruments of
transfer, assignment and conveyance, in form and substance mutually agreeable,
as shall be necessary to vest in the Buyer all the right, title and interest in
and to the Transferred Assets.
6.3 NO LITIGATION. No preliminary or permanent injunction or other order of
any Governmental Entity shall be in effect nor shall there be in effect any
statute, rule, regulation or executive order promulgated or enacted by any
Governmental Entity that, in that case prevents the consummation of the
transactions contemplated by this Agreement. No suit, action, claim, proceeding
or investigation before any Governmental Entity shall have been commenced or
threatened by any Person other than the Buyer or any of their Affiliates seeking
to prevent the sale of the Transferred Assets or the Business or asserting that
the sale of all or a portion of the Transferred Assets or the Business would be
unlawful.
6.4 LICENSE, CONSENTS AND APPROVALS. The Buyer shall have delivered to the
Seller a copy of the licenses, consents, approvals and other authorizations, if
any, from Governmental Entities or other third Persons, the lack of which (a)
would render legally impermissible the consummation of the transactions
contemplated by this Agreement or (b) would have a material Adverse Effect on
Buyer's use of the Transferred Assets.
6.5 RESOLUTIONS. The Buyer shall have received copies of resolutions of the
directors of the Seller approving this Agreement and the transactions
contemplated hereby, certified by the Secretary or Assistant Secretary of the
Seller.
6.6 NO ADVERSE EVENT. The Business and the properties of the Seller shall not
be adversely affected or threatened by any loss or damage to the Transferred
Assets (including any Equipment), whether or not covered by insurance and no
Material Adverse Change shall have occurred.
6.7 OTHER LEGAL MATTERS. All Exhibits, Schedules, certificates, documents and
legal matters in connection with this Agreement and the transactions
contemplated hereby shall be in the form required by this Agreement.
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ARTICLE 7
SELLER'S CONDITIONS
The obligation of the Seller to transfer the Transferred Assets as
contemplated hereby is, at the option of the Seller, subject to the satisfaction
on or before the Closing Date of the conditions set forth below, any of which
may be waived (together with any related breach thereof) by the Seller in
writing.
7.1 REPRESENTATIONS, WARRANTIES AND COVENANTS. The representations and
warranties of ENET and the Buyer contained in this Agreement shall be true,
correct and complete on and as of the closing Date with the same force and
effect as though those representations and warranties had been made or give on
and as of the Closing Date. Each and all of the agreements and covenants of the
Buyer to be performed or complied with by it on or before the closing Date
pursuant to this Agreement shall have been performed or complied with
7.2 RECEIPT OF THE TRANSFERRED ASSETS. The Buyer shall have paid the Cash
Consideration and the Shares of Common Stock, and executed and delivered to the
Seller an instrument acknowledging receipt of the Transferred Assets and
assumption of the Assumed Liabilities in form and substance mutually agreeable.
7.3 LICENSE, CONSENTS AND APPROVALS. The Buyer shall have delivered to the
Seller a copy of each of the licenses, consents, approvals and other
authorizations from Governmental Entities required to be obtained by Buyer and
necessary or appropriate for the Buyer to consummate the transactions
contemplated by this Agreement.
7.4 NO LITIGATION. No preliminary or permanent injunction or other order of
any Governmental Entity shall be in effect nor shall there by any statute, rule,
regulations or executive order promulgated or enacted by any Governmental Entity
that, in that case, prevents the consummation of the transactions contemplated
by this Agreement. No suit, action, claim, proceeding or investigation before
any Governmental Entity shall have been commenced or threatened by any Person
other than the Seller or any of their Affiliates seeking to prevent the sale of
the Transferred Assets or the Business or asserting that the sale of all or a
portion of the Transferred Assets or the Business would be unlawful.
7.5 RESOLUTIONS. The Seller shall have received copies of resolutions or
minutes of the directors of ENET and the Buyer approving this Agreement and the
transactions contemplated hereby, certified by the appropriate officer of the
Buyer.
ARTICLE 8
INDEMNIFICATION
8.1 INDEMNIFICATION BY THE SELLER. Except as otherwise limited by this Article
8 and Article 9, from and after the Closing, the Seller, shall absolutely and
irrevocably indemnify, defend and hold harmless the Buyer and every Affiliate of
the Buyer and their respective directors, stockholders, officers, employees,
agents, consultants, representatives, successors, transferees and assignees
(collectively, the "Seller Indemnified Parties") from, against and in respect of
any and all Damages that arise or result from or relate to the matters described
in Sections 8.1 (a) through 8.1(l) (collectively," Buyer Losses"); provided,
that any claim for indemnity pursuant to Section 8.1(a) based upon a breach of
a representation or warranty made after the survival limitations set forth in
Article 9 shall be void and of no effect, and the Seller shall be relieved of
any liability in respect thereof, unless written notice of that claim under
Section 8.1(a) is provided
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in reasonable detail by the Buyer to the Seller within the applicable notice
period specified in Article 9:
(a) any misrepresentation or breach of representation or warranty made by
the Seller in this Agreement or in any other agreement, certificate, exhibit,
schedule, writing or other document furnished or delivered to the Buyer by the
Seller in connection with this Agreement;
(b) Buyer Losses arising from, relating to or associated with the breach,
violation or default of any Retained Liability.
(c) any actions taken by any of the Buyers to defend against, assume or
discharge any debt, liability or obligation of the Seller or encumbering or
burdening any of the Transferred Assets of any nature whatsoever, whether
currently known or unknown.
(d) any Tax liability of the Seller, including Tax liability relating to
the Transferred Assets which is attributable to a Tax period or portion thereof
ending on or before the Closing Date;
(e) Buyer Losses for consequential or special damages arising out of any
Contract or Other Agreement pursuant to which consequential or special damages
have not been waived;
(f) any and all Environmental Liabilities that may be imposed upon or
incurred by the Buyer, arising out of or in connection with (a) the acts or
omissions of any Person prior to Closing relating to the Business, the
Transferred Assets, the Real Property, the Leasehold interests or; (b) any act
or omission of the Seller relating to the Transferred Assets, Real Property or
the Leasehold Interests (collectively, "Environmental Losses");
(g) Buyer Losses arising out of noncompliance with any law regarding bulk
transfers in connection with the sale and transfer of the Transferred Assets and
the Business to the Buyer;
(h) any losses or costs of defending against the Buyer Losses that may be
made against any of the Buyers by a Person claiming violations of any Laws
relating to the employment relationship, including wages, hours, concerted
activity, nondiscrimination, occupational health and safety and the payment and
withholding of Taxes, in each case in which the Buyer Losses arise out of
circumstances occurring prior to the Closing Date, including in connection with
the transfer of the Transferred Employees or the termination of the Terminated
Employees;
(i) any losses asserted against Buyer relating to the Excluded Assets;
(j) any claims arising out of or in any way related to the Miami office
including rent, utilities and the like from and after November 1, 1999.
(k) any claims arising out of or in any way related to any consulting or
other agreements between persons involved with and/or related to or affiliated
with Seller.
(l) any breach by the Seller of a representation or warranty contained in
Section 3.13 (collectively, "Securities Law Matters");
8.2 INDEMNIFICATION BY THE BUYER. Except as otherwise limited by this Article
8 and Article 9, from and after the Closing the Buyer shall absolutely and
irrevocably indemnify, defend and hold harmless the Seller and every Affiliate
of the Seller and each of their respective directors, stockholders, officers,
employees, agents, consultants, representatives, successors, transferees and
assignees (collectively, "Buyer Indemnified Parties") from and against and in
respect of any and all Damages that arise or result from or relate to the
matters described in Sections 8.2 (a)
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through 8.2 (c); provided, that the Buyer shall be obligated to indemnify the
Seller for any matter that also constitutes Buyer Losses (collectively, "Seller
Losses"):
(a) any misrepresentation or breach of any representation or warranty made
by the Buyer or the breach of, or failure to perform by the Buyer any of their
covenants, commitments, agreements or obligations under or contained in this
Agreement or any other agreement, certificate, exhibit, schedule, writing or
document furnished or delivered to the Seller by the Buyer in connection with
this Agreement;
(b) Seller Losses arising from, relating to or associated with the breach,
violation or default any Assumed Liability; or
(c) except for the Retained Liabilities, Seller Losses arising from,
relating to or associated with the ownership, use, possession, enjoyment or
operation of the Transferred Assets from and after the Closing Date.
8.3 PROCEDURE. All claims for indemnification under this Article 8 shall be
asserted and resolved as follows:
(a) An Indemnitee, promptly after it becomes aware of facts giving rise to
a right of indemnification under this Agreement, shall give the Indemnitor
written notice thereof, stating the amount of the Losses, if known, and method
of computation thereof, all with reasonable particularity, and stating with
particularity the nature of the matter. For purposes of this Section 8.3(a),
receipt by a party of written notice of any demand, assertion, claim, action or
proceeding (judicial, administrative or otherwise) by or from any Person other
than a party to this Agreement that gives rise to Losses on behalf of the party
shall constitute the awareness of facts giving rise to a right of
indemnification by it under this Agreement and shall require prompt notice of
the receipt of such matter as provided in the first sentence of this Section
8.3(a). Failure to provide the notice shall not affect the right of the
Indemnitee to indemnification except to the extent the failure shall have
resulted in liability to the Indemnitor that could have been actually avoided
had the notice been provided within the required time period or except as
provided in Section 8.7.
(b) If any Indemnitee should have a Loss against any Indemnitor hereunder
that does not involve a third party claim asserted against an Indemnitee that
could give rise to a right of indemnification under this Agreement ("Third Party
Claim"), the Indemnitee shall transmit to the Indemnitor a written notice with
respect to the Loss. If the Indemnitor does not notify the Indemnitee within 30
calendar days from the receipt of the written notice of Loss that the Indemnitor
disputes the Loss, the Loss specified by the Indemnitee in the Claim Notice
shall be deemed a liability of the Indemnitor hereunder. If the Indemnitor has
timely disputed the Loss as provided above, such dispute shall be resolved by
arbitration as set forth in this Agreement.
(c) If the Indemnitee shall have a Third Party Claim asserted against it,
the Indemnitee shall transmit to the Indemnitor written notices of the Loss
relating to a Third Party Claim. During the 30 day period following receipt by
an Indemnitor of a notice of Loss relating to a Third Party Claim (the "Election
Period"), the Indemnitor shall advise the Indemnitee (i) whether the Indemnitor
disputes its potential liability to the Indemnitee under this Article 8 with
respect to the Third Party Claim or (ii) whether the Indemnitor desires, at its
sole cost and expense, to defend the Indemnitee against the Third Party Claim.
(d) If the Indemnitor notifies the Indemnitee within the Election Period
that the Indemnitor does not dispute its potential liability to the Indemnitee
under this Article 8 and that the Indemnitor elects to assume the defense of the
Third Party Claim, the Indemnitor shall have the right to defend, at its sole
cost and expense the Third Party Claim by all appropriate proceedings, which
proceedings shall be prosecuted diligently by the Indemnitor to a final
conclusion or settled at the discretion of the Indemnitor in accordance with
this Section 8.3; provided, that such settlement shall not impose any
obligations upon the Indemnitee or deprive the Indemnitee of
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any rights without its consent. The Indemnitor shall have full control of such
defense and proceedings, including, subject to the preceding sentence, any
compromise or settlement thereof. The Indemnitee is hereby authorized, (at its
sole cost and expense but only if the Indemnitee is actually entitled to
indemnification hereunder or if the Indemnitor assumes the defense with respect
to the Third Party Claim), to file, during the Election Period, any motion,
answer or other pleadings that the Indemnitee shall deem necessary or
appropriate to protect its interest or those of the Indemnitor and not
prejudicial to the Indemnitor (it being understood and agreed that if the
Indemnitee takes any such action that is prejudicial and conclusively causes a
final adjudication adverse to the Indemnitor, the Indemnitor shall be relieved
of its obligations hereunder with respect to he Third Party Claim to the extent
so adjudicated). If requested by the Indemnitor, the Indemnitee agrees, at the
sole cost and expense of the Indemnitor, to cooperate with the Indemnitor and
its counsel in contesting any Third Party Claims, including by making of any
related counterclaim against the Person asserting the Third Party Claim or any
cross-complaint against any Person. The Indemnitee shall have the right to
participate in, but not control, any defense or settlement of any Third Party
Claim controlled by the Indemnitor pursuant to this Section 8.3, and shall bear
its own costs and expenses with respect to any such participation.
(e) If an Indemnitor fails to notify an Indemnitee within the Election
Period that the Indemnitor elects to defend the Indemnitee pursuant to this
Section 8.3, or if the Indemnitor elects to defend the Indemnitee but fails to
diligently and promptly prosecute or settle the Third Party Claim, the
Indemnitee shall have the right but not the obligation to defend, at the sole
cost and expense of the Indemnifying party (but only if the Indemnitee actually
is entitled to indemnification hereunder or if the Indemnitor assumes the
defense with respect to the Third Party Claim), the Third Party Claim by such
proceedings deemed reasonably appropriate by the Indemnitee and its counsel. The
Indemnitee shall have full control of such defense and proceedings, including
any compromise or settlement of the Third Party Claim; provided, that if the
Indemnitor agrees to indemnify the Indemnitee under this Article 8, the
Indemnitee shall not enter into any compromise or settlement of such Third Party
Claim without the Indemnitor's consent, which shall not be unreasonably withheld
or delayed. If requested by the Indemnitee, the Indemnitor shall, at the sole
cost and expense of the Indemnitor, cooperate with the Indemnitee and its
counsel in contesting any Third Party Claim that the Indemnitee is contesting,
or, if appropriate and related to the Third Party Claim in question, in making
any counterclaim against the Person asserting the Third Party Claim or any
cross-complaint against any Person. Notwithstanding the foregoing in this
Section 8.3, if the Indemnitor has delivered a written notice to the Indemnitee
to the effect that the Indemnitor disputes its potential liability to the
Indemnitee under this Article 8 and if such dispute is resolved in favor of the
Indemnitor pursuant to Article 11, the Indemnitor shall not be required to bear
the costs and expenses of the Indemnitee's defense pursuant to this Article 8 or
of the Indemnitor's participation therein at the Indemnitee's request, and the
Indemnitee shall reimburse the Indemnitor in full for all reasonable costs and
expenses of the Indemnitor in connection with the Third Party Claims, excluding,
however, any litigation with respect to its indemnity obligation hereunder. The
Indemnitor shall have the right to participate in, but not control, any defense
or settlement controlled by the Indemnitee pursuant to this Section 8.3 and the
Indemnitor shall bear its own costs and expenses with respect to any such
participation.
(f) With respect to any Buyer Loss for which the Seller is required to
indemnify and defend the Buyer pursuant to the terms of this Agreement and that
requires any removal, remedial, response, clean-up or other corrective action
("Remedial Action") to address conditions that cause, contribute to or are
associated with the Buyer Loss, the Seller may elect to implement and complete
the Remedial Action, in which case the Seller shall not be required to achieve
cleanup standards that are more stringent than those required under
Environmental Laws existing as of the Closing Date. The Seller shall endeavor to
plan, design, implement and perform the Remedial Action without undue delay and
in a manner consistent with the operations and requirements of the Business. The
Seller shall provide the Buyer with copies of all reports, plans and
correspondence submitted to any Governmental Entity with respect to the Remedial
Action.
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8.4 PAYMENT. Payment of all amounts owing by an Indemnitor as a result of a
Third Party Claim shall be made within five business days after the earlier of
(i) the settlement of the Third Party Claim and (ii) the expiration of the
period of appeal of a final adjudication of the Third Party Claim. Payments of
all amounts still owing by an Indemnitor other than as a result of a Third Party
Claim shall be made within five business days after the later of (i) 30 days
after the expiration of the Election Period or (ii) if contested through dispute
resolutions proceedings, the expiration of the period for appeal of a final
adjudication of the Indemnitor's liability to the Indemnitee under this
Agreement. Notwithstanding the foregoing, if the Indemnitor has not contested
its indemnity obligations hereunder and has not elected to assume the defense of
a Third Party Claim, the Indemnitor shall reimburse (promptly after the receipt
of each invoice therefor) the Indemnitee for the reasonable costs and expenses
incurred by the Indemnitee in contesting the Third Party Claim together with
reasonable support for such expenditures.
8.5 FAILURE TO PAY INDEMNIFICATION. If and to the extent the Indemnitee shall
make written demand upon the Indemnitor for indemnification pursuant to this
Article 8 and the Indemnitor shall refuse or fail to pay in full within the time
period specified in Section 8.4 the amounts demanded pursuant hereto and in
accordance herewith, the Indemnitee may utilize any legal or equitable remedy
to collect from the Indemnitor the amount of its Losses including the right to
offset such amounts against any principal or interest due under the Note.
Nothing contained herein is intended to limit or constrain the Indemnitee's
rights against the Indemnitor for indemnity, the remedies herein being
cumulative and in addition to all other rights and remedies of the Indemnitee.
8.6 SUBROGATION. If the Indemnitee is one of the Buyer Indemnified Parties and
the Indemnitee has a right against a Person (other than one of the Buyer
Indemnified Parties) with respect to any Damages or other amounts paid to the
Indemnitee by the Buyer, then the Buyer shall, to the extent of that payment, be
subrogated to the right of such Indemnitee. If the Indemnitee has a right
against a Person (other than one of the Seller Indemnified Parties) with respect
to any damages or other amounts paid to the Indemnitee by the Seller, the
Seller shall, to the extent of such payment, be subrogated to the right of such
Indemnitee.
8.7 ADJUSTMENT OF LIABILITY. In determining the amount of any Loss for which
any party is entitled to indemnification under this Article 8, the gross amount
thereof (a) will be reduced by any insurance proceeds realized or to be realized
by such party, and such correlative insurance benefit of such claim and (b) will
be increased by (i) to the extent such payment is based on amounts paid by the
Indemnitor, interest on such amount at the rate quoted from time to time on
London Interbank Market for 30 day borrowings, plus 1 1/2 % from the date such
payment is made until payment is made as required hereunder and (ii) to the
extent such payment is based on Losses incurred by the Indemnitee, interest on
such amount at the rate quoted from time to time on the London Interbank Market
for 30 day borrowings, plus 1 1/2 % from the date of the Loss until payment is
made as required hereunder.
8.8 INDEPENDENT INDEMNITIES. The parties acknowledge and agree that each of
the indemnities under Section 8.1(a) through 8.1(l) and 8.2(a) through 8.2(c)
may be relied upon independently.
8.9 INVESTIGATION AND DUE DILIGENCE. No investigation, examination, audit,
inspection or other due diligence prior to the Closing shall affect any party's
rights to indemnify pursuant to this Agreement; provided, that the foregoing is
not intended to affect the representations, warranties and other agreements as
modified by the Disclosure Schedule.
8.10 EXPRESS NEGLIGENCE. THE FOREGOING INDEMNITIES SET FORTH IN THIS ARTICLE 8
ARE INTENDED TO BE ENFORCEABLE AGAINST THE PARTIES IN ACCORDANCE WITH THE
EXPRESS TERMS AND SCOPE THEREOF NOTWITHSTANDING TEXAS' EXPRESS NEGLIGENCE RULE
OR ANY SIMILAR DIRECTIVE THAT WOULD
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PROHIBIT OR OTHERWISE LIMIT INDEMNITIES BECAUSE OF SIMPLE OR GROSS NEGLIGENCE
(WHETHER SOLE, CONCURRENT, ACTIVE OR PASSIVE) OR OTHER FAULT OR STRICT LIABILITY
OF ANY OF THE INDEMNIFIED PARTIES.
ARTICLE 9
NATURE OF STATEMENTS AND SURVIVAL OF COVENANTS,
REPRESENTATIONS, WARRANTIES AND AGREEMENTS
The several representations and warranties of the parties to this Agreement
shall survive the Closing Date and shall remain in full force and effect for a
period of four years following the Closing Date. All covenants and agreements
contained herein shall survive without limitation. Any claim for
indemnification made during the Survival Period shall be valid and the
representations and warranties relating thereto shall remain in effect for
purposes of that indemnification notwithstanding that the claim may not be
resolved within the Survival Period.
ARTICLE 10
TERMINATION
10.1 EVENTS OF TERMINATION. The obligations to close the transactions
contemplated by this Agreement may be terminated by:
(a) mutual agreement of ENET, the Buyer and the Seller;
(b) ENET or the Buyer, if a material default shall be made by the Seller in
the observance or in the due and timely performance by the Seller of any
agreements and covenants of the Seller herein contained or if there shall have
been a breach by the Seller of any of the warranties and representations of the
Seller herein contained, and the default or breach has not been cured or has not
been waived within 30 days of written notice of;
(c) ENET or the Buyer, upon written notice to the Seller, if there shall
have occurred a Material Adverse Change subsequent to the date of this
Agreement.
(d) the Seller, if a material default shall be made by the Buyer or ENET in
the observance or in the due and timely performance by the Buyer or ENET of any
agreements and covenants of the Buyer or ENET herein contained, or if there
shall have been a breach by the Buyer or ENET of any of the warranties and
representations of the Buyer or ENET herein contained, and the default or breach
has not been cured or has not been waived within 30 days of written notice
thereof.
10.2 LIABILITY UPON TERMINATION. If the obligation to close the transactions
contemplated by this Agreement is terminated pursuant to any provision of this
Article 10, then this Agreement shall forthwith become void and there shall not
be any liability or obligation with respect to the terminated provisions of this
Agreement on the part of the Seller or the Buyer or ENET except and to the
extent the termination results from the willful breach by a party of any of its
representations, warranties or agreements.
10.3 NOTICE OF TERMINATION. The parties hereto may exercise their respective
rights of termination under this Article 10 only by delivering written notice to
that effect to the other party, provided, however, that the notice must be
received on or before the Closing Date.
ARTICLE 11
DISPUTE RESOLUTION
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11.1 NEGOTIATION. Except for disputes, controversies or claims arising under
or relating to the matters in Sections 5.8 and 5.10, which disputes shall be
resolved pursuant to Sections 5.8 and 5.10, respectively, the parties to this
Agreement shall attempt in good faith to resolve any dispute arising out of or
relating to this Agreement promptly by negotiation between their respective
authorized representatives who have authority to settle the controversy. Any
party may give the other party written notice of any dispute not resolved in the
normal course of business. Within five days after the date that the notice is
deemed to have been delivered, authorized representatives of the disputing
parties shall agree upon a mutually acceptable time and place to meet and shall
meet at that time and place, and thereafter as often as they reasonably deem
necessary, to exchange relevant information and to attempt to resolve the
dispute. The first of those meetings shall take place within 30 days after the
date that the notice referred to above has been deemed to be delivered. If a
disputing party intends to be accompanied at a negotiation meeting by an
attorney, that disputing party shall give the other parties at least three
business days notice of that intention, and the other parties may also be
accompanied by an attorney. If the matter has not been resolved within 60 days
of the disputing party's notice or if the parties fail to agree on a time and
place for an initial meeting within five days of delivery of that notice, any
party may initiate arbitration of the dispute, controversy or claim as provided
in Section 11.2. In addition, if one party has requested the other party to
participate in a non-binding procedure and the other party has failed to
participate, the requesting party may initiate arbitration pursuant to Section
11.2 prior to the expiration of the 60 days.
11.2 ARBITRATION. Any dispute, controversy or claim arising out of or relating
to this Agreement or the breach, termination or validity hereof, which cannot be
resolved by negotiation as provided in Section 11.1, shall be finally settled
under the Rules of Conciliation and Arbitration of the American Arbitration
Association (the "Rules") by an arbitral tribunal (the "Tribunal") comprised of
one arbitrator appointed by each party and a third arbitrator appointed by the
two arbitrators appointed by the parties. The third arbitrator shall act as the
presiding arbitrator (the "Chairman"). A decision of the majority of the
arbitrators shall be binding.
(a) Location. Unless the parties shall otherwise agree in writing, the
arbitration shall be held in Houston, Texas.
(b) Time Limitation. Any arbitration proceeding hereunder must be
instituted within one year after the controversy or claim arises. Failure to
institute an arbitration proceeding within the one-year period shall constitute
an absolute bar to the institution of any proceedings respecting the controversy
or claim, and a waiver thereof. The arbitration proceeding shall be conducted
and concluded as soon as reasonably practicable, based on the schedule
established by the Tribunal, but in any event the decision of the Tribunal shall
be rendered within 120 days following the selection of the Chairman. The parties
desire that any dispute, controversy or claim be resolved quickly and at the
lowest possible cost, and the Tribunal shall act in a manner consistent with
these intentions, including limiting discovery only to that which is absolutely
necessary to enable the Tribunal to render a fair decision that reflects the
parties intent set forth in this Agreement.
(c) Interpretation. The Tribunal shall interpret this Agreement in
accordance with the Laws stipulated in Section 12.10 and the construction
stipulated in Section 1.2. The procedural law of the forum shall be applied with
respect to matters not covered by the Rules. All statutes of limitation that
otherwise would be applicable shall apply to the arbitration proceeding. Any
attorney-client privilege and other protection against disclosure of privileged
or confidential information, including any protection afforded the work product
of any attorney, that otherwise could be claimed by any party shall be available
to and may be claimed by that party in any arbitration proceeding. No party
waives any attorney-client privilege or any other protection against disclosure
of privileged or confidential information by reason of anything contained in, or
done pursuant to, the arbitration provisions of this Agreement.
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(d) Binding Nature of Arbitration. The decision of the Tribunal pursuant to
this Article 11 shall be final and binding on the parties to this Agreement and
shall be enforceable in accordance with The New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards (1958). The parties agree
to submit to the jurisdiction of any court within the jurisdiction in which the
party against whom enforcement is sought has property or assets for purposes of
the enforcement of any award, order of judgment.
(e) Written Decision, Awards. Any award or damages pursuant to the
arbitration shall be included in a written decision signed by the arbitrator (or
a majority of the arbitrators) which shall state the reasons upon which the
award was based, including all the elements involved in the calculation of any
award of damages. The award of damages shall not include punitive, special,
exemplary or consequential damages, including loss of profits or lost business
opportunity, or any damages other than or in addition to actual damages, but may
include interest from the date of the award. Any monetary award shall be in
United States dollars free of any tax or other deduction and shall include
interest from the date of any breach or other violation of this Agreement to the
date paid in full at a floating rate of interest equal to the prime rate of
interest in effect at Chase Bank, N.A., New York, United States of America, from
time to time.
(f) Injunctive or Preliminary Relief. Not withstanding any provision of
this Agreement, either party shall have the right, at any time after
commencement of any arbitration proceeding hereunder and prior to the rendering
of any award, order or judgment thereunder, to apply to the Tribunal or to any
court of competent jurisdiction for injunctive or preliminary relief. No
application for injunctive or preliminary relief shall be construed to infringe
upon this arbitration agreement or affect the powers of the Tribunal.
ARTICLE 12
MISCELLANEOUS
12.1 GOVERNMENTAL FILINGS. As promptly as practical, after the execution of
this Agreement, the Buyer, and the Seller shall, in cooperation with the other,
file any reports or notifications that may be required to be filed by them under
applicable law and shall furnish to the other all information in their
possession as my be necessary for the completion of the reports or notifications
to be filed by the other.
12.2 ACCESS TO INFORMATION. Prior to the Closing, the Buyer may make an
investigation of the business and properties of the Seller as the Buyer may
desire and, upon reasonable notice, the Seller shall give to the Buyer and their
counsel, accountants and other representatives reasonable access, during normal
business hours throughout the period prior to Closing, to the property, books,
commitments, agreements, records, files and personnel of the Seller, and the
Seller shall furnish the Buyer during that period all copies of documents and
information concerning the Seller as the Buyer may reasonably request, subject
to all applicable law. The Buyer shall hold, and shall cause their counsel,
accountants and other agents and representatives to hold, that information and
those documents in confidence.
12.3 PUBLIC ANNOUNCEMENTS. Subject to applicable securities law or stock
exchange requirements, neither the Buyer nor the Seller shall, without the prior
approval of the other party hereto, issue, or permit any of their respective
partners, directors, officers, employees, agents or Affiliates to issue, any
press release or other public announcement with respect to this Agreement or the
transactions contemplated hereby.
12.4 OTHER ACTION. Each of the parties shall use its best efforts to cause the
fulfillment at the earliest practical date but, in any event, prior to the
Closing Date of all of the conditions to their respective obligations to
consummate the transactions under this Agreement.
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12.5 EXPENSES. Except as otherwise set forth herein, and whether or not the
transactions contemplated by this Agreement shall be consummated, each party
agrees to pay, without right of reimbursement from any other party, the costs
incurred by that party incident to the preparation and execution of this
Agreement and performance of its obligations hereunder, including the fees and
disbursements of legal counsel, accountants and consultants employed by that
party in connection with the transactions contemplated by this Agreement.
12.6 NOTICES. All notices, requests, consents, directions and other
instruments and communications required or permitted to be given under this
Agreement shall be in writing and shall be deemed to have been duly given if
delivered in person, by courier, by an internationally recognized overnight
delivery service with proof of delivery or by prepaid registered or certified
United States first class mail, return receipt requested, addressed to the
respective party at the address set forth below, or if sent by facsimile
transmission or other similar form of communication (with receipt confirmed) to
the respective party at the facsimile number set forth:
If to Buyer to:
Freecaller Communications Corporation
1250 Wood Branch Park Drive
Houston, Texas 77079
Attention: General Counsel
Facsimile: 281-529-4686
Confirm: 281-529-4648
If to Intelesis:
The Intelesis Group, Inc.
11900 Biscayne Blvd
Suite 262.
Miami, Florida 33181
Attention: Kirsten Fisch
Facsimile: 305-892-7242
Confirm: 877-550-1800
Copies to (in the case of the Seller):
Joel Bernstein, P. A.
11900 Biscayne Blvd.
Suite 625
Miami, Florida 33181
Facsimile: 305-899-0822
Confirm: ___________
or to any other address or facsimile number and to the attention of that other
Person(s) as either party may designate by written notice. Any notice mailed
shall be deemed to have been given and received on the third business day
following the day of mailing.
12.7 BULK TRANSFER LAWS. The Seller represents to the Buyer that the
provisions of any Laws of any state or jurisdiction regulating bulk sales or
transfers do not apply to this Agreement.
12.8 SUCCESSORS; ASSIGNMENT. This Agreement shall inure to the benefit of and
be binding upon the Buyer and the Seller and their respective successors and
permitted assigns. Neither this Agreement nor any of the rights, interest or
obligations hereunder shall be assigned by either of the parties hereto without
the prior written consent of the other party hereto, provided, however, that the
Buyer may assign its rights under this Agreement to any Affiliate of the Buyer,
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but in the event that the Buyer so assigns its rights, it shall remain liable
for its obligations hereunder.
12.9 ENTIRE AGREEMENT. This Agreement, the Exhibits and Schedules hereto and
the Disclosure Schedule constitute the entire agreement and understanding
between the parties relating to the subject matter hereof and thereof and
supercede all prior representations, endorsements, premises, agreements,
memoranda, communications, negotiations, discussions, understandings and
arrangements, whether oral, written, or inferred, between the parties relating
to the subject matter hereof, including without limitation the Letter of Intent,
the Agreement and Plan of Merger dated as of April 15, 1999. Furthermore, this
Agreement expressly cancels and ceases any and all obligations by any parties
under the consulting Agreement between ENET and Global Depository Systems Inc.
effective as of April 1, 1999 and between ENET and Todd and Kirsten Fisch dated
as of April 1, 1999, any agreement between Mark A. Willis or any other Officer,
Director or Manager of ENET or Buyer and Todd Fisch, Richard Sablon a/k/a
Ricardo Sablon or any other officer, director or shareholder of Seller and any
and all successor agreements between the parties that relate to the subject
matters therein except as expressly assumed by and/or assigned to Buyer and/or
ENET herein. This Agreement may not be modified, amended, rescinded, cancelled,
altered or supplemented, in whole or in part, except upon the execution and
delivery of a written instrument executed by a duly authorized representative of
each of the parties hereto.
12.10 GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Texas without giving effect
to choice of law principles.
12.11 SEVERABILITY. Any provision hereof that is prohibited or unenforceable
in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent
of that prohibition or unenforceability in any jurisdiction shall not invalidate
or render unenforceable that provision in any other jurisdiction.
12.12 NO THIRD PARTY BENEFICIARIES. Any Agreement contained, expressed or
implied in this Agreement shall be only for the benefit of the parties hereto
and their respective legal representatives, successors and assigns, and those
agreements shall not inure to the benefit of the obligees of any indebtedness of
any party hereto, it being the intention of the parties hereto that no Person
shall be deemed a third party beneficiary of this Agreement, except to the
extent a third party is expressly given rights herein.
12.13 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. A facsimile of an
original signature shall be as binding on such person or entity as an original
signature would be.
12.14 NEGOTIATED TRANSACTION. The provisions of this Agreement were negotiated
by the parties hereto, and this Agreement shall be deemed to have been drafted
by all of the parties hereto.
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IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the date first above written.
SELLER:
THE INTELESIS GROUP, INC.
By: /s/ Richard Sablon
----------------------------------
Name: Richard Sablon
Title: President
BUYER:
FREECALLER COMMUNICATIONS CORPORATION F/K/A
INTELESIS ACQUISITION CORP.
By: /s/ Mitchell H. Bodian
----------------------------------
Name: Mitchell H. Bodian
Title: President
ASSIGNOR
FREECALLER COMMUNICATIONS CORPORATION
BY: /s/ Richard Sablon
----------------------------------
Name: Richard Sablon
Title: President
34
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EXHIBIT B
ASSUMED LIABILITIES
35
<PAGE>
EXHIBIT C
SELLER'S RESOLUTIONS
36
<PAGE>
EXHIBIT D
ASSIGNMENT OF FREECALLER SERVICE MARK
BY
FREECALLER COMMUNICATIONS CORPORATION
WHEREAS, Freecaller Communications Corporation, a Florida corporation, having an
address at 12062 S.W. 117 Court, Suite 132, Miami, Florida 33186, has adopted
and continuously used in its business the service mark FREECALLER/SM/ in
association with a variety of telecommunication services since at least as early
as January 16, 1998 (the "Mark"); and
WHEREAS, Freecaller Communications Corporation fka Intelesis Acquisition Corp.,
a Delaware corporation, having an address at 1250 Wood Branch Park Drive,
Houston, Texas 77079-1212, is desirous of acquiring the Mark and the goodwill
associated with the Mark;
NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, Freecaller Communications Corporation, does
hereby assign to Freecaller Communications Corporation fka Intelesis Acquisition
Corp. all rights, title and interest in and to the Mark, together with the good
will of the business symbolized by the Mark, and the right to recover any
damages for past infringement, if any.
Freecaller Communications Corporation
By: /s/ Ricardo Sablon
---------------------------------------
Ricardo Sablon
President
Date: 10/28/99
--------------
STATE OF FLORIDA (S)
COUNTY OF DADE (S)
Before me personally appeared the above identified individual and acknowledged
the foregoing assignment to be his voluntary act and deed on the 29 day of
October , 1999.
/s/ Vickie Osburn
---------------------------------------
Notary in and for the State of Florida
My commission expires: Aug. 20, 2002
-------------
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EXHIBIT E
COVENANT NOT TO COMPETE
Attached letter to be executed and delivered at closing by the following
persons:
1. Todd Fisch
2. Kirsten Fisch
3. Richard Sablon
4. Ilene Kaminsky
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EXHIBIT F
October ,1999
The Intelesis Group, Inc.
11900 Biscayne Blvd.
Suite 262
Miami, Florida 33181
RE: Registration of Common Stock
Dear Sir or Madam:
Pursuant to that certain Asset Purchase Agreement by and among Intelesis
Acquisition Corp., The Intelesis Group, Inc., and Freecaller Communications
Corporation, Equalnet Communications Corp. hereby agrees that within 180 days
after the closing of said transaction, it will file an S-3 Registration
Statement with the Securities and Exchange Commission and will include in said
filing any common stock transferred to Intelesis pursuant to said Asset Purchase
Agreement.
Sincerely,
/s/ Mitchell H. Bodian
- ----------------------
Mitchell H. Bodian
President and CEO
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EXHIBIT H
ASSIGNMENT OF SOFTWARE/PATENT PURCHASE AGREEMENT
WHEREAS, The Intelesis Group, Inc., fka The Intelesis Communications Group, Inc.
a Florida corporation, having an address at 12062 S.W. 117 Court, Suite 132,
Miami, Florida 33186, and Ricardo Sablon an individual resident of Miami Florida
on or about August 27, 1998 entered into that certain Software/Patent Purchase
Agreement (the "Agreement") attached hereto as Attachment 1, which superceded
and voided an earlier agreement dated June 9, 1998; and
WHEREAS, Freecaller Communications Corporation fka Intelesis Acquisition Corp.,
a Delaware corporation, having an address at 1250 Wood Branch Park Drive,
Houston, Texas 77079-1212, is desirous of acquiring all of Intelesis' rights in
and to the Agreement and is desirous of Ricardo Sablon expressly consenting to
said assignment
NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, The Intelesis Group, Inc., fka The Intelesis
Communications Group, Inc. does hereby assign to Freecaller Communications
Corporation fka Intelesis Acquisition Corp. all rights, title and interest in
and to the Agreement, and Ricardo Sablon does hereby consent to this Assignment.
Both, The Intelesis Group, Inc. fka The Intelesis Communications Group, Inc. and
Ricardo Sablon warrant and represent that the Agreement is in full force and
effect; that there have been no defaults or terminations or notices of either;
that Ricardo Sablon has continued to and will continue to use his best efforts
to complete the patent process on said software; that the indemnification
provisions of the foregoing Asset Purchase Agreement are in effect with respect
to Assignors herein; that Freecaller Communications Corporation fka Intelesis
Acquisition Corp. is now "Purchaser" as defined in the Agreement and as such
owns all right, title and interest in the subject matter defined as "software",
any patent applications describing and claiming this subject matter and any
patents worldwide that have issued or may issue in the future; that the earlier
agreement dated June 9, 1998 is superceded by the Agreement and is null, void
and of no further force and effect and that The Intelesis Group, Inc, fka The
Intelesis Communications Group, Inc. and Ricardo Sablon will take all reasonable
action in the future to confirm ownership of said software and any patents
issuing on said software and to allow full use of said rights by, Freecaller
Communications Corporation.
The Intelesis Group, Inc.
By: /s/ Ricardo Sablon
----------------------
Date: 10/28/99
---------------------
/s/ Ricardo Sablon
----------------------
Ricardo Sablon
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STATE OF FLORIDA (S)
COUNTY OF DADE (S)
Before me personally appeared the above identified individuals and officers and
acknowledged the foregoing assignment to be their voluntary act and deed on the
29 day of October, 1999.
Vickie Osburn
------------------------------------
Notary in and for the State of Texas
My commission expires: Aug.20,2002
-------------
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EXHIBIT I
ASSIGNMENT OF COMMON LAW TRADE AND SERVICE MARKS
BY
FREECALLER COMMUNICATIONS CORPORATION
AND
THE INTELESIS GROUP, INC.
WHEREAS, Freecaller Communications Corporation, and/or The Intelesis Group, Inc.
both Florida corporations having an address at 12062 S.W. 117 Court, Suite 132,
Miami, Florida 33186, has adopted and continuously used in its business the
following service marks in association with a variety of telecommunication
services since at least as early as January 16, 1998, FREECALLER MEDIA,
FREECALLER TALKER, CONSUMER PREFERENCE INQUIRY, CALL PROCESSING UNIT, and
FREECALLER LEADS ON DEMAND (the "Marks") and has accrued certain common law
rights and goodwill in the Marks; and
WHEREAS, Freecaller Communications Corporation fka Intelesis Acquisition Corp.,
a Delaware corporation, having an address at 1250 Wood Branch Park Drive,
Houston, Texas 77079-1212, is desirous of acquiring the Marks and the goodwill
associated with the Marks;
NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, Freecaller Communications Corporation, and The
Intelesis Group, Inc. do hereby assign to Freecaller Communications Corporation
fka Intelesis Acquisition Corp. all rights, title and interest in and to the
Marks, together with the good will of the business symbolized by the Names, and
the right to recover any damages for past infringement, if any.
Freecaller Communications Corporation
By: /s/ Ricardo Sablon
-------------------------------
Ricardo Sablon
President
Date: 10/28/99
-------------
The Intelesis Group, Inc.
By: /s/ Ricardo Sablon
-------------------------------
Date: 10/28/99
-------------
42
<PAGE>
STATE OF FLORIDA (S)
COUNTY OF DADE (S)
Before me personally appeared the above identified officers and acknowledged the
foregoing assignment to be their voluntary act and deed on the 29 day of
October, 1999.
Vickie Osburn
------------------------------------
Notary in and for the State of Texas
My commission expires: Aug. 20, 2002
-------------
43
<PAGE>
EXHIBIT J
ASSIGNMENT OF DOMAIN NAMES
BY
FREECALLER COMMUNICATIONS CORPORATION
AND
THE INTELESIS GROUP, INC.
WHEREAS, Freecaller Communications Corporation, and/or The Intelesis Group, Inc.
both Florida corporations having an address at 12062 S.W. 117 Court, Suite 132,
Miami, Florida 33186, has adopted and used in its business the following domain
names in association with advertiser sponsored telecommunication services since
at least as early as January 16, 1998, freecaller.com; freetalker.com;
freecaller.net; and freecallermedia.com (the "Names") and has accrued certain
rights in the Names; and
WHEREAS, Freecaller Communications Corporation fka Intelesis Acquisition Corp.,
a Delaware corporation, having an address at 1250 Wood Branch Park Drive,
Houston, Texas 77079-1212, is desirous of acquiring the Names, all registrations
associated with the Names and the goodwill associated with the Names;
NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, Freecaller Communications Corporation, and The
Intelesis Group, Inc. do hereby assign to Freecaller Communications Corporation
fka Intelesis Acquisition Corp. all rights, title and interest in and to the
Names and all registrations associated with the Names together with the good
will of the business symbolized by the Names, and the right to recover any
damages for past infringement, if any. Both, The Intelesis Group, Inc., and
Freecaller Communications Corporation agree to fully cooperate in notifying all
domain registration entities, as, and with the changes and information,
requested by Freecaller Communications Corporation fka Intelesis Acquisition
Corp.
Freecaller Communications Corporation
By: /s/ Ricardo Sablon
-------------------------------
Ricardo Sablon
President
Date: 10/28/99
-----------------
The Intelesis Group, Inc.
By: /s/ Ricardo Sablon
-------------------------------
Date: 10/28/99
-------------------------
44
<PAGE>
STATE OF FLORIDA (S)
COUNTY OF DADE (S)
Before me personally appeared the above identified officers and acknowledged the
foregoing assignment to be their voluntary act and deed on the 29 day of
October, 1999.
Vickie Osburn
-------------------------------------
Notary in and for the State of Texas
My commission expires: Aug. 20, 2002
--------------
45
<PAGE>
EXHIBIT K
ASSIGNMENT OF RIGHTS
BY
FREECALLER COMMUNICATIONS CORPORATION
AND
THE INTELESIS GROUP, INC.
WHEREAS, Freecaller Communications Corporation, and/or The Intelesis Group, Inc.
both Florida corporations having an address at 12062 S.W. 117 Court, Suite 132,
Miami, Florida 33186, has used in its business in association with advertiser
sponsored telecommunication services since at least as early as January 16,
1998, certain inventions, trade secrets, technical know-how, and proprietary
information, including all intellectual and intangible property related to
advertiser sponsored telecommunication services (the "Rights") and has accrued
certain rights in the Rights; and
WHEREAS, Freecaller Communications Corporation fka Intelesis Acquisition Corp.,
a Delaware corporation, having an address at 1250 Wood Branch Park Drive,
Houston, Texas 77079-1212, is desirous of acquiring the Rights, including any
rights that have accrued in the Rights, and the goodwill associated with the
Mark;
NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, Freecaller Communications Corporation, and The
Intelesis Group, Inc. do hereby assign to Freecaller Communications Corporation
fka Intelesis Acquisition Corp. all rights, title and interest in and to the
Rights and any rights that have accrued in the Rights, together with the good
will of the business symbolized by the Names, and the right to recover any
damages for past infringement, if any.
Freecaller Communications Corporation
By: /s/ Ricardo Sablon
-------------------------------
Ricardo Sablon
President
Date: 10/28/99
-----------------
The Intelesis Group, Inc.
By: /s/ Ricardo Sablon
-------------------------------
Date: 10/28/99
-----------------
46
<PAGE>
STATE OF FLORIDA (S)
COUNTY OF DADE (S)
Before me personally appeared the above identified officers and acknowledged the
foregoing assignment to be their voluntary act and deed on the 29 day of
October, 1999.
Vickie Osburn
-------------------------------------
Notary in and for the State of Texas
My commission expires: Aug. 20, 2002
--------------
47
<PAGE>
AMENDMENT TO ASSET PURCHASE AGREEMENT
BY AND AMONG
FREECALLER COMMUNICATIONS CORPORATION F/K/A
INTELESIS ACQUISITION CORP. AS BUYER
AND
THE INTELESIS GROUP, INC. AS SELLER
AND
FREECALLER COMMUNICATIONS CORPORATION as ASSIGNOR
This Amendment is made to that certain Asset Purchase Agreement (the
"Agreement") entered into by and among Freecaller Communications Corporation
f/k/a Intelesis Acquisition Corp. as Buyer, The Intelesis Group, Inc. as Seller,
and FreeCaller Communications Corporation as Assignor (collectively referred to
herein as the "Parties") effective as of the date of the original agreement and
pursuant to the terms of paragraph 12.9 of the Agreement.
WHEREAS, The Intelesis Group, Inc. had received advances totaling
approximately $627,591.56 from either Buyer or Equalnet Communications Corp.,
the parent corporation of Buyer, and
WHEREAS, as part of the consideration for the transfer of assets from
Seller, Seller was released from any obligation to repay said advances, as set
forth in paragraph 2.4 (a) (vii) of the Agreement; and
WHEREAS, the Parties wish to clarify that Seller's release from such
payment obligation was a portion of the consideration that Buyer paid for the
Transferred Assets as defined in the Agreement;
NOW,THEREFORE, paragraph 2.5 of the Agreement is hereby amended to add the
following sentence to the end of the existing paragraph, supplemental to and not
in replacement of, the currently existing paragraph 2.5:
"In addition to the other consideration expressly set forth above in this
paragraph, the consideration for the transfer to the Buyer of the Transferred
Assets shall include all other consideration flowing to Seller pursuant to the
terms of this Asset Purchase Agreement, specifically including, but not limited
to, the release of any claims arising out of Buyer's advancement of funds or
other tangible property to Seller as referenced in paragraph 2.4 (a) (viii)
above."
Signed this 18 day of November, 1999.
SELLER: ASSIGNOR:
THE INTELESIS GROUP, INC. FREECALLER COMMUNICATIONS CORPORATION
By: /s/ Ricardo Sablon By: /s/ Ricardo Sablon
------------------------- -------------------------
Ricardo Sablon Ricardo Sablon
President President
BUYER:
FREECALLER COMMUNICATIONS CORPORATION f/k/a
INTELESIS ACQUISITION CORP.
By: /s/ Mitchell H. Bodian
---------------------------------
Mitchell H. Bodian
President
<TABLE> <S> <C>
<PAGE>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 396,000
<SECURITIES> 0
<RECEIVABLES> 5,887,000
<ALLOWANCES> 675,000
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<CURRENT-ASSETS> 5,923,000
<PP&E> 22,351,000
<DEPRECIATION> 10,089,000
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<CURRENT-LIABILITIES> 16,064,000
<BONDS> 0
0
16,433,000
<COMMON> 320,000
<OTHER-SE> (17,078,000)
<TOTAL-LIABILITY-AND-EQUITY> 20,752,000
<SALES> 0
<TOTAL-REVENUES> 14,825,000
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<TOTAL-COSTS> 10,366,000
<OTHER-EXPENSES> 8,932,000
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<INTEREST-EXPENSE> 720,000
<INCOME-PRETAX> (5,193,000)
<INCOME-TAX> 0
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