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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
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
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EQUALNET COMMUNICATIONS CORP.
(Exact Name of Registrant as Specified in its Charter)
TEXAS 76-0457803
(State of Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
1250 WOOD BRANCH PARK DRIVE
HOUSTON, TEXAS 77079
(Address of Principal Executive Offices, Including Zip Code)
(281) 529-4600
(Registrant's Telephone Number, Including Area Code)
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 40,944,341 shares of the Registrant's $.01 par value common
stock outstanding as of May 15, 2000.
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EQUALNET COMMUNICATIONS CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, March 31,
1999 2000
----------- ----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents........................................................... $ 266,000 $ 326,949
Accounts receivable, trade..................................................... 7,873,000 4,699,627
Other receivables.............................................................. 472,000 --
Prepaid expenses and other..................................................... 401,000 54,116
----------- ---------------
Total current assets........................................................... 9,012,000 5,080,692
----------- ---------------
Property and equipment.......................................................... 20,801,000 22,626,375
Less accumulated depreciation and amortization.................................. (8,368,000) (10,978,632)
----------- ---------------
Net property and equipment..................................................... 12,433,000 11,647,743
----------- ---------------
Customer acquisition costs, net................................................. 3,862,000 2,935,898
Other assets.................................................................... 407,000 545,023
----------- ---------------
Total assets................................................................. $25,714,000 $ 20,209,356
=========== ===============
LIABILITIES AND EQUITY (DEFICIT)
Current Liabilities
Accounts payable................................................................ $ 3,991,000 $ 6,497,920
Accrued liabilities............................................................. 5,740,000 4,993,537
Current portion of long term debt--related party................................ 322,000 322,334
Current portion of long term debt............................................... 2,726,000 2,877,388
Debt in default................................................................. 558,000 558,370
Contractual obligations with regard to receivables
sales agreement................................................................ 3,339,000 3,162,439
----------- ---------------
Total current liabilities................................................... 16,685,000 18,411,988
----------- ---------------
Long term debt.................................................................. 5,301,000 3,692,006
Other long term liabilities..................................................... -- 591,764
Commitments and contingencies
Stockholders' Equity (Deficit):
Preferred stock................................................................ 16,153,000 12,394,633
Common stock................................................................... 284,000 387,271
Treasury stock, at cost........................................................ (232,000) (88,160)
Additional paid-in-capital..................................................... 46,840,000 52,691,504
Stock warrants................................................................. 3,019,000 3,019,359
Deferred compensation.......................................................... (20,000) --
Accumulated deficit............................................................ (62,316,000) (70,891,009)
------------ ---------------
Total stockholders' equity (deficit)........................................ 3,728,000 (2,486,402)
------------ ---------------
Total liabilities and stockholders' equity
(deficit).................................................................. $ 25,714,000 $ 20,209,356
============ ===============
</TABLE>
See notes to consolidated financial statements.
1
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EQUALNET COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------------- -----------------------------------
1999 2000 1999 2000
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Sales..................... $ 9,345,633 $ 7,088,021 $ 25,356,218 $21,912,796
Cost of Sales............. 7,459,706 4,783,361 24,809,039 15,148,887
----------- ----------- ------------ -----------
Gross profit.............. 1,885,927 2,304,660 547,179 6,763,909
----------- ----------- ------------ -----------
Selling, general, and
administrative
expenses................ 2,255,979 2,164,415 8,488,203 7,378,326
Depreciation and
amortization............ 3,737,712 2,118,990 8,867,608 5,646,403
----------- ----------- ------------ -----------
Operating loss............ (4,107,764) (1,978,745) (16,808,632) (6,260,820)
----------- ----------- ------------ -----------
Other income (expense):
Interest, net............ (721,942) (427,464) (1,983,889) (1,147,162)
Other.................... (54,266) (59,684) (37,165) (250,694)
----------- ----------- ------------ -----------
(776,208) (487,148) (2,021,054) (1,397,856)
----------- ----------- ------------ -----------
Loss before income taxes
and reorganization
costs................... (4,883,972) (2,465,893) (18,829,686) (7,658,676)
Benefit for federal
income taxes............ -- -- -- --
----------- ----------- ------------ -----------
Loss before
reorganization costs.... (4,883,972) (2,465,893) (18,829,686) (7,658,676)
Reorganization costs...... (234,000) -- (376,658) --
----------- ----------- ------------ -----------
Net loss.................. $(5,117,972) $(2,465,893) $(19,206,344) $(7,658,676)
=========== =========== ============ ===========
Preferred stock
dividends and deemed
distributions........... $(1,042,753) $ (243,805) $ (3,500,082) $ (854,805)
----------- ----------- ------------ -----------
Net loss available to
common shareholders..... $(6,160,725) $(2,709,698) $(22,706,426) $(8,513,481)
=========== =========== ============ ===========
Net loss per share--
basic and diluted....... $ (0.32) $ (0.08) $ (1.18) $ (0.28)
=========== =========== ============ ===========
Weighted average number
Of shares............... 19,027,111 33,733,716 19,309,972 30,820,000
=========== =========== ============ ===========
</TABLE>
See notes to consolidated financial statements.
2
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EQUALNET COMMUNICATIONS CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
March 31,
----------------------------
1999 2000
--------- -----------
<S> <C> <C>
Operating activities:
Net loss from continuing operations................................. $(19,206,344) $(7,658,676)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization..................................... 8,867,608 5,646,403
Interest charge on convertible debt issued at
discount......................................................... 450,000 --
Provision for bad debt.............................................. 1,383,683 3,231,184
Amortization of discount on convertible debt........................ 106,253
Change in deferred rent............................................. (223,917) --
Compensation expense recognized for common stock
Issue.............................................................. 35,417 114,775
Changes in working capital components:
Accounts receivable, trade......................................... (3,705,510) (1,310,686)
Prepaid expenses and other current assets.......................... 122,867 818,884
Accounts payable and accrued liabilities not
subject to compromise............................................. (5,220,046) 1,760,457
Accounts payable and accrued liabilities
subject to compromise............................................. 14,083,207 --
Other, net......................................................... 203,498 (138,023)
------------ -----------
Net cash provided by (used in) operating
activities........................................................... (3,103,284) 2,464,318
------------ -----------
Investing activities:
Purchases of property and equipment.................................. (639,934) (215,856)
Cash paid for acquisition............................................ (555,000) (166,000)
Proceeds from sale of equipment...................................... 74,775
Expenses capitalized to property and equipment..................... -- (1,457,799)
------------ -----------
Net cash used in investing activities................................ (1,120,159) (1,839,655)
------------ -----------
Financing activities:
Proceeds from subordinated notes payable............................. 4,981,615 --
Repayments on long-term debt......................................... (7,038,927) (865,842)
Proceeds from convertible debt....................................... 2,800,000 --
Proceeds from sale of common stock................................... 107,155 478,689
Proceeds from exchange of common stock for
preferred stock..................................................... 200,000 --
Net proceeds (repayments) on contractual
obligations with regard to receivable sales
agreements.......................................................... 3,458,433 (176,561)
------------ -----------
Net cash provided by (used in) financing
activities.......................................................... 4,508,276 (563,714)
------------ -----------
Net increase (decrease) in cash...................................... 284,833 60,949
Cash at beginning of period.......................................... 459,581 266,000
------------ -----------
Cash at end of period................................................ $ 744,414 $ 326,949
============ ===========
Reorganization costs paid............................................ $ 71,658
============
</TABLE>
See notes to consolidated financial statements.
3
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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 nine month periods ended March 31, 2000
and 1999 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, as amended, 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 March 31, 2000, and the consolidated results of
their operations and cash flows for the periods ended March 31, 2000 and 1999.
Operating results for the three and nine months ended March 31, 2000 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 $558,000 to
Greyrock Business Credit in February 1999 and, accordingly, the corresponding
debt is classified as debt in default as of March 31, 2000 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. This debt is classified as debt in default
on the consolidated balance sheet.
In November 1999, Netco Acquisition Corp. ("Netco"), the Company's 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
4
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interest.
On March 22, 2000 the Company acquired certain assets of Atcall, Inc. from the
debtor-in-possession under a Chapter 11 proceeding pursuant to the Bankruptcy
Code. The assets which were purchased included Atcall's rights and interests to
all accounts of subscribers to Atcall's telecommunications services, Atcall's
network facilities, all contracts, licenses and permits issued by governmental
entities issued to Atcall, and Atcall's debit card inventory, furniture and
equipment. Consideration for the purchase of the assets included a payment of
approximately $16,000 in cash, issuance of 365,044 shares of unregistered common
stock (valued at $233,282), and the assumption of all indebtedness owed by
Atcall to RFC Capital. The assumption of a portion of the indebtedness was done
on a limited recourse basis, such that the Company is not liable for such
portion of the indebtedness except to the extent that accounts receivable
securing such indebtedness are collected. Neither the indebtedness which is
limited recourse except to the underlying assets, nor the assets securing such
indebtedness has been recorded by the Company. Approximately $165,000 of the
indebtedness is on a full recourse basis, is secured by certain equipment and is
recorded as a liability in the financial statements. The Company provided
wholesale long distance to Atcall during the administration of its Chapter 11
proceeding and, in connection therewith, has booked approximately $1.8 million
in customer acquisition costs associated with this acquisition.
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 March 31, 2000.
NOTE 5--MANAGEMENT'S PLANS TO RETURN TO PROFITABILITY
For the three and nine month periods ended March 31, 2000 and 1999, 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. The Company continues to retire certain
obligations, primarily taxes, that were not discharged in the EqualNet
bankruptcy. A significant portion of the Company's capital is provided by 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 and initiatives are being investigated and
implemented to significantly enhance sales and revenue, including (i) prepaid
local dial tone,(ii) wholesale international rates for retail customers (iii)
pre-paid debit cards and postpaid calling cards, (iv) advertiser-sponsored long
distance, (v) voice mail services and (vi) the pursuit of acquisitions expected
to be accretive to earnings.
During the quarter ended March 31, 2000 the Company acquired certain assets of
Atcall, Inc., primarily its customer base. The Atcall customer base included
wholesale purchasers
5
<PAGE>
of prepaid long distance calling cards and also "one plus" and postpaid calling
card long distance customers.
On April 27, 2000 the Company signed a definitive agreement to purchase 100%
of the stock of Max-Tel Communications, Inc.("MTC"). MTC is a prepaid
competitive local exchange carrier providing prepaid dial tone to subscribers
who typically do not meet the credit criteria imposed by the incumbent local
exchange carriers. The acquisition of MTC is subject, among other things, to
satisfactory completion of its due diligence, obtaining required regulatory
approvals, and financing of the cash component of the transaction consideration.
The Company has received a preliminary commitment from a lender to provide the
financing necessary to consummate the transaction. Additionally, the Company is
negotiating with several third parties for possible acquisitions or to form
strategic alliances in order to maximize the utilization of the Company's
telecommunications switches (the "Switches").
The Company believes the acquisitions and 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. Some 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 and from borrowing. In order to provide financing
to support operations, the Company must also continue to increase revenue
generated from its existing resources. Management plans to increase traffic over
its Switches by adding traffic attributable to the new products and recent and
future acquisitions. In addition, the Company is continuing efforts to reduce
its primary carrier costs for its existing customer base. The Company continues
to make improvements in its billing and MIS systems as part of its efforts 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 and local service.
Management believes the plans discussed above are critical to returning the
Company to profitability. Additionally, the Company intends to seek additional
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 additional 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 agreement and other
claims. Although the Company denies any wrongdoing or liability in the matter,
the Company entered into a settlement agreement with Mr. Turner in December
1999. The settlement agreement provided that Mr. Turner would dismiss his
lawsuit and release the Company from all claims arising out of his employment
relationship with the Company. The Company and other defendants agreed to pay
certain cash and common stock consideration. Mr. Turner has received partial
consideration in respect of the settlement agreement but failed to dismiss the
lawsuit as required under the settlement agreement. The Company has not made
certain cash payments called for under the terms of the settlement agreement.
In April 2000 Mr. Turner filed a motion for summary judgment against the Company
requiring that the Company immediately make payment of the amounts owed plus
interest, attorneys' fees and court costs. The Company has filed a response to
Mr. Turner's motion claiming that Mr. Turner is in breach of the settlement
agreement.
6
<PAGE>
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 lawsuit arose out of matters relating to a letter of intent wherein
the Company proposed to purchase certain assets of Cyberserve, Inc. and WSHS
Enterprises, Inc., subject to, among other things, the performance of due
diligence by the Company. 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 the
Company. It is impossible to determine with any degree of certainty what, if
any, liability the Company or any of its subsidiaries may incur in this matter.
The Company denies any wrongdoing or liability in this matter and intends to
defend itself vigorously against all claims of the plaintiffs. The Company
cannot predict the outcome of the lawsuit and its potential liability, if any,
in connection with this lawsuit.
On September 29, 1998, SA Telecommunications Incorporated ("SA
Telecommunications") asserted claims pursuant to a purchase agreement against
USC Telecom, Inc. ("USC Telecom") and the Company for operating losses for the
period from April 1, 1998, to July 22,1998, damages for delayed or unbillable
revenue, delivery of shares of the Company's Series C 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 ("Greyrock"), and the Company
presented an agreement to the SA Telecommunications 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 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. In addition, the agreement calls for
the satisfaction of the remaining obligation to SA Telecommunications by the
payment of $150,000 in 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 the 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. The settlement agreement provides that if the registration of
these shares of the Company's common stock is not effective as of October 31,
1999, the amount of the Company's common stock to be issued will increase. The
Company has not registered these shares of common stock and, in accordance with
the terms of the settlement agreement, is obligated to issue to SA
Telecommunications additional shares of common stock equal to 22.5% of the
number of shares which the Company was initially obligated to issue to SA
Telecommunications.
In 1998, the Comptroller's Office of the State of Texas audited EqualNet
Corporation for compliance with sales and use tax laws. As a result of such
audit the Comptroller has asserted that EqualNet Corporation owes use taxes on
billing services provided to EqualNet Corporation outside of Texas because the
services were taxable data processing services. The Comptroller's office has
assessed taxes, penalties, and interest that are in excess of $420,000. The
Company denies that all such services are taxable data processing services and
denies that the services were wholly used in Texas. The Company cannot predict
the outcome of this matter and its potential liability, if any, in connection
with the matter.
On November 4, 1999, Comdisco, Inc. ("Comdisco") filed suit against the
Company in the United States District Court for the Southern District of Texas
(Cause No. H-99-3872) alleging damages for breach of contract and promissory
estoppel arising out of a failure to pay for the purchase of certain as in the
amount of approximately $155,000. The Company disputes the allegations of
Comdisco. The Company has listed the amount due Comdisco as a claim in its
bankruptcy, and asserts this is a liability of EqualNet Corporation in its
bankruptcy proceeding, and not a liability of the Company. It is impossible at
this time to state with any degree of certainty the ultimate exposure of the
Company in this matter.
On December 15, 1999, Qwest Communications Corporation ("Qwest") filed suit
against RFC Capital Corporation ("RFC"), the Company, USC Telecom, Inc. ("USC
Telecom") 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
7
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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 plead
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 19, 2000, US WATS, Inc. ("US WATS") filed suit against EqualNet
Corporation in the United States District Court for the Eastern District of
Pennsylvania (Cause No. 00-CV-352) alleging damages for breach of contract for
failure to pay for telecommunications services in the amount of approximately
$70,000. The Company believes that it owes US WATS approximately $25,000. The
remaining amounts claimed by US WATS are disputed by the Company because the
Company believes that they arose as a result of a failure by US WATS to perform
its obligations under the terms of the contract. The Company cannot accurately
determine the extent of 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 Company and USC Telecom 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 of 1934,
for breach of contract, quantum meruit, and unjust enrichment in the amount of
$7,800,000 arising out of service 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. The Company disputes the amount owed and believes
that the claims made by WorldCom include amounts for services incurred long
after WorldCom was directed to terminate the services. Additionally, the Company
believes that a significant portion of the amount claimed by WorldCom is
duplicative of claims made by WorldCom against EqualNet Corporation, which were
addressed in its reorganization plan. The Company cannot accurately determine
the extent of either USC Telecom's or the Company's exposure, if any, in these
proceedings.
On February 15, 2000, Netco Acquisition Corp. ("Netco") received demand from
Pointe Communications Corporation for $110,000 for delinquent balances related
to services provided by Point Communications. Netco has demanded Pointe
Communications pay Netco approximately $700,000 owed under the same agreements.
The Company believes that the amounts claimed by Pointe Communications are
subject to being offset against amounts that Pointe Communications owes to
Netco. The Company cannot accurately determine the extent of the its exposure,
if any, in these proceedings.
On February 23, 2000, SNET Diversified Group, Inc. filed suit against the
Company in the County Civil Court at Law No. 1 of Harris County, Texas alleging
damages in the amount of approximately $27,000 for unpaid carrier charges plus
$9,000 in attorney's fees. The Company believes that it has paid SNET the
amounts due and is attempting to reconcile this matter.
In March, 2000, the Company received a demand for payment from Kupper Parker
Communications, Inc. for services allegedly rendered in the amount of
approximately $28,000 in connection with development of the advertiser sponsored
long distance product of its wholly owned subsidiary, Freecaller Communications
Corporation. The Company has denied any liability for payment of these
services.
EqualNet Corporation's plan of reorganization ("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 the 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 has been
advised the by the Trust that there is a deficiency of approximately $245,000
with respect to sales by
8
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the trust for the period ending February 14, 2000. The Company is currently
attempting to negotiate a satisfaction of the amounts due to the Trust.
In connection with EqualNet Corporation's Reorganization Plan the Company is
also obligated to make certain additional contributions of cash and of the
Company's common stock based on a percentage of claims made under the
Reorganization Plan in excess of previously accepted claims. The Company's
obligation to make such additional contributions is limited to $2,000,000 in
aggregate contributions of cash and its common stock. The Reorganization Plan
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 Plan be less than $1.00 per share as
defined in the Reorganization Plan.
As previously noted, it is not possible for the Company to accurately
determine the extent of the its exposure, if any, related to the proceedings
described above. However, the Company has reserved approximately $2,500,000 on
its balance sheet with respect to the commitments and contingencies set forth in
this Note 6.
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.
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
March 31, 2000
Net loss......................... $ (2,465,893)
Dividends applicable to
preferred stock................. $ (243,805)
------------
Basic and diluted EPS --
Net loss applicable to
common stock................... $ (2,709,698) 33,733,716 $ (0.08)
============ ========== ========
Three Months Ended
March 31, 1999
Net loss......................... $ (5,117,972)
Dividends applicable to
preferred stock................. $ (1,042,753)
------------
Basic and diluted EPS --
Net loss applicable to
common stock................... $ (6,160,725) 19,027,111 $ (0.32)
============ ========== ========
Nine Months Ended March
31, 2000
Net loss......................... $ (7,658,676)
Dividends applicable to
preferred stock................. $ (854,805)
------------
Basic and diluted EPS --
Net loss applicable to
common stock................... $ (8,513,481) 30,820,000 $ (0.28)
============ ========== ========
Nine Months Ended March
</TABLE>
9
<PAGE>
<TABLE>
<S> <C> <C> <C>
31, 1999
Net loss......................... $(19,206,344)
Dividends applicable to
preferred stock................. $ (3,500,082)
------------
Basic and diluted EPS --
Net loss applicable to
common stock................... $(22,706,426) 19,309,972 $ (1.18)
============ ========== ========
</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.
On March 22, 2000 the Company acquired certain assets of Atcall, Inc. from the
debtor in possession under a Chapter 11 proceeding of the United States
Bankruptcy court. The purchase price paid for the Atcall assets included the
assumption of certain indebtedness on a limited recourse basis in the amount of
approximately $2,700,000, the assumption of $165,000 of indebtedness on a fully
recourse basis, and the issuance of 365,044 restricted shares of Company Common
Stock. See NOTE - DEBT above for a more complete description of the Atcall
transaction.
On April 27, 2000 the Company signed a definitive agreement to purchase 100%
of the stock of Max-Tel Communications, Inc.("MTC"). MTC is a prepaid
competitive local exchange carrier providing prepaid dial tone to subscribers
who typically do not meet the credit criteria imposed by the incumbent local
exchange carriers. The acquisition of MTC is subject, among other things, to
satisfactory completion of due diligence, obtaining required regulatory
approvals, and financing of the cash component of the transaction consideration.
The Company has received a preliminary commitment from a lender to provide the
financing necessary to consummate the transaction and expects to close the
acquisition on or about June 1, 2000; however the closing of the acquisition
remains subject to certain contingencies and there can be no assurance that the
transaction will be consummated within such time, or upon the terms as
previously disclosed by the Company on Form 8-K filed May 5, 2000.
NOTE 9--EQUITY TRANSACTIONS
During the quarter the Company issued a total of 315,457 shares Common Stock
to four different independent contractors for services rendered to the Company.
Total compensation expense of $114,775 was recorded in respect of those issues.
During the quarter eight different employees of the Company exercised options
to purchase a total of 110,000 shares of Common Stock. Total proceeds from the
exercises were $28,689.
In January 2000 the Company issued 280,000 shares of Common Stock to a vendor
in partial settlement of a dispute.
During March 2000 a total of 1,013 shares of Series A Convertible Preferred
Stock was converted into 3,744,817 shares of Common Stock.
During March 2000 all 3,000 shares of issued and outstanding Series B
Convertible Preferred Stock was converted into 1,500,000 shares of Common Stock.
In February 2000 the Company issued 916,560 shares of Common Stock upon
conversion of 163 shares of Series D Convertible Preferred Stock.
10
<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 March 31, 2000 decreased $2.3 million, or
24%, compared to sales of $9.3 million for the same period of the prior-year.
Sales decreased $3.4 million, or 13.6%, for the nine month period ended March
31, 2000 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 rapid customer attrition following the problems encountered by the Company
in the conversion of its billing system. The declines in the customer base are
partially offset by new business, including acquisition of the Atcall business.
Gross margin increased $418,000, or 22.2%, for the three month period ended
March 31, 2000 as compared to the same period of the prior-year; gross margin
increased $6.2 million, or 1,136.3%, for the nine month period ended March 31,
2000 as compared to the same period of the prior-year. These increases are
primarily due to reduction of fixed costs associated with the Company's switch
network and savings associated with renewed carrier contracts at decreased
prices.
The net loss applicable to common stock for the three months ended March 31,
2000 was $2.7 million, compared to the $6.2 million loss for the corresponding
period in the prior-year. The net loss applicable to common stock for the nine
month period ended March 31, 2000 was $8.5 million, compared to the $22.7
million loss for the corresponding period in the prior-year.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses decreased $0.1 million, or 4.0%,
for the three months ended March 31, 2000, when compared to the same period of
the prior-year. Selling, general, and administrative expenses for the nine month
period ended March 31, 2000 decreased $1.1 million, or 13.1%, as compared to the
corresponding period in the prior-year. The decreases in both comparable periods
are directly attributable to decreases in general overhead expense and rent
expense.
Depreciation and Amortization
Depreciation and amortization decreased $1.6 million, or 43.2%, for the three
month period ended March 31, 2000, as compared to the $3.7 million for the same
period of the prior-year. Depreciation and amortization decreased $3.2 million,
or 36.3%, for the nine month period ended March 31, 2000, as compared to the
$8.9 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 nine months ended March 31, 2000, 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 $1.0 million in cash flow from operations for the nine
months ended March 31, 2000, compared to the $3.1 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.
11
<PAGE>
Cash used in investing activities was $0.4 million for the nine months ended
March 31, 2000, compared to the $1.1 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 $0.5 million for the nine months
ended March 31, 2000, compared to the cash provided by financing activities of
$4.5 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 and the
utilization of cash flow from operations to repay debt.
Management's Plans to Return to Profitability
The Company's management is continuing actions to strengthen the financial
position of the Company. New products and initiatives are being investigated and
implemented to significantly enhance sales and revenue, including (i) prepaid
local dial tone,(ii) wholesale international rates for retail customers (iii)
pre-paid debit cards and postpaid calling cards, (iv) advertiser-sponsored long
distance, (v) voice mail services and (vi) the pursuit of acquisitions expected
to be accretive to earnings.
During the quarter ended March 31, 2000 the Company acquired certain assets of
Atcall, Inc., primarily its customer base. The Atcall customer base included
wholesale purchasers of prepaid long distance calling cards and also "one plus"
and postpaid calling card long distance customers.
On April 27, 2000 the Company signed a definitive agreement to purchase 100%
of the stock of Max-Tel Communications, Inc.("MTC"). MTC is a prepaid
competitive local exchange carrier providing prepaid dial tone to subscribers
who typically do not meet the credit criteria imposed by the incumbent local
exchange carriers. The acquisition of MTC by the Registrant is subject, among
other things, to Registrant's satisfactory completion of its due diligence,
obtaining required regulatory approvals, and Registrant's financing of the cash
component of the transaction consideration. Registrant has received a
preliminary commitment from a lender to provide the financing necessary to
consummate the transaction. Additionally, the Company is negotiating with
several third parties for possible acquisitions or to form strategic alliances
in order to maximize the utilization of the Company's telecommunications
switches (the "Switches").
The Company believes the acquisitions and 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. Some 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 and from borrowing. In order to provide financing
to support operations, the Company must also continue to increase revenue
generated from its existing resources. Management plans to increase traffic over
its Switches by adding traffic attributable to the new products and recent and
future acquisitions. In addition, the Company is continuing efforts to reduce
its primary carrier costs for its existing customer base. The Company continues
to make improvements in its billing and MIS systems as part of its efforts 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 and local service.
Management believes the plans discussed above are critical to returning the
Company to profitability. Additionally, the Company intends to seek additional
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 additional capital
resources to fund the expansion of service
12
<PAGE>
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.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 4, 1999, Comdisco, Inc. ("Comdisco") filed suit against the
Company in the United States District Court for the Southern District of Texas
(Cause No. H-99-3872) alleging damages for breach of contract and promissory
estoppel arising out of a failure to pay for the purchase of certain as in the
amount of approximately $155,000. The Company disputes the allegations of
Comdisco. The Company has listed the amount due Comdisco as a claim in its
bankruptcy, and asserts this is a liability of EqualNet Corporation in its
bankruptcy proceeding, and not a liability of the Company. It is impossible at
this time to state with any degree of certainty the ultimate exposure of the
Company in this matter.
On December 15, 1999, Qwest Communications Corporation ("Qwest") filed suit
against RFC Capital Corporation ("RFC"), the Company, USC Telecom, Inc. ("USC
Telecom") 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 plead 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 19, 2000, US WATS, Inc. ("US WATS") filed suit against EqualNet
Corporation in the United States District Court for the Eastern District of
Pennsylvania (Cause No. 00-CV-352) alleging damages for breach of contract for
failure to pay for telecommunications services in the amount of approximately
$70,000. The Company believes that it owes US WATS approximately $25,000. The
remaining amounts claimed by US WATS are disputed by the Company because the
Company believes that they arose as a result of a failure by US WATS to perform
its obligations under the terms of the contract. The Company cannot accurately
determine the extent of 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 Company and USC Telecom 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 of 1934,
for breach of contract, quantum meruit, and unjust enrichment in the amount of
$7,800,000 arising out of service 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. The Company disputes the amount owed and believes
that the claims made by WorldCom include amounts for services incurred long
after WorldCom was directed to terminate the services. Additionally, the Company
believes that a significant portion of the amount claimed by WorldCom is
duplicative of claims made by WorldCom against EqualNet Corporation, which were
addressed in its reorganization plan. The Company cannot accurately determine
the extent of either USC Telecom's or the Company's exposure, if any, in these
proceedings.
On February 15, 2000, Netco Acquisition Corp. ("Netco") received demand from
Pointe Communications Corporation for $110,000 for delinquent balances related
to services provided by Point Communications. Netco has demanded Pointe
Communications pay Netco approximately $700,000 owed under the same agreements.
The Company believes that the amounts claimed by Pointe Communications are
subject to being offset against amounts that Pointe Communications owes to
Netco. The Company cannot accurately determine the extent of the its exposure,
if any, in these proceedings.
13
<PAGE>
On February 23, 2000, SNET Diversified Group, Inc. filed suit against the
Company in the County Civil Court at Law No. 1 of Harris County, Texas alleging
damages in the amount of approximately $27,000 for unpaid carrier charges plus
$9,000 in attorney's fees. The Company believes that it has paid SNET the
amounts due and is attempting to reconcile this matter.
In March, 2000, the Company received a demand for payment from Kupper Parker
Communications, Inc. for services allegedly rendered in the amount of
approximately $28,000 in connection with development of the advertiser sponsored
long distance product of its wholly owned subsidiary, Freecaller Communications
Corporation. The Company has denied any liability for payment of these
services.
EqualNet Corporation's plan of reorganization ("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 the 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 has been
advised the by the Trust that there is a deficiency of approximately $245,000
with respect to sales by the trust for the period ending February 14, 2000. The
Company is currently attempting to negotiate a satisfaction of the amounts due
to the Trust.
In connection with EqualNet Corporation's Reorganization Plan the Company is
also obligated to make certain additional contributions of cash and of the
Company's common stock based on a percentage of claims made under the
Reorganization Plan in excess of previously accepted claims. The Company's
obligation to make such additional contributions is limited to $2,000,000 in
aggregate contributions of cash and its common stock. The Reorganization Plan
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 Plan be less than $1.00 per share as
defined in the Reorganization Plan.
As previously noted, it is not possible for the Company to accurately
determine the extent of the its exposure, if any, related to the proceedings
described above. However, the Company has reserved approximately $2,500,000 on
its balance sheet with respect to the commitments and contingencies.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter the Company issued a total of 315,457 shares Common Stock
to four different independent contractors for services rendered to the Company.
Total compensation expense of $114,775 was recorded in respect of those issues.
During the quarter eight different employees of the Company exercised options
to purchase a total of 110,000 shares of Common Stock. Total proceeds from the
exercises were $28,689.
In January 2000 the Company issued 280,000 shares of Common Stock to a vendor
in partial settlement of a dispute.
During March 2000 a total of 1,013 shares of Series A Convertible Preferred
Stock was converted into 3,744,817 shares of Common Stock.
During March 2000 all 3,000 shares of issued and outstanding Series B
Convertible Preferred Stock was converted into 1,500,000 shares of Common Stock.
In February 2000 the Company issued 916,560 shares of Common Stock upon
conversion of 163 shares of Series D Convertible Preferred Stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The indebtedness to Greyrock Business Credit has been treated as debt in
default due to the failure to issue shares of Common Stock pursuant to a
registration statement. A complete description of the Greyrock obligation is
contained in NOTE 6 to the financial statements - COMMITMENTS AND CONTINGENCIES.
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
10.1 Purchase Agreement dated March 22, 2000 between EqualNet Corporation,
Equalnet Communications Corp. and Atcall, Inc. relating to the purchase of
certain assets by EqualNet Corporation.
10.2 Assignment and Assumption Agreement between EqualNet Corporation,
Atcall, Inc. and RFC Capital Corporation dated March 22, 2000.
10.3 Letter agreement between EqualNet Corporation and RFC Capital
Corporation dated March 22, 2000.
27.1 Financial Data Schedule
b. Reports on Form 8-K
NONE
14
<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: May 22, 2000 /s/ MITCHELL H. BODIAN
--------------------- _________________________________
Mitchell H. Bodian, Chief
Executive Officer
(duly authorized officer and
principal financial officer)
15
<PAGE>
EXHIBIT 10.1
PURCHASE AGREEMENT
THIS AGREEMENT is made by and among EqualNet Corporation, a Delaware
corporation ("Equalnet"), Equalnet Communications Corp., a Texas corporation
"ECC"), and Atcall, Inc., a Delaware corporation ("Atcall").
W I T N E S S E T H:
WHEREAS, Equalnet is a telecommunications common carrier providing a
variety of services including wholesale and retail domestic and international
calling;
WHEREAS, Atcall is a switchless reseller of common carrier
telecommunications services both domestic and international;
WHEREAS, an involuntary petition in bankruptcy was filed against Atcall on
December 9, 1999 and Atcall consented to the jurisdiction of the bankruptcy
court and converted the matter to a proceeding pursuant to Chapter 11 of the
United States Bankruptcy Code ("Bankruptcy Code") on December 16, 1999;
WHEREAS, Atcall is subject to the requirements imposed upon it as a Debtor-
in-Possession pursuant to the Bankruptcy Code, and all attendant rules,
procedures and orders of the United States Bankruptcy Court for the Eastern
District of Virginia, Alexandria Division ("Bankruptcy Court") and its pending
case number 99-16016-RGM;
WHEREAS, Equalnet has been providing wholesale telecommunications services
to Atcall for the past two months during Atcall's Chapter 11 case;
WHEREAS, Equalnet has become the successful bidder for the assets of Atcall
except as excluded below (the "Assets"), including customer base, pursuant to
which Atcall agreed to sell to Equalnet, and Equalnet agreed to purchase from
Atcall, the Assets;
WHEREAS, the Bankruptcy Court has approved the sale of the Assets to
Equalnet by Order dated March 17, 2000; and
WHEREAS, Equalnet purchased, as part of the Assets, all of the accounts
(the "Accounts") of the subscribers (the "Subscribers") to Atcall's
telecommunications services (the "Services");
NOW THEREFORE, in consideration of the mutual covenants and agreements
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Atcall shall sell, convey, transfer and deliver to Equalnet all of the
Assets, except those specifically excluded below, free and clear of liens,
claims, and encumbrances except for those held by RFC Capital Corporation
("RFC") in the Assets. The Assets include, without limitation, the following (to
the extent that such particular Assets are assignable under applicable law):
1. Atcall's rights and interests to all accounts of subscribers to
Atcall's telecommunications services;
2. Atcall's network facilities;
3. Atcall's rights, title and interest in and under contracts, licenses,
permits, authorizations and approvals that any governmental entity has
issued to Atcall;
4. Atcall's rights, title and interest in and to intangible
telecommunications assets, including, without limitations,
telecommunications numbering codes, locating routing codes and "800"
and "888" numbers and other customer billing and inquiry numbers,
carrier identification codes and other operating codes;
1
<PAGE>
5. Atcall's right, title and interest in and to all intellectual
property, including, without limitation, all confidential proprietary
information, technical knowledge, and trade secrets;
6. Atcall's rights to use the corporate name "Atcall" and any other trade
names used in Atcall's business; provided, however, that Atcall is
entitled to continue to use its corporate name for purposes of its
chapter 11 case and for filing tax returns;
7. Atcall's rights under warranties, representations and guaranties that
suppliers and manufacturers made in connection with the Assets or
Atcall's business;
8. Atcall's books and records; provided, however, that Atcall is entitled
to use those books and records for purposes of winding up its chapter
11 case and business;
9. Attcall's inventory (including debit card inventory), furniture,
fixtures, and equipment and any other fixed assets;
10. Atcall's goodwill relating to the Assets and its business.
2. The following assets are not included in the Assets that Equalnet is
purchasing under this Agreement:
1. Claims that the Atcall bankruptcy estate holds (i) under Sections 547
or 548 of the Bankruptcy Code, and (ii) under applicable state or
federal law against insiders or third parties relating to the conduct
of Atcall's business prior to the commencement of Atcall's chapter 11
case; and
2. Cash or cash equivalents held by Atcall as of the Closing Date.
3. In consideration for the Assets, Equalnet will pay Atcall at Closing
consideration in the form of:
1. Assumption of all RFC's indebtedness against Atcall;
2. Payment of $16,718 to Fairfax County, Virginia in full and final
satisfaction of its secured ad valorem tax claim against the Debtor;
and
3. $233,282 in value as of the Closing Date (defined below) of
unregistered, publicly-traded ECC common stock. The value of such
stock consideration will be based upon the average closing price per
share as quoted in Bloomberg's Financial Reports of ECC common stock
for the ten trading days immediately prior to Closing.
4. Equalnet and Atcall acknowledge and agree that Atcall is not making
any representation or warranty whatsoever, express or implied. The Assets being
sold and purchased under this Agreement are being transferred on an "as is,
where is" basis and in their then present condition.
5. Equalnet and Atcall will cooperate with each other, and will use all
reasonable efforts to cause the fulfillment of the conditions to the parties'
obligations hereunder, to assume and assign all agreements necessary for the
transfer to Equalnet of the Assets, and to obtain as promptly as possible all
consents, authorizations, orders or approvals from each and every third party,
whether private or governmental, required in connection with the transactions
contemplated under this Agreement. At Equalnet's request, Atcall will execute
and deliver such documents and take such other actions as Equalnet may
reasonably request to facilitate Equalnet's possession and control of all or any
part of the Assets and confirm Equalnet's title to those Assets.
6. The closing of the transactions that this agreement contemplates shall
take place on the business day ("the Closing Date") that Equalnet designates
within three days of the date upon which the Bankruptcy Court approves the sale
of the Assets to Equalnet.
2
<PAGE>
7. The Closing of the transfer of the Assets is conditioned upon the
Bankruptcy Court's approval of an Order approving Atcall's sale of the Assets to
Equalnet. The Bankruptcy Court's Order shall provide the following:
1. This Agreement and the transactions contemplated under this Agreement
are approved;
2. Atcall's transfer of the Assets to Equalnet will be a legal, valid and
effective transfer of the Assets notwithstanding any requirement for
any person's approval or consent;
3. Atcall has good and valid title to the Assets and such title shall be
transferred to Equalnet or its designees free of (i) all liens, claims
and encumbrances except those that RFC Capital Corporation holds on
the Assets, and (ii) all rights or options to effect any forfeiture,
modification or termination of Atcall or Equalnet's interest in the
Assets by reason of such transfer;
4. Equalnet is buying the Assets in good faith within the meaning of
Section 363(m) of the Bankruptcy Code;
5. The consideration that Equalnet is paying for the Assets is fair and
reasonable;
6. Exigent circumstances exist for the sale of the Assets contemplated
under the Agreement;
7. The sale of the Assets is in the best interests of Atcall's estate and
creditors;
8. Proper and adequate notice has been given to all parties-in-interest
as required under applicable law; and
9. The requirements of Section 363 of the Bankruptcy Code have been
fulfilled.
8. This Agreement may be terminated by written notice at any time for the
following reasons:
1. The mutual consent of Equalnet and Atcall;
2. If there is a final and non-appealable order of a court of competent
jurisdiction restraining, enjoining or otherwise prohibiting the
consummation of the transactions contemplated under this Agreement;
3. By Equalnet if the Bankruptcy Court approves an Order approving the
transfer of the Assets that does not include the provisions set forth
in paragraph 7 above; or
4. By further Order of the Bankruptcy Court.
9. Without Equalnet's written approval, Equalnet does not assume any
liability under this Agreement for any claims against Atcall other than those of
RFC Capital Corporation.
10. Equalnet and Atcall shall use reasonable good faith efforts to resolve
any disputes that may arise under this Agreement. If Atcall and Equalnet cannot
resolve any such dispute within thirty (30) days after such dispute arises, then
such dispute shall be resolved by the Bankruptcy Court.
3
<PAGE>
11. Any notice or instruction provided for herein shall be provided to the
parties hereto by facsimile transmission.
12. Miscellaneous.
--------------
1. This Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and assigns;
provided that none of the parties hereto may assign their rights and
obligations hereunder, other than for breach of this Agreement,
without the consent of the other party hereto. No person, other than
the parties hereto or their respective successors and assigns, shall
have any legal or equitable right, remedy or claim under or in respect
of this Agreement.
2. This Agreement contains the entire understanding of the parties hereto
with respect to the subject matter hereof and may not be modified
except by a writing signed by all the parties hereto.
3. This Agreement shall be governed and construed in accordance with the
laws of the State of Texas, without regard to the choice of law
principles thereof which would make the laws of any other jurisdiction
applicable to this agreement.
4. To the extent that any provision of this Agreement, or any part
thereof, shall be declared invalid or unenforceable, it shall be
considered deleted herefrom and the remainder of such provision and of
this Agreement shall be unaffected and shall continue in full force
and effect.
5. This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
6. Nothing contained herein shall be deemed to amend, modify, terminate
or extend any lease, contract or agreement to which Atcall is a party
or any rights or obligations of any party thereunder.
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement on this 22nd day of March, 2000.
EqualNet Corporation
By: /s/ Mitchell Bodian
-----------------------------------
Name: Mitchell Bodian
Title: President
Equalnet Communications Corp.
By: /s/ Mitchell Bodian
-----------------------------------
Name: Mitchell Bodian
Title: Chief Executive Officer
ATCALL, Inc.
By: /s/ Khaled Alhegelan
-----------------------------------
Name: Khaled Alhegelan
Title: Chief Executive Officer
4
<PAGE>
EXHIBIT 10.2
ASSIGNMENT AND ASSUMPTION AGREEMENT
-----------------------------------
THIS ASSIGNMENT AND ASSUMPTION AGREEMENT is entered into by and between
ATCALL, Inc., a Delaware corporation located at 8401 Old Courthouse Road, Suite
300, Vienna, Virginia 22182 (the "Assignor"), EqualNet Corporation, a Delaware
corporation located at 1250 Wood Branch Park Drive, Houston, Texas (the
"Assignee") on this 22nd day of March, 2000 and RFC Capital Corporation, a
Delaware corporation, located at 130 E. Chestnut Street, Suite 400, Columbus,
Ohio 43215 (RFC).
WITNESSETH:
WHEREAS, the Assignor and RFC have entered into a certain (i) Receivables
Sale Agreement dated July 11, 1997, as amended (together with any agreement,
instrument or document executed or delivered in connection therewith, the RSA)
and (ii) Loan and Security Agreement and Promissory Note dated June 26, 1998, as
amended (together with any agreement, instrument or document executed or
delivered in connection therewith, the LSA) (the RSA and LSA, collectively the
Transaction Documents);
WHEREAS, on or about December, 1999, Assignor filed a petition under Title
11 of the United States Code, as amended, with the Bankruptcy Court for the
Eastern District of Virginia, bankruptcy case number 99-16016 (the Proceeding);
and
WHEREAS, the Assignor desires to assign and Assignee desires to assume all
of the rights, title, interests, liabilities, duties and obligations arising
under the Transaction Documents and other assets in the manner and on the terms
set forth herein; and
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties, intending to be
legally bound, do hereby represent, warrant, covenant and agree as follows:
1. Assignment. Assignor hereby sells, assigns, conveys, and otherwise
----------
transfers and delivers to Assignee all rights, title and interests in the
Transaction Documents, and all accounts receivable of Assignor which have arisen
or will arise in the future from the provision or sale of telecommunication
goods, equipment and/or services, including but not limited to any right to
payment with respect thereto or other obligations of any obligor relating
thereto and any and all proceeds relating to the foregoing (the "Assets").
Assignee acknowledges and agrees that such Assets are being assigned by Assignor
to Assignee subject to any and all liens, claims and encumbrances held or
maintained by RFC.
2. Assumption. The Assignee hereby accepts the foregoing assignment and
----------
expressly assumes all of the liabilities, duties and obligations of Assignor
pursuant to or arising from the Transaction Documents and with respect to the
Assets as of the date hereof, whether known or unknown, tangible or intangible,
actual or contingent, and including any and all liens, claims and encumbrances
held and/or maintained by RFC.
3. Representations Regarding Assets. The Assignor hereby covenants with
--------------------------------
Assignee that Assignor is the lawful owner of the Assets and the rights hereby
transferred or intended to be so transferred, and that Assignor has the right
and authority to transfer, assign and convey the Assets to Assignee, without
qualification or the consent of any third party other than as such consent may
relate to the Proceeding, and that such Assets are hereby transferred free and
clear of any lien, liability, claim or encumbrance except with respect to any
and all such liens, liabilities, claims and encumbrances held and/or maintained
by RFC.
4. Further Assurances.
------------------
a. From and after the date hereof, Assignor shall duly perform such
further acts and duly execute, acknowledge and deliver all such
further bills of sale, assignments, transfers, conveyances, powers of
attorney and assurances as may be reasonably required to convey to and
vest in Assignee all of Assignor's right, title and interest in and
the benefits of the Assets intended to be conveyed, transferred and
assigned pursuant to this Agreement. Assignor hereby constitutes and
appoints Assignee its true and lawful attorney-in-
- --------------------------------------------------------------------------------
1
<PAGE>
fact, with full power of substitution, in the name of Assignee or
Assignor, but on behalf of and for the benefit of Assignee, to demand,
collect, and receive for the account of Assignee all Assets hereby
sold, conveyed, assigned or transferred to Assignee, to institute and
prosecute, in the name of Assignor, Assignee, or otherwise, all
proceedings which Assignee may deem necessary in order to realize
upon, affirm, or obtain title to or possession of or to collect,
assert, or enforce any claim or right in, to or under the Assets, to
defend and compromise any and all actions, suits or proceedings in
respect of any of the Assets and to do all such acts and things in
relation thereto as Assignee shall deem necessary. Assignor agrees
that the foregoing powers are coupled with an interest and are and
shall be irrevocable by Assignor for any reason.
b. Assignee covenants to execute such other assignments, security
agreements,financing statements, and other documents that RFC may
reasonably deem necessary to further evidence the obligations provided
for herein or under the Transaction Documents, or to perfect, extend,
or clarify RFC's rights in the respective collateral interests
thereunder.
5. Successors and Assigns. This Agreement shall be binding upon and inure
----------------------
to the benefit of the parties hereto, and their respective successors in
interest and assigns.
6. Governing Law. This Assignment and Assumption Agreement shall be
-------------
governed by and construed in accordance with the internal laws (as opposed to
conflict of laws provisions) of the State of Ohio.
7. Notices. All notices in connection with this Assignment and Assumption
-------
Agreement shall be in writing and mailed or telecommunicated, or delivered as to
each party hereto, at its address set forth under its name on the signature
page(s) hereof or at such other address as shall be designated by such party in
a written notice to the other party. All notices shall be effective upon receipt
by the party to whom addressed.
8. Survival. All of the obligations of the parties set forth in this
--------
Assignment and Assumption Agreement shall survive the termination of the
Transaction Documents.
9. Counterparts. This Assignment and Assumption Agreement may be executed
------------
in any number of counterparts, each of which when so executed shall be deemed to
be an original and all of which when taken together shall constitute one and the
same agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by the duly authorized representatives as of the date first above written.
ASSIGNOR - ATCALL, INC. ASSIGNEE-EQUALNET CORPORATION
/s/ Khaled Alhegelan /s/ Mitchell Bodian
---------------------------- -----------------------
By: Khaled Alhegelan By: Mitchell Bodian
Title: Chief Executive Officer Title: President
Acknowledged by on this 22nd day of March, 2000:
RFC Capital Corporation
/s/ Patrick O. Quinton
- ----------------------------------
Patrick O. Quinton, Vice President
- --------------------------------------------------------------------------------
2
<PAGE>
EXHIBIT 10.3
LETTER AGREEMENT
EqualNet Corporation
1250 Wood Branch Park Drive
Houston, Texas 77079
(281) 529-4600
(281) 529-4650 (fax)
March 22, 2000
Via email and facsimile
Mr. Patrick Quinton
RFC Capital Corporation
130 East Chestnut St., Suite 400
Columbus, Ohio 43215
Re: Letter Agreement pertaining to Assignment and Assumption Agreement
dated March 22, 2000 between EqualNet Corporation ("EqualNet") and
ATCALL, Inc ("Atcall") as approved by RFC Capital Corporation ("RFC")
Dear Patrick:
The purpose of this letter is to confirm the agreement between EqualNet and
RFC regarding EqualNet's assumption of Atcall's obligations to RFC under the
above-captioned Assignment and Assumption Agreement. This confirms the
following:
1. Atcall and RFC have entered into a certain (i) Receivables Sale
Agreement dated July 11, 1997, as amended (together with any agreement,
instrument or document executed or delivered in connection therewith, the "RSA")
and (ii) Loan and Security Agreement and Promissory Note dated June 26, 1998, as
amended (together with any agreement, instrument or document executed or
delivered in connection therewith, the "LSA") (the RSA and LSA, collectively the
"Transaction Documents");
2. Atcall's obligations to RFC under the RSA were originally on a limited
recourse basis to Atcall as more fully set forth in the RSA. Such recourse
included but is not limited to Atcall's conversion of certain proceeds relating
to purchased receivables otherwise belonging to RFC in violation of the RSA (the
`Atcall Conversion'). Atcall assumed recourse liability to RFC for certain
substantial obligations to RFC under the RSA and other Transaction Documents;
3. On December, 1999, Atcall filed a petition under Title 11 of the
United States Code, as amended, with the Bankruptcy Court for the Eastern
District of Virginia, bankruptcy case number 99-16016;
4. On March 17, 2000, citing an emergency regarding likely diminution of
RFC's collateral under the Transaction Documents, the Bankruptcy Court in
Atcall's Chapter 11 case approved an Order authorizing Atcall to sell its assets
to EqualNet free and clear of all liens, claims and encumbrances except for
RFC's liens and security interests under the Transaction Documents;
5. Pursuant to the March 17 Order, EqualNet,contemporaneous with the
execution and delivery of this letter,is entering into the above-captioned
Assignment and Assumption Agreement under which it is assuming Atcall's
obligations to RFC under the Transaction Documents;
6. Due to the emergency circumstances surrounding EqualNet's purchase of
the Atcall assets and its assumption of Atcall's obligations under the
Transaction Documents, EqualNet has not had adequate time to review the
Transaction Documents; and
7. Accordingly, EqualNet and RFC confirm their following agreements
relating to EqualNet's assumption of the Atcall obligations under the
Transaction Documents:
1 EqualNet's assumption of Atcall's obligations to RFC under the RSA is
on the same limited recourse basis to EqualNet as it was to Atcall; provided,
however, such recourse shall not include any obligation or liability resulting
from or arising out of the Atcall Conversion;
2 EqualNet's assumption of Atcall's obligations to RFC under the LSA is
(such obligations estimated to approximately $165,000) is on a recourse basis to
EqualNet;
3 Nothing in this Letter Agreement precludes RFC from asserting that
EqualNet has recourse liability for certain obligations under the Transaction
Documents relating to EqualNet's subsequent conversion of RFC's property or
collateral under the Transaction Documents;
- --------------------------------------------------------------------------------
1
<PAGE>
4 You and the undersigned are authorized to execute and deliver this
letter agreement on behalf of RFC and EqualNet, respectively; and
5 RFC and EqualNet will enter into such other agreements or
modifications relating to the Transaction Documents that our respective counsel
deem appropriate to reflect the agreements set forth in this letter.
If the foregoing reflects your understanding of our agreement, please
execute this letter in the appropriate space below and return a signed copy to
the undersigned.
Very truly yours,
EqualNet Corporation
By: /s/ Mitchell H. Bodian
-------------------------------
Mitchell H. Bodian, President
Approved:
RFC Capital Corporation
By: /s/ Patrick Quinton
-----------------------------
Patrick Quinton, Vice President
- --------------------------------------------------------------------------------
2
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 326,949
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<RECEIVABLES> 4,699,627
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0
12,394,631
<COMMON> 387,272
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<TOTAL-LIABILITY-AND-EQUITY> 20,209,356
<SALES> 21,912,796
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